SECTION 4. PROCEDURES — Internal Revenue Bulletin 2011-25

.01 Surveying . This Section 4.01 provides procedures for surveying surrendering Target shareholders to establish basis

the need for such guidance and suggesting various modifications to the safe harbor models.

This revenue procedure adopts the surveying and statistical sampling guidelines in Rev. Proc. 81–70, but updates and revises them to take current market practices into account. This revenue procedure also adopts the safe harbor methodologies described in Notice 2009–4, but modifies them to reflect the comments received, particularly regarding the need for a model that uses data more readily accessible to acquiring corporations. Finally, this revenue procedure expands the applicability of these provisions by permitting their use in any transferred basis transaction.

SECTION 3. OVERVIEW, GENERALLY APPLICABLE PROVISIONS

.01 In General . Section 4.0 of this revenue procedure sets forth procedures for four methodologies that taxpayers may use to determine basis in stock acquired in a transferred basis transaction. Section 4.01 provides procedures for surveying all surrendering Target shareholders to determine actual basis in surrendered shares. Section 4.02 provides procedures for the use of statistical sampling when a full survey is not feasible. Sections 4.03 and 4.04 provide estimation techniques that may be used in lieu of a full survey or statistical sampling when specified criteria are satisfied. Taxpayers may use one or more of these methodologies in any combination. If a taxpayer cannot or does not use the methodologies prescribed in this revenue procedure, basis in acquired Target shares may be established by such other methodologies as agreed by the Service and Acquiring.

Notwithstanding any provision of this revenue procedure, if Acquiring or the Service has or acquires (including by survey and by examining Target’s books and records) knowledge of a surrendering shareholder’s actual basis in a surrendered share, Acquiring’s basis in the share is the surrendering shareholder’s actual basis. For example, in many cases, if Target issued shares to employee plans or with respect to options, convertible stock, or convertible debt, the basis of the shares can be determined using Target’s books

and records. In those cases, Acquiring’s basis in the shares will be the actual basis as determined using Target’s books and records. However, the Service will not undertake its own survey of shareholders (other than, perhaps, reporting shareholders) for the purpose of obtaining actual knowledge of their basis.

In the absence of actual knowledge, the Service will not assert an alternative basis, or an alternative method for determining basis, to the extent a taxpayer determines basis in Target stock in compliance with this revenue procedure.

The Appendix to this revenue procedure sets forth an illustration of the application of the estimation and modeling provisions in Section 4.

.02 Definitions . For purposes of this revenue procedure, the following definitions apply:

(1) Registered shareholder . The term “registered shareholder” means any Target shareholder that surrendered Target shares held in certificated form at the time of the transferred basis transaction.

(2) Nominee shareholder . The term “nominee shareholder” means any surrendering Target shareholder (whether surrendering shares it held on its own account or on behalf of a customer, member, or other beneficial owner) that, at the time of the transferred basis transaction, was either—

(a) A participant or member of the Depository Trust Company (DTC), or such other clearinghouse determined by the Service to be substantially similar to the DTC, that holds securities positions on its own behalf or on behalf of its clients, participants, members, or other persons, or

(b) A person required to file an SEC Form 13F or such other reporting form determined by the Service to be substantially similar to the SEC Form 13F.

(3) Reporting shareholder . The term “reporting shareholder” means any surrendering Target shareholder that, immediately before the transferred basis transaction, was either—

(a) The registered or nominee shareholder of publicly traded Target shares representing at least five percent of the vote or the value of all outstanding Target shares (or, in the case of shares that were not publicly traded, one percent of the vote or value of all outstanding Target shares), or, if identified in a nominee survey or otherwise known to Acquiring,

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(ii) Is inaccurate on its face and differs significantly from the trading prices of the shares at any time within a week of the date they were acquired in a cost-basis transaction. In such a case, the shareholder is considered to have failed to respond to the survey.

If a shareholder surveyed in accordance with this Section 4.01 fails to respond to Acquiring’s request for basis information within 30 days of Acquiring’s second follow-up attempt, Acquiring may determine its basis in a share or shares surrendered by or on behalf of the shareholder using such other procedures in this revenue procedure as are applicable.

.02 Statistical Sampling . This Section 4.02 provides procedures for the use of standard statistical sampling techniques to establish basis in Section 4.02 Eligible Shares (as defined in Section 4.02(1)) when the administrative cost of surveying all surrendering shareholders is unreasonably high. Factors that determine whether administrative cost is unreasonably high include the time, burden, and financial cost of conducting a full survey. The administrative cost of surveying every surrendering Target shareholder is presumed unreasonably high if, immediately before the transaction, Target stock was traded on an established securities market (within the meaning of § 1.7704–1(b) of the Procedure and Administration Regulations). Under this Section 4.02, Acquiring’s basis in each Section 4.02 Eligible Share is determined in accordance with the following—

(1) Section 4.02 Eligible Share . The term “Section 4.02 Eligible Share” means any Target share—

(a) The actual basis of which is not known, and

(b) That is not surrendered by or on behalf of a reporting shareholder.

(2) Statistical sampling procedure . To satisfy the requirements of this Section 4.02— (a) Statistical sampling is done separately for common and preferred shares.

(b) No reporting shareholders may be included in a sample to be surveyed.

(d) The statistical sampling procedures used must comply with standard statistical sampling procedures recognized by the

in the shares surrendered by or on behalf of such shareholders. The procedures of this Section 4.01 apply to all surveys, whether done with respect to all acquired shares, with respect to a sample of acquired shares under the statistical sampling procedures described in Section 4.02, or with respect to shares that are surrendered by or on behalf of reporting shareholders when basis is estimated under Section 4.03 or Section 4.04. (1) Timeliness requirement . All surveys under this Section 4.01 must be done timely. A survey will generally be considered to have been done timely if it is substantially completed within two years of the transferred basis transaction. However, see Section 7 of this revenue procedure for the application of this requirement to transferred basis transactions completed prior to June 20, 2011.

(2) Survey procedure . All surveys done pursuant to this Section 4.01 are to be done in accordance with the following—

(a) Identifying the Target sharehold- ers to be surveyed . Acquiring first identifies the surrendering shareholders that will be included in the survey. For this purpose, Acquiring may use Target’s books and records, or such other information as is appropriate and available, including, for example, the Master Securityholder Files maintained by the stock transfer agent, or Securities Exchange Commission (SEC) filings, including Schedule 13 series and SPR data.

In general, Acquiring must survey all registered and nominee shareholders that surrendered Target stock in the transferred basis transaction. In addition, Acquiring must survey all other reporting shareholders identified by survey or otherwise. However, Acquiring need not survey—

(i) Any shareholder that is not a member of the survey sample and that surrendered Target stock the basis of which is to be determined under the statistical sampling method described in Section 4.02,

(ii) Any registered shareholder that is not a reporting shareholder and that surrendered Target stock the basis of which is to be determined under the estimation methodology described in Section 4.03, or (iii) Any nominee shareholder that is not a reporting shareholder and that surrendered Target stock the basis of which

is to be determined under the estimation methodology described in Section 4.04.

(b) Conducting the survey . Once the survey subjects are identified, Acquiring begins the survey process by sending a letter to the last known address of each such shareholder, asking the shareholder to disclose the number of Target common and preferred shares surrendered, the shareholder’s aggregate basis (by class) of those shares, and whether the shareholder held the shares as the beneficial or nominee owner. The letter must state the purpose for requesting the information, explain how basis is determined, and explain the importance of responding timely and accurately. In addition, the letter must request that—

(i) Any surrendering shareholder that was a beneficial owner provide the identity and contact information of any nominee holder of its surrendered share or shares; and

(ii) Any surrendering shareholder that was a nominee owner either:

(A) Provide the identity and contact information of the beneficial owner or owners of the shares it surrendered;

(B) Provide the aggregate number of common and preferred shares that it surrendered and the aggregate basis (by class) of those shares; or

(C) Forward the request for information (in a form provided by Acquiring) to the beneficial owners of its surrendered shares, requesting that such owners provide the basis information either directly to Acquiring or to the nominee (who would then provide the information to Acquiring).

After 30 days, Acquiring must make at least two additional attempts to contact all shareholders that failed to respond to the initial survey letter. This follow-up contact may be made by telephone, email, and/or such other means as appropriate and available.

(3) Allowable basis . The basis reported by surveyed shareholders will be deemed to be the surrendering shareholder’s actual basis, and Acquiring’s basis will therefore be the basis reported by such shareholders, unless the reported basis—

(i) Differs from the actual basis known by Acquiring or the Service, in which case Acquiring’s basis will be such actual basis, or

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caused the basis of a share to be materially different from the adjusted closing price on its issuance date, including but not limited to the following—

(i) On or about the date a stock certificate was issued to a surrendering Target shareholder, another certificate held by the same shareholder was cancelled. In such case, to the extent that the number of shares issued is less than or equal to the number of shares cancelled, the adjusted closing price for such newly issued shares will not be the adjusted closing price on the date the new certificate was issued, but, instead, the adjusted closing price on the date the earlier certificate was issued. If a cancelled certificate was originally issued concurrently with the cancellation of another certificate, the adjusted closing price is that on the date of the earlier (or earliest) issuance.

(ii) A share was acquired in a taxfree stock split or as a stock dividend by the shareholder who surrendered the share. In such case, the share will be assigned a proportionate amount of the basis of the original share determined under the applicable provisions of the Code and regulations. Or,

(iii) A share was acquired in a prior tax-free exchange by the shareholder who surrendered the share. In such case, the share will be assigned a basis determined under the applicable provisions of the Code and regulations (including the provisions of this revenue procedure).

(b) Adjusting initial estimated basis . The initial estimated basis of each Section 4.03 Eligible Share determined under Section 4.03(2)(a) must be adjusted for all subsequent transactions and events that would require an adjustment to basis under the Code (for example, to take into account distributions under § 301(c)(2)).

(3) Allowable basis . Acquiring’s basis in each Section 4.03 Eligible Share is the initial estimated basis for the share determined under Section 4.03(2)(a) and adjusted as required by Section 4.03(2)(b).

.04 Estimation procedure for shares surrendered by nominees . This Section 4.04 provides procedures for determining the basis of Section 4.04 Eligible Shares (as defined in Section 4.04(1)(a)) using data from Target Security Position Reports (SPRs) or from SEC Form 13F filings (but not both). Under this Section 4.04, Acquiring’s basis in each Section 4.04 El

Service. The use of statistical sampling has been provided for in several items of published guidance. See, for example, Rev. Proc. 2004–29, 2004–1 C.B. 918 (statistical sampling methodology for use in establishing the amount of substantiated meal and entertainment expenses that are excepted from the 50% deduction disallowance under section 274(n)(1)); Rev. Proc. 2007–35, 2007–1 C.B. 1349 (addressing when statistical sampling may be used for purposes of section 199 of the Code (income attributable to domestic production activities)); Rev. Proc. 2002–55, 2002–2 C.B. 435 (permitting external auditors of qualified intermediaries to use statistical sampling); and Rev. Proc. 72–36, 1972–2 C.B. 771 (setting forth statistical sampling guidelines for determining the redemption rate of trading stamps).

If the Service determines that Acquiring’s sampling procedure fails to comply with accepted statistical sampling procedures, Acquiring will have an opportunity to recompute the estimate (Sample Basis Estimate), expand the sample, or make such other adjustments to the basis calculation as necessary to comply with standard statistical sampling procedures. Alternatively, Acquiring may determine its basis in Target stock using such other procedures in this revenue procedure as are applicable.

(3) Allowable basis . Acquiring’s allowable basis in each Section 4.02 Eligible Share will be a valid estimate (Sample Basis Estimate) computed at the least advantageous 95% one-sided confidence limit. The “least advantageous” confidence limit is either the upper or lower limit that results in the least benefit to Acquiring. If the relative precision, as described in Section 4.02(4) of this revenue procedure, does not exceed 10%, the Sample Basis Estimate may be used as the basis for each Section 4.02 Eligible Share. For purposes of determining basis under this revenue procedure, where the relative precision is less than 15% and greater than 10%, Allowable Basis is an amount between the least advantageous 95% onesided confidence limit and the Sample Basis Estimate, determined as follows:

Sample Basis Estimate - (Relative Precision - .10) / .05 × (Sample Basis Estimate - Least Advantageous 95% OneSided Confidence Limit)

(4) Calculating the relative precision for each estimator . The relative precision for each estimator is commonly calculated by dividing the relative precision at the 95% one-sided confidence limit (sometimes referred to as the sampling error) of the Sample Basis Estimate by the estimator. Where a Sample Basis Estimate may be calculated using either a corrected value or difference perspective, as in the case of Ratio and Regression methods or solely a corrected value perspective as in the case of a Mean method, the test will be applied on the basis of a difference perspective. In such cases the numerator of the calculation is the sampling error of the adjustment and the denominator the Sample Basis Estimate of the adjustment.

.03 Estimation Procedure for shares surrendered by registered shareholders and certain reporting shareholders . This Section 4.03 provides procedures for determining basis of Section 4.03 Eligible Shares (as defined in Section 4.03(1)) using data from the Master Securityholder Files. Under this Section 4.03, Acquiring’s basis in each Section 4.03 Eligible Share is determined in accordance with the following—

(1) Section 4.03 Eligible Share . The term “Section 4.03 Eligible Share” means any Target share—

(a) The actual basis of which is not known, and

(b) That was surrendered by a registered shareholder—

(i) That is not a reporting shareholder, or

(ii) That is a reporting shareholder that was surveyed and that failed to respond to the survey.

(2) Estimation procedure . Under this Section 4.03, Acquiring’s basis in each Section 4.03 Eligible Share is determined in accordance with the following—

(a) Establishing initial estimated basis of each Section 4.03 Eligible Share . The initial estimated basis of each Section 4.03 Eligible Share is determined by treating the shareholder who surrendered the share as acquiring the share by purchase for the adjusted closing price on the date that the shareholder was issued its stock certificate. However, any amount so determined must be adjusted or revised to take into account any extraordinary issuance event. For this purpose, an extraordinary issuance event is any transaction or event that could have

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shares to the extent of any decrease, in the number of Target shares that the shareholder holds on the next Measuring Date for which data is available (the next date for which Acquiring has a Target SPR in the case of an SPR modeled shareholder, and the next date that the shareholder made an SEC Form 13F filing in the case of an SEC modeled shareholder). All deemed purchases are treated as having been made for an amount equal to the volume-weighted average of the adjusted closing prices for the period between the modeled shareholder’s immediately preceding Measuring Date and the next Measuring Date for which data is available; all deemed sales are treated as having been made on the average cost method. The process is repeated for every Measuring Date until the shareholder’s aggregate adjusted estimated basis is determined as of its last Measuring Date.

Each modeled shareholder’s aggregate adjusted basis on its last Measuring Date is divided by the total number of shares held by the shareholder on that date to determine the shareholder’s per share final estimated basis.

For purposes of the model, each Target share actually surrendered by a modeled shareholder is deemed to have a basis equal to the surrendering shareholder’s per share final estimated basis.

(d) Section 4.04 per share modeled ba- sis . The deemed bases of all shares actually surrendered by modeled shareholders are combined and the total is divided by the number of shares actually surrendered by those shareholders. The result is the per share modeled basis.

(3) Allowable basis . Acquiring’s basis in each Section 4.04 Eligible Share is determined in accordance with the following—

(i) If SPR data is used to compute the Section 4.04 per share modeled basis, Acquiring’s basis in each Section 4.04 Eligible Share is equal to the Section 4.04 per share modeled basis multiplied by the percentage of Measuring Dates in the Data Collection Period for which SPR data is obtained. Thus, if there are 60 Measuring Dates in the Data Collection Period and Acquiring obtained SPR data for only 54 of those Measuring Dates, Acquiring’s basis in each Section 4.04 Eligible Share is an amount equal to 90 percent (54/60) of the Section 4.04 per share modeled basis. Fur

igible Share is determined in accordance with the following—

(1) Definitions . For purposes of this Section 4.04, the following definitions apply—

(a) Section 4.04 Eligible Share . The term “Section 4.04 Eligible Share” means any Target share—

(i) The actual basis of which is not known, and

(ii) That was surrendered by a nominee shareholder—

(A) That is not a reporting shareholder, or

(B) That is a reporting shareholder that was surveyed and failed to respond to the survey.

(b) Data Collection Period . The “Data Collection Period” is the period of time—

(i) Beginning on the later of— (A) The first day of Target’s first taxable year, and

(B) Either—

( 1 ) the later of the first date that the shares to be modeled are publicly traded and the date that is seven years before the date of the transferred basis transaction if Acquiring is estimating basis using Target’s SPR data, or

( 2 ) the date that is ten years before the date of the transferred basis transaction if Acquiring is estimating basis using SEC Form 13F data, and

(ii) Ending on the date of the transferred basis transaction.

(c) Measuring Date . The term “Measuring Date” means any date with respect to which data is to be collected. The Measuring Dates are:

(i) If SPR data is being used to estimate basis, each Friday in the Data Collection Period on which SPR data was published or, if SPR data is not published on a Friday in a particular week, then the last date prior to that Friday on which SPR data was published, provided that such data is available from the DTC as of the date of the transferred basis transaction, and

(ii) If SEC Form 13F data is being used to estimate basis, each date in the Data Collection Period on which SEC Forms 13F are filed.

(2) Estimation procedure . The estimation of basis under this Section 4.04 is done separately for common and preferred shares, and estimations are made as follows—

(a) Identifying modeled shareholders . Acquiring first identifies the surrendering shareholders to be included in the estimation model (the modeled shareholders), and each such shareholder’s first and last Measuring Date. For this purpose—

(i) If SPR data is being used to estimate basis, the modeled shareholders are all surrendering shareholders identified on an SPR published at any time during the Data Collection Period (SPR modeled shareholder). With respect to each SPR modeled shareholder—

(A) The shareholder’s first Measuring Date is the first date on which the shareholder is continuously identified on Target SPRs, and

(B) The shareholder’s last Measuring Date is the last date for which Target SPR data is available.

(ii) If SEC Form 13F data is being used to estimate basis, the modeled shareholders are all surrendering shareholders that filed an SEC Form 13F at any time during the Data Collection Period (SEC modeled shareholders). With respect to each SEC modeled shareholder—

(A) The shareholder’s first Measuring Date is the first date on which the shareholder is identified in the SEC Form 13F data as holding Target shares, and

(B) The shareholder’s last Measuring Date is the last date on which the shareholder filed an SEC Form 13F.

(b) Establishing each modeled share- holder’s aggregate initial estimated basis . Each modeled shareholder is treated as purchasing the shares it is identified as holding on its first Measuring Date for an amount equal to the volume-weighted average adjusted closing prices for the period—

(i) Beginning on the later of the date that is three months prior to the shareholder’s first Measuring Date and the date that is Target’s first day of its first taxable year, and

(ii) Ending on the modeled shareholder’s first Measuring Date. This is the modeled shareholder’s aggregate initial estimated basis.

(c) Adjusting each modeled share- holder’s initial estimated basis . Each modeled shareholder’s initial estimated basis is adjusted by treating the shareholder as having purchased shares to the extent of any increase, and having sold

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procedures described in Section 4 of this revenue procedure may be the subject of a pre-filing agreement.

SECTION 7. EFFECTIVE DATE, EFFECT ON OTHER DOCUMENTS

This revenue procedure is effective with respect to transferred basis transactions completed on or after June 20, 2011. However, taxpayers may use this revenue procedure with respect to transferred basis transactions completed prior to June 20, 2011; in such cases, surveys will be considered timely if substantially completed, and reporting requirements will be considered satisfied if filed, on or before June 20, 2013.

Rev. Proc. 81–70 and Notice 2009–4 are obsoleted with respect to transferred basis transactions completed on or after June 20, 2011.

ther, appropriate adjustments will be made if the Service determines that SPRs not included in the determination represent material omissions.

(ii) If SEC Form 13F data is used to compute the Section 4.04 per share modeled basis, Acquiring’s basis in each Section 4.04 Eligible Share is equal to the Section 4.04 per share modeled basis multiplied by 75 percent.