Academic journal article Journal of Accountancy

Type B Reorganization Basis Method Updated

Academic journal article Journal of Accountancy

Type B Reorganization Basis Method Updated

Article excerpt

With Revenue Procedure 2011-35 issued May 31, the Service updated and revised methods by which an acquiring corporation may establish its basis in the stock of a target corporation in a type B reorganization under IRC [section] 368(a)(1)(B) or other transferred basis transaction.

The general procedures were provided 30 years earlier in Revenue Procedure 81-70, which the IRS signaled its intention to update and revise in Notices 2004-44 and 2009-4. The earlier revenue procedure provided methods of surveying target corporation shareholders and determining basis by sampling and estimation. Changes in market practices since the issuance of Revenue Procedure 81-70 that made the update necessary include increased use of "street name" in holding stock, that is, by nominees--usually financial institutions or clearinghouses--on behalf of their customers or members, the IRS said.

The latest revenue procedure provides four methods for determining basis in a transferred basis transaction: surveying shareholders, statistical sampling and two estimation techniques. Statistical sampling and estimation methods are generally applied to "reporting shareholders," defined as those that immediately before the transaction were the registered or nominee shareholder or beneficial owner of at least 5% of the votes or value of all outstanding publicly traded shares (1% for nonpublicly traded shares); an officer or director of the target corporation; or an employee stock option, pension or other plan of the target corporation that acquired the stock for or on behalf of the corporation's employees. …

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