The IRS finalized regulations (T.D. 9606) under Treas. Reg. Sec. 1.304-4 containing certain anti-abuse provisions for Section 304 related to party stock sales.
The final regulations apply to stock acquisitions occurring on or after Dec. 29, 2009, and adopt without change certain final and temporary regulations, as well as a notice of proposed rulemaking issued on Dec. 30, 2009 (T.D. 9477). The regulations are meant to prevent certain Section 304 transactions designed to avoid the application of Section 304 to the issuing or acquiring company, often through the creation of a new entity.
The final regulations adopt without change certain modifications to the Section 304 anti-abuse rules found in the 2009 regulations. As with the 2009 regulations, the final regulations are self-executing in contrast to the previous rule dating back to 1988, in which the IRS had the discretion to raise or not raise the anti-abuse rules. In addition, the regulations apply to both issuing corporations and acquiring corporations, whereas the pre-2009 rules applied only to acquiring corporations. Regarding a "deemed acquiring corporation," the final regulations provide that a corporation (deemed acquiring corporation) shall be treated as acquiring for property the stock of a corporation (issuing corporation) acquired for property by another corporation (acquiring corporation) that is controlled by the deemed acquiring corporation, if a principal purpose for creating, organizing or funding the acquiring corporation by any means (including through capital contributions or debt) is to avoid the application of Section 304 to the deemed acquiring corporation.
Regarding a "deemed issuing corporation," the final regulations provide that the acquiring corporation will be treated as acquiring the stock of a corporation controlled by the issuing corporation in exchange for property if, in connection with the acquisition of stock, the issuing corporation acquired stock of the deemed issuing corporation with a principal purpose of avoiding the application of Section 304 to the deemed issuing corporation.
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