SECTION 2. BACKGROUND

The Internal Revenue Service has long held that the optimal method for establishing basis in stock acquired in a reorganization described in § 368(a)(1)(B) of the Internal Revenue Code (B reorganizations) is

a survey of the surrendering Target shareholders. The Service has also long recognized that it will not be practical to survey all surrendering Target shareholders in all such cases, particularly where Target stock is publicly traded. To mitigate this concern, the Service published Rev. Proc. 81–70, 1981–2 C.B. 729, which provides survey procedures, as well as procedures for the use of statistical sampling and estimation of basis, for establishing basis in stock acquired in a B reorganization if a survey of all surrendering shareholders would not be practical or feasible.

Since the publication of Rev. Proc. 81–70, however, the operation of the securities market has changed significantly. Foremost among the changes has been the pervasive shift to the holding of stock in street name, that is, the holding of stock by nominees, typically clearinghouses or other financial institutions, on behalf of their members or customers. Because these nominee holders are subject to confidentiality and other restrictions, it is often difficult, if not impossible, for corporations acquiring stock in a B reorganization to obtain the information necessary to establish basis in acquired stock using the procedures prescribed by Rev. Proc. 81–70. Furthermore, the difficulties associated with determining basis in stock acquired in a B reorganization can also be present when determining basis in stock acquired in any transferred basis transaction.

In 2004, the Service undertook a study of the need for revised and further guidance in the determination of basis of shares acquired in transferred basis transactions. See Notice 2004–44, 2004–2 C.B. 32. The comments received in response to Notice 2004–44 were reflected in Notice 2009–4, 2009–2 I.R.B. 251, which affirmed the intent to revise the general provisions of Rev. Proc. 81–70, described three basis-determination safe harbors under consideration, and requested comments. The basis-determination safe harbors in Notice 2009–4 were: a survey-based methodology for shares surrendered by or on behalf of reporting shareholders, an estimation model based on stock registry and trading data for shares surrendered by registered, nonreporting shareholders, and an estimation model based on public trading data for shares surrendered by nominee shareholders. Comments were received affirming

2011–25 I.R.B. 890 June 20, 2011

the beneficial owner of such amount of shares, or

(b) An officer or director of Target, or a plan that acquired Target stock for or on behalf of Target employees (such as an employee stock option or pension plan).

(4) Security Position Report (SPR) . The term “Security Position Report” (SPR) means the securities position listings issued by the DTC and reporting the closing positions for securities held by DTC members. The term also includes similar publications of other clearinghouses, whether domestic or foreign, if it is established to the satisfaction of the Service that the publication is substantially similar to the DTC-issued SPR and the clearinghouse is substantially similar to the DTC.

(5) SEC Form 13F . The term “SEC Form 13F” means the reporting form filed by institutional investment managers pursuant to Section 13(f) of the Securities Exchange Act of 1934. The term also includes such other reporting forms required to be filed by a foreign jurisdiction if it is established to the satisfaction of the Service that such filing is substantially similar to the SEC Form 13F.

(6) Master Securityholder File . The term “Master Securityholder File” means the official listing of individual securityholder accounts holding certificated shares, see 17 C.F.R. § 240.17Ad–9 (1983).

(7) Transferred basis transaction . The term “transferred basis transaction” means any transaction in which Acquiring’s basis in Target stock acquired in the transaction is determined by reference to the surrendering Target shareholders’ bases in their surrendered shares. Transferred basis transactions include B reorganizations, § 351 exchanges, and certain triangular reorganizations (see § 1.358–6(c)(2)(ii) of the Income Tax Regulations).

(8) Adjusted closing price . The term “adjusted closing price” means the price at which a share of stock closed on an established securities market on a specified date, adjusted to take stock splits into account.