The following article is adapted and reprinted from the M&A Tax Report, Vol. 8, No. 11, June 2000, Panel Publishers, New York, NY.
NEW REGS ON STOCK FOR PROPERTY EXCHANGES
by Robert W. Wood
Final regulations have been issued (TD 8883) on the treatment of
a disposition of an issuing corporation's stock by an acquiring corporation
in a taxable transaction. Issued under Code Section 1032, the regulations
are no particular surprise, since they adopt, albeit with certain modifications,
the proposed regs that were published in September 1998 (see REG-106221-98).
The regulations allow relief from gain using the cash purchase model
from Reg. §1.1502-139(f)(6)(ii). Thus, an acquiring corporation is
treated as purchasing the stock from the issuing corporation for fair market
value, with cash attributed to the acquiring corporation by the issuing
corporation. The condition for this treatment is that the issuing corporation's
stock must not be exchanged for other issuing corporation stock.
There were queries in 1998 to the proposed regulations, and the Service
has provided some answers. For example, the IRS indicates that these rules
apply to an acquiring corporation's exchange of issuing corporation stock
for its own outstanding stock held by a shareholder other than the issuing
corporation. The regulations don't apply, though, to debt instruments or
to options without a readily ascertainable fair market value. There is also an example which addresses the tax consequences of
the situation in which the acquiring corporation (or another party) makes
an actual payment to the issuing corporation for issuing corporation stock.
The example makes clear that the amount of cash being contributed by the
issuing corporation to the acquiring corporation equals the difference
between the fair market value of the issuing corporation's stock and the
fair market value of the money or other property received by the issuing
corporation as payment (from the employee or the acquiring corporation).
Dispositions, Too The final rules also discuss an acquiring corporation's disposition
of an issuing corporation's stock, treating it the same as an acquiring
corporation's disposition of the stock. The rules also apply to transactions
in which the issuing corporation's stock is obtained directly by the acquiring
entity in any combination of exchanges under Sections 351 and 721.
Effective Date The effective date for TD 8883 is May 16, 2000. While the regulations
are set to apply only prospectively, the preamble does state that the IRS
will not challenge a taxpayer's position taken in a prior period that is
consistent with the requirements of these final regulations.
New Regs on Stock for Property Exchanges, Vol. 8, No. 11,
M&A Tax Report (June 2000), p. 6.