On January 21, 2009, Treasury issued proposed regulations that provide shareholders with guidance on allocating and recovering stock basis in Sec. 301 distributions (REG- 143686-07). Their purpose is to present a single model for stock basis recovery when a shareholder receives a constructive or actual distribution to which Sec. 301 applies and a single model for sales and exchanges to which Sec. 302(a) applies.
The proposed regulations define the scope of the exchange that must be analyzed under certain Code sections. They also provide a methodology for determining gain realized under Sec. 356 and stock basis under Sec. 358.
The proposed regulations aim to clarify a number of areas that are currently unclear. For example, Sec. 301 does not specify how to identify the shares upon which a distribution is made or whether a shareholder recovers its stock basis in the aggregate or share by share. It is also unclear whether transactions treated as Sec. 301 distributions (i.e., redemptions under Sec. 302(d), certain Sec. 304 transactions, and certain reorganizations) should be subject to the same rules as actual Sec. 301 distributions. For reorganizations, the Code provides consequences resulting from different types of exchanges but does not specify whether the exchange is based on a shareholder’s aggregate stock holdings or, alternatively, is based on particular elements of the overall exchange.
The proposed model is based on the premise that a share of stock is the basic unit of property that can be disposed of, and therefore the results of a transaction should generally derive from the consideration received in respect of that share. A corollary to this is that a reorganization does not justify altering a shareholder’s tax position beyond what is necessary to reflect the results of the reorganization.
To harmonize the tax treatment of economically similar transactions, the proposed regulations adopt a single model for Sec. 301 distributions (dividend equivalent transactions) and a single model for sale or exchange transactions to which Sec. 302(a) applies (nondividend equivalent transactions), regardless of whether Sec. 301 or Sec. 302(a) applies directly or by reason of Secs. 302(d), 304, or 356.
The IRS has requested that comments on the proposed regulations be submitted by April 21, 2009. The proposed regulations would take effect when finalized.