Significant recent developments.

AuthorSchneider, Mark A.
PositionCorporations & Shareholders

EXECUTIVE SUMMARY

* The SOA focuses primarily on financial reporting, but also contains certain tax provisions.

* The IRS significantly revised the Sec. 355(e) temporary regulations.

* Temporary regulations on BIGs on transfers and conversions to RICs or REITs were revised.

This article summarizes significant recent developments in the C corporation and consolidated return area. Specifically, it addresses (1) the Sarbanes-Oxley Act of 2002 (SOA), (2) temporary regulations on loss disallowance, Sec. 355(e) and conversions of C corporations into regulated investment companies (RICs) or real estate investment trusts (REITs), (3) revenue rulings covering divisive and acquisitive reorganizations and (4) a letter ruling applying the principles of the proposed regulations on statutory mergers into disregarded entities.

Legislation

SOA

The SOA, (1) signed into law by President Bush on July 30, 2002, focuses primarily on auditors and corporate officers responsible for financial reporting. It also contains certain tax provisions. Notably, Section 201 requires that a CPA firm that is auditing a public corporation to secure permission from the corporation's audit committee (or board of directors, if the company is not required to have an audit committee) as a condition of engaging in any non-audit tax work. In addition, Section 1001 provides that in "the sense" of the Senate, corporate Federal income tax returns (not just those of public corporations) "should" be signed by the corporation's chief executive officer. This somewhat curious provision has been interpreted as a nonbinding suggestion.

Temp. Regs.

Loss Disallowance

Temp. Regs. Secs. 1.337(d)-2T and 1.1502-20T(i) were added (2) to amend the loss disallowance rule (applicable to the sale of subsidiary stock by consolidated groups) in response to the Rite Aid Corp. (3) decision, which invalidated the "duplicated loss" rule in Regs. Sec. 1.1502-20. (4) In general, Temp. Regs. Sec. 1.337(d)-2T uses a "tracing" approach in determining whether a stock loss is disallowed. A stock loss is allowed to the extent the taxpayer establishes that the loss is not attributable to the recognition of built-in gain (BIG) on an asset's disposition. Thus, the rule looks to whether the loss is attributable to a positive basis adjustment caused by the disposition of a BIG asset. Temp. Regs. Sec. 1.1502-20T(i) provides transition rules and an election to apply Temp. Regs. Sec. 1.337(d)-2T retroactively.

Sec. 355(e)

Sec. 355(e) generally requires a distributing corporation (Distributing) to recognize gain (if any) on a distribution of a controlled corporation's (Controlled's) stock that would otherwise meet Sec. 355 tax-free requirements if the distribution were part of a plan (or series of related transactions) under which one or more persons acquire at least 50% of either Distributing's or Controlled's stock (a Sec. 355(e) plan). It contains a rebuttable presumption that any acquisition beginning two years before the distribution and ending two years thereafter is part of a Sec. 355(e) plan.

On April 23, 2002, Treasury significantly revised temporary regulations in this area. (5) These regulations use a facts-and-circumstances approach in determining whether there is a Sec. 355(e) plan. In general, they categorize factors as either Plan or Nonplan factors; a practitioner must weigh the relative importance of such factors in determining whether there is a Sec. 355(e) plan. Inevitably, this analysis is subjective. In contrast, the temporary regulations also provide objective safe harbors; if a transaction falls within a safe harbor, it is not subject to Sec. 355(e).

Plan factors: Temp. Regs. Sec. 1.355-7T(b)(3) sets forth Plan factors that suggest the existence of a Sec. 355(e) plan. The first set of Plan factors involves an acquisition of the stock of Distributing or Controlled (other than in a public offering) before or after a Sec. 355 distribution. For an acquisition before, Temp. Kegs. Sec. 1.355-7T(b) (3) (iii) looks to whether Distributing or Controlled discussed the distribution with the acquirer at some time during the two-year period ending on the stock acquisition date. For an acquisition after a Sec. 355 distribution, Temp. Regs. Sec. 1.355-7T(b)(3)(i) focuses on whether, during the two-year period ending on the distribution date, there was an...

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