Government withdraws proposed net value requirement regulations

Tax Hot TopicsThe Treasury Department recently published a notice of proposed rulemaking (REG-139633-08) announcing the withdrawal of proposed regulations that required an exchange of net value in certain nonrecognition transactions subject to Sections 351, 368, and 332.

In 2005, the IRS published the net value proposed regulations (REG–163314–03). The proposed regulations were intended to replace a disparate and sometimes contradictory group of authorities on net value requirements with an “appropriate unifying standard” applicable to the major nonrecognition rules under subchapter C (e.g. Sections 351, 368, and 332).

The proposed regulations applied to contributions under Section 351 and reorganizations under Section 368 by adding the following requirements: (1) that the fair market value of the property transferred be greater than the amount of liabilities assumed by the transferee; and (2) that immediately after the transfer, the transferee’s assets have a fair market value greater than the amount of its liabilities. The proposed regulations applied to distributions under Section 332 by requiring that corporate shareholders receive at least partial payment for each class of stock it owned in the liquidating corporation.

According to the recent IRS notice, the proposed regulations were withdrawn because the “Treasury Department and the IRS are of the view that current law is sufficient to ensure that the reorganization provisions and Section 351 are used to accomplish readjustments of continuing interests in property held in modified corporate form.”  In certain areas, however, the contradictory authorities that prompted the initial issuance of the now-withdrawn proposed regulations.  These authorities should still be considered carefully when evaluating transactions that lack net value.

Contact Andy Cordonnier
Partner, Washington National Tax Office
T +1 202 521 1502

Bryan Keith
Managing Director, Washington National Tax Office
T +1 202 861 4116

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.