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Tuesday, December 19, 2006


The corporate reorganization provisions of the Internal Revenue Code allow for corporate acquisitions, divisions, and other reorganizations to occur with no, or reduced, gain or loss on the transactions. These provisions facilitate the transfer of assets or ownership of corporations between and among corporations when the transaction qualifies as a sanctioned "reorganization."

IRC Section 368(a)(1)(D) generally treats as a qualified 'D' reorganization reorganization a transfer of assets from one corporation to another commonly controlled corporation. A requirement for 'D' treatment is that stock or securities of the transferee corporation must be distributed in pursuance of a plan of reorganization in a transaction that qualifies under Code Sec. 354 , Code Sec. 355 , or Code Sec. 356. However, even though the Code requires the transferor corporation to receive stock of the transferee corporation and distribute it to the shareholders of the transferor corporation, the IRS does not require this stock transfer when the two corporations are owned in the same identical manner, since the issuance and distribution of the stock would be a "meaningless gesture" - that is, because the stock transfer and distribution would not effect an actual economic change in ownership of shares.

The IRS has now issued Regulations that provide parameters and guidance for when the stock issuance required by the Code is not needed. The highlights of the new Regulations are:

-If the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporations in identical proportions, the stock issuance and distribution requirements are treated as satisfied even though no stock is actually issued in the transaction.

-In determining whether the same person or persons own the stock of both corporations, attribution of ownership rules are applied. Under these rules an individual and all members of his family that have a relationship described in Code Sec. 318(a)(1) are treated as one individual.

-The above rules will operate, even if there is only a de minimis variation in shareholder identity or proportionality of ownership in the transferor and transferee corporations.

-Preferred stock described in Code Sec. 1504(a)(4) is disregarded for purposes of determining whether the same person or persons own all of the stock of the transferor and transferee corporations in identical proportions.

-When these rules apply, the Regulations provide that a nominal share of stock of the transferee corporation is treated as being issued, which share is then further treatedas being distributed by the transferor corporation to its shareholders.

See Treas.Reg. §1.368-2T.

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