United States

Treasury withdraws proposed 'no net value' regulations

Existing authorities sufficient to administer rules

TAX ALERT  | 

The IRS has withdrawn the proposed ‘no net value’ regulations (REG-139633-08), which were the only remaining part of the proposed ‘rulemaking’ regulations (REG-163314-03) issued in 2005. The proposed no net value regulations provided that nonrecognition treatment would only be available in transactions involving an exchange of net value (or distribution of net value in the case of a complete liquidation of a subsidiary). The proposed rule was aimed at corporate reorganizations, formations and liquidations involving insolvent companies. The exchange or distribution of net value requirement brought unnecessary complexity to the already complex area of corporate transactions. For example, the net value requirement often required taxpayers to enter into pre-transaction structuring steps more motivated to satisfy the net value requirement than to accomplish true business objectives.

Whether the proposed regulations represented an additional hurdle to qualification of a transaction or an extension of existing authority, their withdrawal allows taxpayers to base their transaction planning on existing authorities. Current law surrounding this area is seen by some as more liberal than the withdrawn regulations. The Treasury and the IRS believe that existing authority is sufficient with regards to corporate reorganizations, formations and liquidations involving insolvent companies and as such, withdrawal of the regulations accomplishes the current Treasury’s goal of reducing unnecessary and burdensome regulations. The remaining portions of the proposed rulemaking regulations were previously adopted as final regulations prior to the IRS’s most recent announcement on the proposed no net value regulations.

As a result, the elimination of the no net value regulations is likely a taxpayer-friendly decision. Taxpayers undergoing corporate reorganizations, liquidations and formations should consult with their tax advisors to better understand how this action by the IRS could impact their transaction structuring.

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