Daily Tax Update - March 19, 2007

IRS PROVIDES GUIDANCE ON MEASUREMENT OF CONTINUITY OF INTEREST IN CORPORATE REORGANIZATIONS:  The IRS today issued temporary regulations (T.D. 9316) providing guidance regarding the satisfaction of the continuity of interest requirement for corporate reorganizations under section 368.  The regulations revise final rules (T.D. 9225) issued in September 2005 that govern transactions that are based on a binding contract.  The IRS and Treasury will continue to study other issues regarding the determination of whether the continuity of interest requirement is satisfied.

  • The temporary regulations continue to apply the signing date rule where the contract provides for fixed consideration.  If the contract does not provide for fixed consideration, the temporary regulations provide that the signing date rule is not applicable. 
  • The temporary regulations modify the definition of fixed consideration found in the 2005 final regulations to eliminate instances where the contract states the percentage of proprietary interests (or each proprietary interest) in the target corporation to be exchanged for stock of the issuing corporation. 
  • The temporary regulations treat certain transactions that allow for shareholder elections as providing for fixed consideration regardless of whether the agreement specifies the maximum amount of money or other property, or the minimum amount of issuing corporation stock, to be exchanged in the transaction, where the exchange rate is based on the value of the issuing corporation stock on the signing date. 
  • The 2005 final regulations regarding contract modifications have been broadened to include modifications that decrease the money or other property that will be delivered to the target corporation shareholders.  The temporary regulations also provide that contract modifications will not result in a new signing date if the terms of the original contract would have prevented the transaction from qualifying as a reorganization.   
  • The temporary regulations modify and expand the applicability of the signing date rule to certain transactions that provide for contingent adjustments (increases or decreases) to the consideration.  Specifically, they provide that a contract will not be treated as providing for fixed consideration if it provides for contingent adjustments to the consideration that prevent the target shareholders from being subject to the economic benefits and burdens of ownership of the issuing corporation as of the signing date.
  • The temporary regulations are effective March 20, 2007, but they apply to transactions occurring pursuant to a binding contract entered into after September 16, 2005.  However, parties to transactions within the scope of binding contract provision may elect to apply the 2005 final regulations instead.   
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com.
  • The regulations can be accessed here.

WAYS AND MEANS OVERSIGHT SUBCOMMITTEE SCHEDULES HEARING ON TAX GAP:  Tomorrow, the House Ways and Means Oversight Subcommittee will hold a hearing on IRS operations, the 2007 tax return filing season, and the “tax gap.”  The Subcommittee will examine the estimated annual $345 billion tax gap, identify components of the tax gap, and discuss ways IRS can improve individual and corporate tax compliance.  In announcing the hearing, Subcommittee Chairman John Lewis (D-GA) said, “Our tax system is based on honesty and integrity.  It is the Subcommittee’s responsibility to ensure that our voluntary tax system operates properly and Americans pay their fair share.”

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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