On December 17, 2009, the I.R.S. and the Treasury Department issued final regulations (Treasury Decision 9475) dealing with “cash D” reorganizations. In drafting the regulations, the IRS and Treasury Department analyzed whether the “meaningless gesture doctrine” is inconsistent with the distribution requirement in Code §§ 368(a)(1)(D) and 354(b)(1)(B), especially in situations in which the cash consideration received equals the full fair market value of the property transferred. In this circumstance, the regulations adopt a rule where a nominal share of stock of the transferee corporation is transferred to the transferor corporation.
The preamble to the regulations includes a summary of the meaningless gesture doctrine:
Notwithstanding the requirement in section 368(a)(1)(D) that “stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356,” the IRS and the courts have not required the actual issuance and distribution of stock and/or securities of the transferee corporation in circumstances where the same person or persons own all the stock of the transferor corporation and the transferee corporation. In such circumstances, the IRS and the courts have viewed an issuance of stock by the transferee corporation to be a “meaningless gesture” not mandated by sections 368(a)(1)(D) and 354(b). See James Armour, Inc. v. Commissioner, 43 T.C. 295, 307 (1964); Wilson v. Commissioner, 46 T.C. 334 (1966); Rev. Rul. 70-240, 1970-1 CB 81.
Code § 368(a)(1)(D) reorganizations are a common type of reorganization in the restructuring of foreign entities of U.S. based multinationals. The meaningless gesture doctrine is often relied upon in these reorganizations.
Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.