One Step Forward, One Step Backward : Recent Changes in the Nonrecognition Treatment of Preferred Stock and Warrants

Recent developments in the reorganization area have altered the landscape as to the scope of the nonrecognition provisions with regard to differing equity instruments. The Treasury Department has recently taken a step forward by promulgating regulations which reverse the long standing position of the Internal Revenue Service ("Service") reflected in Regs. 1.354-1(e), that stock warrants are not included in the term "stock or securities" for purposes of 354. Unfortunately, Congress has recently taken a considerably larger step backward by enacting 1014 of the Taxpayer Relief Act of 1997 (P.L. 105-34), which amends 351, 354, 355, 356, and 1036 to treat certain preferred stock as "boot."