IRS accepts appraisals establishing preferred-stock fair market value for a section 1059(c)(4) extraordinary-dividend election

Plain-English summary

A corporate shareholder bought newly issued, non-publicly-traded preferred stock and, within two years, received two large quarterly dividends. Because each dividend topped 5% of the stock's basis, the dividends counted as "extraordinary dividends" under IRC § 1059, a rule that normally forces the shareholder to reduce its stock basis by the untaxed portion. Section 1059(c)(4) offers relief: instead of using basis, the taxpayer can measure the dividend against the stock's fair market value, but only if it proves that value to the IRS's satisfaction. The taxpayer commissioned two appraisals valuing the preferred stock the day before each dividend's ex-dividend date. The IRS ruled that, assuming the appraiser followed the standard valuation guidance (Rev. Rul. 59-60 and its successors) and the data and assumptions were sound, the fair market values were established well enough to make the § 1059(c)(4) election. The taxpayer must attach this letter to its return with the election statement.

Ruling snapshot

• Question: Has the taxpayer established the preferred stock's fair market value to the Service's satisfaction for a § 1059(c)(4) election?
• Outcome: Approved (fair market value established, subject to stated appraisal conditions)
• Key authorities: IRC § 1059(c)(1), (3), (4); Rev. Proc. 87-33; Rev. Rul. 59-60 (as amplified by Rev. Rul. 77-287, 80-213, 83-120)

Full text (IRS public release)

 Internal Revenue Service                                        Department of the Treasury
                                                                 Washington, DC 20224

 Number: 202227009                                               Third Party Communication: None
 Release Date: 7/8/2022                                          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-125393-21
                                                                 Date:
                                                                 April 12, 2022

Legend

Taxpayer                   =         ----------------------------------------------------------------
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Corporation                =        ----------------

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

Year1                      =        -------

Year2                      =        -------

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

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

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

$X                         =        -----------------


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

This letter responds to your letter dated December 3, 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 two 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 (Dividend 1) and the second dividend had an ex-dividend date of
Date2 (Dividend 2).

Taxpayer has represented that the amount of each of Dividend 1 and Dividend 2
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, two appraisals (the Appraisals), each of which was
dated Date3, with respect to the value of the Preferred Stock as of the day before Date1
and Date2. 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 and Date2, 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).

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
                                                Senior Technician Reviewer, Branch 3
                                                Associate Chief Counsel (Corporate)


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