Important guidance on estimating outside stock basis in transferred basis transactions

Washington National Tax Services

The IRS recently issued Rev. Proc. 2011-35, which establishes four safe-harbor methods for estimating an acquiring corporation's outside basis in stock acquired in certain transactions, including section 351 transactions, "B" reorganizations, and reverse triangular reorganizations covered by section 368(a)(2)(E). This guidance may be extremely helpful for corporations that are considering making or that have made such an acquisition and is especially important for transferred basis transactions involving publicly traded targets.

The new guidance provides updated and expanded safe-harbor estimation methodologies for establishing the acquirer's basis in the target corporation's shares by reference to basis of the target's shareholders. The guidance includes a new estimation method for older transactions not covered by previous guidance.

The most favorable estimation method allowed by the new guidance requires certain data collection steps to be taken as near as possible to the target's acquisition date. Delays in obtaining necessary data will erode the amount of basis established.

Rev. Proc. 2011-35 is effective for transactions completed on or after June 20, 2011. Taxpayers may choose to apply it to earlier transactions.


Return to Tax research and insights
Washington National Tax Services newsletter archive