In April, the IRS issued proposed regulations interpreting deemed distributions under Section 305(c). Specifically, the proposed regulations would clarify the amount and timing of deemed distributions that result from an adjustment to the right to acquire stock. These regulations will generally apply to deemed distributions occurring after they are finalized, but may be relied upon for deemed distributions occurring on or after January 1, 2016.
Section 305 governs situations where a corporation distributes its own stock or rights to acquire such stock. Although stock dividends are generally not taxable to the shareholders of such a corporation, Section 305(b) includes five exceptions to this general rule. Under Section 305(c), Congress specifically provided the Treasury Department the ability to promulgate regulations to expand the exceptions to the general rule to certain changes to warrants, options, instruments convertible into stock and other rights to acquire stock. Although the Treasury Department believes the current regulations are clear as to what constitutes a change that will be considered a taxable deemed distribution, it felt that they are unclear as to the amount and timing of the deemed distribution. The proposed regulations address these two areas. In addition, the proposed regulations provide guidance as to when and how a withholding agent must withhold on the deemed distribution.