The U.S. Treasury Department and IRS today released for publication in the Federal Register a notice that certain provisions under proposed regulations from 2005 are being withdrawn.
The regulatory measures being withdrawn would have required an exchange or distribution of net value for certain corporate formations and reorganizations to qualify for nonrecognition treatment. In other words, the measures would have affected transactions involving the transfer of no net value.
Today’s notice (RIN-1545-BI18) [PDF 211 KB] further explains that portion of the proposed regulations being withdrawn also would have addressed the treatment of certain distributions not qualifying for tax-free treatment under section 332.
In March 2005, proposed regulations were issued to address situations concerning corporate insolvency—specifically involving the application of the nonrecognition rules to transactions involving insolvent corporations. Included in those proposed regulations were provisions concerning the continuity of interest requirement. Final regulations in December 2008 adopted a portion of the proposed regulations that concerned the continuity of interest rules.
The preamble to today’s release also explains that in March 2016, final regulations adopted “minor portions” of the proposed regulations that reflected statutory changes to sections 332 and 351 (as part of final regulations under sections 334 and 362). Today’s explanation continues:
The Treasury Department and the IRS have decided to withdraw the remainder of the 2005 Proposed Regulations…. [C]urrent law is sufficient to ensure that the reorganization provisions and section 351 are used to accomplish readjustments of continuing interest in property held in modified corporate form.
Tax professionals have noted that today’s explanation offers an incomplete statement regarding current law, and whether and how a transfer of net value is necessary to accomplish such a readjustment of continuing interest. Today's release contains a short list of court opinions and revenue rulings that “continue to reflect the position of the Treasury Department and the IRS.” It has been observed that today’s explanation seems neither to approve nor disapprove other precedents that do not insist on a transfer of net value.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.