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IRS Issues Guidance For Determining Stock Basis In Stock-For-Stock Exchanges.

MAY 31, 2011

Rev. Proc. 2011-35; 2011-25 I.R.B. 890

DATED MAY 31, 2011
DOCUMENT ATTRIBUTES
Citations: Rev. Proc. 2011-35; 2011-25 I.R.B. 890

Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or abatement; determination of correct tax liability (Also: Part I §§ 362, 1.362-1, 351, 1.351-3, 1.358-6.)

SECTION 1. PURPOSE

This revenue procedure provides procedures that a corporation (Acquiring) may use to establish its basis in stock of another corporation (Target) when it acquires the Target stock in a transferred basis transaction.

SECTION 2. BACKGROUND

The Internal Revenue Service has long held that the optimal method for establishing basis in stock acquired in a reorganization described in § 368(a)(1)(B) of the Internal Revenue Code (B reorganizations) is a survey of the surrendering Target shareholders. The Service has also long recognized that it will not be practical to survey all surrendering Target shareholders in all such cases, particularly where Target stock is publicly traded. To mitigate this concern, the Service published Rev. Proc. 81-70, 1981-2 C.B. 729, which provides survey procedures, as well as procedures for the use of statistical sampling and estimation of basis, for establishing basis in stock acquired in a B reorganization if a survey of all surrendering shareholders would not be practical or feasible.

Since the publication of Rev. Proc. 81-70, however, the operation of the securities market has changed significantly. Foremost among the changes has been the pervasive shift to the holding of stock in street name, that is, the holding of stock by nominees, typically clearinghouses or other financial institutions, on behalf of their members or customers. Because these nominee holders are subject to confidentiality and other restrictions, it is often difficult, if not impossible, for corporations acquiring stock in a B reorganization to obtain the information necessary to establish basis in acquired stock using the procedures prescribed by Rev. Proc. 81-70. Furthermore, the difficulties associated with determining basis in stock acquired in a B reorganization can also be present when determining basis in stock acquired in any transferred basis transaction.

In 2004, the Service undertook a study of the need for revised and further guidance in the determination of basis of shares acquired in transferred basis transactions. See Notice 2004-44, 2004-2 C.B. 32. The comments received in response to Notice 2004-44 were reflected in Notice 2009-4, 2009-2 I.R.B. 251, which affirmed the intent to revise the general provisions of Rev. Proc. 81-70, described three basis-determination safe harbors under consideration, and requested comments. The basis-determination safe harbors in Notice 2009-4 were: a survey-based methodology for shares surrendered by or on behalf of reporting shareholders, an estimation model based on stock registry and trading data for shares surrendered by registered, nonreporting shareholders, and an estimation model based on public trading data for shares surrendered by nominee shareholders. Comments were received affirming the need for such guidance and suggesting various modifications to the safe harbor models.

This revenue procedure adopts the surveying and statistical sampling guidelines in Rev. Proc. 81-70, but updates and revises them to take current market practices into account. This revenue procedure also adopts the safe harbor methodologies described in Notice 2009-4, but modifies them to reflect the comments received, particularly regarding the need for a model that uses data more readily accessible to acquiring corporations. Finally, this revenue procedure expands the applicability of these provisions by permitting their use in any transferred basis transaction.

SECTION 3. OVERVIEW, GENERALLY APPLICABLE PROVISIONS

.01 In General. Section 4.0 of this revenue procedure sets forth procedures for four methodologies that taxpayers may use to determine basis in stock acquired in a transferred basis transaction. Section 4.01 provides procedures for surveying all surrendering Target shareholders to determine actual basis in surrendered shares. Section 4.02 provides procedures for the use of statistical sampling when a full survey is not feasible. Sections 4.03 and 4.04 provide estimation techniques that may be used in lieu of a full survey or statistical sampling when specified criteria are satisfied. Taxpayers may use one or more of these methodologies in any combination. If a taxpayer cannot or does not use the methodologies prescribed in this revenue procedure, basis in acquired Target shares may be established by such other methodologies as agreed by the Service and Acquiring.

Notwithstanding any provision of this revenue procedure, if Acquiring or the Service has or acquires (including by survey and by examining Target's books and records) knowledge of a surrendering shareholder's actual basis in a surrendered share, Acquiring's basis in the share is the surrendering shareholder's actual basis. For example, in many cases, if Target issued shares to employee plans or with respect to options, convertible stock, or convertible debt, the basis of the shares can be determined using Target's books and records. In those cases, Acquiring's basis in the shares will be the actual basis as determined using Target's books and records. However, the Service will not undertake its own survey of shareholders (other than, perhaps, reporting shareholders) for the purpose of obtaining actual knowledge of their basis.

In the absence of actual knowledge, the Service will not assert an alternative basis, or an alternative method for determining basis, to the extent a taxpayer determines basis in Target stock in compliance with this revenue procedure.

The Appendix to this revenue procedure sets forth an illustration of the application of the estimation and modeling provisions in Section 4.

.02 Definitions. For purposes of this revenue procedure, the following definitions apply:

(1) Registered shareholder. The term "registered shareholder" means any Target shareholder that surrendered Target shares held in certificated form at the time of the transferred basis transaction.

(2) Nominee shareholder. The term "nominee shareholder" means any surrendering Target shareholder (whether surrendering shares it held on its own account or on behalf of a customer, member, or other beneficial owner) that, at the time of the transferred basis transaction, was either --

(a) A participant or member of the Depository Trust Company (DTC), or such other clearinghouse determined by the Service to be substantially similar to the DTC, that holds securities positions on its own behalf or on behalf of its clients, participants, members, or other persons, or

(b) A person required to file an SEC Form 13F or such other reporting form determined by the Service to be substantially similar to the SEC Form 13F.

(3) Reporting shareholder. The term "reporting shareholder" means any surrendering Target shareholder that, immediately before the transferred basis transaction, was either --

(a) The registered or nominee shareholder of publicly traded Target shares representing at least five percent of the vote or the value of all outstanding Target shares (or, in the case of shares that were not publicly traded, one percent of the vote or value of all outstanding Target shares), or, if identified in a nominee survey or otherwise known to Acquiring, the beneficial owner of such amount of shares, or

(b) An officer or director of Target, or a plan that acquired Target stock for or on behalf of Target employees (such as an employee stock option or pension plan).

(4) Security Position Report (SPR). The term "Security Position Report" (SPR) means the securities position listings issued by the DTC and reporting the closing positions for securities held by DTC members. The term also includes similar publications of other clearinghouses, whether domestic or foreign, if it is established to the satisfaction of the Service that the publication is substantially similar to the DTC-issued SPR and the clearinghouse is substantially similar to the DTC.

(5) SEC Form 13F. The term "SEC Form 13F" means the reporting form filed by institutional investment managers pursuant to Section 13(f) of the Securities Exchange Act of 1934. The term also includes such other reporting form required to be filed by a foreign jurisdiction if it is established to the satisfaction of the Service that such filing is substantially similar to the SEC Form 13F.

(6) Master Securityholder File. The term "Master Securityholder File" means the official listing of individual securityholder accounts holding certificated shares, see 17 C.F.R. § 240.17Ad-9 (1983).

(7) Transferred basis transaction. The term "transferred basis transaction" means any transaction in which Acquiring's basis in Target stock acquired in the transaction is determined by reference to the surrendering Target shareholders' bases in their surrendered shares. Transferred basis transactions include B reorganizations, § 351 exchanges, and certain triangular reorganizations (see § 1.358-6(c)(2)(ii) of the Income Tax Regulations).

(8) Adjusted closing price. The term "adjusted closing price" means the price at which a share of stock closed on an established securities market on a specified date, adjusted to take stock splits into account.

SECTION 4. PROCEDURES

.01 Surveying. This Section 4.01 provides procedures for surveying surrendering Target shareholders to establish basis in the shares surrendered by or on behalf of such shareholders. The procedures of this Section 4.01 apply to all surveys, whether done with respect to all acquired shares, with respect to a sample of acquired shares under the statistical sampling procedures described in Section 4.02, or with respect to shares that are surrendered by or on behalf of reporting shareholders when basis is estimated under Section 4.03 or Section 4.04.

(1) Timeliness requirement. All surveys under this Section 4.01 must be done timely. A survey will generally be considered to have been done timely if it is substantially completed within two years of the transferred basis transaction. However, see Section 7 of this revenue procedure for the application of this requirement to transferred basis transactions completed prior to June 20, 2011.

(2) Survey procedure. All surveys done pursuant to this Section 4.01 are to be done in accordance with the following --

(a) Identifying the Target shareholders to be surveyed. Acquiring first identifies the surrendering shareholders that will be included in the survey. For this purpose, Acquiring may use Target's books and records, or such other information as is appropriate and available, including, for example, the Master Securityholder Files maintained by the stock transfer agent, or Securities Exchange Commission (SEC) filings, including Schedule 13 series and SPR data.

In general, Acquiring must survey all registered and nominee shareholders that surrendered Target stock in the transferred basis transaction. In addition, Acquiring must survey all other reporting shareholders identified by survey or otherwise. However, Acquiring need not survey --

(i) Any shareholder that is not a member of the survey sample and that surrendered Target stock the basis of which is to be determined under the statistical sampling method described in Section 4.02,

(ii) Any registered shareholder that is not a reporting shareholder and that surrendered Target stock the basis of which is to be determined under the estimation methodology described in Section 4.03, or

(iii) Any nominee shareholder that is not a reporting shareholder and that surrendered Target stock the basis of which is to be determined under the estimation methodology described in Section 4.04.

(b) Conducting the survey. Once the survey subjects are identified, Acquiring begins the survey process by sending a letter to the last known address of each such shareholder, asking the shareholder to disclose the number of Target common and preferred shares surrendered, the shareholder's aggregate basis (by class) of those shares, and whether the shareholder held the shares as the beneficial or nominee owner. The letter must state the purpose for requesting the information, explain how basis is determined, and explain the importance of responding timely and accurately. In addition, the letter must request that --

(i) Any surrendering shareholder that was a beneficial owner provide the identity and contact information of any nominee holder of its surrendered share or shares; and

(ii) Any surrendering shareholder that was a nominee owner either:

(A) Provide the identity and contact information of the beneficial owner or owners of the shares it surrendered;

(B) Provide the aggregate number of common and preferred shares that it surrendered and the aggregate basis (by class) of those shares; or

(C) Forward the request for information (in a form provided by Acquiring) to the beneficial owners of its surrendered shares, requesting that such owners provide the basis information either directly to Acquiring or to the nominee (who would then provide the information to Acquiring).

After 30 days, Acquiring must make at least two additional attempts to contact all shareholders that failed to respond to the initial survey letter. This follow-up contact may be made by telephone, email, and/or such other means as appropriate and available.

(3) Allowable basis. The basis reported by surveyed shareholders will be deemed to be the surrendering shareholder's actual basis, and Acquiring's basis will therefore be the basis reported by such shareholders, unless the reported basis --

(i) Differs from the actual basis known by Acquiring or the Service, in which case Acquiring's basis will be such actual basis, or

(ii) Is inaccurate on its face and differs significantly from the trading prices of the shares at any time within a week of the date they were acquired in a cost-basis transaction. In such a case, the shareholder is considered to have failed to respond to the survey.

If a shareholder surveyed in accordance with this Section 4.01 fails to respond to Acquiring's request for basis information within 30 days of Acquiring's second follow-up attempt, Acquiring may determine its basis in a share or shares surrendered by or on behalf of the shareholder using such other procedures in this revenue procedure as are applicable.

.02 Statistical Sampling. This Section 4.02 provides procedures for the use of standard statistical sampling techniques to establish basis in Section 4.02 Eligible Shares (as defined in Section 4.02(1)) when the administrative cost of surveying all surrendering shareholders is unreasonably high. Factors that determine whether administrative cost is unreasonably high include the time, burden, and financial cost of conducting a full survey. The administrative cost of surveying every surrendering Target shareholder is presumed unreasonably high if, immediately before the transaction, Target stock was traded on an established securities market (within the meaning of § 1.7704-1(b) of the Procedure and Administration Regulations). Under this Section 4.02, Acquiring's basis in each Section 4.02 Eligible Share is determined in accordance with the following --

(1) Section 4.02 Eligible Share. The term "Section 4.02 Eligible Share" means any Target share --

(a) The actual basis of which is not known, and

(b) That is not surrendered by or on behalf of a reporting shareholder.

(2) Statistical sampling procedure. To satisfy the requirements of this Section 4.02 --

(a) Statistical sampling is done separately for common and preferred shares.

(b) No reporting shareholders may be included in a sample to be surveyed.

(c) All shareholders in the sample must be surveyed under procedures described in Section 4.01, and

(d) The statistical sampling procedures used must comply with standard statistical sampling procedures recognized by the Service. The use of statistical sampling has been provided for in several items of published guidance. See, for example, Rev. Proc. 2004-29, 2004-1 C.B. 918 (statistical sampling methodology for use in establishing the amount of substantiated meal and entertainment expenses that are excepted from the 50% deduction disallowance under section 274(n)(1)); Rev. Proc. 2007-35, 2007-1 C.B. 1349 (addressing when statistical sampling may be used for purposes of section 199 of the Code (income attributable to domestic production activities)); Rev. Proc. 2002-55, 2002-2 C.B. 435 (permitting external auditors of qualified intermediaries to use statistical sampling); and Rev. Proc. 72-36, 1972-2 C.B. 771 (setting forth statistical sampling guidelines for determining the redemption rate of trading stamps).

If the Service determines that Acquiring's sampling procedure fails to comply with accepted statistical sampling procedures, Acquiring will have an opportunity to recompute the estimate (Sample Basis Estimate), expand the sample, or make such other adjustments to the basis calculation as necessary to comply with standard statistical sampling procedures. Alternatively, Acquiring may determine its basis in Target stock using such other procedures in this revenue procedure as are applicable.

(3) Allowable basis. Acquiring's allowable basis in each Section 4.02 Eligible Share will be a valid estimate (Sample Basis Estimate) computed at the least advantageous 95% one-sided confidence limit. The "least advantageous" confidence limit is either the upper or lower limit that results in the least benefit to Acquiring. If the relative precision, as described in Section 4.02(4) of this revenue procedure, does not exceed 10%, the Sample Basis Estimate may be used as the basis for each Section 4.02 Eligible Share. For purposes of determining basis under this revenue procedure, where the relative precision is less than 15% and greater than 10%, Allowable Basis is an amount between the least advantageous 95% one-sided confidence limit and the Sample Basis Estimate, determined as follows:

 

Sample Basis Estimate (+/-) ((Relative Precision - .10) / .05 * (Sample Basis Estimate (+/-) Least Advantageous 95% One-Sided Confidence Limit))

 

(4) Calculating the relative precision for each estimator. The relative precision for each estimator is commonly calculated by dividing the relative precision at the 95% one-sided confidence limit (sometimes referred to as the sampling error) of the Sample Basis Estimate by the estimator. Where a Sample Basis Estimate may be calculated using either a corrected value or difference perspective, as in the case of Ratio and Regression methods or solely a corrected value perspective as in the case of a Mean method, the test will be applied on the basis of a difference perspective. In such cases the numerator of the calculation is the sampling error of the adjustment and the denominator the Sample Basis Estimate of the adjustment.

.03 Estimation Procedure for shares surrendered by registered shareholders and certain reporting shareholders. This Section 4.03 provides procedures for determining basis of Section 4.03 Eligible Shares (as defined in Section 4.03(1)) using data from the Master Securityholder Files. Under this Section 4.03, Acquiring's basis in each Section 4.03 Eligible Share is determined in accordance with the following --

(1) Section 4.03 Eligible Share. The term "Section 4.03 Eligible Share" means any Target share --

(a) The actual basis of which is not known, and

(b) That was surrendered by a registered shareholder --

(i) That is not a reporting shareholder, or

(ii) That is a reporting shareholder that was surveyed and that failed to respond to the survey.

(2) Estimation procedure. Under this Section 4.03, Acquiring's basis in each Section 4.03 Eligible Share is determined in accordance with the following --

(a) Establishing initial estimated basis of each Section 4.03 Eligible Share. The initial estimated basis of each Section 4.03 Eligible Share is determined by treating the shareholder who surrendered the share as acquiring the share by purchase for the adjusted closing price on the date that the shareholder was issued its stock certificate. However, any amount so determined must be adjusted or revised to take into account any extraordinary issuance event. For this purpose, an extraordinary issuance event is any transaction or event that could have caused the basis of a share to be materially different from the adjusted closing price on its issuance date, including but not limited to the following --

(i) On or about the date a stock certificate was issued to a surrendering Target shareholder, another certificate held by the same shareholder was cancelled. In such case, to the extent that the number of shares issued is less than or equal to the number of shares cancelled, the adjusted closing price for such newly issued shares will not be the adjusted closing price on the date the new certificate was issued, but, instead, the adjusted closing price on the date the earlier certificate was issued. If a cancelled certificate was originally issued concurrently with the cancellation of another certificate, the adjusted closing price is that on the date of the earlier (or earliest) issuance.

(ii) A share was acquired in a tax-free stock split or as a stock dividend by the shareholder who surrendered the share. In such case, the share will be assigned a proportionate amount of the basis of the original share determined under the applicable provisions of the Code and regulations. Or,

(iii) A share was acquired in a prior tax-free exchange by the shareholder who surrendered the share. In such case, the share will be assigned a basis determined under the applicable provisions of the Code and regulations (including the provisions of this revenue procedure).

(b) Adjusting initial estimated basis. The initial estimated basis of each Section 4.03 Eligible Share determined under Section 4.03(2)(a) must be adjusted for all subsequent transactions and events that would require an adjustment to basis under the Code (for example, to take into account distributions under § 301(c)(2)).

(3) Allowable basis. Acquiring's basis in each Section 4.03 Eligible Share is the initial estimated basis for the share determined under Section 4.03(2)(a) and adjusted as required by Section 4.03(2)(b).

.04 Estimation procedure for shares surrendered by nominees. This Section 4.04 provides procedures for determining the basis of Section 4.04 Eligible Shares (as defined in Section 4.04(1)(a)) using data from Target Security Position Reports (SPRs) or from SEC Form 13F filings (but not both). Under this Section 4.04, Acquiring's basis in each Section 4.04 Eligible Share is determined in accordance with the following --

(1) Definitions. For purposes of this Section 4.04, the following definitions apply --

(a) Section 4.04 Eligible Share. The term "Section 4.04 Eligible Share" means any Target share --

(i) The actual basis of which is not known, and

(ii) That was surrendered by a nominee shareholder --

(A) That is not a reporting shareholder, or

(B) That is a reporting shareholder that was surveyed and failed to respond to the survey.

(b) Data Collection Period. The "Data Collection Period" is the period of time --

(i) Beginning on the later of --

(A) The first day of Target's first taxable year, and

(B) Either --

(1) the later of the first date that the shares to be modeled are publicly traded and the date that is seven years before the date of the transferred basis transaction if Acquiring is estimating basis using Target's SPR data, or

(2) the date that is ten years before the date of the transferred basis transaction if Acquiring is estimating basis using SEC Form 13F data, and

(ii) Ending on the date of the transferred basis transaction.

(c) Measuring Date. The term "Measuring Date" means any date with respect to which data is to be collected. The Measuring Dates are:

(i) If SPR data is being used to estimate basis, each Friday in the Data Collection Period on which SPR data was published or, if SPR data is not published on a Friday in a particular week, then the last date prior to that Friday on which SPR data was published, provided that such data is available from the DTC as of the date of the transferred basis transaction, and

(ii) If SEC Form 13F data is being used to estimate basis, each date in the Data Collection Period on which SEC Forms 13F are filed.

(2) Estimation procedure. The estimation of basis under this Section 4.04 is done separately for common and preferred shares, and estimations are made as follows --

(a) Identifying modeled shareholders. Acquiring first identifies the surrendering shareholders to be included in the estimation model (the modeled shareholders), and each such shareholder's first and last Measuring Date. For this purpose --

(i) If SPR data is being used to estimate basis, the modeled shareholders are all surrendering shareholders identified on an SPR published at any time during the Data Collection Period (SPR modeled shareholder). With respect to each SPR modeled shareholder --

(A) The shareholder's first Measuring Date is the first date on which the shareholder is continuously identified on Target SPRs, and

(B) The shareholder's last Measuring Date is the last date for which Target SPR data is available.

(ii) If SEC Form 13F data is being used to estimate basis, the modeled shareholders are all surrendering shareholders that filed an SEC Form 13F at any time during the Data Collection Period (SEC modeled shareholders). With respect to each SEC modeled shareholder --

(A) The shareholder's first Measuring Date is the first date on which the shareholder is identified in the SEC Form 13F data as holding Target shares, and

(B) The shareholder's last Measuring Date is the last date on which the shareholder filed an SEC Form 13F.

(b) Establishing each modeled shareholder's aggregate initial estimated basis. Each modeled shareholder is treated as purchasing the shares it is identified as holding on its first Measuring Date for an amount equal to the volume-weighted average adjusted closing prices for the period --

(i) Beginning on the later of the date that is three months prior to the shareholder's first Measuring Date and the date that is Target's first day of its first taxable year, and

(ii) Ending on the modeled shareholder's first Measuring Date. This is the modeled shareholder's aggregate initial estimated basis.

(c) Adjusting each modeled shareholder's initial estimated basis. Each modeled shareholder's initial estimated basis is adjusted by treating the shareholder as having purchased shares to the extent of any increase, and having sold shares to the extent of any decrease, in the number of Target shares that the shareholder holds on the next Measuring Date for which data is available (the next date for which Acquiring has a Target SPR in the case of an SPR modeled shareholder, and the next date that the shareholder made an SEC Form 13F filing in the case of an SEC modeled shareholder). All deemed purchases are treated as having been made for an amount equal to the volume-weighted average of the adjusted closing prices for the period between the modeled shareholder's immediately preceding Measuring Date and the next Measuring Date for which data is available; all deemed sales are treated as having been made on the average cost method. The process is repeated for every Measuring Date until the shareholder's aggregate adjusted estimated basis is determined as of its last Measuring Date.

Each modeled shareholder's aggregate adjusted basis on its last Measuring Date is divided by the total number of shares held by the shareholder on that date to determine the shareholder's per share final estimated basis.

For purposes of the model, each Target share actually surrendered by a modeled shareholder is deemed to have a basis equal to the surrendering shareholder's per share final estimated basis.

(d) Section 4.04 per share modeled basis. The deemed bases of all shares actually surrendered by modeled shareholders are combined and the total is divided by the number of shares actually surrendered by those shareholders. The result is the per share modeled basis.

(3) Allowable basis. Acquiring's basis in each Section 4.04 Eligible Share is determined in accordance with the following --

(i) If SPR data is used to compute the Section 4.04 per share modeled basis, Acquiring's basis in each Section 4.04 Eligible Share is equal to the Section 4.04 per share modeled basis multiplied by the percentage of Measuring Dates in the Data Collection Period for which SPR data is obtained.

Thus, if there are 60 Measuring Dates in the Data Collection Period and Acquiring obtained SPR data for only 54 of those Measuring Dates, Acquiring's basis in each Section 4.04 Eligible Share is an amount equal to 90 percent (54/60) of the Section 4.04 per share modeled basis. Further, appropriate adjustments will be made if the Service determines that SPRs not included in the determination represent material omissions.

(ii) If SEC Form 13F data is used to compute the Section 4.04 per share modeled basis, Acquiring's basis in each Section 4.04 Eligible Share is equal to the Section 4.04 per share modeled basis multiplied by 75 percent.

SECTION 5. REPORTING REQUIREMENTS

Taxpayers acquiring stock in transferred basis transactions described in this revenue procedure are deemed to satisfy the reporting requirements of §§ 1.351-3 and 1.368-3 if they include a statement on or with the timely filed original return for the taxable year of the transferred basis transaction that identifies the transferred basis transaction and states that a basis study is pending with respect to the acquired stock. However, to satisfy the requirements of those sections in such cases, the taxpayer must include complete statements as required under those regulations, with basis amounts determined pursuant to the study or otherwise under this revenue procedure, on or with a timely filed original return for a tax year that is no later than the tax year that includes the date that is two years after the date of the transferred basis transaction. See Section 7 of this revenue procedure for the application of this requirement to transferred basis transactions prior to June 20, 2011. This Section 5 applies to all transferred basis transactions without regard to whether basis is determined under Section 4 of this revenue procedure.

SECTION 6. PRE-FILING AGREEMENTS

The determination of whether a basis study is done in compliance with one of the procedures described in Section 4 of this revenue procedure may be the subject of a pre-filing agreement.

SECTION 7. EFFECTIVE DATE, EFFECT ON OTHER DOCUMENTS

This revenue procedure is effective with respect to transferred basis transactions completed on or after June 20, 2011. However, taxpayers may use this revenue procedure with respect to transferred basis transactions completed prior to June 20, 2011; in such cases, surveys will be considered timely if substantially completed, and reporting requirements will be considered satisfied if filed, on or before June 20, 2013.

Rev. Proc. 81-70 and Notice 2009-4 are obsoleted with respect to transferred basis transactions completed on or after June 20, 2011.

 

* * * * *

 

 

APPENDIX

 

 

EXAMPLE, PART 1:

 

DETERMINATION OF BASIS USING

 

STOCK REGISTRY, CORPORATE BOOKS AND RECORDS,

 

MARKET TRADING DATA, AND

 

SEC FORM 13F FILING DATA

 

 

On January 1, Year 1, Target was formed. On February 2, Year 3, Acquiring acquired all 1000 outstanding shares of Target publicly traded common stock and all 100 outstanding shares of Target nonvoting preferred stock in a transferred basis transaction. The nonvoting preferred stock is not publicly traded and, at the time of the transferred basis transaction, represents 2 percent of the value of Target. Immediately after the transaction, Acquiring collected information to establish its basis in the acquired shares. Acquiring will use the survey and estimation methods provided in this revenue procedure. Note that, to simplify computations, all decimals (other than those related to individual shares) are rounded to the second place.

DATA COLLECTION:

1. From the stock registry, publicly available records (trading prices), and its own books and records, Acquiring collected the following information:

                     Issue       Issue               Shares issued

 

 Shareholder         date        price               and surrendered

 

 __________________________________________________________________________

 

 

 Preferred shares

 

 __________________________________________________________________________

 

 

 Officer             1/1/Y1     No amount                   20

 

                                recorded

 

 

 Employee Plan1      4/1/Y1     $10/share                   30

 

 

 Employee Plan2      4/1/Y2     $36/share                   50

 

 

 Total preferred shares surrendered by registered

 

 shareholders                                              100

 

 

 _____________________________________________________________________________

 

 

                           Adjusted

 

                           closing      High/Low trading

 

                 Issue     price on     price within one      Shares issued

 

 Shareholder     date      issue date   week of issue date    and surrendered

 

 _____________________________________________________________________________

 

 

 Common shares

 

 _____________________________________________________________________________

 

 

 Individual A   1/1/ Y1      $9/share    $7-12/share                10

 

 

 Individual B   1/1/ Y1      $9/share    $7-12/share                10

 

 

 Individual C   1/1/ Y2     $12/share    $8-13/share                50

 

 

 Individual D   1/1/ Y2     $12/share    $8-13/share                50

 

 

 Individual E   1/1/ Y2     $12/share    $8-13/share                50

 

 

 Director A     1/1/ Y2     $12/share    $8-13/share                30

 

 

 Private        1/1/ Y2     $12/share    $8-13/share                50

 

 Placement

 

 

 Total common shares surrendered by

 

 registered shareholders                                           250

 

 

Target's books and records also indicate:

a. There was a $5 distribution declared on each preferred share outstanding on 4/15/Y1. The distributions were made to Officer ($100) and to Employee Plan1 ($150) on 5/1/Y1. For the year of the distribution, Target had no earnings and profits.

b. On or about 1/1/Y2, the date that a certificate was issued to Individual C for 50 shares, a certificate issued on 1/1/Y1 to Individual C for 25 shares was cancelled.

2. From SEC Form 13F Filings, publicly available trading information, and its own books and records, Acquiring collected the following information regarding the ownership of its common shares held by nominees:

                                          Vol Wtd

 

                                          Avg        High/Low

 

                SEC Form                  adjusted   trading

 

 Nominee        13F Filing   Shares       closing    price in    Shares

 

 shareholder    date         reported     price*     quarter     surrendered

 

 _____________________________________________________________________________

 

 

 Nominee1      Y1: 1st        30             8      $5-14/

 

               quarter                             share

 

 

               Y1: 2nd        45            10      $5-14/

 

               quarter                             Share

 

 

               Y1: 3rd       120            11      $5-14/

 

               quarter                             Share

 

 

               Y1: 4th       160            12      $5-14/

 

               quarter                             share

 

 

               Y2: 1st       200            10      $6-15/

 

               quarter                             share

 

 

               Y2: 2nd       150            12      $6-15/

 

               quarter                             share

 

 

               Y2: 3rd       200            14      $6-15/

 

               quarter                             share

 

 

               Y2: 4th       200            16      $6-18/

 

               quarter                             share                250

 

 

 Nominee2      Y1: 1st           No           8      $5-14/

 

               quarter     Form13F                 share

 

                             filed

 

 

               Y1: 2nd       250            10      $5-14/

 

               quarter                             Share

 

 

               Y1: 3rd       250            11      $5-14/

 

               quarter                             Share

 

 

               Y1: 4th       200            12      $5-14/

 

               quarter                             share

 

 

               Y2: 1st       200            10      $6-15/

 

               quarter                             share

 

 

               Y2: 2nd       300            12      $6-15/

 

               quarter                             share

 

 

               Y2: 3rd       300            14      $6-15/

 

               quarter                             share

 

 

               Y2: 4th       150            16      $6-18/

 

               quarter                             share                175

 

 

 Nominee3      Y1: 1st           No          8      $5-14/

 

               quarter     Form13F                share

 

                             filed

 

 

               Y1: 2nd           No         10      $5-14/

 

               quarter     Form13F                Share

 

                             filed

 

 

               Y1: 3rd        75            11      $5-14/

 

               quarter                            Share

 

 

               Y1: 4th        75            12      $5-14/

 

               quarter                            share

 

 

               Y2: 1st           No         10      $6-15/

 

               quarter     Form13F                share

 

                             filed

 

 

               Y2: 2nd       100            12      $6-15/

 

               quarter                             share

 

 

               Y2: 3rd       135            14      $6-15/

 

               quarter                             share

 

 

               Y2: 4th       150            16      $6-18/

 

               quarter                             share                100

 

 

 Nominee4      Y1: 1st        50             8      $5-14/

 

               quarter                             share

 

 

               Y1: 2nd        50            10      $5-14/

 

               quarter                             Share

 

 

               Y1: 3rd       100            11      $5-14/

 

               quarter                             Share

 

 

               Y1: 4th           No          12      $5-14/

 

               quarter     Form13F                 share

 

                             filed

 

 

               Y2: 1st       100            10      $6-15/

 

               quarter                             share

 

 

               Y2: 2nd       150            12      $6-15/

 

               quarter                             share

 

 

               Y2: 3rd       200            14      $6-15/

 

               quarter                             share

 

 

               Y2: 4th           No          16      $6-18/

 

               quarter     Form13F                 share

 

                             filed                                      100

 

 

 Nominee5      Y1: 1st           No           8      $5-14/

 

               quarter     Form13F                 share

 

                             filed

 

 

               Y1: 2nd           No          10      $5-14/

 

               quarter     Form13F                 Share

 

                             filed

 

 

               Y1: 3rd           No          11      $5-14/

 

               quarter     Form13F                 Share

 

                             filed

 

 

               Y1: 4th        50            12      $5-14/

 

               quarter                             share

 

 

               Y2: 1st        50            10      $6-15/

 

               quarter                             share

 

 

               Y2: 2nd           No          12      $6-15/

 

               quarter     Form13F                 share

 

                             filed

 

 

               Y2: 3rd       200            14      $6-15/

 

               quarter

 

 

               Y2: 4th       250            16      $6-18/

 

               quarter                             share                125

 

 

 __________________________________________________________________________

 

 

 * the volume weighted average adjusted closing price applicable with

 

 respect to the first Measuring Date is determined for the period beginning

 

 on the later of Target's first day of its first tax year and the day that

 

 is three months prior to the first Measuring Date; the volume weighted

 

 average adjusted closing price applicable to all subsequent Measuring Dates

 

 is determined for the period between Measuring Dates.

 

 

DATA ANALYSIS:

IDENTIFYING APPLICABLE BASIS DETERMINATION METHODS

                                                         Survey    Eligible

 

 Shareholder   Reporting shareholder status              required  procedure(s)

 

 _____________________________________________________________________________

 

 

 Preferred     (not publicly traded, one percent standard

 

 shares        applies):

 

 

 Officer       Reporting shareholder (<1% vote and value,  Yes    4.01

 

               but specified relationship); issue price

 

               not recorded

 

 

 Employee      Reporting shareholder (<1% vote and value,  No     None, actual

 

 Plan1         but specified relationship); issue price           basis known

 

               recorded

 

 

 Employee      Reporting shareholder (1% of value and      No     None, actual

 

 Plan2         specified relationship); issue price               basis known

 

               recorded

 

 ______________________________________________________________________________

 

 

 Common shares (publicly traded, five percent standard applies):

 

 ______________________________________________________________________________

 

 

 Individual A   Not reporting shareholder (<5% vote and    No     4.01 or 4.03

 

                value, no specified relationship)

 

 

 Individual B   Not reporting shareholder (<5% vote and    No     4.01 or 4.03

 

                value, no specified relationship)

 

 

 Individual C   Reporting shareholder (5% vote)            Yes    4.01; 4.03 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Individual D   Reporting shareholder (5% vote)            Yes    4.01; 4.03 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Individual E   Reporting shareholder (5% vote)            Yes    4.01; 4.03 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Director A     Reporting shareholder (<5% vote and        Yes    4.01; 4.03 if

 

                value but specified relationship)                 surveyed and

 

                                                                  no response

 

 

 Private        Reporting shareholder (5% vote)            Yes    4.01; 4.03 if

 

 Placement                                                        surveyed and

 

                                                                  no response

 

 

 Nominee1       Reporting shareholder (5% vote and value)  Yes    4.01; 4.04 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Nominee2       Reporting shareholder (5% vote and value)  Yes    4.01; 4.04 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Nominee3       Reporting shareholder (5% vote and value)  Yes    4.01; 4.04 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Nominee4       Reporting shareholder (5% vote and value)  Yes    4.01; 4.04 if

 

                                                                  surveyed and

 

                                                                  no response

 

 

 Nominee5       Reporting shareholder (5% vote and value)  Yes    4.01; 4.04 if

 

                                                                  surveyed and

 

                                                                  no response

 

BASIS DETERMINATIONS UNDER SECTION 4.01 (SURVEY METHOD)

 

 

Acquiring conducted a survey of the following shareholders. The survey complied with the procedures of Section 4.01(2)(b). The following summarizes the results of the survey:

 Shareholder  Shareholder's          Allowable basis      Eligible for other

 

 surveyed     Response/Basis         from survey          procedure?

 

 ______________________________________________________________________________

 

 

 Preferred shares:

 

 ______________________________________________________________________________

 

 

 Officer      No response            None                 No, insufficient data

 

                                                          for models

 

 

 Employee     $4.50/share for 30     None for preferred   No

 

 Plan1        preferred shares;      (actual = $10 -

 

                                     5= $5);

 

              In addition, Employee

 

              Plan1 reported it      As reported ($12/

 

              owned 50 common        share) for common

 

              shares surrendered

 

              by Nominee 1

 

              ($12/share)

 

 ______________________________________________________________________________

 

 

 Common shares:

 

 ______________________________________________________________________________

 

 

 Individual A $13/share              As reported ($13/    No

 

                                     share)

 

 

 Individual C No response            None                 Yes, Section 4.03

 

 

 Individual E $40/share              None                 Yes, Section 4.03

 

              (nonresponsive, $40

 

              inaccurate on its

 

              face)

 

 

 Director A   $1/share               None                 Yes, Section 4.03

 

              (nonresponsive, $1

 

              inaccurate on its

 

              face)

 

 

 Private      No response            None                 Yes, Section 4.03

 

 Placement

 

 

 Nominee1     No response            None                 Yes, Section 4.04

 

 

 Nominee2     $65/share              None                 Yes, Section 4.04

 

              (nonresponsive, $65

 

              inaccurate on its

 

              face)

 

 

 Nominee4     No response            None                 Yes, Section 4.04

 

 

 Nominee5     No response            None                 Yes, Section 4.04

 

 

Notes:

Officer. Although Acquiring surveyed Officer and received no response, Acquiring cannot determine basis in the shares surrendered by Officer by the methods described in Section 4.03 and Section 4.04 because the requisite market information is not available.

Employee Plans. Because Acquiring had knowledge of actual basis (issue price was recorded in the register), Acquiring's basis is the actual basis of the shares ($10, reduced by the $5/share "section 301(c)(2)" distribution, or $5), notwithstanding that Employee Plan1 reported a basis of $4.50 in the shares. Although Acquiring was not required to survey Employee Plan1, because it did and Employee Plan1 reported that, in addition to the preferred shares, it also beneficially owned 50 of the shares of common stock held by Nominee1, the basis of each of those 50 common shares is the $12/share basis reported by Employee Plan1 (even though all of Nominee1's trading activity, including with respect to the 50 shares held on behalf of Employee Plan1, will be taken into account in modeling basis in Section 4.04).

Individual A. Although Acquiring was not required to survey Individual A in order to use the estimation method in Section 4.03, Acquiring did survey Individual A and Individual A responded to the survey. Accordingly, the basis in the shares surrendered by Individual A is Individual A's reported basis of $13 per share, notwithstanding that the basis determined under Section 4.03 would only be $9/share for those shares.

Individual B. Acquiring does not have an actual basis for Individual B and was not required to survey Individual B in order to use the estimation method in Section 4.03. Accordingly, Acquiring may determine the basis of Individual B's shares using the estimation method in Section 4.03.

Individual C. Individual C, a reporting shareholder, was surveyed but did not respond. Accordingly, Acquiring may determine the basis of Individual C's shares using the estimation method in Section 4.03.

Individual D. Individual D, a reporting shareholder was not surveyed. As a result, Acquiring has not satisfied the requirements for using the estimation procedures in this revenue procedure and, thus, cannot establish the bases of those shares under this revenue procedure. However, Acquiring may establish its bases in those shares under such other method as agreed to by the Service.

Individual E and Director A. Individual E and Director A, both reporting shareholders, were surveyed and responded. However, the survey responses given by Individual E ($40/share) and Director A ($1/share) are inaccurate on their faces because they differ significantly from the high/low trading prices within a week of their acquisition by the surrendering shareholders ($8-$13/share), and thus Individual E and Director A are considered to have not responded to the survey and the reported bases are disregarded. Acquiring may therefore establish its bases in those shares using the procedures in Section 4.03.

Nominee shareholders. All five of the nominee shareholders are reporting shareholders and must therefore be surveyed in order to determine the bases of their surrendered shares under the modeling procedure of Section 4.04. Acquiring surveyed all the nominee shareholders except Nominee3. Nominee1, Nominee4, and Nominee5 failed to respond. Further, although Nominee2 responded, its response was inaccurate on its face ($65/share) and so Nominee2 is considered also to have not responded. As a result, Acquiring has generally satisfied the requirements to determine its bases in the shares surrendered by Nominee1, Nominee2, Nominee4, and Nominee5 under Section 4.04. However, with respect to Nominee1, Acquiring received survey information on the basis of 50 common shares it held and surrendered on behalf of Employee Plan1, and so 50 of the shares surrendered by Nominee1 will have a basis equal to the reported basis. Because Nominee3 was not surveyed, Acquiring has not satisfied the requirements for using the estimation procedures in this revenue procedure and so cannot use these procedures to determine the bases of those shares. However, Acquiring may establish its bases in the shares surrendered by Nominee3 under such other method as agreed to by the Service. Note that, although the bases of 50 shares surrendered by Nominee1 and all the shares surrendered by Nominee3 are not determined under Section 4.04, all the trading information collected with respect to Nominee1 and Nominee3 is included in the modeling computations.

 

BASIS DETERMINATIONS UNDER SECTION 4.03

 

Even though Individual C, Individual E, Director A, and Private Placement were reporting shareholders, Acquiring surveyed them, they failed to respond, and Acquiring has knowledge of the issue date of shares issued to such shareholders. Thus, the shares they surrendered are Section 4.03 Eligible Shares. The bases in the Section 4.03 Eligible Shares are computed as follows (rounding numbers other than "per share" numbers):

                    Adjusted             Number of

 

 Surrendering       closing price        shares             Allowable

 

 shareholder        on issue date        surrendered        basis

 

 ______________________________________________________________________

 

 

 Common shares:

 

 ______________________________________________________________________

 

 

 Individual B                 $ 9                 10                $90

 

 

 Individual C                 $ 9                 25               $225

 

 

                              $12                 25               $300

 

 

 Individual E                 $12                 50               $600

 

 

 Director A                   $12                 30               $360

 

 

 Private Placement            $12                 50               $600

 

 

Note: In determining the basis of Individual C's 50 shares, Acquiring must take into account the cancellation of a certificate for 25 shares (issued to Individual C on 1/1/Y1) on the same day that the certificate for 50 shares was issued to Individual C. Individual C is treated as surrendering 25 shares with a basis equal to the closing price on 1/1/Y1 and 25 shares with a basis equal to the closing price on 1/1/Y2.

 

BASIS DETERMINATIONS UNDER SECTION 4.04 (FORM 13F DATA)

 

Acquiring's bases in Section 4.04 Eligible Shares are computed as follows:

                                          Modeled basis

 

                                          (Initial estimated

 

                                          basis adjusted

 

                                          each measuring

 

                                          date for

 

                                 Vol wtd  increases and             Deemed

 

                                 avg adj  decreases in              basis in

 

 Surrendering  Filing  Shares    closing  reported                  surrendered

 

 shareholder   date    reported  price    holdings)                 shares

 

 ______________________________________________________________________________

 

 

 Nominee1      Y1: 1st    30       8      Initial estimated basis:

 

               quarter                    30 shares reported

 

                                          x $8 vol wtd avg closing

 

                                          price per share = $240

 

 

               Y1: 2nd    45      10

 

               quarter                    Reported shares

 

                                          increased (30 to 45):

 

                                          15 shs @$10/sh = $150

 

                                          Adjusted estimated basis:

 

                                          $240+$150 = $390

 

 

               Y1: 3rd   120      11      Reported shares

 

               quarter                    increased (45 to 120):

 

                                          75 shs @$11/sh = $825

 

                                          Adjusted estimated basis:

 

                                          $390+825=$1215

 

 

               Y1: 4th   160      12      Reported shares

 

               quarter                    increased (120 to 160):

 

                                          40 shs @$12/sh = $480

 

                                          Adjusted estimated basis:

 

                                          $1215+480=$1695

 

 

               Y2: 1st   200      10      Reported shares

 

               quarter                    increased (160 to 200):

 

                                          40 shs @$10/sh = $400

 

                                          Adjusted estimated basis:

 

                                          $1695+400=$2095

 

 

               Y2: 2nd   150      12      Reported shares

 

               quarter                    decreased (200 to 150):

 

                                          Average cost of shares:

 

                                          $2095/200=$10.48/sh;

 

                                          50shs @$10.48/sh=$524

 

                                          Adjusted estimated basis:

 

                                          $2095-524=$1571

 

 

               Y2: 3rd   200      14      Reported shares

 

               quarter                    increased (150 to 200):

 

                                          +50 shs @$14/sh = $700

 

                                          Adjusted estimated basis

 

                                          $1571+700=$2271

 

 

               Y2: 4th   200      16      No change in holdings.

 

               quarter

 

 

 $2271 aggregate adjusted estimated basis/200 shares =

 

 11.36 per share final estimate basis

 

 

 250 shares surrendered x 11.36 per share final estimated basis  =

 

 $2840 deemed x basis in surrendered shares                              $2840

 

 ______________________________________________________________________________

 

 

 Nominee2      Y1: 1st  No 13F     8

 

               quarter  filed

 

 

               Y1: 2nd   250      10      Initial estimated basis:

 

               quarter                    250 shares reported

 

                                          x $10 vol wtd avg closing

 

                                          price per share = $2500

 

 

               Y1: 3rd   250      11      No change in holdings.

 

               quarter

 

 

               Y1: 4th   200      12      Reported shares

 

               quarter                    decreased (250 to 200):

 

                                          Average cost of shares:

 

                                          $2500/250=$10;

 

                                          50 shs @$10/sh = $500

 

                                          Adjusted estimated basis:

 

                                          $2500-500=$2000

 

 

               Y2: 1st   200      10      No change in holdings.

 

               quarter

 

 

               Y2: 2nd   300      12      Reported shares

 

               quarter                    increased (200 to 300):

 

                                          +100shs @$12/sh=$1200

 

                                          Adjusted estimated basis:

 

                                          $2000+1200=$3200

 

 

               Y2: 3rd   300      14      No change in holdings.

 

               quarter

 

 

               Y2: 4th   150      16      Reported shares

 

               quarter                    decreased (300 to 150):

 

                                          Average cost of shares:

 

                                          $3200/300=$10.67;

 

                                          150shs@$10.67/sh=$1601

 

                                          Adjusted estimated basis:

 

                                          $3200-1601=$1599

 

 

 $1600 aggregate adjusted estimated basis /150 shares =

 

 $10.67 per share final estimated basis:

 

 

 175 shares surrendered x $10.66 per share final estimated basis =

 

 $1867 deemed basis in surrendered shares                                $1867

 

 ______________________________________________________________________________

 

 

 Nominee3      Y1: 1st  No 13F     8

 

               quarter  filed

 

 

               Y1: 2nd  No 13F    10

 

               quarter  filed

 

 

               Y1: 3rd   75       11

 

               quarter                    Initial estimated basis:

 

                                          75 shares reported

 

                                          x $11 vol wtd avg closing

 

                                          price per share = $825

 

 

               Y1: 4th   75       12      No change in holdings.

 

               quarter

 

 

               Y2: 1st  No 13F    10      No change in holdings.

 

               quarter  filed

 

 

               Y2: 2nd   100      12      Reported shares

 

               quarter                    increased (75 to 100)

 

                                          +25 shs @$12/sh = $300

 

                                          Adjusted estimated basis:

 

                                          $825+300=$1125

 

 

               Y2: 3rd   135      14

 

               quarter                    Reported shares

 

                                          increased (100 to 135)

 

                                          +35 shs @$14/sh = $490

 

                                          Adjusted estimated basis:

 

                                          $1125+490=1615

 

 

               Y2: 4th   150      16

 

               quarter                    Reported shares

 

                                          increased (135 to 150):

 

                                          +15 shs @$16/sh = $240

 

                                          Adjusted estimated basis:

 

                                          $1615+240=1855

 

 

 $1855 aggregate adjusted estimated basis /150 shares =

 

 $12.37 per share final estimated basis

 

 

 100 shares surrendered x 12.37 per share final estimated basis =

 

 $1237 deemed basis in surrendered shares                                $1237

 

 ______________________________________________________________________________

 

 

 Nominee4      Y1: 1st   50        8

 

               quarter                    Initial estimated basis:

 

                                          50 shares reported

 

                                          x $8 vol wtd avg closing

 

                                          price per share = $400

 

 

               Y1: 2nd   50       10      No change in holdings.

 

               quarter

 

 

               Y1: 3rd   100      11      Reported shares

 

               quarter                    increased (50 to 100):

 

                                          +50 shs @$11/sh = $550

 

                                          Adjusted estimated basis:

 

                                          $400+550=$950

 

 

               Y1: 4th  No 13F    12      No change in holdings.

 

               quarter  filed

 

 

               Y2: 1st   100      10      No change in holdings.

 

               quarter

 

 

               Y2: 2nd   150      12      Reported shares

 

               quarter                    increased (100 to 150):

 

                                          +50 shs @$12/sh = $600

 

                                          Adjusted estimated basis:

 

                                          $950+600=$1550

 

 

               Y2: 3rd   200      14

 

               quarter                    Reported shares

 

                                          increased (150 to 200):

 

                                          +50 shs @$14/sh = $700

 

                                          Adjusted estimated basis:

 

                                          $1550+700=$2250

 

 

               Y2: 4th  No 13F    16      No change in holdings.

 

               quarter  filed

 

 

 $2250 aggregate adjusted estimated basis/200 shares =

 

 $11.25 per share final estimated basis:

 

 

 100 shares surrendered x  $11.25 per share final estimated basis: =

 

 $11.25 deemed basis in surrendered shares                               $1125

 

 ______________________________________________________________________________

 

 

 Nominee5      Y1: 1st  No 13F    $8

 

               quarter  filed

 

 

               Y1: 2nd  No 13F   $10

 

               quarter  filed

 

 

               Y1: 3rd  No 13F   $11

 

               quarter  filed

 

 

               Y1: 4th   50      $12      Initial estimated basis:

 

               quarter                    50 shares reported

 

                                          x $12 vol wtd avg closing

 

                                          price per share = $600

 

 

               Y2: 1st   50      $10      No change in holdings.

 

               quarter

 

 

               Y2: 2nd  No 13F   $12      No change in holdings.

 

               quarter  filed

 

 

               Y2: 3rd   200     $14      Reported shares

 

               quarter                    increased (50 to 200):

 

                                          +150 shs @ $14 = $2100

 

                                          Adjusted estimated basis:

 

                                          $600 + 2100=$2700

 

 

               Y2: 4th   250     $16      Reported shares

 

               quarter                    increased (200 to 250):

 

                                          +50 @ $16 = $800

 

                                          Adjusted estimated basis:

 

                                          $2700 + 800 = $3500

 

 

 $3500 aggregate adjusted estimate basis/250 shares =

 

 $14 per share final estimated basis

 

 

 125 shares surrendered x $14 per share final estimated basis =

 

 $1750 deemed basis in surrendered shares                             $1750

 

 

    Computation of Section 4.04 per share modeled basis (common shares):

 

 _____________________________________________________________________________

 

 

 Nominee             Per share final     Surrendered      Deemed basis in

 

 shareholder         estimated basis     shares           surrendered shares

 

 _____________________________________________________________________________

 

 

 Nominee1                11.36              250                   $2840

 

 

 Nominee2                10.67              175                   $1867

 

 

 Nominee3                12.37              100                   $1237

 

 

 Nominee4                11.25              100                   $1125

 

 

 Nominee5                14.00              125                   $1750

 

 

 Total deemed basis in surrendered shares                         $8819

 

 

 Total number of surrendered shares                                 750

 

 

 Section 4.04 per share modeled basis                            $11.76

 

 

 Section 4.04 per share modeled basis x 75% =

 

 Allowable basis for each Section 4.04 Eligible Share             $8.82

 

ALLOCATION OF ALLOWABLE BASIS TO SECTION 4.04 ELIGIBLE SHARES

 

 

                                     Surrendered

 

 Surrendering    Allowable basis     Section 4.04        Total allowable

 

 shareholder     per share           Eligible shares     basis

 

 _______________________________________________________________________

 

 

 Nominee1            $8.82               200                  $1764

 

 Nominee2            $8.82               175                  $1544

 

 Nominee3            $8.82                 0                      0

 

 Nominee4            $8.82               100                   $882

 

 Nominee5            $8.82               125                  $1103

 

 

Notes:

Nominee1. As noted above, the basis of 50 of the 250 shares surrendered by Nominee1 was reported by Employee Plan1 and so was not determined under the Section 4.04 model.

Nominee3. As noted above, Acquiring did not satisfy the requirements to determine its basis in the shares surrendered by Nominee3 under this revenue procedure. Thus, there is no basis allowable under the model; however, Acquiring may establish its bases in those shares under such other method as agreed to by the Service.

                SUMMARY BASIS DETERMINED UNDER REVENUE PROCEDURE

 

                           (SEC FORM 13F FILING DATA)

 

 _____________________________________________________________________________

 

 

                                                          Total allowable

 

                                                           basis under

 

 Surrendering    Applicable      Allowable    Shares       revenue

 

 shareholder     method          basis        surrendered  procedure

 

 _____________________________________________________________________________

 

 

 Preferred shares (100 outstanding):

 

 _____________________________________________________________________________

 

 

 Officer         Cannot be         TBD under             20            $0

 

                 established under procedures as

 

                 this revenue      agreed to by

 

                 procedure         Service

 

 

 Employee        Actual, as        $5/share              30          $150

 

 Plan1           determined by     ($10 issue

 

                 Target's          price, less

 

                 records           $5 §

 

                                   301(c)(2)

 

                                   distribution)

 

 

 Employee        Actual, as        $36/share             50         $1800

 

 Plan2           determined by

 

                 Target's

 

                 records

 

 

                                Total basis in preferred shares     $1950

 

 ______________________________________________________________________________

 

 

 Common shares (1000 outstanding):

 

 ______________________________________________________________________________

 

 

 Employee        As reported       $12/share             50          $600

 

 Plan1           in survey, 4.01

 

 

 Individual A    As reported       $13/share             10          $130

 

                 in survey, 4.01

 

 

 Individual B    4.03              $9/share              10           $90

 

 

 Individual C    4.03              $9/share              25          $525

 

                                   $12/share             25

 

 

 Individual D    Cannot be         TBD under             50            $0

 

                 established under procedures as

 

                 this revenue      agreed to by

 

                 procedure         Service

 

 

 Individual E    4.03              $12/share             50          $600

 

 

 Director A      4.03              $12/share             30          $360

 

 

 Private         4.03              $12/share             50          $600

 

 Placement

 

 

 Nominee1        4.04              $8.82/share          200         $1764

 

 

 Nominee2        4.04              $8.82/share          175         $1544

 

 

 Nominee3        Cannot be         TBD under            100            $0

 

                 established under procedures as

 

                 this revenue      agreed to by

 

                 procedure         Service

 

 

 Nominee4        4.04              $8.82/share          100          $882

 

 

 Nominee5        4.04              $8.82/share          125         $1103

 

 

                                Total basis in common shares       $8,198

 

 

                                Total number of shares (preferred

 

                                plus common) surrendered             1100

 

 

                                Total basis in all shares         $10,148

 

 

EXAMPLE PART 2:

 

DETERMINATION OF BASIS USING STOCK REGISTRY, BOOKS AND RECORDS,

 

AND SPR DATA

 

 

Assume that the facts are the same as in Example 1, except that Acquiring uses data from Target's SPRs instead of the SEC Form 13F filings. Further, Acquiring obtains 100 of the 109 SPRs that were published during the data collection period and that were available from the DTC as of the date of the transaction (the missing SPRs are not a material omission); the first SPR obtained by Acquiring that shows Target stock ownership was published in Week 4; the only other SPRs that show movement in Target holdings were published in Weeks 21, 34, 48, 60, 72, 80, and 104. (Note that, to simplify the illustration, the SPR dates correspond to the SEC Form 13F filing dates in the Part 1 of this example; thus, the numbers of shares reported (and their volume weighted average adjusted closing price) on the first SEC Form 13F filing correspond to those on the Week 4 SPR, the second SEC Form 13F filing numbers (and prices) to those in SPR Week 21, and so forth; where no SEC Form 13F was filed, the shares reported are zero; the number of shares surrendered are unchanged.) The determination of the Section 4.04 modeled basis using SPR data is done as follows:

                            Surrendering shareholder

 

 

                                    Nominee1

 

 _____________________________________________________________________________

 

 

                       Vol         Modeled basis

 

                       wtd         (Initial estimated basis

 

                       avg         adjusted each

 

             Shares    closing     measuring date for            Deemed

 

             listed    price       increases and                 basis in

 

 Date of     on        for         decreases in reported         surrendered

 

 SPR         SPR       period*     holdings)                     shares

 

 _____________________________________________________________________________

 

 

 Week 4         30        8        Initial estimated basis:

 

                                   30 shares reported

 

                                   x $8 vol wtd avg closing

 

                                   price per share = $240

 

 

 Week21         45       10        Reported shares

 

                                   increased (30 to 45):

 

                                   15 shs @$10/sh = $150

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $240+$150 = $390

 

 

 Week34        120       11        Reported shares

 

                                   increased (45 to 120):

 

                                   75 shs @$11/sh = $825

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $390+825=$1215

 

 

 Week48        160       12        Reported shares

 

                                   increased (120 to 160):

 

                                   40 shs @$12/sh = $480

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $1215+480=$1695

 

 

 Week60        200       10        Reported shares

 

                                   increased (160 to 200):

 

                                   40 shs @$10/sh = $400

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $1695+400=$2095

 

 

 Week72        150       12        Reported shares

 

                                   decreased (200 to 150):

 

                                   Average cost of shares:

 

                                   $2095/200=$10.48/sh;

 

                                   50shs

 

                                   @$10.48/sh=$524

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $2095-524=$1571

 

 

 Week80        200       14        Reported shares

 

                                   increased (150 to 200):

 

                                   +50 shs @$14/sh =

 

                                   $700

 

                                   Adjusted estimated

 

                                   basis

 

                                   $1571+700=$2271

 

 

 Week104       200       16        No change in holdings.

 

 

 $2271 aggregate adjusted estimated basis/ 200 shares =

 

 $11.36 per share final estimated basis

 

 

 250 shares surrendered x $11.36 per share final estimated basis =

 

 $2840 deemed basis in surrendered shares                              $2840

 

 

 _____________________________________________________________________________

 

 

                            Surrendering shareholder

 

 

                                    Nominee2

 

 _____________________________________________________________________________

 

 

                       Vol         Modeled basis

 

                       wtd         (Initial estimated basis

 

                       avg         adjusted each

 

             Shares    closing     measuring date for        Deemed

 

             listed    price       increases and             basis in

 

 Date of     on        for         decreases in reported     surrendered

 

 SPR         SPR       period*     holdings)                 shares

 

 _____________________________________________________________________________

 

 

 Week 4      Not          8

 

             listed

 

             on

 

             SPR

 

 

 Week21        250       10        Initial estimated basis:

 

                                   250 shares reported

 

                                   x $10 vol wtd avg

 

                                   closing price per share =

 

                                   $2500

 

 

 Week34        250       11        No change in holdings.

 

 

 Week48        200       12        Reported shares

 

                                   decreased (250 to 200).

 

                                   Average cost of shares:

 

                                   $2500/250=$10;

 

                                   50 shs @$10/sh = $500

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $2500-500=$2000

 

 

 Week60        200       10        No change in holdings.

 

 

 Week72        300       12        Reported shares

 

                                   increased (200 to 300).

 

                                   +100shs

 

                                   @$12/sh=$1200

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $2000+1200=$3200

 

 

 Week80        300       14        No change in holdings.

 

 

 Week104       150       16        Reported shares

 

                                   decreased (300 to 150).

 

                                   Average cost of shares:

 

                                   $3200/300=$10.67;

 

                                   150shs@$10.67/sh=$1600

 

                                   Adjusted estimated                  $1867

 

 

 $1930 aggregate adjusted estimated basis /150 shares =

 

 $12.87 per share final estimated basis

 

 

 100 shares surrendered x $12.87 per share final estimated basis =

 

 $1287 deemed basis in surrendered shares

 

 

 175 shares surrendered x $10.67 per share final estimated basis =

 

 $1866 deemed basis in surrendered shares

 

 

 _____________________________________________________________________________

 

 

                            Surrendering shareholder

 

 

                                    Nominee3

 

 _____________________________________________________________________________

 

 

                       Vol         Modeled basis

 

                       wtd         (Initial estimated basis

 

                       avg         adjusted each

 

             Shares    closing     measuring date for         Deemed

 

             listed    price       increases and              basis in

 

 Date of     on        for         decreases in reported      surrendered

 

 SPR         SPR       period*     holdings)                  shares

 

 _____________________________________________________________________________

 

 

 Week 4      Not          8

 

             listed

 

             on

 

             SPR

 

 

 Week21      Not         10

 

             listed

 

             on

 

             SPR

 

 

 Week34      75          11        This is not Nominee3's

 

                                   first measuring date

 

                                   because Nominee3

 

                                   does not appear on

 

                                   Target SPRs

 

                                   continuously to last

 

                                   measuring date

 

 

 Week48      75          12

 

 

 Week60      Not         10

 

             listed

 

             on

 

             SPR

 

 

 Week72      100         12        Initial estimated basis:

 

                                   100 shares reported

 

                                   x $12 vol wtd avg

 

                                   closing price per share =

 

                                   $1200

 

 

 Week80        135       14        Reported shares

 

                                   increased (100 to 135)

 

                                   +35 shs @$14/sh =

 

                                   $490

 

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $1200+490=1690

 

 

 Week104       150        16       Reported shares

 

                                   increased (135 to 150):             $1287

 

                                   +15 shs @$16/sh =

 

                                   $240

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $1690+240=1930

 

 

 _____________________________________________________________________________

 

 

                            Surrendering shareholder

 

 

                                    Nominee4

 

 _____________________________________________________________________________

 

 

                       Vol         Modeled basis

 

                       wtd         (Initial estimated basis

 

                       avg         adjusted each

 

             Shares    closing     measuring date for         Deemed

 

             listed    price       increases and              basis in

 

 Date of     on        for         decreases in reported      surrendered

 

 SPR         SPR       period*     holdings)                  shares

 

 _____________________________________________________________________________

 

 

 Week 4         50        8

 

 

 Week21         50       10

 

 

 Week34        100       11

 

 

 Week48      Not         12

 

             listed

 

             on

 

             SPR

 

 

 Week60        100       10

 

 

 Week72        150       12

 

 

 Week80        200       14

 

 

 Week104     Not         16        No initial estimated

 

             listed                basis can be determined

 

             on                    (Nominee4 holds no

 

             SPR                   shares on the SPR

 

                                   immediately preceding

 

                                   the transaction date)

 

 

 $0 aggregate adjusted estimated basis/0 shares =

 

 $0 per share final estimated basis

 

 

 100 shares surrendered x $0 per share final estimated basis=             $0

 

 $0 deemed basis in surrendered shares

 

 

 _____________________________________________________________________________

 

 

                            Surrendering shareholder

 

 

                                    Nominee5

 

 _____________________________________________________________________________

 

 

                       Vol         Modeled basis

 

                       wtd         (Initial estimated basis

 

                       avg         adjusted each

 

             Shares    closing     measuring date for         Deemed

 

             listed    price       increases and              basis in

 

 Date of     on        for         decreases in reported      surrendered

 

 SPR         SPR       period*     holdings)                  shares

 

 _____________________________________________________________________________

 

 

 Week 4       Not         $8

 

             listed

 

             on

 

             SPR

 

 

 Week21      Not        $10

 

             listed

 

             on

 

             SPR

 

 

 Week34      Not        $11

 

             listed

 

             on

 

             SPR

 

 

 Week48         50      $12

 

 

 Week60         50      $10

 

 

 Week72      Not        $12

 

             listed

 

             on

 

             SPR

 

 

 Week80      200        $14        Initial estimated

 

                                   basis:

 

                                   200 shares reported

 

                                   x $14 vol wtd avg

 

                                   closing price per share =

 

                                   $2800

 

 

 Week104       250      $16        Reported shares

 

                                   increased (200 to 250):

 

                                                                       $1800

 

                                   +50 @ $16 = $800

 

                                   Adjusted estimated

 

                                   basis:

 

                                   $2800 + 800 = $3600

 

 

 $3600 aggregate adjusted estimated basis/250 shares =

 

 $14.40 per share final estimated basis

 

 

 125 shares surrendered x $14.40 per share final estimated basis =

 

 $1800 deemed basis in surrendered shares

 

 

    Computation of Section 4.04 per share modeled basis (common shares):

 

 _____________________________________________________________________________

 

 

 Nominee        Per share final   Surrendered shares   Deemed basis in

 

 shareholder    estimated basis                        surrendered shares

 

 _____________________________________________________________________________

 

 

 Nominee1            11.36                   250                   $2840

 

 

 Nominee2            10.67                   175                   $1867

 

 

 Nominee3            12.87                   100                   $1287

 

 

 Nominee4                0                   100                      $0

 

 

 Nominee5            14.40                   125                   $1800

 

 

 Total deemed basis in surrendered shares                          $7794

 

 

 Total number of surrendered shares                                  750

 

 

 Section 4.04 per share modeled basis                             $10.39

 

 

 Section 4.04 per share modeled basis                              $9.56

 

 x 92% (100/109, the SPR ratio)

 

 = Allowable basis for each Section 4.04 Eligible Share

 

 

         ALLOCATION OF ALLOWABLE BASIS TO SECTION 4.04 ELIGIBLE SHARES

 

 _____________________________________________________________________________

 

 

                                      Surrendered

 

                     Allowable        Section 4.04         Aggregate

 

 Surrendering        basis per        Eligible             allowable

 

 shareholder         share            shares               basis

 

 _____________________________________________________________________________

 

 

 Nominee1              $9.56               200               $1912

 

 Nominee2              $9.56               175               $1673

 

 Nominee3              $9.56                 0                  $0

 

 Nominee4              $9.56               100                $956

 

 Nominee5              $9.56               125               $1195

 

 _____________________________________________________________________________

 

 

 Notes:

 

 

      Nominee1. As noted above, the basis of 50 of the 250 shares

 

 surrendered by Nominee1 was reported by Employee Plan1 and so was not

 

 determined under the Section 4.04 model.

 

 

      Nominee3. As noted above, Acquiring did not satisfy the

 

 requirements to determine its basis in the shares surrendered by Nominee3

 

 under this revenue procedure. Thus, there is no basis allowable under the

 

 model; however, Acquiring may establish its bases in those shares under such

 

 other method as agreed to by the Service.

 

 

                                    SUMMARY

 

                    BASIS DETERMINED UNDER REVENUE PROCEDURE

 

                                   (SPR DATA)

 

 _____________________________________________________________________________

 

 

                                                          Total allowable

 

                                                          basis under

 

 Surrendering      Applicable   Allowable    Shares       revenue

 

 shareholder       method       basis        surrendered  procedure

 

 _____________________________________________________________________________

 

 

 Preferred shares (100 outstanding):

 

 _____________________________________________________________________________

 

 

 Officer             Cannot be    TBD under            20              $0

 

                     established  procedures

 

                     under this   as agreed to

 

                     revenue      by Service

 

                     procedure

 

 

 Employee Plan1      Actual, as   $5/share

 

                     determined   ($10 issue

 

                     by Target's  price reduced

 

                     records      by $5

 

                                  § 301(c)(2)

 

                                  distribution)        30            $150

 

 

 Employee Plan2      Actual, as

 

                     determined

 

                     by Target's

 

                     records      $36/share            50           $1800

 

 

 Total basis in preferred shares                                    $1950

 

 _____________________________________________________________________________

 

 

 Common shares (1000 outstanding):

 

 _____________________________________________________________________________

 

 

 Employee Plan1      As reported  $12/share            50            $600

 

                     in survey,

 

                     4.01

 

 

 Individual A        As reported  $13/share            10            $130

 

                     in survey,

 

                     4.01

 

 

 Individual B        4.03         $9/share             10             $90

 

 

 Individual C        4.03         $9/share             25

 

                                  $12/share            25            $525

 

 

 Individual D        Cannot be    TBD under

 

                     established  procedures

 

                     under this   as agreed to

 

                     revenue      by Service

 

                     procedure                         50              $0

 

 

 Individual E        4.03         $12/share            50            $600

 

 

 Director A          4.03         $12/share            30            $360

 

 

 Private Placement   4.03         $12/share            50            $600

 

 

 Nominee1            4.04         $9.56/share         200           $1912

 

 

 Nominee2            4.04         $9.56/share         175           $1673

 

 

 Nominee3            Cannot be    TBD under

 

                     established  procedures

 

                     under this   as agreed to

 

                     revenue      by Service

 

                     procedure                        100              $0

 

 

 Nominee4            4.04         $9.56/share         100            $956

 

 

 Nominee5            4.04         $9.56/share         125           $1195

 

 

 Total basis in common shares                                      $8,641

 

 

 Total number of shares (preferred plus common) surrendered          1100

 

 

 Total basis in all shares                                        $10,591
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