[Federal Register: October 26, 2006 (Volume 71, Number 207)]
[Rules and Regulations]
[Page 62556-62557]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26oc06-5]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9244]
RIN 1545-BC05; 1545-BE88
Determination of Basis of Stock or Securities Received in
Exchange for, or With Respect to, Stock or Securities in Certain
Transactions; Treatment of Excess Loss Accounts; Correction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Correcting amendment.
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SUMMARY: This document contains a correction to final and temporary
regulations (TD 9244), that were published in the Federal Register on
Thursday, January 26, 2006 (71 FR 4264). This regulation provides
guidance regarding the determination of the basis of stock or
securities received in exchange for, or with respect to, stock or
securities in certain transactions.
DATES: This correction is effective January 23, 2006.
FOR FURTHER INFORMATION CONTACT: Theresa M. Kolish, (202) 622-7530 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The final and temporary regulations (TD 9244) that are the subject
of these corrections are under sections 358 and 1502 of the Internal
Revenue Code.
Need for Correction
As published, TD 9244 contains errors that may prove to be
misleading and are in need of clarification.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Correction of Publication
0
Accordingly, 26 CFR Part 1 is corrected by making the following
correcting amendments:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.358-1 [Corrected]
0
Par. 2. Section 1.358-1 is amended by revising paragraph (b), Example
to read as follows:
Sec. 1.358-1 Basis to distributees.
* * * * *
(b) * * *
Example. A purchased a share of stock in Corporation X in 1935
for $150. Since that date A has received distributions out of other
than earnings and profits (as defined in section 316) totaling $60,
so that A's adjusted basis for the stock is $90. In a transaction
qualifying under section 356, A exchanged this share for one share
in Corporation Y, worth $100, cash in the amount of $10, and other
property with a fair market value of $30. The exchange had the
effect of the distribution of a dividend. A's ratable share of the
earnings and profits of Corporation X accumulated after February 28,
1913, was $5. A realized a gain of $50 on the exchange, but the
amount recognized is limited to $40, the sum of the cash received
and the fair market value of the other property. Of the gain
recognized, $5 is taxable as a dividend, and $35 is taxable as a
gain from the exchange of property. The basis to A of the one share
of stock of Corporation Y is $90, that is, the adjusted basis of the
one share of stock of Corporation X ($90), decreased by the sum of
the cash received ($10) and the fair market value of the other
property received ($30) and increased by the sum of the amount
treated as a dividend ($5) and the amount treated as a gain from the
exchange of property ($35). The basis of the other property received
is $30.
* * * * *
Sec. 1.358-2 [Corrected]
0
Par. 3. Section 1.358-2(c) is amended by revising paragraphs (ii) in
Examples 4, 5, 6 and 11 to read as follows:
Sec. 1.358-2 Allocation of basis among nonrecognition property.
(a) * * *
(2) * * *
(viii) * * *
(c) * * *
Example 4. (i) * * *
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and
under Sec. 1.356-1(b), because the terms of the exchange do not
specify that shares of Corporation Y stock or cash are received in
exchange for particular shares of Class A stock or Class B stock of
Corporation X, a pro rata portion of the shares of Corporation Y
stock and cash received will be treated as received in exchange for
each share of Class A stock and Class B stock of Corporation X
surrendered based on the fair market value of such stock. Therefore,
J is treated as receiving one share of Corporation Y stock and $5 of
cash in exchange for each share of Class A stock of Corporation X
and one share of Corporation Y stock and $5 of cash in exchange for
each share of Class B stock of Corporation X. J realizes a gain of
$140 on the exchange of shares of Class A stock of Corporation X,
$100 of which is recognized under Sec. 1.356-1(a). J realizes a
gain of $80 on the exchange of Class B stock of Corporation X, all
of which is recognized under Sec. 1.356-1(a). Under paragraph
(a)(2)(i) of this section, J has 10 shares of Corporation Y stock,
each of which has a basis of $2 and is treated as having been
acquired on Date 1, 10 shares of Corporation Y stock, each of which
has a basis of $4 and is treated as having been acquired on Date 2,
and 20 shares of Corporation Y stock, each of which has a basis of
$5 and is treated as having been acquired on Date 3. Under paragraph
(a)(2)(vii) of this section, on or before the date on which the
basis of a share of Corporation Y stock received becomes relevant, J
may designate which of the shares of Corporation Y stock received
have a basis of $2, which have a basis of $4, and which have a basis
of $5.
Example 5. (i) * * *
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and
under Sec. 1.356-1(b), because the terms of the exchange specify
that J receives 40 shares of stock of Corporation Y in exchange for
J's shares of Class A stock of Corporation X and $200 of cash in
exchange for J's shares of Class B stock of Corporation X and such
terms are economically reasonable, such terms control. J realizes a
gain of $140 on the exchange of shares of Class A stock of
Corporation X, none of which is recognized under Sec. 1.356-1(a). J
realizes a gain of $80 on the exchange of shares of Class B stock of
Corporation X, all of which is recognized under Sec. 1.356-1(a).
Under paragraph (a)(2)(i) of this section, J has 20 shares of
Corporation Y stock, each of which has a basis of $1 and is treated
as having been acquired on Date 1, and 20 shares of Corporation Y
stock, each of which has a basis of $2 and is treated as having been
acquired on Date 2. Under paragraph (a)(2)(vii) of this section, on
or before the date on which the basis of a share of Corporation Y
stock received becomes relevant, J may designate which of the shares
of Corporation Y stock received have a basis of $1 and which have a
basis of $2.
Example 6. (i) * * *
(ii) Analysis. Under paragraph (a)(2)(ii) of this section and
under Sec. 1.354-1(a), because the terms of the exchange specify
that J receives 10 shares of stock of Corporation Y
[[Page 62557]]
in exchange for J's shares of Class A stock of Corporation X and a
Corporation Y security in exchange for its Corporation X security
and such terms are economically reasonable, such terms control.
Pursuant to section 354, J recognizes no gain on either exchange.
Under paragraph (a)(2)(i) of this section, J has 10 shares of
Corporation Y stock, each of which has a basis of $2 and is treated
as having been acquired on Date 1, and a security that has a basis
of $100 and is treated as having been acquired on Date 2.
* * * * *
Example 11. (i) * * *
(ii) Analysis. Under paragraph (a)(2)(iii) of this section, J is
deemed to have received shares of Corporation Y stock with an
aggregate fair market value of $1,000 in exchange for J's
Corporation X shares. Consistent with the economics of the
transaction and the rights associated with each class of stock of
Corporation Y owned by J, J is deemed to receive additional shares
of Corporation Y common stock. Because the value of the common stock
indicates that the liquidation preference associated with the
Corporation Y preferred stock could be satisfied even if the
reorganization did not occur, it is not appropriate to deem the
issuance of additional Corporation Y preferred stock. Given the
number of outstanding shares of common stock of Corporation Y and
their value immediately before the effective time of the
reorganization, J is deemed to have received 100 shares of common
stock of Corporation Y in the reorganization. Under paragraph
(a)(2)(i) of this section, each of those shares has a basis of $1
and is treated as having been acquired on Date 1. Then, the common
stock of Corporation Y is deemed to be recapitalized in a
reorganization under section 368(a)(1)(E) in which J receives 100
shares of Corporation Y common stock in exchange for those shares of
Corporation Y common stock that J held immediately prior to the
reorganization and those shares of Corporation Y common stock that J
is deemed to have received in the reorganization. Under paragraph
(a)(2)(i), immediately after the reorganization, J holds 50 shares
of Corporation Y common stock, each of which has a basis of $2 and
is treated as having been acquired on Date 1, and 50 shares of
Corporation Y common stock, each of which has a basis of $4 and is
treated as having been acquired on Date 2. Under paragraph
(a)(2)(vii) of this section, on or before the date on which the
basis of any share of J's Corporation Y common stock becomes
relevant, J may designate which of those shares have a basis of $2
and which have a basis of $4.
* * * * *
Sec. 1.1502-19T [Corrected]
0
Par. 4. Section 1.1502-19T is amended by removing the cross reference
for paragraphs (b)(2) through (c) and adding a cross reference for
paragraphs (a) through (c) in its place and revising the text to
paragraph (h)(2)(iv) to read as follows:
Sec. 1.1502-19T Excess loss accounts (temporary).
(a) through (c) [Reserved]. For further guidance, see Sec. 1.1502-
19 (a) through (c).
* * * * *
(h)(2)(iv) * * * For guidance regarding determinations of the basis
of the stock of a subsidiary acquired in an intercompany reorganization
on or after January 23, 2006, see paragraphs (d) and (g) Example 2 of
this section.
* * * * *
Sec. 1.1502-32 [Corrected]
0
Par. 5. Section 1.1502-32 is amended by revising the text of paragraph
(h)(8) to reads as follows:
Sec. 1.1502-32 Investment adjustments.
* * * * *
(h) * * *
(h)(8) * * * Paragraph (b)(5)(ii) Example 6 of this section applies
only with respect to determinations of the basis of the stock of a
subsidiary on or after January 23, 2006. For determinations of the
basis of the stock of a subsidiary before January 23, 2006, see Sec.
1.1502-32(b)(5)(ii) Example 6 as contained in the 26 CFR part 1 edition
revised as of April 1, 2005.
* * * * *
Guy R. Traynor,
Federal Register Liaison, Publications and Regulations Branch, Legal
Processing Division, Associate Chief Counsel (Procedure and
Administration).
[FR Doc. E6-17987 Filed 10-25-06; 8:45 am]
BILLING CODE 4830-01-P