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C12-Chp-07-2B-Rev-Proc-81-70

C12-Chp-07-2B-Rev-Proc-81-70 - WORD-Skeleton2 Page 1 of 2...

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WORD-Skeleton2. Page 1 of 2 Rev. Proc. 81-70, 1981-2 CB 729 SECTION 1. PURPOSE This revenue procedure sets forth guidelines for estimating the basis of stock acquired by an acquiring corporation in a reorganization described in section 368(a)(1)(B) of the Internal Revenue Code. SEC. 2. BACKGROUND Section 368(a)(1)(B) of the Code defines a reorganization as the acquisition by one corporation of stock of another corporation solely in exchange for part or all of the voting stock of either the acquiring corporation or its parent, provided the acquiring corporation has control of the acquired corporation immediately after the acquisition. Section 354(a)(1) provides for nonrecognition of gain or loss on the exchange of stock or securities of one corporate party to a reorganization for stock or securities of another corporate party to the reorganization. Section 362(b) provides that the basis of stock or securities received by a corporate party to a reorganization will be the same as the basis was in the hands of thetransferor if part or all of the consideration for the transfer consisted of stock or securities of the acquiring corporation or its parent. Section 1.368-3(a) of the Income Tax Regulations requires each corporate party to the reorganization tofile, as part of its return for the tax year in which the reorganization occurred, a complete statement of all facts pertinent to the nonrecognition of gain or loss in connection with the reorganization, including information about the basis of stock transferred and the amount of stock received. Two problems may be encountered by the acquiring corporation in complying with the basis requirements of a "B" reorganization because the information necessary to establish the basis of the acquired corporation's stock is in the possession of the former shareholders of the acquired corporation. The first problem is that some of the former shareholders of the acquired corporation may not respond to the acquiring corporation's request that they furnish to it their basis in the acquired corporation's stock. Thus, through no fault of its own, the acquiring corporation does not possess the documentary proof to establish its basis in that stock. It is well established that when a taxpayer has realized income or incurred an expense but does not possess documentary proof of it, the taxpayer has been permitted to estimate such items from the best secondary evidence available. The burden of producing this evidence and justifying the estimations based on the evidence falls on the taxpayer, and any doubts are resolved against the taxpayer. See Cohan v. Commissioner, 39 F. 2d 540 (2nd Cir. 1930), Prosperity Co. v. Commissioner, 17 T.C. 171 (1951), acq. 1951-2 C.B. 3, and Rev. Rul. 54-497, 1954-2 C.B. 75. Under these principles, it is appropriate to permit the acquiring corporation in a "B" reorganization to estimate the basis of stock of nonresponding shareholders.
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