Final regulations on use of controlled corporation to avoid application of section 304 

• With a principal purpose of avoiding the application of section 304 to a corporation that is controlled by the issuing corporation in the transaction, or
• With a principal purpose of avoiding the application of section 304 to a corporation that controls the acquiring corporation in the transaction.

Today’s final regulations [PDF 84 KB] finalize regulations that were issued in 2009 (the “2009 regulations”) “without change” and remove corresponding temporary regulations.

The final regulations will be published in the Federal Register on Monday, December 24, 2012.

Background

In general, section 304 treats a purchase by one corporation (the Acquiring Corporation) of stock in another corporation (the Issuing Corporation) as a section 301 distribution if the Acquiring Corporation and the Issuing Corporation are under common control.

In applying section 301 to a section 304 distribution, section 304(b)(2) provides that the dividend is deemed to be sourced first from the Acquiring Corporation’s earnings and profits and then from the Issuing Corporation’s earnings and profits.

2009 proposed and temporary regulations

The 2009 regulations were issued to apply to certain transactions that are subject to section 304, but that are entered into with a principal purpose of avoiding the application of section 304 to a corporation that (1) is controlled by the issuing corporation in the transaction, or (2) controls the acquiring corporation in the transaction.

Under the 2009 regulations, if a principal purpose for the new Issuing Corporation acquiring the would-be Issuing Corporation was to avoid the application of section 304, the would-be Issuing Corporation would be viewed as the Issuing Corporation (a deemed Issuing Corporation) for purposes of determining the amount and source of a dividend under section 304(b)(2). In addition, the 2009 regulations also addressed a situation in which the stock of a would-be Issuing Corporation is contributed to a new Issuing Corporation, and the Acquiring Corporation acquires the stock of the new Issuing Corporation for property in a transaction subject to section 304.