SECTION 2. BACKGROUND

.01 The provisions of subchapter C, chapter 1, of the Internal Revenue Code of 1986 generally provide nonrecognition treatment for reorganizations described in § 368. The COI requirement is one of a number of requirements that a transaction must satisfy in order to qualify as a reorganization. The COI requirement prevents transactions that resemble sales from qualifying as reorganizations. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462 (1933). Section 1.368–1(e) of the Income Tax Regulations generally provides rules applicable to the determination of whether the COI requirement is satisfied. See generally § 1.368–1(e) for the definitions of terms used in this revenue procedure.

.02 In some reorganizations, the shareholders of a corporation (Target) transfer their Target stock to another corporation (Acquiror) in exchange for either the

stock of Acquiror or, in the case of a triangular reorganization (as defined in § 1.358–6(b)(2)), the stock of the corporation in control (within the meaning of § 368(c)) of Acquiror (in either case, Issuing Corporation stock). In these reorganizations, Target shareholders may receive only Issuing Corporation stock or, in some cases, money or other property in addition to Issuing Corporation stock. In other reorganizations, Target transfers its property to Acquiror in exchange for Issuing Corporation stock (and, in some cases, money or other property), and then Target distributes the Issuing Corporation stock (and the money or other property, if any) to its shareholders in exchange for their Target stock.

.03 The COI requirement requires that, in substance, a substantial part of the value of the Target shareholders’ proprietary interests ( i.e., stock) in Target be preserved. Section 1.368–1(e)(1)(i); John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935). A proprietary interest in Target is preserved if it is exchanged for Issuing Corporation stock. To the extent that the shareholders’ proprietary interests in Target are acquired for money or other property, their proprietary interests are not preserved. Section 1.368–1(e)(1)(i). To determine whether the COI requirement is satisfied, the value of the Issuing Corporation stock the Target shareholders received is compared to the aggregate value of the consideration the Target shareholders received.

.04 Prior to 2011, the determination of whether the COI requirement is satisfied had been based on the value of the Issuing Corporation stock “as of the effective date of the reorganization” (Closing Date). Rev. Proc. 77–37, 1977–2 C.B. 568. Under this rule (Closing Date Rule), a decline in the value of the Issuing Corporation stock between the date a contract to effect a potential reorganization becomes binding (Signing Date) and the Closing Date could cause a transaction to fail the COI requirement.

.05 On December 19, 2011, the Department of the Treasury (Treasury Department) and the IRS issued final regulations (TD 9565, 76 FR 78540) including a special rule (Signing Date Rule) that applies if a binding contract to effect a potential reorganization pro

vides for fixed consideration (as defined in § 1.368–1(e)(2)(iii)(A)) to be exchanged for the Target shareholders’ proprietary interests. Section 1.368– 1(e)(2)(i). If the Signing Date Rule applies, the consideration is valued as of the end of the last business day before the first date there is a binding contract (Pre-signing Date), rather than on the Closing Date. Thus, under the Signing Date Rule, a change between the Signing Date and the Closing Date in the value of the Issuing Corporation stock to be received by the Target shareholders does not affect the determination of whether the COI requirement is satisfied.

.06 The Treasury Department and the IRS published proposed regulations in 2011 (2011 Proposed Regulations) (REG– 124627–11, 76 F.R. 78591 (Dec. 19, 2011)) that identified situations, other than those covered by the Signing Date Rule, in which the value of Issuing Corporation stock could be determined based on a value other than its actual trading price on the Closing Date. In one of these situations, the 2011 Proposed Regulations would have allowed the parties to use an average of the trading prices of Issuing Corporation stock over a number of days, in lieu of its actual trading price on the Closing Date, for purposes of determining whether the COI requirement is satisfied.

.07 The Treasury Department and the IRS received comments on the 2011 Proposed Regulations to the effect that parties to potential reorganizations frequently use average trading price methods to value Issuing Corporation stock in determining the amount and/or the mix of consideration to be exchanged for Target stock. The IRS agrees that such methods often produce a more reliable estimate of the fair market value of Issuing Corporation stock than its trading price on a single date. Accordingly, the IRS has concluded that, in certain circumstances, taxpayers should be able to rely on such methods for purposes of determining whether the COI requirement is satisfied. The IRS also agrees with commenters that taxpayers should be able to rely on such methods regardless of whether the Signing Date Rule or the Closing Date Rule applies to a particular transaction.

Bulletin No. 2018–6 349 February 05, 2018

.08 Accordingly, the IRS is prescribing in section 4 of this revenue procedure certain Safe Harbor Valuation Methods and Measuring Periods. For COI requirement purposes, if a transaction meets the requirements of either section 3.01 or 3.02 of this revenue procedure, the parties to a potential reorganization may select one of these Safe Harbor Valuation Methods and an appropriate Measuring Period, each described in section 4 of this revenue procedure, to determine the value of certain Issuing Corporation stock.