Protecting a tax base can depend on an unglamorous question: which shares belong in a fraction? IRS and Treasury regulations published January 18 address that question for certain acquisitions involving a foreign corporation and a domestic entity. Their stock-exclusion mechanism deserves attention without treating a cross-border transaction as evidence of wrongdoing. [2017-00643][2016-07300]

Under the final section, disqualified stock is generally left out of the ownership fraction's denominator, subject to an exception. The exclusion therefore prevents those shares from enlarging that part of the calculation. But an increase in assets alone does not make stock disqualified: the stock must meet the specified exchange conditions, with a further net-asset limitation. [2017-00643][2016-07300]

The small-ownership exception also has two tests. The specified ownership percentage must be below five by vote and value, calculated without designated exclusions. Separately, each former domestic owner must hold less than five percent by vote and value in each expanded affiliated group member, applying the prescribed attribution rules. An anti-avoidance condition can defeat the exception. [2017-00643][2016-07300]

Who belongs to that group is not an incidental detail. April 2016 temporary definitions, expressly used by the January section, locate it at completion of the acquisition and all related transactions. Together, the documents explain a bounded tax safeguard, not measured revenue recovery or jobs preserved. For people judging its public value, that distinction separates the design of protection from evidence that protection worked. [2017-00643][2016-07300]

Source documents

  1. Guidance for Determining Stock Ownership; Rules Regarding Inversions and Related Transactionshttps://www.govinfo.gov/content/pkg/FR-2017-01-18/html/2017-00643.htm
  2. Inversions and Related Transactionshttps://www.govinfo.gov/content/pkg/FR-2016-04-08/html/2016-07300.htm