Daily Tax Update - December 17, 2009

TREASURY AND IRS ISSUE FINAL REGULATIONS ON TREATMENT OF ACQUISITIVE 'D' REORGANIZATIONS WHERE NO STOCK IS ISSUED: Today, Treasury and the IRS issued final regulations concerning the treatment of transactions as acquisitive 'D' reorganizations under section 368(a)(1)(D) where no stock and/or securities of the transferee corporation is issued and distributed in the transaction.  The final regulations also confirm the determination of basis in stock of the transferee corporation and the treatment where the reorganization involves members of a consolidated group. The final regulations replace temporary regulations published on December 19, 2007, as clarified by an amendment published on February 27, 2007.

  • The final regulations adopt the general approach set forth in the temporary regulations to apply the meaningless gesture doctrine and deem the issuance of stock where no stock and/or securities is issued and distributed in the transaction, provided that the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporation in identical proportions.
  • The final regulations clarify, however, that the transferee corporation will only be deemed to issue a so-called “nominal share” if the transferor corporation receives full consideration in exchange for its assets. In cases where no consideration is received, or the value of the consideration received is less than the fair market value of the transferor's assets, the transferee is treated as issuing stock with a value equal to the excess of the value of the assets over the value of the consideration received. As under the temporary regulations, the final regulations provide that the nominal share or the deemed stock will be deemed to be distributed by the transferor corporation in satisfaction of the distribution requirement under section 354(b)(1)(B), and then further transferred through chains of ownership to reflect the actual ownership of the transferor and transferee corporations.
  • The final regulations did not adopt comments that would treat the nominal share as having tax significance solely to satisfy the distribution requirement in section 354(b)(1)(B). Instead, the final regulations treat the nominal share as qualifying property for purposes of basis allocation and future stock gain or loss recognition. The final regulations provide that, in case of a reorganization in which the property received consists solely of non-qualifying property equal to the value of the assets transferred (as well as the nominal share), the shareholder or security holder may designate the share of stock of the transferee to which basis, if any, of the stock or securities surrendered will attach. This is distinguished from current Treas. Reg. § 1.358-2(a)(2)(iii), which the preamble notes only applies to reorganizations in which no consideration is received or the value of the consideration received is less than the fair market value of the transferor's assets. That regulation provides for a substituted basis in the stock deemed received followed by a deemed recapitalization for the shares actually held by the transferor immediately after the reorganization.
  • The final regulations confirm that the nominal share will be given effect in connection with all-cash 'D' reorganizations involving consolidated return members. Under the consolidated return regulations, an all-cash 'D' reorganization involving consolidated return members will result in a deemed issuance of stock by the transferee corporation followed by a redemption of the deemed stock for the consideration actually received in the exchange. The final regulations confirm that, upon the deemed issuance and redemption, the remaining stock basis or excess loss account (“ELA”) will shift to the nominal share. Thus, gain or loss inherent in that basis or ELA may be triggered upon the deemed transfer of the nominal share through chains of ownership, subject to the intercompany transaction rules of Treas. Reg. § 1.1502-13.
  • The preamble to the final regulations notes that Treasury and the IRS continue to study 'D' reorganizations, including issues relating to the extent to which, if any, the continuity interest requirement applies to 'D' reorganizations and the continued vitality of the liquidation-reincorporation doctrine. In addition, the preamble requests comments on issues raised by the application of the final regulations to reorganizations involving foreign corporations and shareholders.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Lisa M. Zarlenga - lzarlenga@steptoe.com.
  • The regulations can be accessed here

CONGRESS UNLIKELY TO ACT ON ESTATE TAX THIS YEAR: Unless the Senate acts to extend current estate tax law before it adjourns, the estate tax will disappear in 2010. However, Democrats have said that they will try to reenact it retroactively in 2010. Senate Finance Chairman Max Baucus has tried to extend current estate tax law by unanimous consent on the Senate floor, but was unsuccessful in his efforts. Baucus said, “We'll clearly work to [bring back the estate tax] retroactively so that if the law is changed, however it's changed, or if it's extended next year, it will have retroactive application.”

  • House Ways and Means Subcommittee Chairman Richard Neal said, “It looks like it is going to be repealed on the first [of January].” Neal added, “There will be lots of opportunities to act on it next year.”
  • Without Congressional action, the estate tax will disappear after December 31, only to return in 2011 with a 55-percent top rate and $1 million exemption. In addition, estates transferred in 2010 would face carryover basis rules rather than the step-up rules in effect in 2009; step-up rules would come back into effect in 2011.

MISCELLANEOUS GUIDANCE RELEASED:
REG-101896-09 (released yesterday) -- Basis Reporting by Securities Brokers and Basis Determination for Stock; Notice of Proposed Rulemaking was forwarded to the Office of the Federal Register on December 14, 2009.

TAX BILLS INTRODUCED DECEMBER 16th:
H.R.4337: To amend the Internal Revenue Code of 1986 to modify certain rules applicable to regulated investment companies, and for other purposes.
Sponsor: Rep Rangel, Charles B. [NY-15] (introduced 12/16/2009)      Cosponsors (3)

H.R.4348: To amend the Internal Revenue Code of 1986 to allow a credit against income tax for expenses incurred in teleworking.
Sponsor: Rep Wittman, Robert J. [VA-1] (introduced 12/16/2009)      Cosponsors (None)

H.R.4361: To amend the Internal Revenue Code of 1986 to eliminate contribution limitations for retirement plans and increase penalties attributable to such contributions.
Sponsor: Rep Campbell, John [CA-48] (introduced 12/16/2009)      Cosponsors (None)

H.R.4362: To amend the Internal Revenue Code of 1986 to exclude from gross income remediation payments for hazardous drywall.
Sponsor: Rep Cao, Anh "Joseph" [LA-2] (introduced 12/16/2009)      Cosponsors (None)

H.R.4366: To amend the Internal Revenue Code of 1986 to extend the deduction for qualified motor vehicle taxes for motor homes.
Sponsor: Rep Donnelly, Joe [IN-2] (introduced 12/16/2009)      Cosponsors (None)

H.R.4374: To amend the Internal Revenue Code of 1986 to extend the credit for electricity produced from biomass, to provide credit rate parity under such credit, and to exclude certain unprocessed fuels from the cellulosic biofuel producer credit.
Sponsor: Rep Herseth Sandlin, Stephanie [SD] (introduced 12/16/2009)      Cosponsors (1)

H.R.4388: To amend the Internal Revenue Code of 1986 to provide tax incentives for the donation of wild game meat.
Sponsor: Rep Murphy, Scott [NY-20] (introduced 12/16/2009)      Cosponsors (1)

H.R.4389: To amend the Internal Revenue Code of 1986 to allow a credit against income tax to taxpayers using energy derived from biomass to power domestic paper, pulp and paperboard manufacturing process facilities.
Sponsor: Rep Murphy, Scott [NY-20] (introduced 12/16/2009)      Cosponsors (None)

H.R.4391: To amend the Internal Revenue Code of 1986 to exclude from an employee's gross income any employer-provided supplemental instructional services assistance, and for other purposes.
Sponsor: Rep Pascrell, Bill, Jr. [NJ-8] (introduced 12/16/2009)      Cosponsors (None)

S.2894: A bill to amend the Internal Revenue Code to provide for a refundable tax credit for heating fuels and to create a grant program for States to provide individuals with loans to weatherize their homes.
Sponsor: Sen Gillibrand, Kirsten E. [NY] (introduced 12/16/2009)      Cosponsors (None)

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.

STEPTOE & JOHNSON LLP - TAX PRACTICE
Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving. Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them. Read more information on Steptoe's tax practice.