On January 23, the Internal Revenue Service (the “IRS”) released Revenue Procedure 2018-12 (the “Revenue Procedure”) detailing a safe harbor that will permit taxpayers to utilize average-price methods for purposes of determining stock consideration values in corporate reorganizations. The Revenue Procedure is helpful to corporations that engage in acquisitions intended to qualify as tax-free reorganizations where the consideration is a mix of stock and cash (or other property). In particular, the Revenue Procedure should give transacting parties the ability to determine with certainty whether a given transaction satisfies the continuity of interest (“COI”) doctrine when the acquisition agreement uses average-price methods to set the value of stock consideration.

Background -

In order for a corporate transaction to qualify as a tax-free reorganization under the Internal Revenue Code (the “Code”) it must, among other things, satisfy the COI doctrine. The purpose of the COI doctrine is to prevent a transaction from qualifying for non-recognition treatment if the transaction more closely resembles a sale rather than a reorganization. In general, the doctrine requires shareholders of the target corporation to preserve a substantial part of their proprietary interest in the target corporation by receiving stock in the acquiring corporation. Treasury Regulations and prevailing opinion practice both reflect the view that an acquisition will generally satisfy the COI doctrine if at least 40 percent of the total consideration, by value, received by a target corporation’s shareholders consists of stock of the acquiring corporation.