IRS accepts appraised preferred-stock values for an extraordinary-dividend election

Plain-English summary

A taxpayer acquired nonpublicly traded preferred stock and received four quarterly dividends within two years. Each dividend exceeded five percent of the taxpayer’s adjusted basis and otherwise qualified as an extraordinary dividend under IRC § 1059(c). The taxpayer wanted to elect under § 1059(c)(4) to use the stock’s fair market value on the day before each ex-dividend date instead of adjusted basis when applying the extraordinary-dividend rules. It obtained four appraisals supporting those values. The IRS ruled that the appraised values were established to the Secretary’s satisfaction, provided the appraiser followed the cited valuation guidance, used complete and accurate information, understood the stock’s terms, made reasonable assumptions and comparisons, and considered all relevant available data. The taxpayer must attach the ruling to its election statement and federal return for the relevant year.

Ruling snapshot

• Question: Were the appraised fair market values established well enough to support an IRC § 1059(c)(4) election?
• Outcome: Approved, subject to the stated appraisal and data conditions.
• Key authorities: IRC § 1059(c)(4); Rev. Proc. 87-33; Rev. Rul. 59-60 and related valuation rulings.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202137003 Third Party Communication: None
Release Date: 9/17/2021 Date of Communication: Not Applicable
Index Number: 1059.06-00, 1059.06-02
Person To Contact:
-------------------------------------------- ------------------, ID No. -----------------
-------------------------------------------------- Telephone Number:
------------- --------------------
----------------------- Refer Reply To:
-------------------------------------- CC:CORP:B03
PLR-104778-21
Date:
June 17, 2021

Legend

Taxpayer = ---------------------------------------------------------------
------------------------

Corporation = ----------------

Preferred Stock = ---------------------------------------------------------------------------------

                                -----------------------

Appraiser = ------------------------------------------------------------------

Year1 = -------

Year2 = -------

Date1 = -------------------------

Date2 = ------------------

Date3 = ----------------------

Date4 = --------------------------

Date5 = -------------------------

$X = -----------------
PLR-104778-21 2

Dear -----------------:

This letter responds to your letter dated February 23, 2021 requesting a written
determination as to whether Taxpayer has established the fair market value of certain
shares of preferred stock to the satisfaction of the Service for purposes of making an
election under section 1059(c)(4) of the Internal Revenue Code (the Code). See Rev.
Proc. 87-33, 1987-2 C.B. 402. The information submitted for consideration is
summarized below.

In Year1, Taxpayer acquired newly issued preferred stock of Corporation (specifically,
the Preferred Stock). The Preferred Stock is not publicly traded. Subsequently during
Year2 and within two years from the acquisition of the Preferred Stock in the
transaction, Taxpayer received four quarterly dividends, each in the amount of $X, with
respect to the Preferred Stock. The first dividend received by Taxpayer had an ex-
dividend date of Date1; the second dividend had an ex-dividend date of Date2; the third
dividend had an ex-dividend date of Date3; and the fourth dividend had an ex-dividend
date of Date4.

Taxpayer has represented that the amount of each quarterly dividend it received in
Year2 exceeded five percent of the adjusted basis in the Preferred Stock and, as a
result, each of the dividends otherwise qualified as “extraordinary” under section
1059(c). Accordingly, Taxpayer wishes to elect under section 1059(c)(4) to apply
section 1059(c)(1) and (3) by substituting the fair market value of the Preferred Stock as
of the day before each of the respective ex-dividend dates for Taxpayer's adjusted basis
in the Preferred Stock.

Taxpayer obtained, from Appraiser, four appraisals (the Appraisals), each of which was
dated Date5, with respect to the value of the Preferred Stock as of the day before
Date1, Date2, Date3, and Date4. Subsequently, this ruling request was submitted.

Provided that (i) Appraiser followed the relevant guidelines contained in Rev. Rul. 59-
60, 1959-1 C.B. 237, as amplified by Rev. Rul. 77-287, 1977-2 C.B. 319, Rev. Rul. 80-
213, 1980-2 C.B. 101, and Rev. Rul. 83-120, 1983-2 C.B. 170, (ii) the financial data and
all other relevant data analyzed for the Appraisals was accurate and complete, (iii)
Appraiser was knowledgeable about the terms of the Preferred Stock, (iv) any and all
assumptions and comparables relied upon by Appraiser were reasonable, and (v)
Appraiser appropriately took into consideration any and all available data relevant for
the appraisals, we conclude that the proposed fair market values of the Preferred Stock
as of the day before Date1, Date2, Date3, and Date4, as supported by the appraisals,
have been established to the satisfaction of the Secretary for the purpose of making the
election pursuant to section 1059(c)(4).
PLR-104778-21 3

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

Taxpayer must include a copy of this letter with the section 1059(c)(4) election
statement attached to its federal income tax return for the tax year in which it is relevant
and should retain a copy of this letter with its federal income tax return information for
that year.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,


                                    Justin O. Kellar
                                   Justin O. Kellar
                                   Senior Technician Reviewer, Branch 3
                                   Associate Chief Counsel (Corporate)

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