A small percentage is not enough, by itself, to establish an exception under the IRS stock-ownership rule published January 18, 2017. Section 1.7874-4 first identifies disqualified shares that generally leave the denominator of an inversion ownership fraction. It then supplies a conditional exception, rather than a universal exemption for small holdings. [2017-00643][2016-07300]

The first condition requires the specified ownership percentage to be less than five by both vote and value, calculated without designated stock exclusions. The second examines each former domestic shareholder or partner individually: after the acquisition and related transactions, that person must hold less than five percent by vote and value in each expanded affiliated group member, using the stated attribution rules. [2017-00643][2016-07300]

April 2016 temporary definitions clarify the reference point. Completion means completion of the domestic acquisition and all related transactions; the expanded affiliated group includes the foreign acquiring corporation and is determined at that completion date. The January section expressly incorporates those common definitions, making the earlier document part of interpreting the test rather than a second confirmation of results. [2017-00643][2016-07300]

There are limits before and after the exception. Stock must meet the specified disqualification categories, and only counts as disqualified to the extent its exchange increases asset fair value or reduces liabilities. That exchange is assessed without netting related transactions. Even when the small-owner conditions are met, a principal purpose of avoiding section 7874 can prevent the exception from applying. [2017-00643][2016-07300]

Source documents

  1. Guidance for Determining Stock Ownership; Rules Regarding Inversions and Related Transactionshttps://www.govinfo.gov/content/pkg/FR-2017-01-18/html/2017-00643.htm
  2. Inversions and Related Transactionshttps://www.govinfo.gov/content/pkg/FR-2016-04-08/html/2016-07300.htm