Corporations and Shareholders

Regulations eliminate ‘Hot Stock’ rule for certain reorganizations.

March 2009
by Alistair Nevius/The Tax Adviser

On December 15, 2008, the IRS issued final, temporary, and proposed regulations that generally hold that the so-called hot stock rule is inapplicable in reorganizations where a subsidiary is a member of the distributing corporation’s separate affiliated group (DSAG) (T.D. 9435, REG-150670-07).

Before the issuance of these regulations, under the hot stock rule of Sec. 355 (a)(3)(B), controlled corporation stock acquired within five years of the distribution of such stock in a transaction in which gain or loss was recognized would be treated as boot. However, this treatment could conflict with the Sec. 355(b)(3)(A) rule that members of a corporation’s separate affiliated group (SAG) will be treated as one corporation for purposes of determining whether a corporation meets the active trade or business requirements of Sec. 355(b)(2)(A).

For example, if a distributing corporation acquired all of a controlled corporation’s stock in a taxable transaction that qualified as an expansion of the distributing corporation’s existing trade or business under the SAG regime, and later distributed all such stock within five years of the acquisition in an unrelated transaction, the distribution would satisfy the active trade or business requirement but could be fully taxable under the hot stock rule.

This article has been excerpted from The Tax Adviser. Read the full article here (PDF).

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