IRS Chief Counsel - Treatment of share exchange by majority shareholder 

December 18:  The IRS today publicly posted a “redacted” field advice memorandum* (prepared by attorneys in the IRS Office of Chief Counsel) concluding that an exchange in which the taxpayer (a shareholder and CEO) receives stock having a fair market value, but the surrendered stock that had no fair market value, does not qualify as an E reorganization.

Accordingly, the IRS field advice memo concludes that the entire excess amount of the stock value is subject to tax as compensation, a gift, a payment to satisfy an obligation, an inducement to enter into the transaction, or for whatever purpose the facts indicate. 20131601F (release date April 19, 2013, and dated February 19, 2013).

Read the field advice memo [PDF 104 KB]


The situation in the field advice memo concerns:

  • Whether a shareholder and CEO of a company is subject to tax on the exchange of old common stock worth having “no fair market value” for new common stock worth an unspecified amount (presumably, a greater amount) and preferred stock worth another unspecified amount, and
  • What would be the character of the gain

The IRS memo concludes that:

  • In an E reorganization, if a taxpayer receives new stock having a fair market value in excess of the fair market value of the stock surrendered, the amount of the excess will not qualify for non-recognition treatment. In this situation, because stock having no fair market value was surrendered, the exchange is not an E reorganization and the entire excess amount received in stock is taxable.
  • The amount of excess stock received would be treated as ordinary income, e.g., as compensation, a gift, a payment to satisfy an obligation, an inducement to enter into the transaction, or for whatever purpose the facts indicate.

*Field advice memo documents are prepared by IRS field attorneys in the Office of Chief Counsel, are reviewed by an Associate Office, and are subsequently issued to IRS field or service center employees. The memo cannot be used or cited as precedent.

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