SAFE HARBOR PROVIDED FOR STOCK BUY-BACKS.

Rev. Proc. 91-63

SECTION 1. PURPOSE

This revenue procedure provides a safe harbor under which the Internal Revenue Service will rule that a purchase by the distributing corporation (Distributing) or the controlled corporation (Controlled) of its stock subsequent to a section 355 transaction will not violate the device test of section 355(a)(1)(B) of the Internal Revenue Code.

SEC. 2. BACKGROUND

Section 355(a)(1)(B) of the Code provides that a section 355 transaction cannot be used principally as a device for the distribution of the earnings and profits of the Distributing corporation or the Controlled corporation or both. Section 355(a)(1)(B) further provides that the mere fact that stock of the Distributing or the Controlled corporation is sold or exchanged subsequent to the transaction (except for prearranged sales or exchanges) shall not be construed to mean that the transaction was a device. Section 1.355-2(d)(2)(iii) of the Income Tax Regulations provides:

(B) SALE OR EXCHANGE NEGOTIATED OR AGREED UPON BEFORE THE DISTRIBUTION. A subsequent sale or exchange pursuant to an arrangement negotiated or agreed upon before the distribution is substantial evidence of device.

(C) SALE OR EXCHANGE NOT NEGOTIATED OR AGREED UPON BEFORE THE DISTRIBUTION. A subsequent sale or exchange not pursuant to an arrangement negotiated or agreed upon before the distribution is evidence of device.

Rev. Proc. 86-41, 1986-2 C.B. 716, sets forth the information that must be included in a request for a ruling under section 355. Section 4.052 of Rev. Proc. 86-41 requires a representation that, "[t]here is no plan or intention by the shareholders . . . to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in . . . either the distributing or controlled corporation subsequent to the transaction."

The Service recognizes that there are widely held corporations that purchase their stock for valid corporate business reasons unrelated to the stock distribution under section 355. This revenue procedure modifies Rev. Proc. 86-41 to provide a safe harbor for certain stock repurchases. If the repurchases do not satisfy the safe harbor, the Service will consider ruling on whether the purchases violate the device requirement of section 355(a)(1)(B), depending on the facts in each case.

The repurchases will, however, be taken into account, in appropriate cases, in determining whether the continuity of interest requirement of section 1.355-2(c) is satisfied and whether section 355(d) applies.

SEC. 3. PROCEDURE

Section 4.052. of Rev. Proc. 86-41 is modified to read as follows:

2. Dispositions of stock or securities.

(a) Submit the following REPRESENTATION: There is no plan or intention by the shareholders or security holders of the distributing corporation to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in, or securities of, either the distributing or controlled corporation subsequent to the transaction other than stock repurchases meeting the requirements of section 4.052(b).

(b) Purchases by either Distributing or Controlled of its stock subsequent to the transaction provided:

(1) There is a corporate business purpose for the stock purchase;

(2) The stock to be purchased is widely held;

(3) The stock purchases will be made in the open market and, to the best of the corporation's knowledge, will not be made from (i) directors or officers or (ii) any shareholder owning 1% or more of the outstanding stock of the corporation; and

(4) There is no plan or intention that the aggregate amount of stock purchased will equal or exceed 20% of the outstanding stock of the corporation.

If the stock repurchases do not meet the requirements of this section 4.052(b), the Service will consider ruling on whether the purchases violate the device requirement of section 355(a)(1)(B) depending on the facts in each case.

(c) If a plan or intention to dispose of the stock exists (including stock repurchases that do not meet the requirements of section 4.052(b)), see section 1.355-2(d) of the regulations regarding what constitutes evidence of a device and provide the following information:

(1) Transaction. -- Give complete details concerning the transaction, including any agreements existing between the parties and the number of shares of each class of stock or the amount of each series of securities that each stockholder or security holder will dispose of. If the disposition results from governmental action, explain fully how this action necessitates the shareholder disposition. See Rev. Ruls. 83-23, 1983-1 C.B. 82, and 78-383, 1978-2 C.B. 142.

(2) Consideration. -- State the consideration to be received by each shareholder and security holder.

SEC. 4. COMMENTS AND INQUIRIES

Comments or inquiries regarding this revenue procedure should be addressed to the Commissioner of Internal Revenue, ATTN: CC:CORP, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

SEC. 5. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 86-41 is modified.

SEC. 6. EFFECTIVE DATE

This revenue procedure will apply to all ruling requests on hand in the National Office on December 9, 1991, the date of publication of this revenue procedure in the Internal Revenue Bulletin, as well as to requests received thereafter.

DRAFTING INFORMATION

The principal author of this revenue procedure is Kirsten L. Simpson of the Office of Assistant Chief Counsel (Corporate). For further information regarding this revenue procedure, contact Ms. Simpson on (202) 566-6212 (not a toll-free call).