Question

Rev. Proc. 2016-40 provides safe harbor rules for transactions involving acquisition of control in certain corporate transactions. Please identify one transaction under Rev. Proc. 2016-40 and discuss why you think IRS provided safe harbor for the transaction. Rev. Proc. 2016-40 and the related provisions are discussed in the article linked below.

IRS Provides Safe Harbors for Acquisition of Control in Certain Corporate Transactions. By Alistair M. Nevius, J.D. July 15, 2016

http://www.thetaxadviser.com/news/2016/jul/acquisition-of-control-safe-harbors-corporate-transactions-201614836.html#sthash.oFagt0RR.N8VATMVE.dpuf

This is for Advanced Federal Taxation Accounting Class

Answer 1

Safe harbors for acquisition of control

Rev. Proc. 2015-40 provides that fact patterns in which the IRS will not assert that a distributing corporation lacks control of another corporation within the meaning of section 355(a)(1).

Rev. Proc. explains that the IRS and Treasury Department recognize that determining whether an acquisition of control has substance for federal tax purposes can be difficult and fact intensive. The IRS is concerned that in some cases taxpayers may not be able to determine whether such an acquisition has substance with sufficient certainity to proceed with the transactions.

EXAMPLE : Distributing Corporation (D) owns another corporation (C) stock not constituting control of C.

C issues shares of one or more classes of stock to D and/or to other shareholders of c as a result of which D owns C stock processing atleast 80% of the total number of shares of all other classes of C

D distributes its C stock in a transaction that qualifies under section 355 and

C subsequently engags in a transaction thatactually or in effect substantially restores C's shareholders to the relative interests, direct or indirect, they would have held in C had the issuance not occured and the relative voting rights and valueof the C classes of stock that were present prior to the issuance