Federal Headlines

Final Regulations Address the Tax-Free Treatment of Acquisitive Transactions When Acquiring Corporation Issues No Stock (T.D. 9475)

The IRS has adopted final regulations that clarify when the stock distribution requirements of Code Sec. 368(a)(1)(D) (Type-D reorganizations) and Code Sec. 354(b)(1)(B) (nonrecognition of gain or loss) are considered satisfied even though no qualifying stock or securities are actually issued. Under the final regulations (which generally adopt temporary regulations issued in December 2006 (T.D. 9303, 2007-1 CB 379, clarified by T.D. 9313, 2007-1 CB 805)), the distribution requirements for a Type-D reorganization are satisfied and a nominal share of stock is deemed issued if:

the same person or persons own, directly or indirectly, all of the stock of the transferor and transferee corporations in identical proportions; and

there is only a de minimis variation in shareholder identity or proportionality of ownership in the transferor and transferee corporations (Reg. §1.368-2(l)(2), as added by the new regulations.

Companion regulations under Code Sec. 358 are also issued which hold that in Type-D reorganizations where the property received consists solely of nonqualifying property equal to the value of the transferred assets (i.e., none of the consideration is stock or securities of the transferee), the shareholder may designate the share of stock of the transferee that they already hold to which the basis, if any, of the surrendered stock or securities of the transferor will attach (Reg. §1.358-2(a)(2)(iii), as added by T.D. 9475, December 17, 2009). In addition, the IRS has added a new example to the intercompany transaction regulations extending these Type-D reorganization rules to consolidated groups (Reg. §1.1502-13(f)(7), as amended by the new rules.

The IRS request comments on the application of these rules to reorganizations involving foreign corporations or shareholders. Specifically, the IRS is soliciting comments on:

whether any Code Sec. 1248 amount attributable to the stock of the transferor corporation can be preserved in the nominal share deemed issued by the transferee corporation;

the manner in which earnings and profits (E&P) are (or should be) taken into account for purposes ofCode Sec. 902 when an exchanging shareholder recognizes gain under Code Sec. 356(a) that is treated as a dividend from the E&P of the transferor and transferee corporations;

whether and how Code Sec. 902 should apply when an exchanging shareholder does not actually own stock in the transferee corporation but the exchanging shareholder recognizes gain under Code Sec. 356(a) that is treated as a dividend from the E&P of the transferee corporation (including whether a limitation similar to Code Sec. 304(b)(5) is appropriate in such cases);

whether and how, under Code Sec. 959, an exchanging shareholder should be able to access previously taxed E&P of a foreign transferor and/or transferee corporation before any nonpreviously taxed E&P of either corporation; and

whether and how Code Sec. 897 applies if the transferor corporation is a United States real property holding corporation with at least one foreign shareholder.

The final regulations are effective December 17, 2009, and apply to transactions occurring on or after the effective date. For transactions occurring before December 17, 2009, taxpayers should rely on Temporary Reg. §1.368-2T(l), prior to removal by T.D. 9475. However, taxpayers may, in certain circumstances, apply the new rules to transactions occurring before December 17, 2009 (Reg. §1.368-2(l)(4), as added by the new rules.

T.D. 9475, 2010FED ¶47,005

Other References:

Code Sec. 354

CCH Reference - 2009FED ¶16,433.021

Code Sec. 358

CCH Reference - 2009FED ¶16,553.01

Code Sec. 368

CCH Reference - 2009FED ¶16,753.0253

Code Sec. 1502

CCH Reference - 2009FED ¶33,168.0236

Tax Research Consultant

CCH Reference - TRC REORG: 18,052.15

State Headlines

All States --Sales and Use Tax: SST Board Approves Membership Changes, Finds Indiana and Iowa Out of Compliance

Meeting by conference call on December 17, the Streamlined Sales Tax (SST) Governing Board gave final approval to an amendment to the SST Agreement that relates to the organization's membership structure. The board also confirmed that Indiana and Iowa are out of compliance with the Agreement at this time, gave initial approval to a standard for documenting exemptions, and agreed to consider if the taxation of online travel companies is within its remit.

 New Membership Requirements Approved

The board gave final approval to an amendment, which won initial support at the board's last meeting (TAXDAY, 2009/10/05, S.1), that creates a new category of "contingent membership." A state qualifies if it is found to be in full compliance with the Agreement except that its conformity provisions are not yet in effect but will be within 12 months of the state's admission as a contingent member. A contingent member has full voting rights on the board and will become a full member once its laws come into effect. Previously, a state in this position had associate membership status pending the arrival of its delayed effective date, and it had restricted voting rights. Currently, there are no contingent members.

The category of "associate membership" is limited going forward to states that have achieved substantial compliance with the terms of the agreement taken as a whole, but not necessarily with each provision. As was the case previously, associate members have restricted voting rights. Under the amendment, Ohio, Tennessee and Utah will continue as associate members.

A seller registering under the SST system may choose to collect tax on sales into a contingent or associate member state but is not obligated to do so, absent a separate legal obligation (i.e., nexus). Both contingent and associate members must offer the SST amnesty from the time of their admission until 12 months after they become full members.

The board also approved a rule specifying the minimum requirements for associate membership status. The requirements include adopting a majority of the relevant uniform definitions and sourcing mandates, complying with the exemption administration provisions, providing liability relief to sellers and purchasers, and accepting the simplified electronic return. The board did not act on a Business Advisory Council (BAC) proposal presented by Fred Nicely, Council On State Taxation, to add a requirement that associate member states comply with the Agreement's rounding rule. West Virginia Del. John Doyle, the board's president, said that any such requirement would impose an insurmountable obstacle to non-members Florida and Maryland. He added that he saw no reason to deny those states associate member status in the future based purely on their deviation from the Agreement's rounding rule, since they would still have to conform to the rule to attain full member status.

Nicely and Stephen Kranz of the Sutherland law firm sought and received assurances from representatives of the three current associate member states (Ohio, Tennessee and Utah) that they would expect their states to be subject to these new rule requirements when the 2010 compliance review process begins next August. Wisconsin was the only member state to vote against the amendment to the Agreement and the accompanying rule.

 States' Compliance Discussed

The board accepted the 2009 annual compliance review recommendations offered by the Compliance Review and Interpretations Committee (CRIC) and found Indiana and Iowa to be out of compliance. (TAXDAY, 2009/12/08, S.1) Indiana is out of compliance on several bases. Indiana state Sen. Luke Kenley said that legislation to remedy the shortcomings has been drafted and he expects it to be enacted early in 2010. Iowa was found to be out of compliance during the 2008 review (TAXDAY, 2009/05/19, S.1) and it continues to be out of compliance in 2009 for one of the same reasons as in 2008: the presence of bundling provisions in its definition of "sales price." Legislation to remedy the defect has been drafted and it will be introduced during the 2010 legislative session. The board's Executive Committee previously approved sanctions for Iowa if its noncompliance persists. (TAXDAY, 2009/11/10, S.1)

Separately, Nicely moved on behalf of the BAC to have Nevada found out of compliance for 2009 because of its inability to accept ACH credit payments. The board's failure to find Nevada out of compliance for the same reason during the 2008 review was the subject of recent arguments before the Issue Resolution Committee. (TAXDAY, 2009/12/15, S.1) Nicely agreed to withdraw his motion on the understanding that the board will address the issue when it acts on the recommendation from the Issue Resolution Committee regarding Nevada's 2008 compliance. That recommendation has not been issued yet.

The board also approved amendments to the rule relating to the compliance review process that clarify the review procedures and adopt standards.

 Other Actions Taken

In other action, the board gave initial approval to an amendment developed by the State and Local Advisory Council (SLAC) regarding the evidence a seller must provide in an audit situation to substantiate noncollection of tax in a transaction in which the seller failed to obtain an exemption certificate. Sutherland's Kranz asked the board for changes to the amendment to eliminate what he characterized as "subjectivity" in the proposed standard. However, the board declined to accept the changes at this time and asked Kranz to propose them as amendments for consideration at a future meeting. A second board vote will be required before this amendment becomes final.

The board also approved an interpretation developed by the CRIC and SLAC to distinguish breakfast cereals from "candy." (TAXDAY, 2009/11/13, S.1; TAXDAY, 2009/10/28, S.2)

The board referred to the SLAC for its evaluation a proposed amendment by Ohio related to exemption certificates.

Finally, North Dakota state Sen. Dwight Cook said that he believes the board should be addressing the current controversy in several states relating to the tax obligations of online travel companies. In response, President Doyle appointed a task force including three state legislators to examine the issue.

The board's next in-person meeting is set for April 28-30 in Washington, D.C. Another conference call meeting may be held before that date.

Conference call, Streamlined Sales Tax Governing Board, December 17, 2009