The 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According to the recent IRS notice, the proposed regulations were withdrawn because the “Treasury Department and the IRS are of the view that current law is sufficient to ensure that the reorganization provisions and Section 351 are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 In certain areas, however, the contradictory authorities that prompted the initial issuance of the now-withdrawn proposed regulations.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.
Partner, Washington National Tax Office
T +1 202 521 1502
Managing Director, Washington National Tax Office
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