Deloitte Comments on Proposed Regs on Stock, Asset Transfers After Reorganizations
Deloitte Comments on Proposed Regs on Stock, Asset Transfers After Reorganizations
- AuthorsGribens, BruceForrest, JonathanBaroutjian, Raffi
- Institutional AuthorsDeloitte
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2004-22513
- Tax Analysts Electronic Citation2004 TNT 229-6
November 15, 2004
CC:PA:LPD:PR (REG-130863-04)
Courier's Desk
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, DC 20044
RE: Comments on the Proposed Amendments to Regulations Addressing Transfers of Assets or Stock Following a Corporate Reorganization (REG-130863-04)
Ladies and Gentlemen:
We are writing to provide comments regarding the proposed regulations under section 368(a) contained in Notice REG-130863-04, and dated August 18, 2004 ("Proposed Regulations").1 Our comments focus on the reference to transfers of stock of the "issuing corporation" contained in Prop. Treas. Reg. § 1.368-2(k)(1)(i)(B) and recommend that this reference be removed.
Proposed Treas. Reg. § 1.368-2(k) provides, in part, that a transaction otherwise qualifying as a reorganization under section 368(a) is not disqualified if any asset of a party to the reorganization or the stock of a party to the reorganization "other than [stock of] the issuing corporation" is transferred to a member of the qualified group. The issuing corporation is generally the acquiring corporation, except in the case of a triangular reorganization in which case the issuing corporation is the corporation in control of the acquiring corporation.2 The inclusion of the above-quoted limitation suggests that a tax-free reorganization may be disqualified from tax-free treatment if stock of the issuing corporation is transferred, even to a member of the qualified group as defined in Treas. Reg. § 1.368-1(d)(4)(ii).3
Proposed Treas. Reg. § 1.368-2(k) relates to the continuity of business enterprise ("COBE") requirement, as compared to Treas. Reg. § 1.368-1(e), which addresses the continuity of interest ("COI") requirement.4 We believe Prop. Treas. Reg. § 1.368-2(k) does not apply to transfers of the issuing corporation's stock because such transfers are relevant to the COI requirement rather than the COBE requirement, and thus, are governed by Treas. Reg. § 1.368-1(e). However, excluding such transfers from the rule described in Treas. Reg. § 1.368-2(k) could be interpreted to mean that the transfer of the issuing corporation's stock following a reorganization creates a COBE problem. Consider the following example:
P owns 100 percent of the stock of S-1, S-2 and S-3. P, S-1, S-2 and S-3 are not members of a consolidated group. Pursuant to a plan of reorganization, S-2 acquires all the assets of S-1 in the merger of S-1 into S-2. Following the reorganization, P transfers all the S-2 stock to S-3.
The merger of S-1 into S-2 qualifies as a reorganization under sections 368(a)(1)(A) and 368(a)(1)(D). In the transaction, S-2 is the issuing corporation within the meaning of Treas. Reg. § 1.368-1(b). Accordingly, it could be argued that the Proposed Regulations would cause P's transfer of S-2 stock to S-3 to disqualify the reorganization. We do not believe this is the result intended by the Proposed Regulations. As discussed above, we believe the negative reference to stock of the "issuing corporation" was intended to reflect the fact that transfers of the stock of the issuing corporation are relevant for purposes of the COI requirement and thus, are governed by Treas. Reg. § 1.368-1(e).5
For the reasons discussed above, we recommend that the final regulations remove the phrase "other than the issuing corporation (as defined in § 1.368-1(b))" from Treas. Reg. § 1.368- 2(k)(1)(i)(B). We believe this change would eliminate unnecessary confusion caused by the language of the Proposed Regulations.
Please feel free to call any of the undersigned if you would like to discuss these comments.
Bruce Gribens
Deloitte Tax LLP
Washington, DC
(202) 879-4925
Jonathan Forrest
Deloitte Tax LLP
Washington, DC
(202) 378-5261
Raffi Baroutjian
Deloitte Tax LLP
San Francisco, CA
(415) 783-4188
1 69 FR 51209. All section references are to the Internal Revenue Code of 1986, as amended, or to the Treasury regulations promulgated thereunder.
2See Treas. Reg. § 1.368-1(b).
3 Treas. Reg. § 1.368-1(d)(4)(ii) provides that a "qualified group" is a chain of controlled corporations (within the meaning of section 368(c)) held by the issuing corporation.
4 Both of these regulations relate to the issue of "remote continuity," discussed by the Supreme Court in Groman v. Commissioner, 302 U.S. 82 (1937), and Commissioner v. Bashford, 302 U.S. 454 (1938). Remote continuity has historically been thought of as two separate but related concepts: asset remoteness (i.e., where the acquired assets are lodged in an entity other than the acquiring corporation) which implicates the COBE requirement and stock remoteness (i.e., where the stock of the acquiring corporation is held by persons other than those who initially received such stock) which implicates the COI requirement. See generally, Murray, "How to Avoid Loss of Continuity of Interest Through 'Stock Remoteness' in a Reorg," 59 J. Tax'n 8 (1983); Murray, "IRS Revocation of 'Stock Remoteness' posture May have Positive Effect on Reorgs," 60 J. Tax'n 352 (1984).
5 We believe that the transfer of S-2 to S-3 does not violate the COI requirement because P maintains an indirect interest in the issuing corporation. See Treas. Reg. § 1.368- 1(e)(2); Treas. Reg. § 1.368-1(e)(6), Ex. 8. See also Rev. Rul. 84-30, 1984-1 C.B. 114; and T.D. 8760 (63 FR 4178).
END OF FOOTNOTES
- AuthorsGribens, BruceForrest, JonathanBaroutjian, Raffi
- Institutional AuthorsDeloitte
- Cross-Reference
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2004-22513
- Tax Analysts Electronic Citation2004 TNT 229-6