The IRS on November 18 issued identical temporary and proposed regulations on basis allocation in all-cash D reorganizations (T.D. 9558; REG-101273-10). The regulations govern the determination of the basis of stock or securities in a corporate reorganization when the issuing corporation does not distribute any stock or securities in the reorganization.
The temporary regulations clarify that in certain reorganizations in which no stock or securities of the issuing corporation are issued and distributed in the transaction, only a shareholder that owns actual shares of the issuing corporation will be able to designate the issuing corporation share of stock to which the basis (if any) of the stock or securities surrendered will attach.
A D reorganization (under Sec. 368(a)(1)(D)) generally involves a transfer by one corporation of all or a part of its assets to another corporation if, immediately after the transfer, the target corporation or one or more of its shareholders, or any combination thereof, is in control of the acquiring corporation.
The IRS has issued the temporary regulations after becoming aware of an interpretation of the final regulations on all-cash D reorganizations issued in 2009 (T.D. 9475). The interpretation involves transactions where the consideration received in a reorganization consists solely of cash and a nominal share. Some practitioners maintain that T.D. 9475 could be interpreted to allow an allocation of basis by persons who do not own actual shares of stock in the issuing corporation. The IRS considers this possible allocation “inappropriate.”
The IRS does not believe the current rules allow for such an allocation and is issuing the temporary and proposed regulations to clarify that such an allocation is impermissible. The regulations are effective November 21, 2011.