On Jan. 21, the Treasury Department issued proposed regulations (REG-143686-07) that provide shareholders with guidance on allocating and recovering stock basis in section 301 distributions. Their purpose is to present a single model for stock basis recovery when a shareholder receives a constructive or actual distribution to which section 301 applies and a single model for sales and exchanges to which section 302(a) applies.
The proposed regulations define the scope of the exchange that must be analyzed under certain Code sections. They also provide a methodology for determining gain realized under section 356 and stock basis under section 358.
The proposed regulations aim to clarify a number of areas that are currently unclear. For example, section 301 does not specify how to identify the shares upon which a distribution is made or whether a shareholder recovers its stock basis in the aggregate or share by share. It is also unclear whether transactions treated as section 301 distributions (that is, redemptions under section 302(d), certain section 304 transactions, and certain reorganizations) should be subject to the same rules as actual section 301 distributions. For reorganizations, the Code provides consequences resulting from different types of exchanges, but does not specify whether the exchange is based on a shareholder’s aggregate stock holdings or, alternatively, based on particular elements of the overall exchange.
The proposed model is based on the premise that a share of stock is the basic unit of property that can be disposed of and, therefore, the results of a transaction should generally derive from the consideration received in respect of that share. A corollary to this is that a reorganization does not justify altering a shareholder’s tax position beyond what is necessary to reflect the results of the reorganization.
To harmonize the tax treatment of economically similar transactions, the proposed regulations adopt a single model for section 301 distributions (dividend equivalent transactions) and a single model for sale or exchange transactions to which section 302(a) applies (nondividend equivalent transactions), regardless of whether section 301 or section 302(a) applies directly or by reason of sections 302(d), 304 or 356.
The IRS has requested that comments on the proposed regulations be submitted by April 21. The proposed regulations would take effect when finalized.