Final regs. on cash D reorgs.

• Author: Almeras, Jon

On December 18, 2009, the IRS published final regulations addressing the qualification and treatment of certain acquisitive transactions as reorganizations under Sec. 368(a)(1)(D) where no stock or securities of the acquiring corporation are issued in the transaction (cash D reorganizations) (T.D. 9475). The final regulations also address the determination of basis of stock or securities under Sec. 358 in a cash D reorganization as well as how the rules apply in a consolidated group context.

Prior to the issuance of the final regulations, cash D reorganizations were subject to the temporary regulations issued in 2006 (T.D. 9303). The final regulations generally retain the rules of the temporary regulations, though the IRS and Treasury made certain modifications in response to comments they received, including the following:

* In cases in which no consideration is received by the shareholders or the value of the consideration received in the transaction is less than the fair market value (FMV) of the target corporation's assets, the acquiring corporation is deemed to issue stock with a value equal to the excess of the FMV of the target corporation's assets over the consideration actually issued, if any.

* The taxpayer may designate the actual share of stock to which stock basis of the nominal share, determined under Sec. 358, will attach.

* The final regulations provide an example that clarifies the consequences of a cash D reorganization between members of a consolidated group.

Background

A reorganization under Sec. 368(a) (1) (D) (a D reorganization) generally involves a transfer by one corporation (target corporation) of all or a part of its assets to another corporation (acquiring corporation) if, immediately after the transfer, the target corporation or one or more of its shareholders, or any combination thereof, is in control of the acquiring corporation. Notably, Sec. 368(a)(1) (D) requires that the acquiring corporation's stock or securities be distributed in pursuance of a plan of reorganization in a transaction that qualifies under Secs. 354, 355, or 356.

In order for a purported acquisitive reorganization to qualify under Sec. 368(a)(1)(D), Sec. 354(b)(1)(B) provides (in part) that the acquiring corporation's stock or securities must be distributed by the target corporation in pursuance of the plan of reorganization (the distribution requirement). As such, under a literal reading of Secs. 368(a)(1)(D) and 354(b)(1)(B), an...