Net value requirement for tax-free reorganization treatment withdrawn

By Sally P. Schreiber, J.D.

On July 12, the IRS partially withdrew proposed regulations that would have required an exchange of net value 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 The partially withdrawn regulations, from 2005 (REG-163314-03), would also have clarified that Sec. 332 applies only to those cases in which the recipient corporation receives at least partial payment for each class of stock that it owns in the liquidating corporation. The IRS has already finalized the rest of the 2005 regulations.

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) that were contained in the 2005 proposed regulations.

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