With Revenue Procedure 2011-35 issued May 31, the Service updated and revised methods by which an acquiring corporation may establish its basis in the stock of a target corporation in a type B reorganization under IRC § 368(a)(1)(B) or other transferred basis transaction.
The general procedures were provided 30 years earlier in Revenue Procedure 81-70, which the IRS signaled its intention to update and revise in Notices 2004-44 and 2009-4. The earlier revenue procedure provided methods of surveying target corporation shareholders and determining basis by sampling and estimation. Changes in market practices since the issuance of Revenue Procedure 81-70 that made the update necessary include increased use of “street name” in holding stock, that is, by nominees—usually financial institutions or clearinghouses—on behalf of their customers or members, the IRS said.
The latest revenue procedure provides four methods for determining basis in a transferred basis transaction: surveying shareholders, statistical sampling and two estimation techniques. Statistical sampling and estimation methods are generally applied to “reporting shareholders,” defined as those that immediately before the transaction were the registered or nominee shareholder or beneficial owner of at least 5% of the votes or value of all outstanding publicly traded shares (1% for nonpublicly traded shares); an officer or director of the target corporation; or an employee stock option, pension or other plan of the target corporation that acquired the stock for or on behalf of the corporation’s employees.
Under the survey method, the acquiring corporation surveys all registered and nominee surrendering shareholders of the target corporation, who report their actual basis. The acquiring corporation may exclude from its survey sample any shareholders the basis of whose stock is determined under the revenue procedure’s statistical sampling method, or registered or nominee shareholders that are not reporting shareholders and the basis of whose target corporation stock is determined under the estimation methods prescribed in the revenue procedure.
The survey generally must be performed in accordance with other guidelines in the revenue procedure and, for transactions completed after the revenue procedure’s effective date of June 20, 2011, be substantially completed within two years of completion of the transaction. Surveys applying the revenue procedure to transactions completed before June 20, 2011, may be considered timely if substantially completed by June 20, 2013.
The statistical sampling method may be applied in conjunction with a shareholder survey by estimating the basis of shares with an unknown basis that are surrendered by or on behalf of shareholders other than reporting shareholders, under sampling and estimation techniques that must comply with standard statistical sampling procedures recognized by the Service.
An estimation procedure for shares surrendered by registered shareholders and certain reporting shareholders may be used. The other estimation procedure is used for shares surrendered by nominees.
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