Final sec. 355(d) regulations.A divisive di·vi·sive adj. Creating dissension or discord. di·vi  sive·ly adv.di·vi distribution's usefulness was hampered by Sec. 355(d)'s enactment, following the repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law. The revocation of the law can either be done through an express repeal of the General Utilities doctrine General Utilities Doctrine An Internal Revenue Service provision that permits a firm to liquidate its assets at more than book value and to pass the proceeds of the liquidation through to stockholders without making the firm pay income taxes on the gains. by the Tax Reform Act of 1986. A divisive distribution (Distribution) is a spin-off The situation that arises when a parent corporation organizes a subsidiary corporation, to which it transfers a portion of its assets in exchange for all of the subsidiary's capital stock, which is subsequently transferred to the parent corporation's shareholders. , split-off The process whereby a parent corporation organizes a subsidiary corporation to which it transfers part of its assets in exchange for all of the subsidiary's capital stock, which is subsequently transferred to the shareholders of the parent corporation in exchange for a portion of their or split-up. Sec. 355(d) disqualifies a spin-off if, immediately thereafter, any person owns "disqualified dis·qual·i·fy tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies 1. a. To render unqualified or unfit. b. To declare unqualified or ineligible. 2. stock" constituting 50%-or-more ownership in either the parent (Distributing) or the spun-off subsidiary (Controlled). Disqualified stock includes any stock purchased during the five years preceding the spin-off (the five-year period). A disqualification dis·qual·i·fi·ca·tion n. 1. The act of disqualifying or the condition of having been disqualified. 2. Something that disqualifies: illness as a disqualification for enlistment in the army. imposes a corporate-level tax, but no shareholder tax. The final regulations, generally effective for distributions after Dec. 20, 2000, correct many unexpected hardships under the proposed regulations. The final regulations appear to be very taxpayer-friendly and provide greatly desired definitional clarity. Purpose Exception The final regulations continue the approach of the proposed regulations, which made an exception for distributions that do not violate Sec. 355(d)'s purposes. A distribution does not violate Sec. 355(d)'s purposes if it meets two tests. First, it does not increase a disqualified person's direct or indirect ownership in Distributing or Controlled. Second, it does not provide a disqualified person with a purchased basis in any Controlled stock. A "disqualified person" is any person who, immediately after a distribution, holds disqualified stock in Distributing or Controlled that constitutes a 50%-or-greater interest. The final regulations clarify that the term "disqualified person" includes only a person who meets that definition because of its own purchase of "disqualified stock" (or who receives stock in Controlled with respect to stock that the person purchased). The final regulations also modify the definition of disqualified stock. Distributing or Controlled stock acquired by purchase within the five-year period (including stock indirectly acquired by purchase) will no longer be considered as purchased if (and when) the basis resulting from that purchase is eliminated. Basis in a corporation's stock is eliminated if and when it would no longer be taken into account by any person in determining gain or loss on a sale or exchange of that corporation's stock. For example, a direct purchase by Distributing of all Controlled stock, followed by a distribution of that stock, would have been a disqualified distribution under the proposed regulations. However, it is not disqualified under the final regulations; a Controlled distribution will result in elimination of the basis originating from Distributing's purchase of Controlled stock. The Controlled basis is eliminated because the shareholders' bases are determined by reference to their Distributing bases. Thus, the Controlled stock is no longer treated as purchased, and therefore is not disqualified stock. This is a welcome change and significant benefit under the final regulations. Under the proposed regulations, stock in purchased subsidiaries was usually considered disqualified stock, thereby preventing the tax-free spin-off of subsidiaries purchased by Distributing during the five-year period. Subsidiaries purchased by Distributing during the five-year period can now be spun off tax-free if the shareholders do not receive Distributing's purchased basis for the subsidiaries' stock. However, the spin-off of a purchased subsidiary will not always result in elimination of purchased basis. This occurs when a shareholder holds a purchased interest in Distributing. A spin-off in these circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or would then cause the shareholder to have a purchased basis in both Distributing and Controlled. Definition of Purchase A "purchase" generally means any acquisition, except for property acquired in a carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) basis transaction, property acquired from a decedent An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. and generally property acquired in Sec. 351, 354, 355 or 356 transactions. The final regulations contain special rules for certain Sec. 351 transactions, transfers among affiliated group members, Sec. 338 transactions and partnership transactions. Sec. 351 Transactions The general rule is that stock is not considered purchased when it is acquired in a completely tax-free Sec. 351 transaction (i.e., when no boot is received). However, Sec. 355(d)(5)(B) provides an exception to this rule by considering a Sec. 351 transaction as a purchase when property is acquired in exchange for any cash or cash item, marketable Marketable are securities that can be easily converted into cash. Such securities will generally have highly liquid markets allowing the security to be sold at a reasonable price very quickly. stock or security or transferor's debt. Fortunately, the final regulations contain an "active business" exception to this purchase treatment. The active business exception provides that an acquisition of stock in exchange for any cash or cash item, marketable stock or transferor's debt in a Sec. 351 transaction generally is not a purchase, if the transferor transfers the items as part of an active trade or business and the transferred items do not exceed the trade or business's reasonable needs. A re-transfer of assets does not fail to meet this exception solely because the transferee transfers the assets to another member of the transferee's affiliated group, if the active business exception would be met if the assets were transferred directly to the final transferee. The final regulations also eliminate the requirement that distributed controlled corporations of the transferee be group members before the Sec. 351 transaction. Sec. 338 Under the final regulations, stock acquired in a qualified stock purchase for which an election is made under Sec. 338 or 338(h)(10) is not treated as a purchase. However, if the old target holds stock in another corporation, that stock is treated as purchased by the new target. However, separate Sec. 338 or 338(h)(10) elections also can be made for the stock owned by the new target. Partnerships The final regulations clarify that an acquisition of stock (or interest in another entity) by a partner pursuant to the liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy of a partnership interest is a purchase of that stock (or that interest) on the liquidation. If the adjusted basis of stock (or interest in another entity) held by the partnership is increased under Sec. 734(b), a proportionate pro·por·tion·ate adj. Being in due proportion; proportional. tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates To make proportionate. amount of the stock (or other interest) will be treated as purchased at the time of the basis adjustment. 50%-or-Greater Interest The final regulations provide rules for determining whether a person owns stock possessing at least 50% of the total combined voting power or value of all classes of stock. Under these regulations, if two or more persons act under a plan or arrangement with respect to acquisitions of stock in Distributing or Controlled, they are treated as one person for Sec. 355(d) purposes. Options Both the proposed and final regulations generally provide that options outstanding when a distribution occurs are treated as exercised when issued or last transferred, if the deemed exercise would cause a person to be a disqualified person and, immediately after the distribution, taking into account all the facts and circumstances, it is reasonably certain the option will be exercised. However, the final regulations exclude cash settlement options, phantom stock Phantom stock is essentially a cash bonus plan, although some plans pay out the benefits in the form of shares. Phantom stock provides a cash or stock bonus based on the value of a stated number of shares, to be paid out at the end of a specified period of time. , stock appreciation rights and notional principal contracts The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. from the definition of options for Sec. 355(d) purposes. However, to the extent that such instruments are exercisable into stock, they still are subject to this deemed-exercise rule. FROM RANDY A. SCHWARTZMAN, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , MST See micro systems technology. , NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , NY |
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