[Federal Register Volume 64, Number 84 (Monday, May 3, 1999)]
[Proposed Rules]
[Pages 23554-23570]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10818]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-106004-98]
RIN 1545-AW71
Guidance Under Section 355(d); Recognition of Gain on Certain
Distributions of Stock or Securities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to
recognition of gain on certain distributions of stock or securities of
a controlled corporation. These proposed regulations affect
corporations and their shareholders. Proposed regulations are necessary
because of statutory changes made by the Omnibus Budget Reconciliation
Act of 1990. This document also provides notice of a public hearing on
these proposed regulations.
DATES: Written and electronic comments must be received by August 2,
1999. Outlines of topics to be discussed at the public hearing
scheduled for September 21, 1999, at 10 a.m. must be received by August
31, 1999.
ADDRESSES: Send submissions to CC:DOM:CORP:R (REG-106004-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
106004-98), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.ustreas.gov/tax__regs/
regslist.html. The public hearing will be held in room 2615, Internal
Revenue Building, 1111 Constitution Avenue, N.W., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Robert Hawkes (202) 622-7530 or Phoebe Bennett (202) 622-7750;
concerning submissions of comments, the hearing, and/or to be placed on
the building access list to attend the hearing, Guy R. Traynor (202)
622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
If the requirements of section 355(a) are met, a distributing
corporation (Distributing) may distribute the stock or securities of a
controlled corporation (Controlled) to its shareholders or security
holders (Distributees) with no gain or loss recognized to the
Distributees. A Distributee allocates its basis in Distributing stock
or securities between the Controlled stock or securities received in
the distribution and any Distributing stock or securities retained in
proportion to the fair market value of each. See section 358;
Secs. 1.358-1 and 1.358-2. If neither section 355 (d) nor (e) applies,
then Distributing generally recognizes no gain on the distribution of
stock or securities. See section 355(c)(2) or 361(c)(2).
With limited exceptions, the Tax Reform Act of 1986 (Public Law 99-
514, 100 Stat. 208) (TRA), repealed the doctrine of General Utilities &
Operating Co. v. Helvering, 296 U.S. 200 (1935), by requiring a
corporation to recognize gain on both liquidating and nonliquidating
distributions of appreciated property. In retaining section 355 as an
exception to General Utilities repeal, Congress intended to permit
historic shareholders to carry on their historic corporate businesses
in separate corporations. See H. R. Rep. 101-881, at 341 (1990).
However, Congress became concerned that, after the TRA, a person could
purchase a historic shareholder's
[[Page 23555]]
interest, receive a distribution of Controlled stock tax-free to both
Distributing and the purchaser, and obtain a fair market value basis in
the Controlled stock. Accordingly, Congress amended section
355(b)(2)(D) in the Omnibus Budget Reconciliation Act of 1987 (Public
Law 100-203, section 10223, 101 Stat. 1330-411) (1987 OBRA) to make
section 355 inapplicable where a Distributee acquired control (as
defined in section 368(c)) of a corporation conducting a business in a
taxable transaction during the five-year period ending on the date of
the distribution. See H. R. Rep. No. 100-391, at 1082-83 (1987).
However, section 355(b)(2)(D) did not apply to noncorporate purchasers
or purchasers of less than 80 percent of Distributing stock.
Section 355(d), enacted as part of the Omnibus Budget
Reconciliation Act of 1990 (Public Law 101-508, section 11321(a), 104
Stat. 1388-460) (1990 OBRA), followed the purposes of the 1987 OBRA
provisions but substantially expanded their scope. See H. R. Rep. 101-
881, at 341 (1990). In section 355(d), Congress intended to prevent the
use of section 355 either to ``dispose of subsidiaries in transactions
that resemble sales, or to obtain a fair market value stepped-up basis
for any future dispositions, without incurring corporate-level tax.''
Id.
Section 355(d) requires recognition of gain on a distribution of
Controlled stock (as though the Controlled stock were sold to the
Distributee at its fair market value) if, immediately after the
distribution, any person holds disqualified stock of Distributing or
any distributed Controlled that constitutes a 50 percent or greater
interest. See section 355(d) (1) and (2). Disqualified stock is stock
in Distributing acquired by purchase after October 9, 1990 and during
the five-year period (taking into account section 355(d)(6)) ending on
the date of distribution (the five-year period), or Controlled stock
either (1) acquired by purchase during the five-year period or (2)
distributed with respect to either disqualified Distributing stock or
on Distributing securities acquired by purchase during the five-year
period. See section 355(d)(3). A 50 percent or greater interest means
stock possessing at least 50 percent of the total combined voting power
of all classes of stock entitled to vote or at least 50 percent of the
total value of shares of all classes of stock. See section 355(d)(4).
Section 355(d) also contains a definition of purchase (section
355(d)(5)), a provision suspending the five-year period for certain
stock or securities (section 355(d)(6)), and aggregation and
attribution provisions (section 355(d) (7) and (8)). Section 355(d)(9)
authorizes regulations to carry out the purposes of section 355(d),
including regulations to prevent the avoidance of its purposes through
the use of related persons, intermediaries, pass-through entities,
options, or other arrangements, and regulations modifying the
definition of purchase.
Explanation of Provisions
(a) General Rules and Purposes of Section 355(d)
As stated above, section 355(d) is intended to prevent taxpayers
from using section 355 to dispose of subsidiaries in sale-like
transactions, or to obtain a fair market value stepped-up basis for
future dispositions, without incurring a corporate-level tax. See H. R.
Rep. 101-881, at 341 (1990). The legislative history to section 355(d)
describes transactions generally not violating the purposes of section
355(d):
The purposes of [section 355(d)] are not generally violated if
there is a distribution of a controlled corporation within 5 years
of an acquisition by purchase and the effect of the distribution is
neither (1) to increase ownership in the distributing corporation or
any controlled corporation by persons who have directly or
indirectly acquired stock within the prior five years, nor (2) to
provide a basis step-up with respect to the stock of any controlled
corporation.
H. R. Rep. No. 101-964 (Conference Report), at 1093 (1990).
The Conference Report, at page 1091, clarifies that the grant of
regulatory authority in section 355(d)(9) includes the authority to
exclude from section 355(d) transactions not violating its purposes.
The proposed regulations provide that a distribution is not a
disqualified distribution under section 355(d)(2) and proposed
Sec. 1.355-6(b)(1) if the distribution and any related transactions do
not violate the purposes of section 355(d). The proposed regulations
describe transactions not violating the purposes of section 355(d) in a
manner similar to the legislative history and provide some examples of
those transactions. If a distribution does not violate the purposes of
section 355(d) under proposed Sec. 1.355-6(b)(3), such distribution is
a distribution to which section 355(d) does not apply. Accordingly,
such a distribution still could be a distribution to which section
355(e) applies. See section 355(e)(2)(D).
The exception in the proposed regulations for transactions that do
not violate the purposes of section 355(d) applies to transactions in
which a disqualified person neither increases an interest nor obtains a
purchased basis in Controlled stock. A disqualified person is any
person that, immediately after a distribution, holds disqualified stock
in Distributing or Controlled that constitutes a 50-percent or greater
interest (under section 355(d)(4) and proposed Sec. 1.355-6(c)). Based
on examples in the Conference Report, the proposed regulations define
purchased basis as basis in Controlled stock that is disqualified
stock, unless the Controlled stock and the Distributing stock on which
the Controlled stock is distributed are treated as acquired by purchase
solely under the attribution rules of section 355(d)(8) and proposed
Sec. 1.355-6(e)(1). Examples in the proposed regulations demonstrate
the application of the two-pronged purpose test.
The proposed regulations also provide that a person that acquires
an interest in any entity by purchase is not treated as having acquired
by purchase stock owned by the entity under section 355(d)(8)(B) and
paragraph (e)(1) of this section when the person no longer holds the
directly purchased interest. Examples demonstrate the operation of this
rule when purchased stock is eliminated in a liquidation or upstream
merger.
The proposed regulations provide an anti-avoidance rule that
permits the Commissioner to treat any distribution as a disqualified
distribution under section 355(d)(2) and proposed Sec. 1.355-6(b)(1) if
the distribution or another transaction or transactions are engaged in
or structured with a principal purpose to avoid the purposes of section
355(d) or the regulations thereunder with respect to the distribution.
For example, the Commissioner may determine that the existence of a
related person, intermediary, pass-through entity, or similar person
(an intermediary) should be disregarded, in whole or in part, if the
intermediary is formed or availed of with a principal purpose to avoid
the purposes of section 355(d) or the regulations thereunder.
(b) Whether a Person Holds a 50 Percent or Greater Interest
Under section 355(d)(4), 50 percent or greater interest means stock
possessing at least 50 percent of the total combined voting power of
all classes of stock entitled to vote or at least 50 percent of the
total value of shares of all classes of stock. The proposed regulations
provide rules relating to that definition.
Valuation
The proposed regulations provide that, for purposes of section
355(d)(4) and proposed Sec. 1.355-6, all shares of stock within a
single class are
[[Page 23556]]
considered to have the same value. But see proposed Sec. 1.355-
6(c)(3)(vii), which applies a special valuation rule to determine
whether options are reasonably certain to be exercised.
Effect of Options, Warrants, Convertible Obligations, and Other Similar
Interests
Section 355(d)(9) provides regulatory authority to prevent the
avoidance of the purposes of section 355(d) through the use of options.
The Conference Report states, at page 1092, that Congress intends that
regulations be issued to treat an option to acquire stock as exercised
if two criteria are satisfied. The first is that a deemed exercise
would cause a person to have a 50 percent or greater interest acquired
by purchase. The second is that, under all the facts and circumstances
(including projected earnings or appreciation and including the risk
shifting or other effects of any other arrangements with the option
holder or related parties), the effect of the option would be to avoid
the application of section 355(d).
In general, the proposed regulations disregard options in
determining whether any person holds disqualified stock constituting a
50 percent or greater interest. However, under the proposed
regulations, an option to acquire stock that has not been exercised
when a distribution occurs is treated as exercised on the date it was
issued or most recently transferred if two criteria are satisfied. The
first, based on the Conference Report, is that a deemed exercise would
cause a person to become a disqualified person. An option is not
treated as exercised under this criterion, however, if the effect of
the treatment is to prevent a person who would otherwise be a
disqualified person from being treated as a disqualified person. The
second criterion is that, immediately after the distribution of
Controlled, and based on all the facts and circumstances, it is
reasonably certain that the option will be exercised. The IRS and
Treasury believe that the proposed regulations, which employ a
``reasonably certain'' standard to treat options as exercised in
potentially abusive situations, is consistent with the guidance given
in the Conference Report with respect to options. The proposed
regulations generally except certain instruments not ordinarily having
an abuse potential from treatment as options, such as escrow, pledge,
or other security agreements, compensatory options, and options
exercisable only upon death, disability, mental incompetency, or
retirement.
When an option is treated as exercised, it is treated as exercised
both for purposes of determining the percentage of the voting power of
stock owned and for purposes of determining the percentage of the value
of stock owned. The effect of control premiums and minority and
blockage discounts on stock value is taken into account only for
purposes of applying the ``reasonably certain'' test. If the
``reasonably certain'' test is met, so that an option is treated as
exercised, all shares of a single class are considered to have the same
value for purposes of determining the amount of stock deemed acquired
under the option.
The option rules of proposed Sec. 1.355-6(c)(3) determine when an
option is treated as exercised only for purposes of section 355(d) (but
not for purposes of section 355(d)(6)) and do not apply for purposes of
any other sections of the Internal Revenue Code. The option rules are
proposed to apply generally to options outstanding in distributions
occurring after the regulations are published as final regulations in
the Federal Register. See proposed Sec. 1.355-6(g). However, the
Service may apply substance over form principles in determining whether
options outstanding in distributions before the effective date are
treated as stock or as exercised in appropriate circumstances.
Plan or Arrangement
Under section 355(d)(7)(B), if two or more persons act pursuant to
a plan or arrangement with respect to acquisitions of stock or
securities in Distributing or Controlled, those persons are treated as
one person for purposes of section 355(d). The proposed regulations
provide a rule to determine when shareholders act pursuant to a plan or
arrangement. Under the rule (which does not apply for purposes of any
other section of the Internal Revenue Code), two or more shareholders
act pursuant to a plan or arrangement only if they have a formal or
informal understanding among themselves to make a coordinated
acquisition of stock. A principal element in determining if such an
understanding exists is whether the investment decision of each person
is based on the investment decision of one or more other existing or
prospective shareholders. Thus, in general, a public offering is not
treated as a plan or arrangement if each investor makes an independent
investment decision. This rule applies regardless of the amount of
stock the shareholders own or acquire. The rule is based on the entity
rule contained in Sec. 1.382-3(a)(1), and the IRS and Treasury intend
that the two provisions be administered in a similar manner.
The proposed regulations provide that creditors' participation in
an insolvency workout or reorganization in a title 11 or similar case,
and the receipt of stock in satisfaction of indebtedness in a workout
or reorganization, are not treated as a plan or arrangement among the
creditors. The IRS and Treasury request comments as to whether
additional provisions are appropriate for workout or bankruptcy
situations, such as rules regarding the timing of purchases of stock
received by creditors, or rules regarding whether rights created in
favor of creditors in a bankruptcy case should be treated as options.
(c) Purchase
Under section 355(d)(5)(A), except as otherwise provided in section
355(d)(5) (B) and (C), a purchase means any acquisition, but only if
(1) the basis of the property acquired in the hands of the acquirer is
not determined in whole or in part by reference to the adjusted basis
of such property in the hands of the person from whom acquired, or
under section 1014(a), and (2) the property is not acquired in an
exchange to which section 351, 354, 355, or 356 applies. The proposed
regulations clarify that the term exchange in the statute includes a
reference to all section 355 distributions (for example, spin-offs,
even though no property is conveyed in exchange for the distributed
stock).
Exceptions to Definition of Purchase Under Section 355(d)(5)(A)
The proposed regulations provide that an acquisition of stock
permitted to be received by a transferor of property without the
recognition of gain under section 351(a), or permitted to be received
without the recognition of gain under section 354 or 355, is not a
purchase to the extent section 358(a)(1) applies to determine the
recipient's basis, whether or not the recipient also recognizes gain
under section 351(b) or 356. The Conference Report suggests, at page
1092, that regulations generally should treat stock received by a
target corporation shareholder in a reorganization as acquired by
purchase if the shareholder also receives boot. The Conference Report
states that purchase treatment is warranted because the basis in the
shareholder's acquiring corporation stock is increased by the gain the
shareholder recognizes. However, under section 358(a)(1)(A), the basis
in the stock also is reduced by the amount of the boot received. Thus,
the shareholder will not receive a net basis increase in the acquiring
corporation stock. The proposed regulations also provide that, to the
extent stock that is ``other property'' under section 351(b) or
356(a)(1) is
[[Page 23557]]
received in addition to stock excepted from purchase treatment under
the basic rule, the boot stock is treated as purchased on the date of
the exchange or distribution for purposes of section 355(d).
The proposed regulations provide that an acquisition of stock by a
corporation is generally not a purchase to the extent section 334(b) or
362 (a) or (b) applies to determine the corporation's basis in the
stock received. However, because of the basis results, stock is treated
as purchased on the date of the stock acquisition for purposes of
section 355(d) if the liquidating corporation recognizes gain or loss
with respect to the transferred stock as described in section
334(b)(1), or to the extent the basis of the transferred stock is
increased through the recognition of gain by the transferor under
section 362 (a) or (b).
The proposed regulations provide that, subject to certain
restrictions, section 305(a) and section 1036(a) transactions are not
purchases.
Certain Section 351 Exchanges Treated as Purchases
Under section 355(d)(5)(B), a purchase includes any acquisition of
property in an exchange to which section 351 applies to the extent the
property is acquired in exchange for any cash or cash item, any
marketable stock or security, or any debt of the transferor. The
property treated as acquired by purchase is the property received by
the transferor in the exchange. If the transferor receives more than
one class of stock or securities, or receives both stock and
securities, the proposed regulations provide that the amount of stock
or securities purchased is determined in a manner that corresponds to
the basis allocation under section 358. The proposed regulations define
the terms cash item and marketable stock to include personal property
within the meaning of section 1092(d)(1) and Sec. 1.1092(d)-1, without
giving effect to section 1092(d)(3).
The proposed regulations provide certain exceptions to purchase
treatment under section 355(d)(5)(B). Under the first exception, an
acquisition of stock in a corporation in a section 351(a) transaction
by one or more persons in exchange for an amount of stock in another
corporation (the transferred corporation) that meets the requirements
of section 1504(a)(2) is not a purchase by the transferor or
transferors, regardless of whether the stock of the transferred
corporation is marketable stock. Under the second exception, an
acquisition of stock in exchange for any cash or cash item, any
marketable stock, or any debt of the transferor in a section 351
transaction generally is not a purchase if the transferor transfers the
items as part of an active trade or business and the transferred items
do not exceed the reasonable needs of the trade or business. This
exception is based on the Conference Report, at page 1093. The proposed
regulations provide guidance based on Sec. 1.355-3(b) (2) and (3) for
determining active conduct of a trade or business and guidance on the
reasonable needs of the trade or business. All facts and circumstances
are considered in applying the exception.
The third exception, also based on the Conference Report, at pages
1092-93, provides that an acquisition of stock in exchange for any cash
or cash item, marketable stock or security, or debt of the transferor
in a section 351 transaction is generally not a purchase if the
transferor corporation or corporations, the transferee corporation, and
any distributed controlled corporation of the transferee corporation
are members of the same affiliated group as defined in section 1504(a)
before the section 351 transaction (if the transferee corporation is in
existence before the transaction) and do not cease to be members of
such affiliated group in any transaction related to the section 351
transaction (including any distribution of a controlled corporation by
the transferee corporation). An example illustrates that, under the
anti-avoidance rule of proposed Sec. 1.355-6(b)(4), this exception does
not apply if the section 351 transaction is engaged in or structured
with a principal purpose to avoid the purposes of section 355(d).
The proposed regulations provide purchase rules for certain
triangular asset reorganizations. For purposes of section 355(d), the
proposed regulations generally treat the controlling corporation as
having acquired the assets and liabilities of the target corporation in
a transaction in which basis in the acquired assets is determined under
section 362(b) and then transferred the assets and liabilities to its
subsidiary corporation in a section 351 transaction. This treatment is
consistent with the determination of basis in the stock of the
acquiring subsidiary or target corporation under Sec. 1.358-6. The
application of section 351 to the deemed asset contribution causes
section 355(d)(5)(B) (and proposed Sec. 1.355-6(d)(3) (i) through (iv))
to apply.
The proposed regulations provide special rules for transactions
qualifying as a reorganization under section 368(a)(1)(A) by reason of
section 368(a)(2)(E) and also as either a reorganization under section
368(a)(1)(B) or a section 351 transfer. Special rules are necessary for
these transactions because, under Sec. 1.358-6(c)(2)(ii) or 1.1502-
30(b), a controlling corporation may determine its basis in surviving
corporation stock by choosing from two alternative methods, but the
taxpayer need not choose a method until a basis determination is
relevant. The proposed regulations describe corresponding methods for
determining the amount of surviving corporation stock treated as
purchased for purposes of section 355(d). The proposed regulations
provide that, regardless of which method the controlling corporation
may actually employ to determine its basis in the surviving corporation
stock under Sec. 1.358-6(c)(2)(ii) or 1.1502-30(b), the total amount of
surviving corporation stock treated as purchased immediately after the
distribution equals the higher of the amount of surviving corporation
stock that would be treated as purchased under the two alternative
methods described in proposed Sec. 1.355-6(d)(5)(i). The proposed
regulations allow a controlling corporation to select one of the two
alternative methods if the controlling corporation obtains a letter
ruling and enters into a closing agreement under section 7121 in which
it agrees to determine its basis in surviving corporation stock using
the corresponding method under Sec. 1.358-6(c)(2)(ii) (A) or (B). This
option allows the taxpayer to conform the section 355(d) results with
the section 358 basis results it chooses.
Finally, the proposed regulations explain the treatment of group
structure changes to which Sec. 1.1502-31 applies, and provide rules
adjusting purchase treatment to conform to basis treatment in
triangular reorganizations and group structure changes.
(d) Deemed Purchase and Timing Rules
Attribution and Aggregation
Under section 355(d)(8)(B), if any person purchases an interest in
an entity, and any stock held by the entity is attributed to the person
under section 355(d)(8)(A), the person is treated as purchasing the
stock on the later of the date the person purchased the interest in the
entity or the date the entity purchased the stock.
The proposed regulations adopt three additional timing rules based
on the Conference Report, at page 1090. First, if a person and an
entity are treated as a single person under section 355(d)(7), and the
person later purchases an
[[Page 23558]]
additional interest in the entity, the person is treated as purchasing,
at the time the additional interest is purchased, the amount of stock
attributed from the entity to the person as a result of the additional
interest. This timing rule applies even though the person was (prior to
purchasing the additional interest in the entity) already treated as
owning all of the stock owned by the entity under the aggregation rules
of section 355(d)(7). Second, if two persons are treated as one person
under section 355(d)(7) and one later purchases stock from the other,
the date of the later purchase is used. Third, if a person who is
already treated as holding stock under section 355(d)(8)(A) later
directly purchases such stock, the date of the later direct purchase is
used. The proposed regulations contain a series of examples, similar to
those on pages 1090 and 1091 of the Conference Report, demonstrating
the operation of these rules.
Transferred Basis Rule
Under section 355(d)(5)(C), if any person acquires property from
another person who acquired the property by purchase, and the adjusted
basis of the property in the hands of the acquirer is determined in
whole or in part by reference to the adjusted basis of the property in
the hands of the other person, the acquirer is treated as having
acquired the property by purchase on the date it was acquired by the
other person. This rule applies, for example, where stock of a
corporation with a purchased basis is acquired in a section 351
transfer or a reorganization qualifying under section 368(a)(1)(B), but
does not apply if the stock of a former common parent is acquired in a
group structure change.
Under proposed Sec. 1.355-6(d)(2)(i)(B)(2), transferred stock is
treated as purchased on the date of a transfer if the stock is
transferred in a liquidation, and the liquidating corporation
recognizes gain or loss with respect to the transferred stock as
described in section 334(b)(1), or to the extent the basis of the
transferred stock is increased through the recognition of gain by the
transferor under section 362(a) or (b).
Exchanged Basis Rule
Based on the Conference Report, at page 1092, the proposed
regulations adopt a rule that, if any person acquires an interest in an
entity (the first interest) by purchase, and the first interest is
exchanged for an interest in another entity (the second interest) where
the adjusted basis of the second interest is determined by reference to
the adjusted basis of the first interest, then the second interest is
treated as having been purchased on the date the first interest was
purchased. This rule applies, for example, where stock of a corporation
acquired by purchase is subsequently exchanged for other stock in a
section 351, 354, or 1036(a) exchange. Under proposed Sec. 1.355-
6(d)(2)(i)(A)(2), stock that is other property under section 351(b) or
356(a)(1) is treated as purchased on the date of the exchange or
distribution.
Substantial Diminution of Risk
As in section 355(d)(6), the proposed regulations provide that the
running of the five-year period under section 355(d)(3) is suspended
for any period during which the holder's risk of loss is substantially
diminished by an option, a short sale, any special class of stock
(including tracking stock), or any other device or transaction.
(e) Duty to Determine Stockholders and Presumptions
The proposed regulations provide that, in determining whether
section 355(d) applies to a distribution, Distributing must determine
whether a disqualified person holds its stock or the stock of any
distributed Controlled. For this purpose, a corporation is deemed to
have knowledge of the existence and contents of all schedules, forms,
and other documents filed with or under the rules of the Securities and
Exchange Commission, including, without limitation, any Schedule 13D or
13G (or any similar schedules) and amendments, with respect to any
relevant corporation.
The proposed regulations provide that, absent actual knowledge to
the contrary, with respect to reporting stock, Distributing may presume
that all schedules, forms, or other documents are timely filed,
accurate, and complete. Reporting stock is defined as stock that is
described in Rule 13d-1(i) of Regulation 13D promulgated under the
Securities and Exchange Act of 1934. In addition, the proposed
regulations provide a presumption with respect to less-than-five-
percent shareholders, which are defined as persons that, at no time
during the five-year period, hold directly (or under the option rules
contained in the proposed regulations) stock possessing five percent or
more of the total combined voting power of all classes of stock
entitled to vote and the total value of shares of all classes of stock
of a corporation. Absent actual knowledge (or deemed knowledge
regarding reporting stock) immediately after a distribution to the
contrary regarding a particular shareholder, Distributing may generally
presume that no less-than-five-percent shareholder of a corporation
acquired stock by purchase during the five-year period. This
presumption does not apply to any less-than-five-percent shareholder
that, at any time during the five-year period, is related to, acted
pursuant to a plan or arrangement with, or holds stock that is
attributed to a shareholder that is not a less-than-five-percent
shareholder at any time during the five-year period. If an acquiring
corporation acquires Distributing in a transferred basis transaction,
Distributing may apply both the reporting stock presumption and the
less-than-five-percent shareholder presumption to determine whether
section 355(d) applies to a distribution of Controlled stock to the
acquiring corporation due to preacquisition stock purchases by
Distributing's former shareholders.
Proposed Effective Date
The proposed regulations would apply to distributions occurring
after the regulations are published as final regulations in the Federal
Register, except that they would not apply to any distributions
occurring pursuant to a written agreement which is (subject to
customary conditions) binding on the date the regulations are published
as final regulations in the Federal Register, and at all times
thereafter.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and, because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written or electronic comments
(preferably a signed original and eight (8) copies, if written) that
are submitted timely to the IRS. The IRS and Treasury specifically
request comments on the clarity of the proposed rule and how it may be
made easier to understand. All
[[Page 23559]]
comments will be available for public inspection and copying.
A public hearing has been scheduled for September 21, 1999,
beginning at 10 a.m. in room 2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, N.W. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments and an outline of the topics to be discussed and
the time to be devoted to each topic (preferably a signed original and
eight (8) copies, if written) by August 31, 1999. A period of 10
minutes will be allotted to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing.
Drafting information. The principal author of these proposed
regulations is Phoebe Bennett, Office of the Assistant Chief Counsel
(Corporate). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.355-6 also issued under 26 U.S.C. 355(d)(9). * * *
Par. 2. Section 1.355-0 is amended by;
1. Revising the section heading.
2. Revising the entries for Sec. 1.355-6.
The revisions read as follows:
Sec. 1.355-0 To facilitate the use of Secs. 1.355-1 through 1.355-6,
this section lists the major paragraphs in those sections.
* * * * *
Sec. 1.355-6 Recognition of gain on certain distributions of stock
or securities in controlled corporation.
(a) Conventions.
(1) Distributing securities.
(2) Marketable securities.
(3) Examples.
(4) Five-year period.
(b) General rules and purposes of section 355(d).
(1) Disqualified distributions in general.
(2) Disqualified stock.
(i) In general.
(ii) Purchase.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated.
(i) In general.
(ii) Disqualified person.
(iii) Purchased basis.
(iv) Purchased interest no longer held.
(v) Examples.
(4) Anti-avoidance rule.
(i) In general.
(ii) Example.
(c) Whether a person holds a 50 percent or greater interest.
(1) In general.
(2) Valuation.
(3) Effect of options, warrants, convertible obligations, and
other similar interests.
(i) Application.
(ii) General rule.
(iii) Options deemed newly issued.
(A) Exchange, adjustment, or alteration of existing option.
(B) Certain compensatory options.
(iv) Effect of treating an option as exercised.
(A) In general.
(B) Cash settlement options, phantom stock, stock appreciation
rights, certain notional principal contracts, or similar interests.
(C) Stock purchase agreement or similar arrangement.
(v) Instruments treated as options.
(vi) Instruments generally not treated as options.
(A) Escrow, pledge, or other security agreements.
(B) Compensatory options.
(1) General rule.
(2) Exception.
(C) Certain stock conversion features.
(D) Options exercisable only upon death, disability, mental
incompetency, or retirement.
(E) Rights of first refusal.
(F) Other enumerated instruments.
(vii) Reasonably certain that the option will be exercised.
(A) In general.
(B) Stock purchase agreement or similar arrangement.
(viii) Examples.
(4) Plan or arrangement.
(i) In general.
(ii) Understanding.
(iii) Examples.
(d) Purchase.
(1) In general.
(i) Definition of purchase under section 355(d)(5)(A).
(ii) Section 355 distributions.
(iii) Examples.
(2) Exceptions to definition of purchase under section
355(d)(5)(A).
(i) Acquisition of stock in a transaction which includes other
property or money.
(A) Transferors and shareholders of transferor or distributing
corporations.
(1) In general.
(2) Exception.
(B) Transferee corporations.
(1) In general.
(2) Exception.
(C) Examples.
(ii) Acquisition of stock in a distribution to which section
305(a) applies.
(iii) Section 1036(a) exchange.
(3) Certain section 351 exchanges treated as purchases.
(i) In general.
(A) Treatment of stock received by transferor.
(B) Multiple classes of stock.
(ii) Cash item, marketable stock.
(iii) Exception for certain acquisitions.
(A) In general.
(B) Example.
(iv) Exception for assets transferred as part of an active trade
or business.
(A) In general.
(B) Active conduct of a trade or business.
(C) Reasonable needs of the trade or business.
(D) Consideration of all facts and circumstances.
(v) Exception for transfer between members of the same
affiliated group.
(A) In general.
(B) Examples.
(4) Triangular asset reorganizations.
(i) Definition.
(ii) Treatment.
(iii) Example.
(5) Reverse triangular reorganizations other than triangular
asset reorganizations.
(i) In general.
(ii) Letter ruling and closing agreement.
(iii) Examples.
(6) Treatment of group structure changes.
(i) In general.
(ii) Adjustments to basis of higher-tier members.
(iii) Example.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes.
(e) Deemed purchase and timing rules.
(1) Attribution and aggregation.
(i) In general.
(ii) Purchase of additional interest.
(iii) Purchase between persons treated as one person.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A).
(v) Examples.
(2) Transferred basis rule.
(3) Exchanged basis rule.
(i) In general.
(ii) Example.
(4) Substantial diminution of risk.
(i) In general.
(ii) Property to which suspension applies.
(iii) Risk of loss substantially diminished.
[[Page 23560]]
(iv) Special class of stock.
(f) Duty to determine stockholders.
(1) In general.
(2) Deemed knowledge of contents of securities filings.
(3) Presumptions as to securities filings.
(4) Presumption as to less-than-five-percent shareholders.
(5) Examples.
(g) Effective date.
Par. 3. Section 1.355-6 is revised to read as follows:
Sec. 1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
(a) Conventions--(1) Distributing securities. Unless otherwise
stated, any reference in this section to stock of a corporation that is
(or becomes) a distributing corporation includes a reference to
securities of the corporation. See section 355(d)(3)(B)(ii)(II)
(disqualified controlled corporation stock includes controlled
corporation stock distributed with respect to purchased distributing
corporation securities).
(2) Marketable securities. Unless otherwise stated, any reference
in this section to marketable stock includes a reference to marketable
securities.
(3) Examples. For purposes of the examples in this section, unless
otherwise stated, assume that P, S, T, X, Y, N, HC, D, D1, D2, D3, and
C are corporations, A and B are individuals, shareholders are not
treated as one person under section 355(d)(7), stock has been owned for
more than five years and section 355(d)(6) and paragraph (e)(4) of this
section do not apply, no election under section 338 (if available) is
made, and all transactions described are respected under general tax
principles, including the step transaction doctrine. No inference
should be drawn from any example as to whether any requirements of
section 355 other than those of section 355(d), as specified, are
satisfied.
(4) Five-year period. For purposes of this section, the term five-
year period means the five-year period (determined after applying
section 355(d)(6) and paragraph (e)(4) of this section) ending on the
date of the distribution, but in no event beginning earlier than
October 10, 1990.
(b) General rules and purposes of section 355(d)--(1) Disqualified
distributions in general. In the case of a disqualified distribution,
any stock or securities in the controlled corporation shall not be
treated as qualified property for purposes of section 355(c)(2) or
361(c)(2). In general, a disqualified distribution is any distribution
to which section 355(or so much of section 356 as relates thereto)
applies if, immediately after the distribution--
(i) Any person holds disqualified stock in the distributing
corporation that constitutes a 50 percent or greater interest in such
corporation; or
(ii) Any person holds disqualified stock in the controlled
corporation (or, if stock of more than one controlled corporation is
distributed, in any controlled corporation) that constitutes a 50
percent or greater interest in such corporation.
(2) Disqualified stock--(i) In general. Disqualified stock is--
(A) Any stock in the distributing corporation acquired by purchase
during the five-year period; and
(B) Any stock in any controlled corporation--
(1) Acquired by purchase during the five-year period; or
(2) Received in the distribution to the extent attributable to
distributions on any stock in the distributing corporation acquired by
purchase during the five-year period.
(ii) Purchase. For the definition of a purchase for purposes of
section 355(d) and this section, see section 355(d)(5) and paragraph
(d) of this section.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated--(i) In general.
Notwithstanding the provisions of section 355(d)(2) and this paragraph
(b), a distribution is not a disqualified distribution if the
distribution and any related transactions do not violate the purposes
of section 355(d) as provided in this paragraph (b)(3). A distribution
does not violate the purposes of section 355(d) if the effect of the
distribution and any related transactions is neither--
(A) To increase direct or indirect ownership in the distributing
corporation or any controlled corporation by a disqualified person; nor
(B) To provide a disqualified person with a purchased basis in the
stock of any controlled corporation.
(ii) Disqualified person. A disqualified person is any person
(taking into account section 355(d)(7) and paragraph (c)(4) of this
section) that, immediately after a distribution, holds (directly or
indirectly under section 355(d)(8) and paragraph (e)(1) of this
section) disqualified stock in the distributing corporation or
controlled corporation that constitutes a 50 percent or greater
interest in such corporation (under section 355(d)(4) and paragraph (c)
of this section).
(iii) Purchased basis. A purchased basis is basis in controlled
corporation stock that is disqualified stock, unless the controlled
corporation stock and any distributing corporation stock with respect
to which the controlled corporation stock is distributed are treated as
acquired by purchase solely under the attribution rules of section
355(d)(8) and paragraph (e)(1) of this section.
(iv) Purchased interest no longer held. A person that acquires an
interest in any entity by purchase ceases to be treated as having
acquired by purchase stock owned by the entity under section
355(d)(8)(B) and paragraph (e)(1) of this section at the time when the
person no longer holds the directly purchased interest.
(v) Examples. The following examples illustrate this paragraph
(b)(3):
Example 1. Stock distributed in spin-off; no purchased basis. D
owns all of the stock of D1, and D1 owns all the stock of C. A
purchases 60 percent of the D stock for cash. Within five years of
A's purchase, D1 distributes the C stock to D. A is treated as
having purchased 60 percent of the stock of both D1 and C on the
date A purchases 60 percent of the D stock under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of this section. The
C stock received by D is attributable to a distribution on purchased
D1 stock under section 355(d)(3)(B)(ii). Accordingly, the D1 and C
stock each is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. However, the purposes of
section 355(d) under paragraph (b)(3)(i) of this section are not
violated. A did not increase direct or indirect ownership in D1 or
C. In addition, D's basis in the C stock is not a purchased basis
under paragraph (b)(3)(iii) of this section because both the D1 and
the C stock are treated as acquired by purchase solely under the
attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, D1's distribution of the C stock to D is not a
disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 2. Stock distributed in spin-off; purchased basis. The
facts are the same as Example 1, except that D immediately further
distributes the C stock to its shareholders (including A) pro rata.
The D and C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated. A did
not increase direct or indirect ownership in D or C. However, A's
basis in the C stock is a purchased basis under paragraph
(b)(3)(iii) of this section because the D stock is not treated as
acquired by purchase solely under the attribution rules of section
355(d)(8) and paragraph (e)(1) of this section. Accordingly, the
further distribution is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 3. Stock distributed in split-off with ownership
increase; purchased basis. The facts are the same as Example 1,
except
[[Page 23561]]
that D immediately further distributes the C stock to A in exchange
for A's purchased stock in D. The C stock received by A is
attributable to a distribution on purchased D stock under section
355(d)(3)(B)(ii), and A's basis in the C stock is determined by
reference to the adjusted basis of A's purchased D stock under
paragraph (e)(3) of this section. Accordingly, the D stock and the C
stock each is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated
because A increased its ownership in C from a 60 percent indirect
interest to a 100 percent direct interest, and because A's basis in
the C stock is a purchased basis under paragraph (b)(3)(iii) of this
section. Accordingly, the further distribution is a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 4. Stock distributed in spin-off; purchased basis. D1
owns all the stock of C. D purchases all of the stock of D1 for
cash. Within five years of D's purchase of D1, P acquires all of the
stock of D1 from D in a section 368(a)(1)(B) reorganization that is
not a reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E), and D1 distributes all of its C stock to P. P is
treated as having acquired the D1 stock by purchase on the date D
acquired it under the transferred basis rule of section 355(d)(5)(C)
and paragraph (e)(2) of this section. P is treated as having
purchased all of the C stock on the date D purchased the D1 stock
under the attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section, and the C stock received by P is
attributable to a distribution on purchased D1 stock under section
355(d)(3)(B)(ii). Accordingly, the D1 and C stock each is
disqualified stock under section 355(d)(3) and paragraph (b)(2) of
this section, and P is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated. P did not increase
direct or indirect ownership in D1 or C. However, P's basis in the C
stock is a purchased basis under paragraph (b)(3)(iii) of this
section because the D1 stock is not treated as acquired by purchase
solely under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. Accordingly, D1's distribution of
the C stock to P is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 5. Stock distributed in split-off with ownership
increase; no purchased basis. P owns 50 percent of the stock of D,
the remaining D stock is owned by unrelated persons, D owns all the
stock of C, and A purchases all of the P stock from the P
shareholders. Within five years of A's purchase, D distributes all
of the C stock to P in exchange for P's D stock. A is treated as
having purchased 50 percent of the stock of both D and C on the date
A purchases the P stock under the attribution rules of section
355(d)(8) and paragraph (e)(1) of this section. The C stock received
by P is attributable to a distribution on purchased D stock under
section 355(d)(3)(B)(ii). Accordingly, the D stock and the C stock
each is disqualified stock under section 355(d)(3) and paragraph
(b)(2) of this section, and A is a disqualified person under
paragraph (b)(3)(ii) of this section. The purposes of section 355(d)
under paragraph (b)(3)(i) of this section are violated because, even
though P's basis in the C stock is not a purchased basis under
paragraph (b)(3)(iii) of this section, A increased its direct or
indirect ownership in C from a 50 percent indirect interest to a 100
percent indirect interest. Accordingly, D's distribution of the C
stock to P is a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section.
Example 6. Stock distributed in split-off with no ownership
increase; no purchased basis. A purchases all of the stock of T. T
later merges into D in a section 368(a)(1)(A) reorganization and A
exchanges its purchased T stock for 60 percent of the stock of D. D
owns all of the stock of D1 and D2, D1 and D2 each owns 50 percent
of the stock of D3, and D3 owns all of the stock of C. Within five
years of A's purchase of the T stock, D3 distributes the C stock to
D1 in exchange for all of D1's D3 stock. A is treated as having
acquired 60 percent of the D stock by purchase on the date A
purchases the T stock under paragraph (e)(3) of this section. A is
treated as having purchased 60 percent of the stock of D1, D2, D3,
and C on the date A purchases the T stock under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of this section. The
C stock received by D1 is attributable to a distribution on
purchased D3 stock under section 355(d)(3)(B)(ii). Accordingly, the
D3 stock and the C stock each is disqualified stock under section
355(d)(3) and paragraph (b)(2) of this section, and A is a
disqualified person under paragraph (b)(3)(ii) of this section.
However, the purposes of section 355(d) under paragraph (b)(3)(i) of
this section are not violated. A did not increase direct or indirect
ownership in D3 or C, and D1's basis in the C stock is not a
purchased basis under paragraph (b)(3)(iii) of this section because
the D3 stock is treated as acquired by purchase solely under the
attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, D3's distribution of the C stock to D1 is not
a disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 7. Purchased basis eliminated by liquidation; stock
distributed in spin-off. P owns 30 percent of the stock of D, D owns
all of the stock of D1, and D1 owns all of the stock of C. P
purchases the remaining 70 percent of the D stock for cash. Within
five years of P's purchase, P liquidates D in a transaction
qualifying under sections 332 and 337(a), and D1 then distributes
the stock of C to P. Prior to the liquidation, P is treated as
having purchased 70 percent of the stock of D1 and C on the date P
purchases the D stock under the attribution rules of section
355(d)(8)(B) and paragraph (e)(1) of this section. After the
liquidation, however, under paragraph (b)(3)(iv) of this section, P
is not treated as having acquired by purchase the D1 or the C stock
under section 355(d)(8)(B) and paragraph (e)(1) of this section
because P no longer holds the directly purchased interest in D.
Under section 334(b)(1), P's basis in the D1 stock is determined by
reference to D's basis in the D1 stock and not by reference to P's
basis in D. Paragraph (d)(2)(i)(B) of this section does not treat
the D1 stock as newly purchased in P's hands because no gain or loss
was recognized by D in the liquidation. Accordingly, neither the D1
stock nor the C stock is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section in P's hands, and the
distribution is not a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 8. Purchased basis eliminated by upstream merger; stock
distributed in spin-off. D owns all of the stock of D1, and D1 owns
all of the stock of C. P purchases 60 percent of the D stock for
cash. Within five years of P's purchase, D merges into P in a
section 368(a)(1)(A) reorganization, with the D shareholders other
than P receiving solely P stock in exchange for their D stock, and
D1 then distributes the stock of C to P. Prior to the merger, P is
treated as having purchased 60 percent of the stock of D1 and C on
the date P purchases the D stock under the attribution rules of
section 355(d)(8) and paragraph (e)(1) of this section. After the
merger, however, under paragraph (b)(3)(iv) of this section, P is
not treated as having acquired by purchase the D1 or the C stock
under section 355(d)(8)(B) and paragraph (e)(1) of this section
because P no longer holds the directly purchased interest in D.
Under section 362(b), P's basis in the D1 stock is determined by
reference to D's basis in the D1 stock and not by reference to P's
basis in D. Paragraph (d)(2)(i)(B) of this section does not treat
the D1 stock as newly purchased in P's hands because no gain or loss
was recognized by D in the merger. Accordingly, neither the D1 stock
nor the C stock is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section in P's hands, and the distribution
is not a disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
(4) Anti-avoidance rule--(i) In general. Notwithstanding any
provision of section 355(d) or this section, the Commissioner may treat
any distribution as a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section if the distribution or another
transaction or transactions are engaged in or structured with a
principal purpose to avoid the purposes of section 355(d) or this
section with respect to the distribution. Without limiting the
preceding sentence, the Commissioner may determine that the existence
of a related person, intermediary, pass-through entity, or similar
person (an intermediary) should be disregarded, in whole or in part, if
the intermediary is formed or availed of with a principal purpose to
avoid the purposes of section 355(d) or this section.
(ii) Example. The following example illustrates this paragraph
(b)(4):
Example. Post-distribution redemption. B wholly owns D, which
wholly owns C. With a principal purpose to avoid the purposes of
[[Page 23562]]
section 355(d), A, B, D, and C engage in the following transactions.
A purchases 45 of 100 shares of the only class of D stock. Within
five years after A's purchase, D distributes all of its 100 shares
in C to A and B pro rata. D then redeems 20 shares of B's D stock,
and C redeems 20 shares of B's C stock. After the redemption, A owns
45 shares and B owns 35 shares in each of D and C. Under paragraph
(b)(4)(i) of this section, the Commissioner may treat A as owning
disqualified stock in D and C that constitutes a 50 percent or
greater interest in D and C immediately after the distribution.
Under that treatment, the distribution is a disqualified
distribution under section 355(d)(2).
(c) Whether a person holds a 50 percent or greater interest--(1) In
general. Under section 355(d)(4), 50 percent or greater interest means
stock possessing at least 50 percent of the total combined voting power
of all classes of stock entitled to vote or at least 50 percent of the
total value of shares of all classes of stock.
(2) Valuation. For purposes of section 355(d)(4) and this section,
all shares of stock within a single class are considered to have the
same value. But see paragraph (c)(3)(vii)(A) of this section
(determination of whether it is reasonably certain that an option will
be exercised).
(3) Effect of options, warrants, convertible obligations, and other
similar interests--(i) Application. This paragraph (c)(3) provides
rules to determine when an option is treated as exercised for purposes
of section 355(d) (other than section 355(d)(6)). Except as provided in
this paragraph (c)(3), an option is not treated as exercised for
purposes of section 355(d). This paragraph (c)(3) does not affect the
determination of whether an instrument is an option or stock under
general principles of tax law (such as substance over form).
(ii) General rule. In determining whether a person has acquired by
purchase a 50 percent or greater interest under section 355(d)(4), an
option to acquire stock (as described in paragraphs (c)(3) (v) and (vi)
of this section) that has not been exercised when a distribution occurs
is treated as exercised on the date it was issued or most recently
transferred if--
(A) Its exercise (whether by itself or in conjunction with the
deemed exercise of one or more other options) would cause a person to
become a disqualified person; and
(B) Immediately after the distribution, it is reasonably certain
(as described in paragraph (c)(3)(vii) of this section) that the option
will be exercised.
(iii) Options deemed newly issued--(A) Exchange, adjustment, or
alteration of existing option. For purposes of this paragraph (c)(3),
each of the following is treated as a new issuance or transfer of an
existing option only if it materially increases the likelihood that an
option will be exercised--
(1) An exchange of an option for another option or options;
(2) An adjustment to the terms of an option (including an
adjustment pursuant to the terms of the option);
(3) An adjustment to the terms of the underlying stock (including
an adjustment pursuant to the terms of the stock);
(4) A change to the capital structure of the issuing corporation;
and
(5) An alteration to the fair market value of issuing corporation
stock through an asset transfer (other than regular, ordinary
dividends) or through any other means.
(B) Certain compensatory options. An option described in paragraph
(c)(3)(vi)(B)(2) of this section is treated as issued on the date it
becomes transferable.
(iv) Effect of treating an option as exercised--(A) In general. For
purposes of section 355(d), an option that is treated as exercised
under this paragraph (c)(3) is treated as exercised both for purposes
of determining the percentage of the voting power of stock owned by the
holder and for purposes of determining the percentage of the value of
stock owned by the holder.
(B) Cash settlement options, phantom stock, stock appreciation
rights, certain notional principal contracts, or similar interests. If
a cash settlement option, phantom stock, stock appreciation right,
notional principal contract described in paragraph (c)(3)(v)(B) of this
section, or similar interest is treated as exercised, the option is
treated as having been converted into stock of the issuing corporation.
If the amount to be received upon the exercise of such an option is
determined by reference to a multiple of the increase in the value of a
share of the issuing corporation's stock on the exercise date over the
value of a share of the stock on the date the option is issued, the
option is treated as converted into a corresponding number of shares of
such stock. Appropriate adjustments must be made in any situation in
which the amount to be received upon exercise of the option is
determined in another manner.
(C) Stock purchase agreement or similar arrangement. If a stock
purchase agreement or similar arrangement is deemed exercised, the
purchaser is treated as having purchased of the stock under the terms
of the agreement or arrangement as though all covenants had been
satisfied and all contingencies met. The agreement or arrangement is
deemed to have been exercised as of the date it is entered into or most
recently assigned.
(v) Instruments treated as options. For purposes of this paragraph
(c)(3), except to the extent provided in paragraph (c)(3)(vi) of this
section, the following are treated as options:
(A) A call option, warrant, convertible obligation, the conversion
feature of convertible stock, put option, redemption agreement
(including a right to cause the redemption of stock), notional
principal contract (as defined in Sec. 1.446-3(c)) that provides for
the payment of amounts in stock, stock purchase agreement or similar
arrangement, or any other instrument that provides for the right to
purchase, issue, redeem, or transfer stock (including an option on an
option).
(B) A cash settlement option, phantom stock, stock appreciation
right, notional principal contract (as defined in Sec. 1.446-3(c)) that
provides for payment based on the price of stock, or any other similar
interest (except for stock).
(vi) Instruments generally not treated as options. For purposes of
this paragraph (c)(3), the following are not treated as options, unless
issued, transferred, or listed with a principal purpose to avoid the
application of section 355(d) or this section:
(A) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(B) Compensatory options--(1) General rule. An option to acquire
stock in a corporation with customary terms and conditions provided to
an employee, director, or independent contractor in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and that is not excessive by reference to
the services performed) and that--
(i) Is nontransferable within the meaning of Sec. 1.83-3(d); and
(ii) Does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b).
(2) Exception. Paragraph (c)(3)(vi)(B)(1) of this section ceases to
apply to an option that becomes transferable.
[[Page 23563]]
(C) Certain stock conversion features. The conversion feature of
convertible stock, provided that--
(1) The stock is not convertible for at least five years after
issuance or transfer; and
(2) The terms of the conversion feature do not require the tender
of any consideration other than the stock being converted.
(D) Options exercisable only upon death, disability, mental
incompetency, or retirement. Any option entered into between
stockholders of a corporation (or a stockholder and the corporation)
with respect to the stock of either stockholder that is exercisable
only upon the death, disability, mental incompetency of the
stockholder, or, in the case of stock acquired in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and that is not excessive by reference to
the services performed), the stockholder's retirement.
(E) Rights of first refusal. A bona fide right of first refusal
regarding the corporation's stock with customary terms, entered into
between stockholders of a corporation (or between the corporation and a
stockholder).
(F) Other enumerated instruments. Any other instruments specified
in regulations, a revenue ruling, or a revenue procedure. See
Sec. 601.601(d)(2) of this chapter.
(vii) Reasonably certain that the option will be exercised--(A) In
general. The determination of whether, immediately after the
distribution, an option is reasonably certain to be exercised is based
on all the facts and circumstances. In applying the previous sentence,
the fair market value of stock underlying an option is determined by
taking into account control premiums and minority and blockage
discounts.
(B) Stock purchase agreement or similar arrangement. A stock
purchase agreement or similar arrangement is treated as reasonably
certain to be exercised if the parties' obligations to complete the
transaction are subject only to reasonable closing conditions.
(viii) Examples. The following examples illustrate this paragraph
(c)(3):
Example 1. D owns all of the stock of C. A purchases 40 percent
of D's only class of stock and an option to purchase an additional
20 percent of the D stock. Assume that no control premium or
minority or blockage discount applies to the D stock underlying the
option. The option permits A to acquire the stock at $30 per share,
and D's stock has a fair market value of $27 per share on the date
the option is issued. The option is subject to no contingencies or
restrictive covenants, may be exercised within five years after its
issuance, and is not described in paragraph (c)(3)(vi) of this
section (regarding instruments generally not treated as options).
Within five years of A's purchase of the D stock and option, D
distributes the stock of its subsidiary C pro rata and A receives 40
percent of the C stock in the distribution. Immediately after the
distribution, D's stock has a fair market value of $30 per share and
C's stock has a fair market value of $15 per share. At the time of
the distribution, A exchanges A's option for an option to purchase
20 percent of the D stock at $20 per share and an option to purchase
20 percent of the C stock at $10 per share. Based on all the facts
and circumstances, it is reasonably certain, immediately after the
distribution, that A will exercise its options. Under paragraph
(c)(3)(iii)(A)(1) of this section, the substituted options are
treated as issued on the date the original option was issued.
Accordingly, the options are treated as exercised by A on the date
that A purchased the original option. A is treated as owning 60
percent of the D stock and 60 percent of the C stock that is
disqualified stock, and the distribution is a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 2. D owns all of the stock of C. A purchases 37 percent
of D's only class of stock. B owns 38 percent of the D stock, and
the remaining 25 percent is owned by 20 individuals, each of whom
owns less than five percent of D's stock. A purchases an option to
purchase an additional 14 percent of the D stock from shareholders
other than B for $50 per share. The option is subject to no
contingencies or restrictive covenants, may be exercised within five
years after its issuance, and is not described in paragraph
(c)(3)(vi) of this section. Within five years of A's purchase of the
option and 37 percent interest in D, D distributes the stock of its
subsidiary C pro rata and A receives 37 percent of the C stock in
the distribution. At the time of the distribution, A exchanges its
option for an option to purchase 14 percent of the D stock at $25
per share and an option to purchase 14 percent of the C stock at $25
per share. Assume that, although a shareholder that owned no D or C
stock would pay only $20 per share for D or C stock immediately
after the distribution, a shareholder in A's position would pay $30
per share for 14 percent of the stock of D or C because of the
control premium which attaches to the shares. The control premium is
taken into account under paragraph (c)(3)(vii)(A) of this section to
determine whether A is reasonably certain to exercise the options.
Based on all the facts and circumstances, it is reasonably certain,
immediately after the distribution, that A will exercise its
options. Under paragraph (c)(3)(iii)(A) of this section, the
substituted options are treated as issued on the date the original
option was issued. Accordingly, the options are treated as exercised
by A on the date that A purchased the original option. Under
paragraph (c)(2) of this section, all shares of D and C are
considered to have the same value to determine the amount of stock A
is treated as purchasing under the options. A is treated as owning
51 percent of the D stock and 51 percent of the C stock that is
disqualified stock, and the distribution is a disqualified
distribution under section 355(d)(2).
(4) Plan or arrangement--(i) In general. Under section
355(d)(7)(B), if two or more persons act pursuant to a plan or
arrangement with respect to acquisitions of stock in the distributing
corporation or controlled corporation, those persons are treated as one
person for purposes of section 355(d).
(ii) Understanding. For purposes of section 355(d)(7)(B), two or
more persons who are (or will after an acquisition become) shareholders
(or are treated as shareholders under paragraph (c)(3)(ii) of this
section) act pursuant to a plan or arrangement with respect to an
acquisition of stock only if they have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock. A principal element in determining if such an understanding
exists is whether the investment decision of each person is based on
the investment decision of one or more other existing or prospective
shareholders. However, the participation by creditors in formulating a
plan for an insolvency workout or a reorganization in a title 11 or
similar case (whether as members of a creditors' committee or
otherwise) and the receipt of stock by creditors in satisfaction of
indebtedness pursuant to the workout or reorganization do not cause the
creditors to be considered as acting pursuant to a plan or arrangement.
(iii) Examples. The following examples illustrate paragraph
(c)(4)(ii) of this section:
Example 1. D has 1,000 shares of common stock outstanding. A
group of 20 unrelated individuals who previously owned no D stock
(the Group) agree among themselves to acquire 50 percent or more of
D's stock. The Group is not a person under section 7701(a)(1).
Subsequently, pursuant to their understanding, the members of the
Group purchase 600 shares of D common stock from the existing D
shareholders (a total of 60 percent of the D stock), with each
member purchasing 30 shares. Under paragraph (c)(4)(ii) of this
section, the members of the Group have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock. Their interests are therefore aggregated under section
355(d)(7)(B), and they are treated as one person who purchased 600
shares of D's stock for purposes of section 355(d).
Example 2. D has 1,000 shares of outstanding stock owned by
unrelated individuals. D's management is concerned that D may become
subject to a takeover bid. In separate meetings, D's management
meets with potential investors who own no stock and are friendly to
management to convince them to acquire D's stock based on an
understanding that D will assemble a group
[[Page 23564]]
that in the aggregate will acquire more than 50 percent of D's
stock. Subsequently, 15 of these investors each purchases four
percent of D's stock. Under paragraph (c)(4)(ii) of this section,
the 15 investors have a formal or informal understanding among
themselves to make a coordinated acquisition of stock. Their
interests are therefore aggregated under section 355(d)(7)(B), and
they are treated as one person who purchased 600 shares of D stock
for purposes of section 355(d).
Example 3. (i) D has 1,000 shares of outstanding stock owned by
unrelated individuals. An investment advisor advises its clients
that it believes D's stock is undervalued and recommends that they
acquire D stock. Acting on the investment advisor's recommendation,
20 unrelated individuals each purchases 30 shares of D stock. Each
client's decision was not based on the investment decisions made by
one or more other clients. Because there is no formal or informal
understanding among the clients to make a coordinated acquisition of
D stock, their interests are not aggregated under section
355(d)(7)(B) and they are treated as making separate purchases.
(ii) The facts are the same as in paragraph (i) of this Example
3, except that the investment advisor is also the underwriter
(without regard to whether it is a firm commitment or best efforts
underwriting) for a primary or secondary offering of D stock. The
result is the same.
(iii) The facts are the same as in paragraph (i) of this Example
3, except that, instead of an investment advisor recommending that
clients purchase D stock, the trustee of several trusts qualified
under section 401(a) sponsored by unrelated corporations causes each
trust to purchase the D stock. The result is the same, provided that
the trustee's investment decision made on behalf of each trust was
not based on the investment decision made on behalf of one or more
of the other trusts.
(d) Purchase--(1) In general--(i) Definition of purchase under
section 355(d)(5)(A). Under section 355(d)(5)(A), except as otherwise
provided in section 355(d)(5)(B) and (C), a purchase means any
acquisition, but only if--
(A) The basis of the property acquired in the hands of the acquirer
is not determined--
(1) In whole or in part by reference to the adjusted basis of such
property in the hands of the person from whom acquired; or
(2) Under section 1014(a); and
(B) The property is not acquired in an exchange to which section
351, 354, 355, or 356 applies.
(ii) Section 355 distributions. Paragraph (d)(1)(i)(B) of this
section includes all section 355 distributions, whether in exchange (in
whole or in part) for stock or pro rata.
(iii) Examples. The following examples illustrate this paragraph
(d)(1):
Example 1. Section 304(a)(1) acquisition. A, who owns all of the
stock of P and T, sells the T stock to P for cash. The T stock is
not marketable stock under section 355(d)(5)(B)(ii) and paragraph
(d)(3)(ii) of this section. A is treated under section 304(a)(1) as
receiving a distribution in redemption of the P stock. Under section
302(d), the deemed redemption is treated as a section 301
distribution. Assume that under sections 304(b)(2) and 301(c)(1),
all of the distribution is a dividend. A and P are treated in the
same manner as if A had transferred the T stock to P in exchange for
stock of P in a transaction to which section 351(a) applies, and P
had then redeemed the stock P was treated as issuing in the
transaction. Under section 362(a), P's basis in the T stock is
determined by reference to A's adjusted basis in the T stock, and
there is no basis increase in the T stock because A recognizes no
gain on the deemed transfer. Accordingly, P's acquisition of the T
stock from A is not a purchase by P under section 355(d)(5)(A)(i)(I)
and paragraphs (d)(1)(i)(A)(1) and (d)(2)(i)(B) of this section.
Example 2. Section 338 election. P owns all of the stock of S
and no other assets. X acquires all of the P stock from the P
shareholders and makes an election under section 338. Under section
355(d)(5)(A), X has acquired the P stock by purchase. Under section
338(a) and (b), P is treated as having sold all of its assets at
fair market value and purchased the assets as a new corporation as
of the beginning of the day after the acquisition date for an amount
equal to the purchase price of the P stock. Accordingly, P is
treated as having purchased all of the S stock under section
355(d)(5)(A).
(2) Exceptions to definition of purchase under section
355(d)(5)(A). The following acquisitions are not treated as purchases
under section 355(d)(5)(A):
(i) Acquisition of stock in a transaction which includes other
property or money--(A) Transferors and shareholders of transferor or
distributing corporations--(1) In general. An acquisition of stock
permitted to be received by a transferor of property without the
recognition of gain under section 351(a), or permitted to be received
without the recognition of gain under section 354 or 355, is not a
purchase to the extent section 358(a)(1) applies to determine the
recipient's basis in the stock received, whether or not the recipient
also recognizes gain under section 351(b) or 356. But see paragraph
(e)(3) of this section (interest received in exchange for purchased
interest in exchanged basis transaction treated as purchased).
(2) Exception. To the extent there is received in the exchange or
distribution, in addition to stock described in paragraph
(d)(2)(i)(A)(1) of this section, stock that is other property under
section 351(b) or 356(a)(1), the stock is treated as purchased on the
date of the exchange or distribution for purposes of section 355(d).
(B) Transferee corporations--(1) In general. An acquisition of
stock by a corporation is not a purchase to the extent section 334(b)
or 362(a) or (b) applies to determine the corporation's basis in the
stock received. But see section 355(d)(5)(C) and paragraph (e)(2) of
this section (purchased property transferred in transferred basis
transaction is treated as purchased by transferee).
(2) Exception. If a corporation acquires stock, the stock is
treated as purchased on the date of the stock acquisition for purposes
of section 355(d)--
(i) If the liquidating corporation recognizes gain or loss with
respect to the transferred stock as described in section 334(b)(1); or
(ii) To the extent the basis of the transferred stock is increased
through the recognition of gain by the transferor under section 362(a)
or (b).
(C) Examples. The following examples illustrate this paragraph
(d)(2)(i):
Example 1. (i) A owns all the stock of T. T merges into D in a
transaction qualifying under section 368(a)(1)(A), with A exchanging
all of the T stock for D stock and $100 cash. Under section
356(a)(1), A recognizes $100 of the realized gain on the
transaction. Under section 358(a)(1), A's basis in the D stock
equals A's basis in the T stock, decreased by the $100 received and
increased by the gain recognized, also $100. Under paragraph
(d)(2)(i)(A) of this section, A is not treated as having purchased
the D stock for purposes of section 355(d)(5).
(ii) The facts are the same as in paragraph (i) of this Example,
except that rather than D stock and $100 cash, A receives D stock
and stock in C, a corporation not a party to the reorganization,
with a fair market value of $100. Under section 358(a)(2), A's basis
in the C stock is its fair market value, or $100. Under paragraph
(d)(2)(i)(A)(2) of this section, A is treated as having purchased
the C stock, but not the D stock, for purposes of section 355(d)(5).
Example 2. A purchases all of the stock of D, which is not
marketable stock, on Date 1 for $90. Within five years of A's
purchase, on Date 2, A contributes the D stock to P in exchange for
P stock worth $90 and $10 cash in a transaction qualifying under
section 351. Under section 362(a), P's basis in D is $100. P is
treated as having purchased 90 percent ($90 worth) of the D stock on
Date 1 under section 355(d)(5)(C) and paragraph (e)(2)(i) of this
section and as having purchased 10 percent ($10 worth) of the D
stock on Date 2 under paragraph (d)(2)(i)(B)(2) of this section.
(ii) Acquisition of stock in a distribution to which section 305(a)
applies. An acquisition of stock in a distribution qualifying under
section 305(a) is not a purchase to the extent section 307(a) applies
to determine the recipient's basis. However, to the extent
[[Page 23565]]
the distribution is of rights to acquire stock, see paragraph (c)(3) of
this section for rules regarding options, warrants, convertible
obligations, and other similar interests.
(iii) Section 1036(a) exchange. An exchange of stock qualifying
under section 1036(a) is not a purchase by either party to the exchange
to the extent the basis of the property acquired equals that of the
property exchanged under section 1031(d).
(3) Certain section 351 exchanges treated as purchases--(i) In
general--(A) Treatment of stock received by transferor. Under section
355(d)(5)(B), a purchase includes any acquisition of property in an
exchange to which section 351 applies to the extent the property is
acquired in exchange for any cash or cash item, any marketable stock,
or any debt of the transferor. The property treated as acquired by
purchase is the property received by the transferor in the exchange.
(B) Multiple classes of stock. If the transferor in a transaction
described in section 355(d)(5)(B) receives stock or securities of more
than one class, or receives both stock and securities, then the amount
of stock or securities purchased is determined in a manner that
corresponds to the allocation of basis to the stock or securities under
section 358. See Sec. 1.358-2(b).
(ii) Cash item, marketable stock. For purposes of section
355(d)(5)(B) and this paragraph (d)(3), either or both of the terms
cash item and marketable stock include personal property within the
meaning of section 1092(d)(1) and Sec. 1.1092(d)-1, without giving
effect to section 1092(d)(3).
(iii) Exception for certain acquisitions--(A) In general. Except to
the extent provided in paragraph (e)(3) of this section (interest
received in exchange for purchased interest in exchanged basis
transaction treated as purchased), an acquisition of stock in a
corporation in a section 351 transaction by one or more persons in
exchange for an amount of stock in another corporation (the transferred
corporation) that meets the requirements of section 1504(a)(2) is not a
purchase by the transferor or transferors, regardless of whether the
stock of the transferred corporation is marketable stock under section
355(d)(5)(B)(ii) and paragraph (d)(3)(ii) of this section.
(B) Example. The following example illustrates this paragraph
(d)(3)(iii):
Example. D's two classes of stock, voting common and nonvoting
preferred, are both widely held and publicly traded. The nonvoting
preferred stock is stock described in section 1504(a)(4). Assume
that all of the D stock is marketable stock under section
355(d)(5)(B)(ii) and paragraph (d)(3)(ii) of this section. D's board
of directors proposes that, for valid business purposes, D's common
stock should be held by a holding company, HC, but its preferred
stock should not be transferred to HC. As proposed, the D common
shareholders exchange their D stock solely for HC common stock in a
section 351(a) transaction. The D preferred shareholders retain
their stock. HC acquires an amount of D stock that meets the
requirements of section 1504(a)(2). Although the D common stock was
marketable stock in the hands of the D shareholders immediately
before the transfer, and the D nonvoting preferred stock is
marketable stock after the transfer, the D shareholders are not
treated as having acquired the HC stock by purchase (except to the
extent the exchanged basis rule of paragraph (e)(3) of this section
may apply to treat HC stock as purchased on the date the exchanged D
stock was purchased).
(iv) Exception for assets transferred as part of an active trade or
business--(A) In general. Except to the extent provided in paragraph
(e)(3) of this section, an acquisition not described in paragraph
(d)(3)(iii) of this section of stock in exchange for any cash or cash
item, any marketable stock, or any debt of the transferor in a section
351 transaction is not a purchase if--
(1) The transferor is engaged in the active conduct of a trade or
business under paragraph (d)(3)(iv)(B) of this section and the
transferred items (including debt incurred in the ordinary course of
the trade or business) are used in the trade or business;
(2) The transferred items do not exceed the reasonable needs of the
trade or business under paragraph (d)(3)(iv)(C) of this section;
(3) The transferor transfers the items as part of the trade or
business; and
(4) The transferee continues the active conduct of the trade or
business.
(B) Active conduct of a trade or business. For purposes of this
paragraph (d)(3)(iv), whether, with respect to the trade or business at
issue, the transferor and transferee are engaged in the active conduct
of a trade or business is determined under Sec. 1.355-3(b)(2) and (3),
except that--
(1) Conduct is tested before the transfer (with respect to the
transferor) and after the transfer (with respect to the transferee)
rather than immediately after a distribution; and
(2) The trade or business need not have been conducted for five
years before its transfer, but it must have been conducted for a
sufficient period of time to establish that it is a viable and ongoing
trade or business.
(C) Reasonable needs of the trade or business. For purposes of this
paragraph (d)(3)(iv), the reasonable needs of the trade or business
include only the amount of cash or cash items, marketable stock, or
debt of the transferor that a prudent business person apprised of all
relevant facts would consider necessary for the present and reasonably
anticipated future needs of the business. Transferred items may be
considered necessary for reasonably anticipated future needs only if
the transferor and transferee have specific, definite, and feasible
plans for their use. Those plans must require that items intended for
anticipated future needs rather than present needs be used as
expeditiously as possible consistent with the business purpose for
retention of the items.
Future needs are not reasonably anticipated if they are uncertain
or vague or where the execution of the plan for their use is
substantially postponed. The reasonable needs of a trade or business
are generally its needs at the time of the transfer of the business
including the items. However, for purposes of applying section 355(d)
to a distribution, events and conditions after the transfer and through
the date immediately after the distribution (including whether plans
for the use of transferred items have been consummated or substantially
postponed) may be considered to determine whether at the time of the
transfer the items were necessary for the present and reasonably
anticipated future needs of the business.
(D) Consideration of all facts and circumstances. All facts and
circumstances are considered in determining whether this paragraph
(d)(3)(iv) applies.
(v) Exception for transfer between members of the same affiliated
group--(A) In general. Except to the extent provided in paragraph
(e)(3) of this section, an acquisition of stock (whether actual or
constructive) not described in paragraphs (d)(3)(iii) and (iv) of this
section in exchange for any cash or cash item, marketable stock, or
debt of the transferor in a section 351 transaction is not a purchase
if the transferor corporation or corporations, the transferee
corporation, and any distributed controlled corporation of the
transferee corporation are members of the same affiliated group as
defined in section 1504(a) before the section 351 transaction (if the
transferee corporation is in existence before the transaction) and do
not cease to be members of such affiliated group in any transaction
that is related to the section 351 transaction (including any
distribution of a controlled corporation by the transferee
corporation). But see paragraph (b)(4) of this section where the
transfer is made
[[Page 23566]]
for a principal purpose to avoid the purposes of section 355(d).
(B) Examples. The following examples illustrate this paragraph
(d)(3)(v):
Example 1. Publicly traded P has wholly owned S since 1990. S is
engaged in the business of computer software development and is
developing a new software platform for use in the managed health
care industry. Over a period of four years beginning on January 31,
2000, P contributes a substantial amount of cash to S solely for the
purpose of funding the software platform development. On completion
of the software platform in January of 2004, 60 percent of the value
of the S stock is attributable to the cash contributions made within
the last four years. The P group's primary lender requires that S
separately incorporate the software platform and related assets and
distribute the new subsidiary to P as a condition of providing
required funding to market the platform. Accordingly, on February 1,
2004, S forms N, contributes the platform and related assets to N,
and distributes all of the N stock to P in a transaction intended to
qualify under section 355(a). P, S, and N will not leave the
affiliated group in any transaction related to the cash
contributions. Under paragraph (d)(3)(v)(A) of this section, P's
cash contributions to S are not treated as purchases of additional S
stock, and the distribution of N from S to P is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 2. On Date 1, P contributes cash to its subsidiary S
with a principal purpose to increase its stock basis in S. Sixty
percent of the value of P's S stock is attributable to the cash
contribution. Under paragraph (b)(4) of this section (anti-avoidance
rule), 60 percent of the S stock is treated as purchased under
section 355(d)(5)(B), notwithstanding paragraph (d)(3)(v)(A) of this
section. Accordingly, any distribution of a subsidiary of S to P
within the five-year period after Date 1 will be a disqualified
distribution, regardless of whether P, S, and any distributed S
subsidiary remain affiliated after the distribution and any
transactions related to the cash contribution.
(4) Triangular asset reorganizations--(i) Definition. A triangular
asset reorganization is a reorganization that qualifies under--
(A) Section 368(a)(1) (A) or (G) by reason of section 368(a)(2)(D);
(B) Section 368(a)(1)(A) by reason of section 368(a)(2)(E)
(regardless of whether section 368(a)(3)(E) applies), unless the
transaction also qualifies as either a section 351 transfer or a
reorganization under section 368(a)(1)(B); or
(C) Section 368(a)(1)(C), and stock of the controlling corporation
rather than the acquiring corporation is exchanged for the acquired
corporation's properties.
(ii) Treatment. Notwithstanding section 355(d)(5)(A), for purposes
of section 355(d), the controlling corporation in a triangular asset
reorganization is treated as having--
(A) Acquired the assets of the acquired corporation (and as having
assumed any liabilities assumed by the controlling corporation's
subsidiary corporation or to which the acquired corporation's assets
were subject (the acquired liabilities)) in a transaction in which the
controlling corporation's basis in the acquired corporation's assets
was determined under section 362(b); and
(B) Transferred the acquired assets and acquired liabilities to its
subsidiary corporation in a section 351 transfer.
(iii) Example. The following example illustrates this paragraph
(d)(4):
Example. Forward triangular reorganization. P forms S with $10
cash and T merges into S in a reorganization qualifying under
section 368(a)(1)(A) by reason of section 368(a)(2)(D) in which the
T shareholders receive solely P stock in exchange for their T stock.
T is not a common parent of a consolidated group of corporations.
The $10 cash with which P formed S will not be used in the acquired
business. T's assets consist only of assets part of and used in its
business with a value of $80, and $10 cash that is not part of or
used in T's business. T has no liabilities. S will use T's business
assets in T's business (which will become S's business), but will
invest the $20 cash in an unrelated passive investment. Under
paragraph (d)(4)(ii) of this section, P is treated as acquiring the
T assets in a transaction in which P's basis in the T assets was
determined under section 362(b) and contributing them to S in a
section 351 transfer. The exception in paragraph (d)(3)(v) of this
section does not apply because P and S became affiliated in the same
transaction in which the section 351 transfer is deemed to occur.
Accordingly, P is treated under section 355(d)(5)(B) and paragraph
(d)(3)(iv) of this section as having purchased $20 of the S stock,
but is not deemed to have purchased the remaining $80 of the S
stock.
(5) Reverse triangular reorganizations other than triangular asset
reorganizations--(i) In general. Except as provided in paragraph
(d)(5)(ii) of this section, if a transaction qualifies as a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E) and also as either a reorganization under section
368(a)(1)(B) or a section 351 transfer, then either section
355(d)(5)(B) (and paragraph (d)(3) (i) through (iv) of this section) or
355(d)(5)(C) (and paragraph (e)(2) of this section) applies. Regardless
of which method the controlling corporation employs to determine its
basis in the surviving corporation stock under Sec. 1.358-6(c)(2)(ii)
or 1.1502-30(b), the total amount of surviving corporation stock
treated as purchased by the controlling corporation will equal the
higher of--
(A) The amount of surviving corporation stock that would be treated
as purchased (on the date of the deemed section 351 transfer) by the
controlling corporation if the controlling corporation acquired the
surviving corporation's assets and assumed its liabilities in a
transaction in which the controlling corporation's basis in the
surviving corporation assets was determined under section 362(b), and
then transferred the acquired assets and liabilities to the surviving
corporation in a section 351 transfer (see Secs. 1.358-6(c) (1) and
(2)(ii)(A) and 1.1502-30(b)); or
(B) The amount of surviving corporation stock that would be treated
as purchased (on the date the surviving corporation shareholders
purchased their surviving corporation stock) if the controlling
corporation acquired the stock of the surviving corporation in a
transaction in which the basis in the surviving corporation's stock was
determined under section 362(b) (see Secs. 1.358-6(c)(2)(ii)(B) and
1.1502-30(b)).
(ii) Letter ruling and closing agreement. If a controlling
corporation obtains a letter ruling and enters into a closing agreement
under section 7121 in which it agrees to determine its basis in
surviving corporation stock under Sec. 1.358-6(c)(2)(ii)(A), or under
Sec. 1.1502-30(b) by applying Sec. 1.358-6(c)(2)(ii)(A) (deemed asset
acquisition and transfer by controlling corporation), then section
355(d)(5)(B) and paragraph (d)(3) (i) through (iv) of this section
apply, and section 355 (d)(5)(C) and paragraph (e)(2) of this section
do not apply. If a controlling corporation obtains a letter ruling and
enters into a closing agreement under section 7121 under which it
agrees to determine its basis in surviving corporation stock under
Sec. 1.358-6(c)(2)(ii)(B), or under Sec. 1.1502-30(b) by applying
1.358-6(c)(2)(ii)(B) (deemed stock acquisition), then section 355
(d)(5)(C) and paragraph (e)(2) of this section apply, and section 355
(d)(5)(B) and paragraphs (d)(3) (i) through (iv) of this section do not
apply.
(iii) Example. The following example illustrates this paragraph
(d)(5):
Example. Reverse triangular reorganization; purchase. (i) A
purchases 60 percent of the stock of D on Date 1. D owns no cash
items, marketable stock, or transferor debt, but holds cash that is
not part of or used in D's trade or business under paragraph
(d)(3)(iv) of this section and that represents 20 percent of D's
value. On Date 2, P forms S, and S merges into D in a reorganization
qualifying under section 368(a)(1)(B) and under section 368(a)(1)(A)
by reason of section 368(a)(2)(E). In the reorganization, P acquires
all of the D stock in exchange solely for P stock. After Date 2, and
within five years after Date 1, D
[[Page 23567]]
distributes its wholly owned subsidiary C to P. P does not obtain a
letter ruling and enter into a closing agreement under paragraph
(d)(5)(ii) of this section. P would acquire 20 percent of the D
stock by purchase on Date 2 under paragraph (d)(5)(i)(A) of this
section by operation of section 355(d)(5)(B) and paragraph
(d)(3)(iv) of this section. The exception in paragraph (d)(3)(v) of
this section does not apply because P and S became affiliated in the
same transaction in which the section 351 transfer is deemed to
occur. P would acquire 60 percent of the D stock by purchase on Date
1 under paragraph (d)(5)(i)(B) of this section because, under the
transferred basis rule of section 355(d)(5)(C) and paragraph (e)(2)
of this section, P is treated as though P purchased the D stock on
the date A purchased it. Accordingly, under paragraph (d)(5)(i) of
this section, P is treated as acquiring the higher amount (60
percent) by purchase on Date 1. D's distribution of C to P is a
disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section. In addition, A is treated as acquiring the P
stock by purchase on Date 1 under paragraph (e)(3) of this section
because A's basis in the P stock is determined by reference to A's
basis in the D stock.
(ii) The facts are the same as in paragraph (i) of this Example,
except that P obtains a letter ruling and enters into a closing
agreement under which it agrees to determine its basis in the D
stock under Sec. 1.358-6(c)(2)(ii)(A). Under paragraph (d)(5)(ii) of
this section, section 355(d)(5)(B) (and paragraphs (d)(3) (i)
through (iv) of this section) applies, and section 355(d)(5)(C) (and
paragraph (e)(2) of this section) does not apply. Accordingly, P is
treated as acquiring only 20 percent of the D stock by purchase on
Date 2. D's distribution of C to P is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
(6) Treatment of group structure changes--(i) In general.
Notwithstanding section 355(d)(5)(A), for purposes of section 355(d),
if a corporation succeeds another corporation as the common parent of a
consolidated group in a group structure change to which Sec. 1.1502-31
applies, the new common parent is treated as having acquired the assets
and assumed the liabilities of the former common parent in a
transaction in which the new common parent's basis in the former common
parent's assets was determined under section 362(b), and then
transferred the acquired assets and liabilities to the former common
parent (or, if the former common parent does not survive, to the new
common parent's subsidiary) in a section 351 transfer, with the new
common parent and former common parent being treated as not in the same
affiliated group at the time of the transfer (notwithstanding
Sec. 1.1502-31(c)(2)).
(ii) Adjustments to basis of higher-tier members. A higher-tier
member that indirectly owns all or part of the former common parent's
stock after a group structure change is treated as having purchased the
stock of an immediate subsidiary to the extent that the higher-tier
member's basis in the subsidiary is increased under Sec. 1.1502-
31(d)(4).
(iii) Example. The following example illustrates this paragraph
(d)(6):
Example. P is the common parent of a consolidated group, and T
is the common parent of another group. P has owned S for more than
five years, and the fair market value of the S stock is $50. T's
assets consist only of non-marketable stock of direct and indirect
wholly owned subsidiaries with a value of $50, assets used in its
business with a value of $50, and $50 of marketable stock that is
not part of or used in T's business. T has no liabilities. T merges
into S with the T shareholders receiving solely P stock with a value
of $150 in exchange for their T stock in a section 368(a)(2)(D)
reorganization. S will use T's business assets in T's business
(which will become S's business), but will hold the $50 of
marketable stock for investment purposes. Assume that the
transaction is a reverse acquisition under Sec. 1.1502-75(d)(3)
because the T shareholders, as a result of owning T stock, own more
than 50 percent of the value of P's stock immediately after the
transaction. Thus, the transaction is a group structure change under
Sec. 1.1502-33(f)(1). Under paragraph (d)(6) of this section, P is
treated as having acquired the assets of T in a transaction in which
P's basis in the T assets was determined under section 362(b), and
then transferred the acquired assets to S in a section 351 transfer,
with P and T being treated as not in the same affiliated group at
the time of the transfer. The exception in paragraph (d)(3)(v) of
this section (transfers within an affiliated group) does not apply.
Accordingly, P is treated under section 355(d)(5)(B) and paragraph
(d)(3)(iv) of this section as having purchased $50 of the S stock
(attributable to the marketable stock), but is not deemed to have
purchased the remaining $150 of the S stock.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes. The
amount of acquiring subsidiary, surviving corporation, or former common
parent stock that is treated as purchased under paragraph (c)(4),
(5)(i)(A), or (6) of this section (by operation of section 355(d)(5)(B)
and paragraphs (d)(3) (i) through (iv) of this section) is adjusted to
reflect any basis adjustment under--
(i) Section 1.358-6(c)(2)(i) (B) and (C) (reduction of basis
adjustment in reverse triangular reorganization where controlling
corporation acquires less than all of the surviving corporation stock),
Sec. 1.1502-30(b) (applying Sec. 1.358-6(c)(2)(i) (B) and (C) to a
consolidated group), and Sec. 1.1502-31(d)(2)(ii) (reduction of basis
adjustment in group structure change where new common parent acquires
less than all of the former common parent stock); or
(ii) Section 1.358-6(d) (reduction of basis adjustment in any
triangular reorganization to the extent controlling corporation does
not provide consideration), Sec. 1.1502-30(b) (applying Sec. 1.358-6(d)
(except Sec. 1.358-6(d)(2)) to a consolidated group), and Sec. 1.1502-
31(d)(1) (reduction of basis adjustment in group structure change to
the extent new common parent does not provide consideration).
(e) Deemed purchase and timing rules--(1) Attribution and
aggregation--(i) In general. Under section 355(d)(8)(B), if any person
acquires by purchase an interest in any entity, and the person is
treated under section 355(d)(8)(A) as holding any stock by reason of
holding the interest, the stock shall be treated as acquired by
purchase on the later of the date of the purchase of the interest in
the entity or the date the stock is acquired by purchase by such
entity.
(ii) Purchase of additional interest. If a person and an entity are
treated as a single person under section 355(d)(7), and the person
later purchases an additional interest in the entity, the person is
treated as purchasing on the date of the later purchase the amount of
stock attributed from the entity to the person under section
355(d)(8)(A) as a result of the additional interest.
(iii) Purchase between persons treated as one person. If two
persons are treated as one person under section 355(d)(7), and one
later purchases stock or securities from the other, the date of the
later purchase is used for purposes of determining when the five-year
period commences.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A). If a person who is already treated as holding
stock under section 355(d)(8)(A) later directly purchases such stock,
the date of the later direct purchase is used for purposes of
determining when the five-year period commences.
(v) Examples. The following examples illustrate this paragraph
(e)(1):
Example 1. On Date 1, A purchases 10 percent of the stock of P,
which has held 100 percent of the stock of T for more than five
years at the time of A's purchase. A is deemed to have purchased 10
percent of P's T stock on Date 1. If A later purchases an additional
41 percent of the stock of P on Date 2, A is deemed to have
purchased an additional 41 percent of P's T stock on Date 2. Because
A and P are now related persons under section 267(b), they are
treated as one person under section 355(d)(7)(A), and A is treated
as owning all of P's T stock. A is treated as acquiring 51 percent
of the T stock by purchase at the times of A's respective purchases
of P stock on Date 1 and Date 2. The remaining 49 percent of T stock
is
[[Page 23568]]
treated as acquired when P acquired the T stock, more than five
years before Date 1. If P distributes T within five years after Date
1, the distribution will be a disqualified distribution under
section 355 (d)(2) and paragraph (b)(1) of this section.
Example 2. A has owned 60 percent of the stock of P for more
than five years, and P has owned 40 percent of the stock of T for
more than five years. A and P are treated as one person, and A is
treated as owning 40 percent of the stock of T for more than five
years. If P later purchases an additional 20 percent of the stock of
T on Date 1, A is treated as acquiring by purchase the additional 20
percent of T stock on Date 1. If A then purchases an additional 10
percent of the stock of P on Date 2, under the attribution rule and
the deemed purchase rule, A is deemed to have purchased on Date 2 an
additional four percent of the T stock (10 percent of the 40 percent
that P originally owned). In addition, even though A and P were
already treated as one person under section 355(d)(7)(A), A is also
deemed to have purchased two percent of the T stock on Date 2 (10
percent of the 20 percent of the T stock that it was treated as
purchasing on Date 1). A is still treated as owning all 60 percent
of the T stock owned by P. However, of the 60 percent, A is treated
as having purchased 18 percent of the T stock on Date 1 and 6
percent of the T stock on Date 2, for a total of 24 percent
purchased stock.
Example 3. A purchases a 20 percent interest in partnership M on
Date 1. M has owned 30 percent of the stock and 25 percent of the
securities of P for more than five years. P has owned 40 percent of
the stock and 100 percent of the securities of T for more than five
years. Under section 318(a)(2)(C) as modified by section
355(d)(8)(A), M is deemed to own 12 percent of the stock (30 percent
of the 40 percent P owns) and 30 percent of the securities (30
percent of the 100 percent P owns) of T. Under sections 318(a)(2)(A)
and 355(d)(8)(B), A is deemed to have purchased 2.4 percent of the
stock (20 percent of the 12 percent M is deemed to own) and 6
percent of the securities (20 percent of the 30 percent M is deemed
to own) of T on Date 1. Similarly, A is deemed to have purchased 6
percent of the stock (20 percent of the 30 percent M owns) and five
percent of the securities (20 percent of the 25 percent M owns) of P
on Date 1. If M later purchases an additional 10 percent of P stock
on Date 2, M is deemed to have purchased four percent of the stock
(10 percent of the 40 percent P owns) and 10 percent of the
securities (10 percent of the 100 percent P owns) of T on Date 2. A
is deemed to have purchased two percent of the stock of P on Date 2
(20 percent of the 10 percent M purchased). A is also deemed to have
purchased 0.8 percent of the stock (20 percent of the four percent M
is deemed to have purchased) and two percent of the securities (20
percent of the 10 percent M is deemed to have purchased) of T on
Date 2.
Example 4. A and B are brother and sister. For more than five
years, A has owned 75 percent of the stock of P, and B has owned 25
percent of the stock of P. A and B are treated as one person under
section 267(b), and the stock of each is treated as purchased on the
date it was purchased by A and B, respectively. If B later purchases
50 percent of the P stock from A on Date 1, A and B are still
treated as one person. However, the 50 percent of P stock that B
purchased from A is treated as purchased on Date 1.
(2) Transferred basis rule. If any person acquires property from
another person who acquired the property by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2) and (3) of
this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the adjusted basis of the property in the
hands of the acquirer is determined in whole or in part by reference to
the adjusted basis of the property in the hands of the other person,
the acquirer is treated as having acquired the property by purchase on
the date it was so acquired by the other person. The rule in this
paragraph (e)(2) applies, for example, where stock of a corporation
acquired by purchase is subsequently acquired in a section 351 transfer
or a reorganization qualifying under section 368(a)(1)(B), but does not
apply if the stock of a former common parent is acquired in a group
structure change to which Sec. 1.1502-31 applies. But see paragraph
(d)(2)(i)(B)(2) of this section for situations where the stock is
treated as purchased on the date of a transfer.
(3) Exchanged basis rule--(i) In general. If any person acquires an
interest in an entity (the first interest) by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2) and (3) of
this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the first interest is exchanged for an
interest in another entity (the second interest) where the adjusted
basis of the second interest is determined in whole or in part by
reference to the adjusted basis of the first interest, then the second
interest is treated as having been purchased on the date the first
interest was purchased. The rule in this paragraph (e)(3) applies, for
example, where stock of a corporation acquired by purchase is
subsequently exchanged for other stock in a section 351, 354, or
1036(a) exchange. But see paragraph (d)(2)(i)(A)(2) of this section for
situations where the stock is treated as purchased on the date of an
exchange or distribution.
(ii) Example. The following example illustrates this paragraph
(e)(3):
Example. A purchases 50 percent of the stock of T on Date 1. On
Date 2, T merges into D in a section 368(a)(1)(A) reorganization,
with A exchanging all of the T stock solely for stock of D. Under
section 358(a), A's basis in the D stock is determined by reference
to the basis of the T stock it purchased. Accordingly, A is treated
as having purchased the D stock on Date 1, and has a purchased basis
in the D stock under paragraph (b)(3)(iii) of this section.
(4) Substantial diminution of risk--(i) In general. If section
355(d)(6) applies to any stock for any period, the running of any five-
year period set forth in section 355(d)(3) is suspended during such
period.
(ii) Property to which suspension applies. Section 355(d)(6)
applies to any stock for any period during which the holder's risk of
loss with respect to such stock, or with respect to any portion of the
activities of the corporation, is (directly or indirectly)
substantially diminished by an option, a short sale, any special class
of stock, or any other device or transaction.
(iii) Risk of loss substantially diminished. Whether a holder's
risk of loss is substantially diminished under section 355(d)(6) and
paragraph (e)(4)(ii) of this section will be determined based on all
facts and circumstances relating to the stock, the corporate
activities, and arrangements for holding the stock.
(iv) Special class of stock. For purposes of section 355(d)(6) and
paragraph (e)(4)(ii) of this section, the term special class of stock
includes a class of stock that grants particular rights to, or bears
particular risks for, the holder or the issuer with respect to the
earnings, assets, or attributes of less than all the assets or
activities of a corporation or any of its subsidiaries. The term
includes, for example, tracking stock and stock (or any related
instruments or arrangements) the terms of which provide for the
distribution (whether or not at the option of any party or in the event
of any contingency) of any controlled corporation or other specified
assets to the holder or to one or more persons other than the holder.
(f) Duty to determine stockholders--(1) In general. In determining
whether section 355(d) applies to a distribution of controlled
corporation stock, a distributing corporation must determine whether a
disqualified person holds its stock or the stock of any distributed
controlled corporation. This paragraph (f) provides rules regarding
this determination and the extent to which a distributing corporation
must investigate whether a disqualified person holds stock.
(2) Deemed knowledge of contents of securities filings. A
distributing corporation is deemed to have knowledge of the existence
and contents of all schedules, forms, and other documents filed with or
under the rules of the Securities and Exchange Commission, including
without limitation any Schedule 13D or 13G (or
[[Page 23569]]
any similar schedules) and amendments, with respect to any relevant
corporation.
(3) Presumption as to securities filings. Absent actual knowledge
to the contrary, in determining whether section 355(d) applies to a
distribution, a distributing corporation may presume, with respect to
stock that is reporting stock (while such stock is reporting stock),
that every shareholder or other person required to file a schedule,
form, or other document with or under the rules of the Securities and
Exchange Commission as of a given date has filed the schedule, form, or
other document as of that date and that the contents of filed
schedules, forms, or other documents are accurate and complete.
Reporting stock is stock that is described in Rule 13d-1(i) of
Regulation 13D (17 CFR 240.13d-1(i)) (or any rule or regulation to
generally the same effect) promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.).
(4) Presumption as to less-than-five-percent shareholders. Absent
actual knowledge (or deemed knowledge under paragraph (f)(2) of this
section) immediately after the distribution to the contrary with regard
to a particular shareholder, a distributing corporation may presume
that no less-than-five-percent shareholder of a corporation acquired
stock by purchase under section 355(d) (5) or (8) and paragraphs (d)
and (e) of this section during the five-year period. For purposes of
this paragraph (f), a less-than-five-percent shareholder is a person
that, at no time during the five-year period, holds directly (or by
application of paragraph (c)(3)(ii) of this section, but not by
application of section 355(d) (7) or (8)) stock possessing five percent
or more of the total combined voting power of all classes of stock
entitled to vote and the total value of shares of all classes of stock
of a corporation. However, this presumption does not apply to any less-
than-five-percent shareholder that, at any time during the five-year
period--
(i) Is related under section 355(d)(7)(A) to a shareholder in the
corporation that is, at any time during the five-year period, not a
less-than-five-percent shareholder;
(ii) Acted pursuant to a plan or arrangement, with respect to
acquisitions of the corporation's stock under section 355 (d)(7)(B) and
paragraph (c)(4) of this section, with a shareholder in the corporation
that is, at any time during the five-year period, not a less-than-five-
percent shareholder; or
(iii) Holds stock that is attributed under section 355(d)(8)(A) to
a shareholder in the corporation that is, at any time during the five-
year period, not a less-than-five-percent shareholder.
(5) Examples. The following examples illustrate this paragraph (f):
Example 1. Publicly traded corporation; no schedules filed. D is
a widely held and publicly traded corporation with a single class of
reporting stock and no other class of stock. Assume that applicable
federal law requires any person that directly holds five percent or
more of the D stock to file a schedule with the Securities and
Exchange Commission within 10 days after an acquisition. D
distributes its wholly owned subsidiary C pro rata. D determines
that no schedule, form, or other document has been filed with
respect to its stock or the stock of any other relevant corporation
during the five-year period or within 10 days after the
distribution. Immediately after the distribution, D has no knowledge
that any of its shareholders are (or were at any time during the
five-year period) not less-than-five-percent shareholders, or that
any particular shareholder acquired D stock by purchase under
section 355(d) (5) or (8) and paragraphs (d) and (e) of this section
during the five-year period. Under paragraph (f)(3) of this section,
D may presume it has no shareholder that is or was not a less-than-
five-percent shareholder during the five-year period due to the
absence of any filed schedules, forms, or other documents. Under
paragraph (f)(4) of this section, D may presume that none of its
less-than-five-percent shareholders acquired D's stock by purchase
during the five-year period. Accordingly, D may presume that section
355(d) does not apply to the distribution of C.
Example 2. Publicly traded corporation; schedule filed. The
facts are the same as those in Example 1, except that D determines
that, as of 10 days after the distribution, only one schedule has
been filed with respect to its stock. That schedule discloses that X
acquired 15 percent of the D stock one year before the distribution.
Absent contrary knowledge, D may rely on the presumptions in
paragraph (f)(3) of this section and so may presume that X is its
only shareholder that is or was not a less-than-five-percent
shareholder during the five-year period. D may not rely on the
presumption in paragraph (f)(4) of this section with respect to X.
In addition, D may not rely on the presumption in paragraph (f)(4)
of this section with respect to any less-than-five-percent
shareholder that, at any time during the five-year period, is
related to X under section 355(d)(7)(A), acted pursuant to a plan or
arrangement with X under section 355 (d)(7)(B) and paragraph (c)(4)
of this section with respect to acquisitions of D stock, or holds
stock that is attributed to X under section 355(d)(8)(A).
Accordingly, under paragraph (f)(1) of this section, to determine
whether section 355(d) applies, D must determine: whether X acquired
its directly held D stock by purchase under section 355(d)(5) and
paragraphs (d) and (e)(2) and (3) of this section during the five-
year period; whether X is treated as having purchased any additional
D stock under section 355 (d)(8) and paragraph (e)(1) of this
section during the five-year period; and whether X is related to, or
acquired its D stock pursuant to a plan or arrangement with, one or
more of D's other shareholders during the five-year period under
section 355(d)(7) (A) or (B) and paragraph (c)(4) of this section,
and if so, whether those shareholders acquired their D stock by
purchase under section 355(d) (5) or (8) and paragraphs (d) and (e)
of this section during the five-year period.
Example 3. Acquisition of publicly traded corporation. The facts
are the same as those in Example 1, except that P acquires all of
the D stock in a section 368(a)(1)(B) reorganization that is not
also a reorganization under section 368(a)(1)(A) by reason of
section 368(a)(2)(E), and D distributes C to P one year later. Under
the deemed purchase rule of section 355 (d)(5)(C) and paragraph
(e)(2) of this section, P is treated as having acquired the D stock
by purchase on the date the D shareholders acquired the D stock by
purchase. Even though D has no less-than-five-percent shareholder
immediately after the distribution, D may rely on the presumptions
in paragraphs (f)(3) and (4) of this section to determine whether
and to what extent the D stock is treated as purchased during the
five-year period in P's hands under the deemed purchase rule of
section 355 (d)(5)(C) and paragraph (e)(2) of this section.
Accordingly, D may presume that section 355(d) does not apply to the
distribution of C to P.
Example 4. Non-publicly traded corporation. D is owned by 20
shareholders and has a single class of stock that is not reporting
stock. D knows that A owns 40 percent of the D stock, and D does not
know that any other shareholder has owned as much as five percent of
the D stock at any time during the five-year period. D may not rely
on the presumption in paragraph (f)(3) of this section because its
stock is not reporting stock. D may not rely on the presumption in
paragraph (f)(4) of this section with respect to A. In addition, D
may not rely on the presumption in paragraph (f)(4) of this section
for any less-than-five-percent shareholder that, at any time during
the five-year period, is related to A under section 355(d)(7)(A),
acted pursuant to a plan or arrangement with A under section 355
(d)(7)(B) and paragraph (c)(4) of this section with respect to
acquisitions of D stock, or holds stock that is attributed to A
under section 355(d)(8)(A). D may rely on the presumption in
paragraph (f)(4) of this section for less-than-five-percent
shareholders that during the five-year period are not related to A,
did not act pursuant to a plan or arrangement with A, and do not
hold stock attributed to A. Accordingly, under paragraph (f)(1) of
this section, to determine whether section 355(d) applies, D must
determine: that A is its only shareholder that is (or was at any
time during the five-year period) not a less-than-five-percent
shareholder; whether A acquired its directly held D stock by
purchase under section 355 (d)(5) and paragraphs (d) and (e)(2) and
(3) of this section during the five-year period; whether A is
treated as having purchased any additional D stock under section 355
(d)(8) and paragraph (e)(1) of this
[[Page 23570]]
section during the five-year period; and whether A is related to, or
acquired its D stock pursuant to a plan or arrangement with, one or
more of D's other shareholders during the five-year period under
section 355(d)(7) (A) or (B) and paragraph (c)(4) of this section,
and if so, whether those shareholders acquired their D stock by
purchase under section 355(d) (5) or (8) and paragraphs (d) and (e)
of this section during the five-year period.
(g) Effective date. The regulations in this section apply to
distributions occurring after the regulations in this section are
published as final regulations in the Federal Register, except that
they do not apply to any distributions occurring pursuant to a written
agreement which is (subject to customary conditions) binding on the
date the regulations in this section are published as final regulations
in the Federal Register, and at all times thereafter.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 99-10818 Filed 4-29-99; 8:45 am]
BILLING CODE 4830-01-P
