IRS AND TREASURY FINALIZE SECTION 355(a)(3)(B) "HOT STOCK" REGULATIONS:  Today, the IRS and Treasury issued final regulations that modify the application of the section 355(a)(3)(B) "hot stock rule" to be consistent with the active trade or business rules of section 355(b).  The final regulations adopt, without substantive change, temporary regulations issued in 2008.  The final regulations apply to distributions occurring after October 20, 2011.

  • Section 355(a)(3)(B) generally provides that stock of a controlled corporation is treated as boot for section 355 purposes if such stock was acquired by a distributing corporation in a taxable transaction within five years of the distribution of the stock.
  • Under the final regulations, the hot stock rule does not apply to any acquisition of stock of a controlled corporation when it is a member of the affiliated group of the distributing corporation at any time after the acquisition but before the distribution of the controlled corporation.
  • Transfers of controlled corporation stock owned by members of the distributing corporation’s affiliated group immediately before and immediately after the transfer are disregarded.
  • In issuing the final regulations, the IRS and Treasury stated that they continue to study the interrelationship between section 355(a)(3)(B) and section 355(b).
  • The IRS and Treasury also stated that no inference regarding the content of future section 355(b) guidance should be drawn from the final regulations, and that further guidance may be issued under section 355(a)(3)(B) in connection with future section 355(b) guidance if it is necessary to harmonize the two provisions.
  • The regulations can be accessed here.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.