IRS scrutinizes basis studies.

The Internal Revenue Service has shown increasing interest in taxpayer compliance with Revenue Procedure 81-70, which provides guidance on determining the basis of stock acquired in stock purchase transactions (mainly stock swaps). This topic was the subject of an article in the March-April 2003 issue of The Tax Executive, where Juliane L. Keppler of KPMG discussed the requirements of the revenue procedure, the perhaps-not-stringent adherence to those requirements by some taxpayers and advisers, and the IRS's efforts to assess the degree and significance of any compliance problems. In recent weeks, many large case taxpayers have reportedly received information document requests from their audit teams, requesting information on whether the company had conducted a basis study in respect of any transaction occurring during the audit period.

Based on the TTE article and subsequent events, the following points seem relevant:

* Although the regulations contemplate the determination of stock basis at or near the time of a transaction, it is never too late to conduct a Revenue Procedure 81-70 study.

* The determination of target stock tax basis in many, if not most, stock swaps is based on information received (or accessible) from the previous stock owners of the acquired company; the longer a company has to wait to retrieve and analyze the information, the more difficult it may be.

* The IRS is scrutinizing the methodologies used to perform basis studies to assess compliance with the requirements of Revenue Procedure 81-70. Comments from IRS officials and practitioners suggest that some studies are viewed as more in compliance with the rules than others. Basis studies are not all created equal.

TEI understands that the IRS will soon issue a notice soliciting comments on the revenue procedure (including whether it should be revised). When the IRS request is issued, the Institute's Federal Tax Committee will consider whether TEI should file a submission and, if so, the scope and direction of any comments. If you have received an IDR about your company's basis study or otherwise wish to contribute to any forthcoming TEI project, please send an email message to [e-mail].