Academic journal article Journal of Accountancy

IRS Proposes Basis-Tracing Regulations

Academic journal article Journal of Accountancy

IRS Proposes Basis-Tracing Regulations

Article excerpt

The IRS has issued proposed regulations that propose a comprehensive approach for stock basis recovery.

The regulations, if adopted as final, would apply across a broad spectrum of transactions. They will create a single model for stock basis recovery if a shareholder receives a dividend under IRC [section] 301. These transactions are labeled "dividend-equivalent transactions." Another model would apply to sale and exchange transactions under section 302(a). These transactions are labeled "non-dividend-equivalent transactions."

The proposed regulations, which add or revise 11 sections in all, would treat a distribution under IRC [section] 301 as received by a shareholder on a pro rata, share-by-share basis. A surprising effect of the new basis-tracing system of Prop. Treas. Reg. [section] 1.301-2 is that a distribution under section 301(c)(1) (a distribution in excess of earnings and profits and of basis) could result in a gain for a portion of the shares in a class and unrecovered basis in other shares in that same class.

Dividend-equivalent redemptions would be treated in much the same way. Such redemptions would result in the same pro rata, share-by-share reduction of a shareholder's stock held immediately before the redemption. Again, this determination could result in a gain from some shares while other shares of the same class could have unrecovered basis.

Reorganization treatment will depend upon whether the reorganization exchange is dividend-equivalent or not. To determine whether the transaction is dividend-equivalent, the overall exchange must be taken into account. Thus, an exchange of one class of stock solely for "boot" and another class of stock solely for nonqualifying property must be considered as a whole. …

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