rp-11-35.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.105: Examination of returns and claims for refund, credit or
abatement; determination of correct tax liability
(Also: Part I §§ 362, 1.362-1, 351, 1.351-3, 1.358-6.)

Rev. Proc. 2011-35

BASIS IN STOCK ACQUIRED IN TRANSFERRED BASIS TRANSACTIONS

SECTION 1. PURPOSE

This revenue procedure provides procedures that a corporation
(Acquiring) may use to establish its basis in stock of another corporation (Target)
when it acquires the Target stock in a transferred basis transaction.

SECTION 2. BACKGROUND

The Internal Revenue Service has long held that the optimal method for
establishing basis in stock acquired in a reorganization described in
§ 368(a)(1)(B) of the Internal Revenue Code (B reorganizations) is a survey of
the surrendering Target shareholders. The Service has also long recognized that
it will not be practical to survey all surrendering Target shareholders in all such
cases, particularly where Target stock is publicly traded. To mitigate this
concern, the Service published Rev. Proc. 81-70, 1981-2 C.B. 729, which
provides survey procedures, as well as procedures for the use of statistical
sampling and estimation of basis, for establishing basis in stock acquired in a B
reorganization if a survey of all surrendering shareholders would not be practical
or feasible.

Since the publication of Rev. Proc. 81-70, however, the operation of the
securities market has changed significantly. Foremost among the changes has
been the pervasive shift to the holding of stock in street name, that is, the holding

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of stock by nominees, typically clearinghouses or other financial institutions, on
behalf of their members or customers. Because these nominee holders are
subject to confidentiality and other restrictions, it is often difficult, if not
impossible, for corporations acquiring stock in a B reorganization to obtain the
information necessary to establish basis in acquired stock using the procedures
prescribed by Rev. Proc. 81-70. Furthermore, the difficulties associated with
determining basis in stock acquired in a B reorganization can also be present
when determining basis in stock acquired in any transferred basis transaction.

In 2004, the Service undertook a study of the need for revised and further
guidance in the determination of basis of shares acquired in transferred basis
transactions. See Notice 2004-44, 2004-2 C.B. 32. The comments received in
response to Notice 2004-44 were reflected in Notice 2009-4, 2009-2 I.R.B. 251,
which affirmed the intent to revise the general provisions of Rev. Proc. 81-70,
described three basis-determination safe harbors under consideration, and
requested comments. The basis-determination safe harbors in Notice 2009-4
were: a survey-based methodology for shares surrendered by or on behalf of
reporting shareholders, an estimation model based on stock registry and trading
data for shares surrendered by registered, nonreporting shareholders, and an
estimation model based on public trading data for shares surrendered by
nominee shareholders. Comments were received affirming the need for such
guidance and suggesting various modifications to the safe harbor models.

This revenue procedure adopts the surveying and statistical sampling
guidelines in Rev. Proc. 81-70, but updates and revises them to take current
market practices into account. This revenue procedure also adopts the safe
harbor methodologies described in Notice 2009-4, but modifies them to reflect
the comments received, particularly regarding the need for a model that uses
data more readily accessible to acquiring corporations. Finally, this revenue
procedure expands the applicability of these provisions by permitting their use in
any transferred basis transaction.

SECTION 3. OVERVIEW, GENERALLY APPLICABLE PROVISIONS

.01 In General
. Section 4.0 of this revenue procedure sets forth
procedures for four methodologies that taxpayers may use to determine basis in
stock acquired in a transferred basis transaction. Section 4.01 provides
procedures for surveying all surrendering Target shareholders to determine
actual basis in surrendered shares. Section 4.02 provides procedures for the
use of statistical sampling when a full survey is not feasible. Sections 4.03 and
4.04 provide estimation techniques that may be used in lieu of a full survey or
statistical sampling when specified criteria are satisfied. Taxpayers may use one
or more of these methodologies in any combination. If a taxpayer cannot or does
not use the methodologies prescribed in this revenue procedure, basis in
acquired Target shares may be established by such other methodologies as
agreed by the Service and Acquiring.

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Notwithstanding any provision of this revenue procedure, if Acquiring or
the Service has or acquires (including by survey and by examining Target’s
books and records) knowledge of a surrendering shareholder's actual basis in a
surrendered share, Acquiring’s basis in the share is the surrendering
shareholder's actual basis. For example, in many cases, if Target issued shares
to employee plans or with respect to options, convertible stock, or convertible
debt, the basis of the shares can be determined using Target’s books and
records. In those cases, Acquiring’s basis in the shares will be the actual basis
as determined using Target’s books and records. However, the Service will not
undertake its own survey of shareholders (other than, perhaps, reporting
shareholders) for the purpose of obtaining actual knowledge of their basis.

In the absence of actual knowledge, the Service will not assert an
alternative basis, or an alternative method for determining basis, to the extent a
taxpayer determines basis in Target stock in compliance with this revenue
procedure.

The Appendix to this revenue procedure sets forth an illustration of the
application of the estimation and modeling provisions in Section 4.

.02 Definitions
. For purposes of this revenue procedure, the following
definitions apply:

(1) Registered shareholder. The term “registered shareholder" means any
Target shareholder that surrendered Target shares held in certificated form at the
time of the transferred basis transaction.

(2) Nominee shareholder
. The term “nominee shareholder” means any
surrendering Target shareholder (whether surrendering shares it held on its own
account or on behalf of a customer, member, or other beneficial owner) that, at
the time of the transferred basis transaction, was either –

(a) A participant or member of the Depository Trust Company
(DTC), or such other clearinghouse determined by the Service to be substantially
similar to the DTC, that holds securities positions on its own behalf or on behalf
of its clients, participants, members, or other persons, or

(b) A person required to file an SEC Form 13F or such other
reporting form determined by the Service to be substantially similar to the SEC
Form 13F.

(3) Reporting shareholder
. The term "reporting shareholder" means any
surrendering Target shareholder that, immediately before the transferred basis
transaction, was either--

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(a) The registered or nominee shareholder of publicly traded Target
shares representing at least five percent of the vote or the value of all
outstanding Target shares (or, in the case of shares that were not publicly traded,
one percent of the vote or value of all outstanding Target shares), or, if identified
in a nominee survey or otherwise known to Acquiring, the beneficial owner of
such amount of shares, or

(b) An officer or director of Target, or a plan that acquired Target
stock for or on behalf of Target employees (such as an employee stock option or
pension plan).

(4) Security Position Report (SPR)
. The term “Security Position Report”
(SPR) means the securities position listings issued by the DTC and reporting the
closing positions for securities held by DTC members. The term also includes
similar publications of other clearinghouses, whether domestic or foreign, if it is
established to the satisfaction of the Service that the publication is substantially
similar to the DTC-issued SPR and the clearinghouse is substantially similar to
the DTC.

(5) SEC Form 13F
. The term “SEC Form 13F” means the reporting form
filed by institutional investment managers pursuant to Section 13(f) of the
Securities Exchange Act of 1934. The term also includes such other reporting
form required to be filed by a foreign jurisdiction if it is established to the
satisfaction of the Service that such filing is substantially similar to the SEC Form
13F.

(6) Master Securityholder File
. The term “Master Securityholder File”
means the official listing of individual securityholder accounts holding certificated
shares, see 17 C.F.R. § 240.17Ad-9 (1983).

(7) Transferred basis transaction
. The term “transferred basis transaction”
means any transaction in which Acquiring’s basis in Target stock acquired in the
transaction is determined by reference to the surrendering Target shareholders’
bases in their surrendered shares. Transferred basis transactions include B
reorganizations, § 351 exchanges, and certain triangular reorganizations (see
§ 1.358-6(c)(2)(ii) of the Income Tax Regulations).

(8) Adjusted closing price
. The term “adjusted closing price” means the
price at which a share of stock closed on an established securities market on a
specified date, adjusted to take stock splits into account.

SECTION 4. PROCEDURES

.01 Surveying
. This Section 4.01 provides procedures for surveying
surrendering Target shareholders to establish basis in the shares surrendered by
or on behalf of such shareholders. The procedures of this Section 4.01 apply to

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all surveys, whether done with respect to all acquired shares, with respect to a
sample of acquired shares under the statistical sampling procedures described in
Section 4.02, or with respect to shares that are surrendered by or on behalf of
reporting shareholders when basis is estimated under Section 4.03 or Section
4.04.

(1) Timeliness requirement
. All surveys under this Section 4.01 must be
done timely. A survey will generally be considered to have been done timely if it
is substantially completed within two years of the transferred basis transaction.
However, see Section 7 of this revenue procedure for the application of this
requirement to transferred basis transactions completed prior to June 20, 2011.

(2) Survey procedure
. All surveys done pursuant to this Section 4.01 are
to be done in accordance with the following—

(a) Identifying the Target shareholders to be surveyed
. Acquiring first
identifies the surrendering shareholders that will be included in the survey. For
this purpose, Acquiring may use Target's books and records, or such other
information as is appropriate and available, including, for example, the Master
Securityholder Files maintained by the stock transfer agent, or Securities
Exchange Commission (SEC) filings, including Schedule 13 series and SPR
data.

In general, Acquiring must survey all registered and nominee shareholders
that surrendered Target stock in the transferred basis transaction. In addition,
Acquiring must survey all other reporting shareholders identified by survey or
otherwise. However, Acquiring need not survey--

(i) Any shareholder that is not a member of the survey sample and
that surrendered Target stock the basis of which is to be determined under the
statistical sampling method described in Section 4.02,

(ii) Any registered shareholder that is not a reporting shareholder
and that surrendered Target stock the basis of which is to be determined under
the estimation methodology described in Section 4.03, or

(iii) Any nominee shareholder that is not a reporting shareholder
and that surrendered Target stock the basis of which is to be determined under
the estimation methodology described in Section 4.04.

(b) Conducting the survey
. Once the survey subjects are identified,
Acquiring begins the survey process by sending a letter to the last known
address of each such shareholder, asking the shareholder to disclose the
number of Target common and preferred shares surrendered, the shareholder’s
aggregate basis (by class) of those shares, and whether the shareholder held the
shares as the beneficial or nominee owner. The letter must state the purpose for

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requesting the information, explain how basis is determined, and explain the
importance of responding timely and accurately. In addition, the letter must
request that—

(i) Any surrendering shareholder that was a beneficial owner
provide the identity and contact information of any nominee holder of its
surrendered share or shares; and

(ii) Any surrendering shareholder that was a nominee owner either:

(A) Provide the identity and contact information of the
beneficial owner or owners of the shares it surrendered;

(B) Provide the aggregate number of common and preferred
shares that it surrendered and the aggregate basis (by class) of those shares; or

(C) Forward the request for information (in a form provided
by Acquiring) to the beneficial owners of its surrendered shares, requesting that
such owners provide the basis information either directly to Acquiring or to the
nominee (who would then provide the information to Acquiring).

After 30 days, Acquiring must make at least two additional attempts to
contact all shareholders that failed to respond to the initial survey letter. This
follow-up contact may be made by telephone, email, and/or such other means as
appropriate and available.

(3) Allowable basis
. The basis reported by surveyed shareholders will be
deemed to be the surrendering shareholder’s actual basis, and Acquiring’s basis
will therefore be the basis reported by such shareholders, unless the reported
basis--

(i) Differs from the actual basis known by Acquiring or the Service,
in which case Acquiring’s basis will be such actual basis, or

(ii) Is inaccurate on its face and differs significantly from the trading
prices of the shares at any time within a week of the date they were acquired in a
cost-basis transaction. In such a case, the shareholder is considered to have
failed to respond to the survey.

If a shareholder surveyed in accordance with this Section 4.01 fails to
respond to Acquiring’s request for basis information within 30 days of Acquiring’s
second follow-up attempt, Acquiring may determine its basis in a share or shares
surrendered by or on behalf of the shareholder using such other procedures in
this revenue procedure as are applicable.

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.02 Statistical Sampling. This Section 4.02 provides procedures for the use of
standard statistical sampling techniques to establish basis in Section 4.02
Eligible Shares (as defined in Section 4.02(1)) when the administrative cost of
surveying all surrendering shareholders is unreasonably high. Factors that
determine whether administrative cost is unreasonably high include the time,
burden, and financial cost of conducting a full survey. The administrative cost of
surveying every surrendering Target shareholder is presumed unreasonably high
if, immediately before the transaction, Target stock was traded on an established
securities market (within the meaning of § 1.7704-1(b) of the Procedure and
Administration Regulations). Under this Section 4.02, Acquiring’s basis in each
Section 4.02 Eligible Share is determined in accordance with the following--

(1) Section 4.02 Eligible Share
. The term “Section 4.02 Eligible Share”
means any Target share—

(a) The actual basis of which is not known, and

(b) That is not surrendered by or on behalf of a reporting shareholder.

(2) Statistical sampling procedure. To satisfy the requirements of this
Section 4.02—

(a) Statistical sampling is done separately for common and preferred
shares.

(b) No reporting shareholders may be included in a sample to be
surveyed.

(c) All shareholders in the sample must be surveyed under procedures
described in Section 4.01, and

(d) The statistical sampling procedures used must comply with standard
statistical sampling procedures recognized by the Service. The use of statistical
sampling has been provided for in several items of published guidance. See, for
example, Rev. Proc. 2004-29, 2004-1 C.B. 918 (statistical sampling methodology
for use in establishing the amount of substantiated meal and entertainment
expenses that are excepted from the 50% deduction disallowance under section
274(n)(1)); Rev. Proc. 2007-35, 2007-1 C.B. 1349 (addressing when statistical
sampling may be used for purposes of section 199 of the Code (income
attributable to domestic production activities)); Rev. Proc. 2002-55, 2002-2 C.B.
435 (permitting external auditors of qualified intermediaries to use statistical
sampling); and Rev. Proc. 72-36, 1972-2 C.B. 771 (setting forth statistical
sampling guidelines for determining the redemption rate of trading stamps).

If the Service determines that Acquiring’s sampling procedure fails to
comply with accepted statistical sampling procedures, Acquiring will have an

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opportunity to recompute the estimate (Sample Basis Estimate), expand the
sample, or make such other adjustments to the basis calculation as necessary to
comply with standard statistical sampling procedures. Alternatively, Acquiring
may determine its basis in Target stock using such other procedures in this
revenue procedure as are applicable.

(3) Allowable basis
. Acquiring’s allowable basis in each Section 4.02
Eligible Share will be a valid estimate (Sample Basis Estimate) computed at the
least advantageous 95% one-sided confidence limit. The “least advantageous”
confidence limit is either the upper or lower limit that results in the least benefit to
Acquiring. If the relative precision, as described in Section 4.02(4) of this
revenue procedure, does not exceed 10%, the Sample Basis Estimate may be
used as the basis for each Section 4.02 Eligible Share. For purposes of
determining basis under this revenue procedure, where the relative precision is
less than 15% and greater than 10%, Allowable Basis is an amount between the
least advantageous 95% one-sided confidence limit and the Sample Basis
Estimate, determined as follows:

Sample Basis Estimate - (Relative Precision - .10) / .05 * (Sample
Basis Estimate - Least Advantageous 95% One-Sided Confidence
Limit)

(4) Calculating the relative precision for each estimator
. The relative
precision for each estimator is commonly calculated by dividing the relative
precision at the 95% one-sided confidence limit (sometimes referred to as the
sampling error) of the Sample Basis Estimate by the estimator. Where a Sample
Basis Estimate may be calculated using either a corrected value or difference
perspective, as in the case of Ratio and Regression methods or solely a
corrected value perspective as in the case of a Mean method, the test will be
applied on the basis of a difference perspective. In such cases the numerator of
the calculation is the sampling error of the adjustment and the denominator the
Sample Basis Estimate of the adjustment.

.03 Estimation Procedure for shares surrendered by registered
shareholders and certain reporting shareholders. This Section 4.03 provides
procedures for determining basis of Section 4.03 Eligible Shares (as defined in
Section 4.03(1)) using data from the Master Securityholder Files. Under this
Section 4.03, Acquiring’s basis in each Section 4.03 Eligible Share is determined
in accordance with the following--

(1) Section 4.03 Eligible Share
. The term “Section 4.03 Eligible Share”
means any Target share –

(a) The actual basis of which is not known, and

(b) That was surrendered by a registered shareholder--

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(i) That is not a reporting shareholder, or

(ii) That is a reporting shareholder that was surveyed and that failed
to respond to the survey.

(2) Estimation procedure
. Under this Section 4.03, Acquiring’s basis in
each Section 4.03 Eligible Share is determined in accordance with the following--

(a) Establishing initial estimated basis of each Section 4.03 Eligible

Share
. The initial estimated basis of each Section 4.03 Eligible Share is
determined by treating the shareholder who surrendered the share as acquiring
the share by purchase for the adjusted closing price on the date that the
shareholder was issued its stock certificate. However, any amount so
determined must be adjusted or revised to take into account any extraordinary
issuance event. For this purpose, an extraordinary issuance event is any
transaction or event that could have caused the basis of a share to be materially
different from the adjusted closing price on its issuance date, including but not
limited to the following–

(i) On or about the date a stock certificate was issued to a
surrendering Target shareholder, another certificate held by the same
shareholder was cancelled. In such case, to the extent that the number of
shares issued is less than or equal to the number of shares cancelled, the
adjusted closing price for such newly issued shares will not be the adjusted
closing price on the date the new certificate was issued, but, instead, the
adjusted closing price on the date the earlier certificate was issued. If a
cancelled certificate was originally issued concurrently with the cancellation of
another certificate, the adjusted closing price is that on the date of the earlier (or
earliest) issuance.

(ii) A share was acquired in a tax-free stock split or as a stock
dividend by the shareholder who surrendered the share. In such case, the share
will be assigned a proportionate amount of the basis of the original share
determined under the applicable provisions of the Code and regulations. Or,

(iii) A share was acquired in a prior tax-free exchange by the
shareholder who surrendered the share. In such case, the share will be
assigned a basis determined under the applicable provisions of the Code and
regulations (including the provisions of this revenue procedure).

(b) Adjusting initial estimated basis
. The initial estimated basis of each
Section 4.03 Eligible Share determined under Section 4.03(2)(a) must be
adjusted for all subsequent transactions and events that would require an
adjustment to basis under the Code (for example, to take into account
distributions under § 301(c)(2)).

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(3) Allowable basis. Acquiring’s basis in each Section 4.03 Eligible Share
is the initial estimated basis for the share determined under Section 4.03(2)(a)
and adjusted as required by Section 4.03(2)(b).

.04 Estimation procedure for shares surrendered by nominees
. This
Section 4.04 provides procedures for determining the basis of Section 4.04
Eligible Shares (as defined in Section 4.04(1)(a)) using data from Target Security
Position Reports (SPRs) or from SEC Form 13F filings (but not both). Under this
Section 4.04, Acquiring’s basis in each Section 4.04 Eligible Share is determined
in accordance with the following--

(1) Definitions
. For purposes of this Section 4.04, the following
definitions apply--

(a) Section 4.04 Eligible Share
. The term “Section 4.04 Eligible Share”
means any Target share—

(i) The actual basis of which is not known, and

(ii) That was surrendered by a nominee shareholder—

(A) That is not a reporting shareholder, or

(B) That is a reporting shareholder that was surveyed and failed to
respond to the survey.

(b) Data Collection Period
. The “Data Collection Period” is the period of
time—

(i) Beginning on the later of –

(A) The first day of Target’s first taxable year, and

(B) Either –

(1
) the later of the first date that the shares to be modeled are
publicly traded and the date that is seven years before the date of the transferred
basis transaction if Acquiring is estimating basis using Target’s SPR data, or

(2
) the date that is ten years before the date of the transferred basis
transaction if Acquiring is estimating basis using SEC Form 13F data, and

(ii) Ending on the date of the transferred basis transaction.

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(c) Measuring Date. The term “Measuring Date” means any date with
respect to which data is to be collected. The Measuring Dates are:

(i) If SPR data is being used to estimate basis, each Friday in the
Data Collection Period on which SPR data was published or, if SPR data is not
published on a Friday in a particular week, then the last date prior to that Friday
on which SPR data was published, provided that such data is available from the
DTC as of the date of the transferred basis transaction, and

(ii) If SEC Form 13F data is being used to estimate basis, each
date in the Data Collection Period on which SEC Forms 13F are filed.

(2) Estimation procedure
. The estimation of basis under this Section 4.04
is done separately for common and preferred shares, and estimations are made
as follows—

(a) Identifying modeled shareholders. Acquiring first identifies the
surrendering shareholders to be included in the estimation model (the modeled
shareholders), and each such shareholder’s first and last Measuring Date. For
this purpose--

(i) If SPR data is being used to estimate basis
, the modeled
shareholders are all surrendering shareholders identified on an SPR published at
any time during the Data Collection Period (SPR modeled shareholder). With
respect to each SPR modeled shareholder—

(A) The shareholder’s first Measuring Date is the first date
on which the shareholder is continuously identified on Target SPRs, and

(B) The shareholder’s last Measuring Date is the last date for
which Target SPR data is available.

(ii) If SEC Form 13F data is being used to estimate basis
, the
modeled shareholders are all surrendering shareholders that filed an SEC Form
13F at any time during the Data Collection Period (SEC modeled shareholders).
With respect to each SEC modeled shareholder—

(A) The shareholder’s first Measuring Date is the first date
on which the shareholder is identified in the SEC Form 13F data as holding
Target shares, and

(B) The shareholder’s last Measuring Date is the last date on
which the shareholder filed an SEC Form 13F.

(b) Establishing each modeled shareholder’s aggregate initial estimated
basis. Each modeled shareholder is treated as purchasing the shares it is

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identified as holding on its first Measuring Date for an amount equal to the
volume-weighted average adjusted closing prices for the period—

(i) Beginning on the later of the date that is three months prior to
the shareholder’s first Measuring Date and the date that is Target’s first day of its
first taxable year, and

(ii) Ending on the modeled shareholder’s first Measuring Date. This
is the modeled shareholder’s aggregate initial estimated basis.

(c) Adjusting each modeled shareholder’s initial estimated basis
. Each
modeled shareholder’s initial estimated basis is adjusted by treating the
shareholder as having purchased shares to the extent of any increase, and
having sold shares to the extent of any decrease, in the number of Target shares
that the shareholder holds on the next Measuring Date for which data is available
(the next date for which Acquiring has a Target SPR in the case of an SPR
modeled shareholder, and the next date that the shareholder made an SEC Form
13F filing in the case of an SEC modeled shareholder). All deemed purchases
are treated as having been made for an amount equal to the volume-weighted
average of the adjusted closing prices for the period between the modeled
shareholder’s immediately preceding Measuring Date and the next Measuring
Date for which data is available; all deemed sales are treated as having been
made on the average cost method. The process is repeated for every Measuring
Date until the shareholder’s aggregate adjusted estimated basis is determined as
of its last Measuring Date.

Each modeled shareholder’s aggregate adjusted basis on its last
Measuring Date is divided by the total number of shares held by the shareholder
on that date to determine the shareholder’s per share final estimated basis.

For purposes of the model, each Target share actually surrendered by a
modeled shareholder is deemed to have a basis equal to the surrendering
shareholder’s per share final estimated basis.

(d) Section 4.04 per share modeled basis
. The deemed bases of all
shares actually surrendered by modeled shareholders are combined and the total
is divided by the number of shares actually surrendered by those shareholders.
The result is the per share modeled basis.

(3) Allowable basis
. Acquiring’s basis in each Section 4.04 Eligible Share
is determined in accordance with the following--

(i) If SPR data is used
to compute the Section 4.04 per share
modeled basis, Acquiring’s basis in each Section 4.04 Eligible Share is equal to
the Section 4.04 per share modeled basis multiplied by the percentage of
Measuring Dates in the Data Collection Period for which SPR data is obtained.

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Thus, if there are 60 Measuring Dates in the Data Collection Period and
Acquiring obtained SPR data for only 54 of those Measuring Dates, Acquiring’s
basis in each Section 4.04 Eligible Share is an amount equal to 90 percent
(54/60) of the Section 4.04 per share modeled basis. Further, appropriate
adjustments will be made if the Service determines that SPRs not included in the
determination represent material omissions.

(ii) If SEC Form 13F data is used
to compute the Section 4.04 per
share modeled basis, Acquiring’s basis in each Section 4.04 Eligible Share is
equal to the Section 4.04 per share modeled basis multiplied by 75 percent.

SECTION 5. REPORTING REQUIREMENTS

Taxpayers acquiring stock in transferred basis transactions described in
this revenue procedure are deemed to satisfy the reporting requirements of
§§ 1.351-3 and 1.368-3 if they include a statement on or with the timely filed
original return for the taxable year of the transferred basis transaction that
identifies the transferred basis transaction and states that a basis study is
pending with respect to the acquired stock. However, to satisfy the requirements
of those sections in such cases, the taxpayer must include complete statements
as required under those regulations, with basis amounts determined pursuant to
the study or otherwise under this revenue procedure, on or with a timely filed
original return for a tax year that is no later than the tax year that includes the
date that is two years after the date of the transferred basis transaction. See
Section 7 of this revenue procedure for the application of this requirement to
transferred basis transactions prior to June 20, 2011. This Section 5 applies to
all transferred basis transactions without regard to whether basis is determined
under Section 4 of this revenue procedure.

SECTION 6. PRE-FILING AGREEMENTS

The determination of whether a basis study is done in compliance with
one of the procedures described in Section 4 of this revenue procedure may be
the subject of a pre-filing agreement.

SECTION 7. EFFECTIVE DATE, EFFECT ON OTHER DOCUMENTS

This revenue procedure is effective with respect to transferred basis
transactions completed on or after June 20, 2011. However, taxpayers may use
this revenue procedure with respect to transferred basis transactions completed
prior to June 20, 2011; in such cases, surveys will be considered timely if
substantially completed, and reporting requirements will be considered satisfied if
filed, on or before June 20, 2013.

Rev. Proc. 81-70 and Notice 2009-4 are obsoleted with respect to
transferred basis transactions completed on or after June 20, 2011.

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APPENDIX

EXAMPLE, PART 1:

DETERMINATION OF BASIS USING

STOCK REGISTRY, CORPORATE BOOKS AND RECORDS,

MARKET TRADING DATA, AND
SEC FORM 13F FILING DATA

On January 1, Year 1, Target was formed. On February 2, Year 3,
Acquiring acquired all 1000 outstanding shares of Target publicly traded common
stock and all 100 outstanding shares of Target nonvoting preferred stock in a
transferred basis transaction. The nonvoting preferred stock is not publicly
traded and, at the time of the transferred basis transaction, represents 2 percent
of the value of Target. Immediately after the transaction, Acquiring collected
information to establish its basis in the acquired shares. Acquiring will use the
survey and estimation methods provided in this revenue procedure. Note that, to
simplify computations, all decimals (other than those related to individual shares)
are rounded to the second place.

DATA COLLECTION
:

1. From the stock registry, publicly available records (trading prices), and
its own books and records, Acquiring collected the following information:

Shareholder Issue
date
Issue
price
Shares issued
and surrendered
Preferred shares
Officer

1/1/Y1 No amount
recorded
20

Employee Plan1 4/1/Y1 $10/share 30
Employee Plan2 4/1/Y2 $36/share 50

Total preferred shares surrendered by registered shareholders 100
Shareholder Issue
date
Adjusted
closing
price on
issue date
High/Low trading
price within one
week of issue date
Shares issued
and surrendered
Common shares
Individual A 1/1/ Y1 $ 9/share$7-12/share 10
Individual B 1/1/ Y1 $ 9/share$7-12/share 10
Individual C 1/1/ Y2 $12/share$8-13/share 50
Individual D 1/1/ Y2 $12/share$8-13/share 50
Individual E 1/1/ Y2 $12/share$8-13/share 50
Director A 1/1/ Y2 $12/share$8-13/share 30

- 15 -
Private
Placement
1/1/ Y2 $12/share$8-13/share 50
Total common shares surrendered by registered shareholders 250

Target’s books and records also indicate:

a. There was a $5 distribution declared on each preferred share
outstanding on 4/15/Y1. The distributions were made to Officer ($100) and to
Employee Plan1 ($150) on 5/1/Y1. For the year of the distribution, Target had no
earnings and profits.

b. On or about 1/1/Y2, the date that a certificate was issued to Individual
C for 50 shares, a certificate issued on 1/1/Y1 to Individual C for 25 shares was
cancelled.

2. From SEC Form 13F Filings, publicly available trading information,
and its own books and records, Acquiring collected the following information
regarding the ownership of its common shares held by nominees:

Nominee
shareholder
SEC Form
13F Filing
date
Shares
reported
Vol Wtd
Avg
adjusted
closing
price*
High/low
trading
price in
quarter
Shares
surrendered
Y1: 1
st

quarter
308$5-14/
share
Y1: 2
nd

quarter
4510$5-14/
Share
Y1: 3
rd

quarter
12011$5-14/
Share
Y1: 4
th

quarter
16012$5-14/
share
Y2: 1
st

quarter
20010$6-15/
share
Y2: 2
nd

quarter
15012$6-15/
share
Y2: 3
rd

quarter
20014$6-15/
share
Nominee1
Y2: 4
th

quarter
20016$6-18/
share
250
Y1: 1
st

quarter
No
Form13F
filed
8$5-14/
share
Y1: 2
nd

quarter
25010$5-14/
Share
Nominee2
Y1: 3
rd
25011$5-14/

- 16 -
quarter Share
Y1: 4
th

quarter
20012$5-14/
share
Y2: 1
st

quarter
20010$6-15/
share
Y2: 2
nd

quarter
30012$6-15/
share
Y2: 3
rd

quarter
30014$6-15/
share
Y2: 4
th

quarter
15016$6-18/
share
175
Y1: 1
st

quarter
No
Form13F
filed
8$5-14/
share
Y1: 2
nd

quarter
No
Form13F
filed
10$5-14/
Share
Y1: 3
rd

quarter
7511$5-14/
Share
Y1: 4
th

quarter
7512$5-14/
share
Y2: 1
st

quarter
No
Form13F
filed
10$6-15/
share
Y2: 2
nd

quarter
10012$6-15/
share
Y2: 3
rd

quarter
13514$6-15/
share
Nominee3
Y2: 4
th

quarter
15016$6-18/
share
100
Y1: 1
st

quarter
508$5-14/
share
Y1: 2
nd

quarter
5010$5-14/
Share
Y1: 3
rd

quarter
10011$5-14/
Share
Y1: 4
th

quarter
No
Form13F
filed
12$5-14/
share
Y2: 1
st

quarter
10010$6-15/
share
Y2: 2
nd

quarter
15012$6-15/
share
Y2: 3
rd

quarter
20014$6-15/
share
Nominee4
Y2: 4
th
No 16$6-18/

- 17 -
quarter Form13F
filed
share
100
Y1: 1
st

quarter
No
Form13F
filed
8$5-14/
share
Y1: 2
nd

quarter
No
Form13F
filed
10$5-14/
Share
Y1: 3
rd

quarter
No
Form13F
filed
11$5-14/
Share
Y1: 4
th

quarter
5012$5-14/
share
Y2: 1
st

quarter
5010$6-15/
share
Y2: 2
nd

quarter
No
Form13F
filed
12$6-15/
share
Y2: 3
rd

quarter
20014$6-15/
share
Nominee5
Y2: 4
th

quarter
25016$6-18/
share
125

* the volume weighted average adjusted closing price applicable with
respect to the first Measuring Date is determined for the period beginning on the
later of Target’s first day of its first tax year and the day that is three months prior
to the first Measuring Date; the volume weighted average adjusted closing price
applicable to all subsequent Measuring Dates is determined for the period
between Measuring Dates.

DATA ANALYSIS:

IDENTIFYING APPLICABLE BASIS DETERMINATION METHODS

Shareholder Reporting shareholder status Survey
required
Eligible
procedure(s)
Preferred shares (not publicly traded, one percent standard applies):
Officer Reporting shareholder (<1% vote and value,
but specified relationship); issue price not
recorded
Yes 4.01
Employee
Plan1
Reporting shareholder (<1% vote and value,
but specified relationship); issue price
recorded
No None, actual
basis known
Employee
Plan2
Reporting shareholder (1% of value and
specified relationship); issue price recorded
No None, actual
basis known

- 18 -
Common shares (publicly traded, five percent standard applies):
Individual A Not reporting shareholder (<5% vote and
value, no specified relationship)
No 4.01 or 4.03
Individual B Not reporting shareholder (<5% vote and
value, no specified relationship)
No 4.01 or 4.03
Individual C Reporting shareholder (5% vote) Yes 4.01; 4.03 if
surveyed and
no response
Individual D Reporting shareholder (5% vote) Yes 4.01; 4.03 if
surveyed and
no response
Individual E Reporting shareholder (5% vote) Yes 4.01; 4.03 if
surveyed and
no response
Director A Reporting shareholder (<5% vote and value
but specified relationship)
Yes 4.01; 4.03 if
surveyed and
no response
Private
Placement
Reporting shareholder (5% vote) Yes 4.01; 4.03 if
surveyed and
no response
Nominee1 Reporting shareholder (5% vote and value) Yes 4.01; 4.04 if
surveyed and
no response
Nominee2 Reporting shareholder (5% vote and value) Yes 4.01; 4.04 if
surveyed and
no response
Nominee3 Reporting shareholder (5% vote and value) Yes 4.01; 4.04 if
surveyed and
no response
Nominee4 Reporting shareholder (5% vote and value) Yes 4.01; 4.04 if
surveyed and
no response
Nominee5 Reporting shareholder (5% vote and value) Yes 4.01; 4.04 if
surveyed and
no response

BASIS DETERMINATIONS UNDER SECTION 4.01 (SURVEY METHOD)

Acquiring conducted a survey of the following shareholders. The survey
complied with the procedures of Section 4.01(2)(b). The following summarizes
the results of the survey:

Shareholder
surveyed
Shareholder’s
Response/Basis
Allowable basis
from survey
Eligible for other
procedure?
Preferred shares:
Officer No response None No, insufficient data

- 19 -
for models
Employee Plan1 $4.50/share for 30
preferred shares;

In addition, Employee
Plan1 reported it
owned 50 common
shares surrendered
by Nominee 1
($12/share)
None for
preferred
(actual = $10 -
5= $5);

As reported
($12/share) for
common
No
Common shares:
Individual A $13/share As reported
($13/share)
No
Individual C No response None Yes, Section 4.03
Individual E $40/share
(nonresponsive, $40
inaccurate on its face)
None Yes, Section 4.03
Director A $1/share
(nonresponsive, $1
inaccurate on its face)
None Yes, Section 4.03
Private Placement No response None Yes, Section 4.03
Nominee1 No response None Yes, Section 4.04
Nominee2 $65/share
(nonresponsive, $65
inaccurate on its face)
None Yes, Section 4.04
Nominee4 No response None Yes, Section 4.04
Nominee5 No response None Yes, Section 4.04

Notes:

Officer
. Although Acquiring surveyed Officer and received no response,
Acquiring cannot determine basis in the shares surrendered by Officer by the
methods described in Section 4.03 and Section 4.04 because the requisite
market information is not available.

Employee Plans
. Because Acquiring had knowledge of actual basis
(issue price was recorded in the register), Acquiring’s basis is the actual basis of
the shares ($10, reduced by the $5/share “section 301(c)(2)” distribution, or $5),
notwithstanding that Employee Plan1 reported a basis of $4.50 in the shares.
Although Acquiring was not required to survey Employee Plan1, because it did
and Employee Plan1 reported that, in addition to the preferred shares, it also
beneficially owned 50 of the shares of common stock held by Nominee1, the
basis of each of those 50 common shares is the $12/share basis reported by
Employee Plan1 (even though all of Nominee1’s trading activity, including with

- 20 -
respect to the 50 shares held on behalf of Employee Plan1, will be taken into
account in modeling basis in Section 4.04).

Individual A
. Although Acquiring was not required to survey Individual A in
order to use the estimation method in Section 4.03, Acquiring did survey
Individual A and Individual A responded to the survey. Accordingly, the basis in
the shares surrendered by Individual A is Individual A’s reported basis of $13 per
share, notwithstanding that the basis determined under Section 4.03 would only
be $9/share for those shares.

Individual B
. Acquiring does not have an actual basis for Individual B and
was not required to survey Individual B in order to use the estimation method in
Section 4.03. Accordingly, Acquiring may determine the basis of Individual B’s
shares using the estimation method in Section 4.03.

Individual C
. Individual C, a reporting shareholder, was surveyed but did
not respond. Accordingly, Acquiring may determine the basis of Individual C’s
shares using the estimation method in Section 4.03.

Individual D
. Individual D, a reporting shareholder was not surveyed. As
a result, Acquiring has not satisfied the requirements for using the estimation
procedures in this revenue procedure and, thus, cannot establish the bases of
those shares under this revenue procedure. However, Acquiring may establish
its bases in those shares under such other method as agreed to by the Service.

Individual E and Director A
. Individual E and Director A, both reporting
shareholders, were surveyed and responded. However, the survey responses
given by Individual E ($40/share) and Director A ($1/share) are inaccurate on
their faces because they differ significantly from the high/low trading prices within
a week of their acquisition by the surrendering shareholders ($8-$13/share), and
thus Individual E and Director A are considered to have not responded to the
survey and the reported bases are disregarded. Acquiring may therefore
establish its bases in those shares using the procedures in Section 4.03.

Nominee shareholders
. All five of the nominee shareholders are reporting
shareholders and must therefore be surveyed in order to determine the bases of
their surrendered shares under the modeling procedure of Section 4.04.
Acquiring surveyed all the nominee shareholders except Nominee3. Nominee1,
Nominee4, and Nominee5 failed to respond. Further, although Nominee2
responded, its response was inaccurate on its face ($65/share) and so Nominee2
is considered also to have not responded. As a result, Acquiring has generally
satisfied the requirements to determine its bases in the shares surrendered by
Nominee1, Nominee2, Nominee4, and Nominee5 under Section 4.04. However,
with respect to Nominee1, Acquiring received survey information on the basis of
50 common shares it held and surrendered on behalf of Employee Plan1, and so
50 of the shares surrendered by Nominee1 will have a basis equal to the

- 21 -
reported basis. Because Nominee3 was not surveyed, Acquiring has not
satisfied the requirements for using the estimation procedures in this revenue
procedure and so cannot use these procedures to determine the bases of those
shares. However, Acquiring may establish its bases in the shares surrendered
by Nominee3 under such other method as agreed to by the Service. Note that,
although the bases of 50 shares surrendered by Nominee1 and all the shares
surrendered by Nominee3 are not determined under Section 4.04, all the trading
information collected with respect to Nominee1 and Nominee3 is included in the
modeling computations.

BASIS DETERMINATIONS UNDER SECTION 4.03

Even though Individual C, Individual E, Director A, and Private Placement
were reporting shareholders, Acquiring surveyed them, they failed to respond,
and Acquiring has knowledge of the issue date of shares issued to such
shareholders. Thus, the shares they surrendered are Section 4.03 Eligible
Shares. The bases in the Section 4.03 Eligible Shares are computed as follows
(rounding numbers other than “per share” numbers):

Surrendering
shareholder
Adjusted
closing price
on issue date
Number of
shares
surrendered
Allowable
basis
Common shares:
Individual B $ 910$90
$ 925$225 Individual C
$1225$300
Individual E $1250$600
Director A $1230$360
Private Placement $1250$600

Note
: In determining the basis of Individual C’s 50 shares, Acquiring must
take into account the cancellation of a certificate for 25 shares (issued to
Individual C on 1/1/Y1) on the same day that the certificate for 50 shares was
issued to Individual C. Individual C is treated as surrendering 25 shares with a
basis equal to the closing price on 1/1/Y1 and 25 shares with a basis equal to the
closing price on 1/1/Y2.

BASIS DETERMINATIONS UNDER SECTION 4.04 (FORM 13F DATA)

Acquiring’s bases in Section 4.04 Eligible Shares are computed as
follows:
Surrendering
shareholder
Filing
date
Shares
reported
Vol wtd
avg adj
closing
price
Modeled basis
(Initial estimated basis
adjusted each measuring
date for increases and
Deemed
basis in
surrendered
shares

- 22 -
for
period
decreases in reported
holdings)
Y1: 1
st

quarter
308Initial estimated basis:
30 shares reported
x $8 vol wtd avg closing
price per share = $240

Y1: 2
nd

quarter
4510Reported shares
increased (30 to 45):
15 shs @$10/sh = $150
Adjusted estimated basis
:
$240+$150 = $390
Y1: 3
rd

quarter
12011Reported shares
increased (45 to 120):
75 shs @$11/sh = $825
Adjusted estimated basis
:
$390+825=$1215
Y1: 4
th

quarter
16012Reported shares
increased (120 to 160):
40 shs @$12/sh = $480
Adjusted estimated basis
:
$1215+480=$1695
Y2: 1
st

quarter
20010Reported shares
increased (160 to 200):
40 shs @$10/sh = $400
Adjusted estimated basis:
$1695+400=$2095
Y2: 2
nd

quarter
15012Reported shares
decreased (200 to 150):
Average cost of shares:
$2095/200=$10.48/sh;
50shs @$10.48/sh=$524
Adjusted estimated basis
:
$2095-524=$1571
Y2: 3
rd

quarter
20014Reported shares
increased (150 to 200):
+50 shs @$14/sh = $700
Adjusted estimated basis
$1571+700=$2271

Nominee1
Y2: 4
th

quarter
20016No change in holdings.
$2271 aggregate adjusted estimated basis/ 200 shares =
$11.36 per share final estimated basis
250 shares surrendered x $11.36 per share final estimated basis =
$2840 deemed basis in surrendered shares
$2840

- 23 -

Y1: 1
st

quarter
No 13F
filed
8

Y1: 2
nd

quarter
25010Initial estimated basis:
250 shares reported
x $10 vol wtd avg closing
price per share = $2500
Y1: 3
rd

quarter
25011No change in holdings.
Y1: 4
th

quarter
20012Reported shares
decreased (250 to 200):
Average cost of shares:
$2500/250=$10;
50 shs @$10/sh = $500
Adjusted estimated basis:
$2500-500=$2000
Y2: 1
st

quarter
20010No change in holdings.
Y2: 2
nd

quarter
30012Reported shares
increased (200 to 300):
+100shs @$12/sh=$1200
Adjusted estimated basis:
$2000+1200=$3200
Y2: 3
rd

quarter
30014No change in holdings.
Nominee2
Y2: 4
th

quarter
15016Reported shares
decreased (300 to 150):
Average cost of shares:
$3200/300=$10.67;
150shs@$10.67/sh=$1601
Adjusted estimated basis:
$3200-1601=$1599
$1600 aggregate adjusted estimated basis /150 shares =
$10.67 per share final estimated basis:
175 shares surrendered x $10.66 per share final estimated basis =
$1867 deemed basis in surrendered shares
$1867
Y1: 1
st

quarter
No 13F
filed
8

Y1: 2
nd

quarter
No 13F
filed
10
Y1: 3
rd

quarter
7511Initial estimated basis:
75 shares reported
x $11 vol wtd avg closing
price per share = $825
Nominee3
Y1: 4
th
7512No change in holdings.

- 24 -
quarter
Y2: 1
st

quarter
No 13F
filed
10No change in holdings.
Y2: 2
nd

quarter
10012Reported shares
increased (75 to 100)
+25 shs @$12/sh = $300
Adjusted estimated basis:
$825+300=$1125
Y2: 3
rd

quarter
13514Reported shares
increased (100 to 135)
+35 shs @$14/sh = $490
Adjusted estimated basis:
$1125+490=1615
Y2: 4
th

quarter
15016Reported shares
increased (135 to 150):
+15 shs @$16/sh = $240
Adjusted estimated basis:
$1615+240=1855
$1855 aggregate adjusted estimated basis /150 shares =
$12.37 per share final estimated basis
100 shares surrendered x $12.37 per share final estimated basis =
$1237 deemed basis in surrendered shares
$1237
Y1: 1
st

quarter
508Initial estimated basis:
50 shares reported
x $8 vol wtd avg closing
price per share = $400
Y1: 2
nd

quarter
5010No change in holdings.
Y1: 3
rd

quarter
10011Reported shares
increased (50 to 100):
+50 shs @$11/sh = $550
Adjusted estimated basis:
$400+550=$950
Y1: 4
th

quarter
No 13F
filed
12No change in holdings.
Y2: 1
st

quarter
10010No change in holdings.
Y2: 2
nd

quarter
15012Reported shares
increased (100 to 150):
+50 shs @$12/sh = $600
Adjusted estimated basis:
$950+600=$1550
Nominee4
Y2: 3
rd

quarter
20014Reported shares
increased (150 to 200):
+50 shs @$14/sh = $700
Adjusted estimated basis:

- 25 -

Computation of Section 4.04 per share modeled basis (common shares)
:

Nominee
shareholder
Per share final
estimated basis
Surrendered shares Deemed basis in
surrendered shares
Nominee1 11.36250$2840
Nominee2 10.67175$1867
Nominee3 12.37100$1237
$1550+700=$2250
Y2: 4
th

quarter
No 13F
filed
16No change in holdings.
$2250 aggregate adjusted estimated basis/200shares =
$11.25 per share final estimated basis:
100 shares surrendered x $11.25 per share final estimated basis:=
$1125 deemed basis in surrendered shares
$1125
Y1: 1
st

quarter
No 13F
filed
$8
Y1: 2
nd

quarter
No 13F
filed
$10
Y1: 3
rd

quarter
No 13F
filed
$11
Y1: 4
th

quarter
50$12 Initial estimated basis:
50 shares reported
x $12 vol wtd avg closing
price per share = $600
Y2: 1
st

quarter
50$10No change in holdings.
Y2: 2
nd

quarter
No 13F
filed
$12No change in holdings.
Y2: 3
rd

quarter
200$14 Reported shares
increased (50 to 200):
+150 shs @ $14 = $2100
Adjusted estimated basis:
$600 + 2100=$2700
Nominee5

Y2: 4
th

quarter
250$16 Reported shares
increased (200 to 250):
+50 @ $16 = $800
Adjusted estimated
basis:
$2700 + 800 = $3500
$3500 aggregate adjusted estimated basis/250 shares =
$14 per share final estimated basis
125 shares surrendered x $14 per share final estimated basis=
$1750 deemed basis in surrendered shares
$1750

- 26 -
Nominee4 11.25100$1125
Nominee5 14.00125$1750
Total deemed basis in surrendered shares$8819
Total number of surrendered shares750
Section 4.04 per share modeled basis$11.76
Section 4.04 per share modeled basis x 75%
= Allowable basis for each Section 4.04 Eligible Share
$8.82

ALLOCATION OF ALLOWABLE BASIS

TO SECTION 4.04 ELIGIBLE SHARES

Surrendering
shareholder
Allowable
basis per
share
Surrendered
Section 4.04
Eligible
shares
Total
allowable
basis
Nominee1 $8.82200$1764
Nominee2 $8.82175$1544
Nominee3 $8.8200
Nominee4 $8.82100$882
Nominee5 $8.82125$1103

Notes:

Nominee1. As noted above, the basis of 50 of the 250 shares
surrendered by Nominee1 was reported by Employee Plan1 and so was not
determined under the Section 4.04 model.

Nominee3
. As noted above, Acquiring did not satisfy the requirements to
determine its basis in the shares surrendered by Nominee3 under this revenue
procedure. Thus, there is no basis allowable under the model; however,
Acquiring may establish its bases in those shares under such other method as
agreed to by the Service.

SUMMARY

BASIS DETERMINED UNDER REVENUE PROCEDURE

(SEC FORM 13F FILING DATA)

Surrendering
shareholder
Applicable
method
Allowable
basis
Shares
surrendered
Total allowable
basis under
revenue
procedure
Preferred shares (100 outstanding):
Officer Cannot be TBD under 20 $0

- 27 -
established
under this
revenue
procedure
procedures
as agreed to
by Service
Employee Plan1 Actual, as
determined
by Target’s
records
$5/share
($10 issue
price, less $5
§301(c)(2)
distribution)

30 $150
Employee Plan2 Actual, as
determined
by Target’s
records$36/share

50 $1800
Total basis in preferred shares $1950
Common shares (1000 outstanding):
Employee Plan1 As reported
in survey,
4.01
$12/share50 $600
Individual A As reported
in survey,
4.01
$13/share10 $130
Individual B 4.03$ 9/share10 $90
Individual C 4.03$9/share
$12/share
25
25 $525
Individual D Cannot be
established
under this
revenue
procedure
TBD under
procedures
as agreed to
by Service

50 $0
Individual E 4.03$12/share50 $600
Director A 4.03$12/share30 $360
Private Placement 4.03$12/share50 $600
Nominee1 4.04$8.82/share200 $1764
Nominee2 4.04$8.82/share175 $1544
Nominee3 Cannot be
established
under this
revenue
procedure
TBD under
procedures
as agreed to
by Service

100 $0
Nominee4 4.04$8.82/share100 $882
Nominee5 4.04$8.82/share125 $1103
Total basis in common shares $8,198
Total number of shares (preferred plus common) surrendered 1100
Total basis in all shares $10,148

- 28 -
EXAMPLE PART 2:

DETERMINATION OF BASIS USING

STOCK REGISTRY, BOOKS AND RECORDS,
AND SPR DATA

Assume that the facts are the same as in Example 1, except that Acquiring uses
data from Target’s SPRs instead of the SEC Form 13F filings. Further, Acquiring
obtains 100 of the 109 SPRs that were published during the data collection period and
that were available from the DTC as of the date of the transaction (the missing SPRs
are not a material omission); the first SPR obtained by Acquiring that shows Target
stock ownership was published in Week 4; the only other SPRs that show movement in
Target holdings were published in Weeks 21, 34, 48, 60, 72, 80, and 104. (Note that, to
simplify the illustration, the SPR dates correspond to the SEC Form 13F filing dates in
the Part 1 of this example; thus, the numbers of shares reported (and their volume
weighted average adjusted closing price) on the first SEC Form 13F filing correspond to
those on the Week 4 SPR, the second SEC Form 13F filing numbers (and prices) to
those in SPR Week 21, and so forth; where no SEC Form 13F was filed, the shares
reported are zero; the number of shares surrendered are unchanged.) The
determination of the Section 4.04 modeled basis using SPR data is done as follows:

- 29 -

Surrendering
shareholder
Date of
SPR
Shares
listed
on
SPR
Vol
wtd
avg
closing
price
for
period*
Modeled basis
(Initial estimated basis
adjusted each
measuring date for
increases and
decreases in reported
holdings)
Deemed
basis in
surrendered
shares
Week 4
308Initial estimated basis:
30 shares reported
x $8 vol wtd avg closing
price per share = $240

Week21
4510Reported shares
increased (30 to 45):
15 shs @$10/sh = $150
Adjusted estimated
basis:
$240+$150 = $390
Week34
12011Reported shares
increased (45 to 120):
75 shs @$11/sh = $825
Adjusted estimated
basis:
$390+825=$1215
Week48
16012Reported shares
increased (120 to 160):
40 shs @$12/sh = $480
Adjusted estimated
basis:
$1215+480=$1695

Week60
20010Reported shares
increased (160 to 200):
40 shs @$10/sh = $400
Adjusted estimated
basis:
$1695+400=$2095

Nominee1
Week72
15012Reported shares
decreased (200 to 150):
Average cost of shares:
$2095/200=$10.48/sh;
50shs
@$10.48/sh=$524
Adjusted estimated
basis:

- 30 -
$2095-524=$1571
Week80
20014Reported shares
increased (150 to 200):
+50 shs @$14/sh =
$700
Adjusted estimated
basis
$1571+700=$2271

Week104
20016No change in holdings.
$2271 aggregate adjusted estimated basis/ 200 shares =
$11.36 per share final estimated basis
250 shares surrendered x $11.36 per share final estimated basis =
$2840 deemed basis in surrendered shares
$2840
Week4
Not
listed
on
SPR
8

Week21
25010Initial estimated basis:
250 shares reported
x $10 vol wtd avg
closing price per share =
$2500
Week34
25011No change in holdings.
Week48
20012Reported shares
decreased (250 to 200).
Average cost of shares:
$2500/250=$10;
50 shs @$10/sh = $500
Adjusted estimated
basis:
$2500-500=$2000
Week60
20010No change in holdings.
Week72
30012Reported shares
increased (200 to 300).
+100shs
@$12/sh=$1200
Adjusted estimated
basis:
$2000+1200=$3200
Week80
30014No change in holdings.
Nominee2
Week104
15016Reported shares
decreased (300 to 150).
Average cost of shares:
$3200/300=$10.67;
150shs@$10.67/sh=$1600
Adjusted estimated
$1867

- 31 -
basis:
$3200-1601=$1600
$1600 aggregate adjusted estimated basis /150 shares =
$10.67 per share final estimated basis:
175 shares surrendered x $10.67 per share final estimated basis =
$1866 deemed basis in surrendered shares
Week4
Not
listed
on
SPR
8

Week21
Not
listed
on
SPR
10
Week34
7511This is not Nominee3’s
first measuring date
because Nominee3
does not appear on
Target SPRs
continuously to last
measuring date
Week48
7512
Week60
Not
listed
on
SPR
10
Week72
10012Initial estimated basis:
100 shares reported
x $12 vol wtd avg
closing price per share =
$1200
Week80
13514Reported shares
increased (100 to 135)
+35 shs @$14/sh =
$490

Adjusted estimated
basis:
$1200+490=1690
Nominee3
Week104
15016Reported shares
increased (135 to 150):
+15 shs @$16/sh =
$240
Adjusted estimated
basis:
$1690+240=1930
$1287
$1930 aggregate adjusted estimated basis /150 shares =
$12.87 per share final estimated basis
100 shares surrendered x $12.87 per share final estimated basis =
$1287 deemed basis in surrendered shares

- 32 -

Week4
508
Week21
5010
Week34
10011
Week48
Not
listed
on
SPR
12
Week60
10010
Week72
15012
Week80
20014
Nominee4
Week10
4
Not
listed
on
SPR
16No initial estimated
basis can be determined
(Nominee4 holds no
shares on the SPR
immediately preceding
the transaction date)
$0 aggregate adjusted estimated basis/0 shares =
$0 per share final estimated basis
100 shares surrendered x $0 per share final estimated basis=
$0 deemed basis in surrendered shares
$0
Week4 Not
listed
on
SPR
$8
Week2
1
Not
listed
on
SPR
$10
Week3
4
Not
listed
on
SPR
$11
Week4
8
50$12
Week6
0
50$10
Week7
2
Not
listed
on
SPR
$12
Nominee5

Week8
0
200$14 Initial estimated
basis:
200 shares reported
x $14 vol wtd avg

- 33 -

Computation of Section 4.04 per share modeled basis (common shares)
:

Nominee
shareholder
Per share final
estimated basis
Surrendered shares Deemed basis in
surrendered shares
Nominee1 11.36250$2840
Nominee2 10.67175$1867
Nominee3 12.87100$1287
Nominee4 0100$0
Nominee5 14.40125$1800
Total deemed basis in surrendered shares$7794
Total number of surrendered shares750
Section 4.04 per share modeled basis$10.39
Section 4.04 per share modeled basis
x 92% (100/109, the SPR ratio)
= Allowable basis for each Section 4.04 Eligible Share
$9.56

ALLOCATION OF ALLOWABLE BASIS TO SECTION 4.04 ELIGIBLE
SHARES

Surrendering
shareholder
Allowable
basis per
share
Surrendered
Section 4.04
Eligible
shares
Aggregate
allowable
basis
Nominee1 $9.56200$1912
Nominee2 $9.56175$1673
Nominee3 $9.560$0
Nominee4 $9.56100$956
Nominee5 $9.56125$1195

Notes
:
closing price per share =
$2800
Week10
4
250$16 Reported shares
increased (200 to 250):

+50 @ $16 = $800
Adjusted estimated
basis:
$2800 + 800 = $3600
$3600 aggregate adjusted estimated basis/250 shares =
$14.40 per share final estimated basis
125 shares surrendered x $14.40 per share final estimated basis =
$1800 deemed basis in surrendered shares
$1800

- 34 -

Nominee1. As noted above, the basis of 50 of the 250 shares
surrendered by Nominee1 was reported by Employee Plan1 and so was not
determined under the Section 4.04 model.

Nominee3
. As noted above, Acquiring did not satisfy the requirements to
determine its basis in the shares surrendered by Nominee3 under this revenue
procedure. Thus, there is no basis allowable under the model; however,
Acquiring may establish its bases in those shares under such other method as
agreed to by the Service.

SUMMARY

BASIS DETERMINED UNDER REVENUE PROCEDURE

(SPR DATA)

Surrendering
shareholder
Applicable
method
Allowable
basis
Shares
surrendered
Total allowable
basis under
revenue
procedure
Preferred shares (100 outstanding):
Officer Cannot be
established
under this
revenue
procedure
TBD under
procedures
as agreed to
by Service
20 $0
Employee Plan1 Actual, as
determined
by Target’s
records
$5/share
($10 issue
price reduced
by $5
§301(c)(2)
distribution)

30 $150
Employee Plan2 Actual, as
determined
by Target’s
records$36/share

50 $1800
Total basis in preferred shares $1950
Common shares (1000 outstanding):
Employee Plan1 As reported
in survey,
4.01
$12/share50 $600
Individual A As reported
in survey,
4.01
$13/share10 $130
Individual B 4.03$9/share10 $90
Individual C 4.03$9/share
$12/share
25
25 $525

- 35 -
Individual D Cannot be
established
under this
revenue
procedure
TBD under
procedures
as agreed to
by Service

50 $0
Individual E 4.03$12/share50 $600
Director A 4.03$12/share30 $360
Private Placement 4.03$12/share50 $600
Nominee1 4.04$9.56/share200 $1912
Nominee2 4.04$9.56/share175 $1673
Nominee3 Cannot be
established
under this
revenue
procedure
TBD under
procedures
as agreed to
by Service

100 $0
Nominee4 4.04$9.56/share100 $956
Nominee5 4.04$9.56/share125 $1195
Total basis in common shares $8,641
Total number of shares (preferred plus common) surrendered 1100
Total basis in all shares $10,591