IRS Finalizes COI Regs.

• Jurisdiction: United States
• Date: 01 January 2001
• Author: Weinberger, Mark

Effective Aug. 31, 2000, the Service issued final regulations (TD 8898) on the effect of pre-reorganization transactions on the continuity-of-interest (COI) requirement for corporate reorganizations. The regulations finalize the proposed and temporary regulations published on Jan. 28, 1998 (TD 8761).

Background

Under the temporary regulations, a proprietary interest in a target was not preserved if the interest were redeemed or an extraordinary distribution made on target stock prior to (and in connection with) a potential reorganization. Under this rule, continuity is adversely affected by pre-acquisition distributions made when (1) a regulated investment company (RIC) or real estate investment trust (REIT) acquires a corporation (which must distribute all non-RIC or non-REIT earnings and profits), (2) a C corporation acquires an S corporation (which commonly distributes its accumulated adjustments account (AAA)) or 0) there is an acquisition of a controlled foreign corporation (which commonly distributes its previously taxed income account on its subpart F income).

Commentators argued that the temporary regulations were too broad and should instead have been based on the "solely for voting stock" requirement: Pre-reorganization redemptions and extraordinary distributions by a target should not be taken into account for COI purposes, unless an acquiring corporation directly or indirectly furnishes the consideration for the redemption or distribution.

Sec. 356 Rule

The final regulations replace the temporary regulations' "in connection with" language with a Sec. 356 test, providing that a proprietary interest in a target is not preserved to the extent that consideration received before a reorganization in a redemption of (or distribution on) the target...