Representations required under new continuity regulations.

In Letter Ruling 9907001, the IRS required the taxpayer in a Sec. 368(a)(1)(C) reorganization to make extensive representations for pre-reorganization distributions for continuity of interest (COI) purposes under the new regulations. Temp. Regs. Sec. 1.368-1T(e) provides that, when a target makes distributions in connection with a reorganization, they will be counted against it in measuring whether the COI requirement is satisfied.

The Service required the taxpayer to make a representation that looked back five years before the reorganization. The representation specifically stated:

During the five-year period ending on the date of the transaction, neither Target nor any person related to Target (as defined in [sections] 1.3681(e)(3) of the Income Tax Regulations without regard to [sections] 1.368-1 (e)(3) (A)) will have directly or through any transaction, agreement, or arrangement with any other person, (i) acquired stock of Target with consideration other than shares of Acquiring or Target (except for shares of Target stock acquired from dissenters in the transaction), (ii) redeemed or made distributions with respect to Target stock, except for redemptions in the ordinary course of Target's business ...

It appears that the basis for the five-year lookback comes from Rev. Rul. 66-23, in which the IRS indicated that a reorganization's COI requirements can be satisfied when the shareholder of the transferor corporation receives stock of the transferee corporation, without any preconceived plan or arrangement for disposing, of any of the stock and with unrestricted rights of ownership for a period of time sufficient to warrant the conclusion that such ownership is definite and substantial. The ruling also stated that, generally, five years of unrestricted ownership rights would qualify as a sufficient period for satisfying a reorganization's COI requirements. This rule applies to the period after which the exchange in a reorganization occurs.

Whether a representation containing the five-year lookback becomes a standard representation is not yet clear. There does not appear to be any technical basis for the Service to require it. Requiring such a representation could have an effect on the ability to issue opinions and structure reorganizations. The IRS's 1999 business plan includes an item about revising the revenue procedure that contains the COI representations. Practitioners in this area should continue to monitor this issue for new developments.

FROM IRWIN PANITCH, J.D., LL.M., WASHINGTON, DC