IRS withdraws proposed net value requirement rule

By Sally P. Schreiber, J.D.

The IRS on Wednesday partially withdrew proposed regulations that would have required that there be an exchange of net value in order for certain corporate formations and reorganizations to qualify for nonrecognition treatment (REG-139633-08). The partially withdrawn regulations, from 2005 (REG-163314-03), would also have restricted Sec. 332 liquidation treatment to solvent corporations. The IRS is withdrawing the portions of the 2005 regulations that have not already been finalized.

In withdrawing the 2005 proposed regulations, the IRS says that it believes that current law is sufficient to ensure that the reorganization provisions and Sec. 351 are used to accomplish readjustments of continuing interests in property held in modified corporate form. It also cited various cases and revenue rulings as supporting its position on Sec. 332.

The guidance withdraws the revisions to Regs. Secs. 1.332-2(b) and (e); the addition of Example 2 to Regs. Sec. 1.332-2(e); the additions of Regs. Secs. 1.351-1(a)(1)(iii) and (a)(1)(iv); the addition of Example 4 to Regs. Sec. 1.351-1(a)(2); the amendments to Regs. Secs. 1.368-1(a) and (b); the addition of Regs. Sec. 1.368-1(f); and the revision to Regs. Sec. 1.368-2(d)(1).

—Sally Schreiber (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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