Estimating the basis of stock acquired in a type B reorg.

• Author: Howell, Lindsey M.

A large corporation is acquiring a target corporation in a type B stock-for-stock reorganization. The tax basis of the target stock acquired in the reorganization must be determined, but where should one begin to look for information? What if some of the shareholders do not respond to requests for information? How time consuming and burdensome will the project be? These are questions and concerns that the IRS has dealt with over the years regarding type B reorganizations. It recently issued Rev. Proc. 2011-35 to address some of these issues.

Type B Reorgs.

A type B reorganization as defined in Sec. 368(a)(1)(B) occurs when a parent corporation or its controlled subsidiary acquires the stock of a target corporation solely in exchange for voting stock of the parent corporation. However, to qualify as a type B reorganization, immediately after the reorganization the parent corporation or its subsidiary must own at least 80% of the combined voting power of the target stock and at least 80% of the number of shares in each class of the target's nonvoting stock. In that case, under Sec. 362(b), the acquiring parent or subsidiary's tax basis in the target corporation stock acquired in the reorganization is the same as the basis the former target shareholders held in their target stock. However, obtaining such basis information from the target shareholders is not always possible, particularly when the target stock is widely held.

Previous Methods of Calculating the Basis of Stock

Years ago, recognizing the burden of calculating the basis of stock in a type B reorganization, the IRS issued Rev. Proc. 81-70 to establish procedures that an acquiring corporation could use to estimate the basis of the acquired target stock. In the event that the acquiring corporation was unable to obtain information on the basis of stock from a shareholder of the target corporation, it could estimate the value of the stock based on the stock transfer records. This revenue procedure also provided guidelines on how to administer a statistical sample to establish the basis of the target stock.

Since the IRS issued the 1981 revenue procedure, the stock market has changed. Most stock of public companies no longer is held by individual owners, but rather by nominees, such as clearinghouses and financial institutions. The transfer records therefore do not list the names of the actual owners of the stock. There are usually multiple levels of ownership within nominee ownership...