At a recent D.C Bar Tax Section Corporate Tax Committee meeting, panelists—including a Treasury representative—discussed some of the Administration’s budget proposals in the corporate area, as well as pending guidance.
The Administration proposed to amend the code to require average basis reporting for traded stock. That approach is not consistent with the 2006 Reg. Section 1.358-2, which enforces the share-byshare tracing of basis and distributions with respect to stock, said to have originated in the Johnson v. United States, 435 F.2d 1257 (4th Cir. 1971) decision.
The Treasury representative was asked whether the legislative proposal meant the IRS would back off of its current emphasis on treating each share of stock as a unit of property. He said it would not.
The F reorganization is defined as a mere change of identity, form or place of organization of one corporation, however effected. In 2004, Treasury proposed regulations amplifying this brief definition. The proposal built on the “F in a bubble” concept applied in earlier rulings, and proposed that unlimited distributions and redemptions could occur in connection with an F reorganization.
The proposals obviously have languished. The panelists discussed how the allowance of unlimited distributions seemed at odds with prior authority. They suggested that a series of earlier court rulings had relaxed the definition of the F reorganization to allow loss carrybacks, which is the principal beneficial feature of the F reorganization, along with not closing the taxable year. The Treasury official was noncommittal. Evidently, no decision has been made whether distributions in connection with the F reorganization will be taxed under Section 301 or 356, or the extent to which they will be allowed.
The most problematic case discussed was the sideways transfer of some of a subsidiary’s assets to a new sister subsidiary followed by, or simultaneously with, a liquidation of the transferring corporation, with some of its assets staying in the parent. If the sideways transfer precedes the liquidation, presumably the transaction is an F and a D reorganization. If it follows the liquidation, the liquidation is an upstream C reorganization followed by a Section 368(a)(2)(C) drop down of assets acquired in the reorganization. That transaction cannot be recharacterized as a sideways F reorganization due to Reg. Section 1.368-2(k). If the transactions are simultaneous, the treatment is unclear.
It appeared unlikely that the Treasury will revisit Reg. Section 1.368-2(k). It also does not seem that the F reorganization regulation is near completion.
Section 355 Guidance
The Section 355(b) active trade or business regulations that were proposed in 2007 primarily to flesh out the separate affiliated group concept of identifying the active business may be nearing completion and may be finalized without great change.
More problematic is guidance on successors for Section 355(e) purposes. Section 355(e) can cause a spinoff to be taxable to the distributing corporation if there is a 50 percent or greater change in the ownership of either of the corporations. Many questions arise about events other than straightforward transfers of stock of the corporations. For example, is it possible that contributing the business assets of the corporation to a partnership could trigger Section 355(e) when the contributing corporation receives less than half of the partnership interests?
The practitioner panelists agreed that should not be the case, since the corporations could as well have sold all of its assets without triggering Section 355(e). However, the Treasury official was noncommittal.
No Net Value
In 2005, Treasury proposed regulations to deal with the perceived need of a corporate party for a reorganization to be solvent. Evidently, those proposals are slowly being reconsidered. In a related Prop. Reg. Section 1.332-2(e), Example 2 stated that an upstream liquidation that could not be treated as a Section 332 liquidation might be treated as a C reorganization in which the parent could deduct a loss on its common stock.
This particular part of the proposal was viewed as the most problematic. It appears to override or ignore Section 356(c), which states that the shareholder cannot recognize a loss on the reorganization.