Daily Tax Update - December 16, 2011: IRS Issues Final Regs on Continuity of Interest Requirement for Corporate Reorganizations

IRS AND TREASURY ISSUE FINAL AND PROPOSED REGULATIONS THAT PROVIDE GUIDANCE ON THE CONTINUITY OF INTEREST REQUIREMENT FOR CORPORATE REORGANIZATIONS: The IRS and Treasury have issued final and proposed regulations that provide guidance regarding the continuity of interest requirement (COI) for corporate reorganizations.

  • The final regulations adopt, with minor changes, temporary regulations that were issued in 2007.  The 2007 temporary regulations generally narrowed the definition of "fixed consideration" for purposes of the "signing date" rule.  The "signing date" rule provides that in determining whether a proprietary interest in the target corporation is preserved, the consideration to be exchanged for the proprietary interests in the target corporation pursuant to a contract to effect the potential reorganization shall be valued on the last business day before the first date such contract is a binding contract if such contract provides for fixed consideration..  The final regulations clarify that a shareholder election does not prevent a contract from satisfying the general definition of fixed consideration if that requirement is otherwise met.
  • In addition to the final regulations, the IRS and Treasury also issued proposed regulations further clarifying the scope of the signing date rule.  The proposed regulations permit the use of an average value for issuing corporation stock in certain circumstances in lieu of the value of issuing corporation stock on the Closing Date.  The proposed regulations provide that an average value may be used if it is based upon issuing corporation stock values occurring after the signing date and before the Closing Date, and the binding contract utilizes the average price, so computed, in determining the number of shares of each class of stock of the issuing corporation, the amount of money, and the other property to be exchange for all the proprietary interests in the target corporation.
  • The regulations can be accessed here and here.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Gregory N. Kidder - gkidder@steptoe.com 

FINAL RULES ON COST-SHARING ARRANGEMENTS RELEASED: Today, the IRS issued final regulations (T.D. 9568) on determining taxable income in connection with a cost-sharing arrangement under tax code Section 482. According to the IRS, "The final regulations address issues that have arisen in administering the current cost sharing regulations. The final regulations affect domestic and foreign entities that enter into cost sharing arrangements described in the final regulations." The regs adopt the effective date and transition rules under 2008 temporary regulations so they are generally applicable for all cost-sharing arrangements, with transition rules for certain arrangements in existence prior to January 5, 2009.

DEAL REACHED ON TWO-MONTH PAYROLL TAX CUT EXTENSION:  Last night, House and Senate negotiators reached a tentative agreement on a $1 trillion omnibus spending bill that would avert a government shutdown.  The agreement would also fund the federal government through the end of 2012.

  • Speaker John Boehner said the House will insist that the Keystone pipeline language be added to the bill.  Boehner said, "These rumors that are floating around here about a two-month extension, I'll just say this: If that bill comes over to us, we will make changes to it, and I will guarantee you that the Keystone pipeline will be in there when it goes back to the United States Senate."
  • Senate Minority Leader Mitch McConnell said, "The majority leader and I are making significant progress on reaching agreement on a package that will have bipartisan support, I hope. I think we're going to get to that place."
  • Senate Majority Leader Harry Reid also said that they were close to a final deal on the payroll tax cut extension.  Reid said, "We are making real good progress, we not there yet, but we are very, very close."
  • The House will come back in session next week to vote on the payroll tax bill.  A Senate vote on the omnibus spending bill may not occur until Saturday or Sunday.  Boehner said, "The House will do its work today; the members will go home; and if there's a need to come back to finish our work, we will do so."


Announcement 2011-82 describes several important changes to the Employee Plans determination letter program.

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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