SERVICE ISSUES PROCEDURES FOR VALUATION OF STOCK GIVING RISE TO NONTAXED 'EXTRAORDINARY DIVIDENDS.'

Rev. Proc. 87-33

SECTION 1. PURPOSE

The purpose of this revenue procedure is to provide guidance to corporate taxpayers on how to make the election under section 1059(c)(4) of the Internal Revenue Code and how to establish the fair market value of stock for purposes of that election. This revenue procedure sets forth an automatic procedure to value certain stocks and informs taxpayers unable to use that automatic procedure how to establish the fair market value of the stock to the satisfaction of the Secretary.

SEC. 2. BACKGROUND

Section 1059(a)(1) of the Code generally provides that if any corporation receives any "extraordinary dividend" with respect to any share of stock and the corporation has not held the stock for more than 2 years before the "dividend announcement date," the basis in the stock held by the corporation shall be reduced (but not below zero) by the "nontaxed portion" of the dividend.

Section 1059(a)(2) of the Code provides that, in addition to any gain recognized under normal income tax rules, there shall be treated as gain from the sale or exchange of any stock for the taxable year in which the sale or disposition of the stock occurs an amount equal to the aggregate nontaxed portions of any extraordinary dividends with respect to the stock that did not reduce the basis of the stock by reason of the limitation on reducing basis below zero.

Under section 1059(b) of the Code, the nontaxed portion of any dividend generally equals the amount of the dividend not taxed because of a corporate shareholder's dividends received deduction under section 243, 244, or 245.

Under section 1059(c)(1) of the Code, the term "extraordinary dividend" means any dividend with respect to a share of stock if the amount of the dividend equals or exceeds the "threshold percentage" (5 percent for preferred stock, 10 percent otherwise, and specified in section 1059(c)(2)) of the taxpayer's adjusted basis in the share of stock. Under section 1059(c)(3)(A), all dividends that are received by a taxpayer with respect to any share of stock and that have "ex-dividend dates" within the same period of 85 consecutive days are treated as one dividend. Moreover, under section 1059(c)(3)(B), all dividends that are received by a taxpayer with respect to any share of stock and that have ex-dividend dates during the same period of 365 consecutive days are treated as extraordinary dividends if the aggregate of the dividends exceeds 20 percent of the taxpayer's adjusted basis in the stock (determined without regard to section 1059).

Section 1059(c)(4) of the Code provides that if the taxpayer establishes to the satisfaction of the Secretary the fair market value of any share of stock as of the day before the ex-dividend date, the taxpayer may elect to apply sections 1059(c)(1) and (3) by substituting this value for the taxpayer's adjusted basis.

Section 1059(d)(4) of the Code defines the term "dividend announcement date," with respect to any dividend, as the date on which the corporation declares, announces, or agrees to, the payment of the dividend, whichever is the earliest.

Under section 614(f) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. * * *, section 1059(c)(4) of the Code applies to dividends declared after July 18, 1986, in tax years ending after that date.

SEC. 3. AUTOMATIC VALUATION PROCEDURES

The procedures in this section apply only to stocks that are publicly traded on a national or regional stock exchange or on the NASDAQ system.

For purposes of the election under section 1059(c)(4) of the Code, the closing price of the stock on the day before the ex- dividend date establishes, to the satisfaction of the Secretary, the fair market value of the stock as of the day before the ex-dividend date. If there were no sales of the stock on the date before the ex- dividend date, the mean of the bid and asked prices on the day before the ex-dividend date establishes the fair market value of the stock as of the day before the ex-dividend date.

For stock listed on more than one exchange, the price of the stock on a composite listing of the combined exchanges must be used if the records are set forth in a generally available listing or publication of general circulation. If a composite listing of combined exchange prices is not available, the records of the price on the exchange where the stock is principally traded must be used.

SEC. 4. VALUATION PROCEDURES FOR STOCKS THAT ARE NOT PUBLICLY TRADED ON A NATIONAL OR REGIONAL STOCK EXCHANGE OR ON THE NASDAQ SYSTEM

A corporate taxpayer who wishes to make the election under section 1059(c)(4) of the Code but to whom the procedures in section 3 of this revenue procedure do not apply must comply with sections 4.01 and 4.02 in order to establish the fair market value of the stock to the satisfaction of the Secretary.

01 A taxpayer must request from the Internal Revenue Service a written determination of the stock's fair market value. The request should be sent to the Corporation Tax Division, Internal Revenue Service, Washington, D.C. 20224, Attn: Branch 5, must include a proposed determination of the stock's fair market value, and must be supported by a credible appraisal that follows the guidelines contained in Rev. Rul. 59-60, 1959-1 C.B. 237, as amplified by Rev. Rul. 77-287, 1977-2 C.B. 319, Rev. Rul. 80-213, 1980-2 C.B. 101, and Rev. Rul. 83-120, 1983-2 C.B. 170. The request must be made no later than: (1) 60 days after the close of the tax year containing the ex- dividend date at issue (or the last of the ex-dividend dates at issue if the election is made for purposes of section 1059(c)(3)), or (2) September 18, 1987, whichever is later. The request must comply with section 8 (Instructions To Taxpayers) of Rev. Proc. 87-1, 1987-1 I.R.B. 7, 11 (or, if applicable, the corresponding section of the most recent successor revenue procedure).

02 The Corporation Tax Division will respond with a letter indicating what fair market value has been established to the satisfaction of the Secretary for purposes of section 1059(c)(4). When the Service's response is received by the taxpayer, it is to be retained in the taxpayer's records.

SEC. 5 ELECTION PROCEDURE

If a tax year contains an ex-dividend date (or the last of the ex-dividend dates at issue if the election is made for purposes of section 1059(c)(3)) and the taxpayer wishes to make an election under section 1059(c)(4) and this revenue procedure, the taxpayer must attach the statement described in this section (Election Statement) to its federal income tax return for such year. The top of the Election Statement should contain the words "ELECTION FILED UNDER SECTION 1059(c)(4)"; the the Election Statement must include the following information: (1) the taxpayer's name, address, and taxpayer identification number; (2) identification of the stock; (3) the amount of the dividend(s); (4) the number of shares of stock; and (5) the ex-dividend date(s).

01 A taxpayer to whom the automatic procedures described in section 3 apply must include in the Election Statement the following additional information: (6) closing price of the stock or, if applicable, the mean of the bid and asked prices of the stock on the day before the ex-dividend date(s); and (7) identification of the publication that sets forth the composite listing, principal exchange listing, or NASDAQ listing used.

02 A taxpayer to whom the procedures described in section 4 apply and who has received the Service's response referred to in section 4.02 must include WITH the Election Statement a copy of the Service's response to the request for a written determination of the fair market value.

03 A taxpayer to whom the procedures described in section 4 apply and who, at the time its tax return is filed, has not received the Service's response referred to in section 4.02 must include in the Election Statement the following additional material: (6) the proposed fair market value of the stock in the written request; and (7) a representation that the letter requesting the proposed fair market value was filed with the Corporation Tax Division (the representation must specify the date the request was mailed).

SEC. 6. EFFECTIVE DATE

This revenue procedure applies to all dividends declared after July 18, 1986, in tax years ending after that date.