On January 23, 2018, the IRS released Rev. Proc. 2018-12 (and re-released on January 31 with minor corrections), which provides three average pricing safe harbor valuation methods to assist taxpayers in determining whether publicly traded stock received by the target corporation's shareholders in a potential reorganization satisfies the continuity of interest (COI) requirement under Treas. Reg. Sec. 1.368-1(e). Rev. Proc. 2018-12 is effective for reorganizations with an effective date on or after January 23, 2018.
Publicly traded corporations that intend to effectuate a tax-free reorganization should be familiar with the Rev. Proc. 2018-12 Safe Harbor Valuation Methods. The new Safe Harbor Valuation Methods provide corporate taxpayers with more flexibility and practical guidance in determining the value of the issuing corporation's stock in a potential tax-free reorganization that meets the aforementioned requirements.
By allowing publicly traded corporations the ability to take an average trading value of the issuing corporation's stock over the appropriate Measuring Period (instead of measuring on one single date), the IRS is giving corporate taxpayers more certainty that the potential reorganization will satisfy the COI requirement. Notably, while valuation issues arise in many other technical areas of Subchapter C, the Safe Harbor Valuation Methods provided in Rev. Proc. 2018-12 are specifically limited to determining the value of publicly traded stock for purposes of satisfying the COI requirement.
Finally, Rev. Proc. 2018-12 provides taxpayers with the ability to request a private letter ruling to address the issues that may arise in determining the applicability of the Safe Harbor Valuation Methods.
National Tax Services and Mergers & Acquisitions Tax Leader, PwC US