[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2004 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
26
Part 1 (Sec. Sec. 1.301 to 1.400)
Revised as of April 1, 2004
Internal Revenue
________________________
Containing a codification of documents of general
applicability and future effect
As of April 1, 2004
With Ancillaries
Published by
Office of the Federal Register
National Archives and Records
Administration
A Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2004
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[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 26:
Chapter I--Internal Revenue Service, Department of
the Treasury (Continued) 3
Finding Aids:
Table of CFR Titles and Chapters........................ 533
Alphabetical List of Agencies Appearing in the CFR...... 551
Table of OMB Control Numbers............................ 561
List of CFR Sections Affected........................... 579
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 26 CFR 1.301-1
refers to title 26, part
1, section 301-1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
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name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
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LEGAL STATUS
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OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
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OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
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of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate
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Sections Affected'' is published at the end of each CFR volume.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
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[[Page vii]]
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Raymond A. Mosley,
Director,
Office of the Federal Register.
April 1, 2004.
[[Page ix]]
THIS TITLE
Title 26--Internal Revenue is composed of nineteen volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
2004. The first twelve volumes comprise part 1 (Subchapter A--Income
Tax) and are arranged by sections as follows: Sec. Sec. 1.0-1-1.60;
Sec. Sec. 1.61-1.169; Sec. Sec. 1.170-1.300; Sec. Sec. 1.301-1.400;
Sec. Sec. 1.401-1.440; Sec. Sec. 1.441-1.500; Sec. Sec. 1.501-1.640;
Sec. Sec. 1.641-1.850; Sec. Sec. 1.851-1.907; Sec. Sec. 1.908-1.1000;
Sec. Sec. 1.1001-1.1400 and Sec. 1.1401 to end. The thirteenth volume
containing parts 2-29, includes the remainder of subchapter A and all of
Subchapter B--Estate and Gift Taxes. The last six volumes contain parts
30-39 (Subchapter C--Employment Taxes and Collection of Income Tax at
Source); parts 40-49; parts 50-299 (Subchapter D--Miscellaneous Excise
Taxes); parts 300-499 (Subchapter F--Procedure and Administration);
parts 500-599 (Subchapter G--Regulations under Tax Conventions); and
part 600 to end (Subchapter H--Internal Revenue Practice).
The OMB control numbers for Title 26 appear in Sec. 602.101 of this
chapter. For the convenience of the user, Sec. 602.101 appears in the
Finding Aids section of the volumes containing parts 1 to 599.
For this volume, Robert J. Sheehan was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Frances D. McDonald, assisted by Alomha S. Morris.
[[Page x]]
[[Page 1]]
TITLE 26--INTERNAL REVENUE
(This book contains part 1, Sec. Sec. 1.301 to 1.400)
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Part
chapter i--Internal Revenue Service, Department of the
Treasury (Continued)...................................... 1
[[Page 3]]
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
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Editorial Note: IRS published a document at 45 FR 6088, Jan. 25, 1980,
deleting statutory sections from their regulations. In chapter I cross
references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy, the
cross reference has been deleted. For further explanation, see 45 FR
20795, March 31, 1980.
SUBCHAPTER A--INCOME TAX (CONTINUED)
Part Page
1 Income taxes................................ 5
Supplementary Publications: Internal Revenue Service Looseleaf
Regulations System.
Additional supplementary publications are issued covering Alcohol and
Tobacco Tax Regulations, and Regulations Under Tax Conventions.
[[Page 5]]
SUBCHAPTER A_INCOME TAX (CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Normal Taxes and Surtaxes
CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
DISTRIBUTIONS BY CORPORATIONS
Effects on Recipients
Sec.
1.301-1 Rules applicable with respect to distributions of money and
other property.
1.302-1 General.
1.302-2 Redemptions not taxable as dividends.
1.302-3 Substantially disproportionate redemption.
1.302-4 Termination of shareholder's interest.
1.303-1 General.
1.303-2 Requirements.
1.303-3 Application of other sections.
1.304-1 General.
1.304-2 Acquisition by related corporation (other than subsidiary).
1.304-3 Acquisition by a subsidiary.
1.304-4T Special rule for use of a related corporation to acquire for
property the stock of another commonly owned corporation
(temporary).
1.304-5 Control.
1.305-1 Stock dividends.
1.305-2 Distributions in lieu of money.
1.305-3 Disproportionate distributions.
1.305-4 Distributions of common and preferred stock.
1.305-5 Distributions on preferred stock.
1.305-6 Distributions of convertible preferred.
1.305-7 Certain transactions treated as distributions.
1.305-8 Effective dates.
1.306-1 General
1.306-2 Exception
1.306-3 Section 306 stock defined.
1.307-1 General.
1.307-2 Exception.
effects on corporation
1.312-1 Adjustment to earnings and profits reflecting distributions by
corporations.
1.312-2 Distribution of inventory assets.
1.312-3 Liabilities.
1.312-4 Examples of adjustments provided in section 312(c).
1.312-5 Special rule for partial liquidations and certain redemptions.
1.312-6 Earnings and profits.
1.312-7 Effect on earnings and profits of gain or loss realized after
February 28, 1913.
1.312-8 Effect on earnings and profits of receipt of tax-free
distributions requiring adjustment or allocation of basis of
stock.
1.312-9 Adjustments to earnings and profits reflecting increase in value
accrued before March 1, 1913.
1.312-10 Allocation of earnings in certain corporate separations.
1.312-11 Effect on earnings and profits of certain other tax-free
exchanges, tax-free distributions, and tax-free transfers from
one corporation to another.
1.312-12 Distributions of proceeds of loans guaranteed by the United
States.
1.312-15 Effect of depreciation on earnings and profits.
definitions; constructive ownership of stock
1.316-1 Dividends.
1.316-2 Sources of distribution in general.
1.317-1 Property defined.
1.318-1 Constructive ownership of stock; introduction.
1.318-2 Application of general rules.
1.318-3 Estates, trusts, and options.
1.318-4 Constructive ownership as actual ownership; exceptions.
Corporate Liquidations
effects on recipients
1.331-1 Corporate liquidations.
1.332-1 Distributions in liquidation of subsidiary corporation; general.
1.332-2 Requirements for nonrecognition of gain or loss.
1.332-3 Liquidations completed within one taxable year.
1.332-4 Liquidations covering more than one taxable year.
1.332-5 Distributions in liquidation as affecting minority interests.
1.332-6 Records to be kept and information to be filed with return.
1.332-7 Indebtedness of subsidiary to parent.
1.334-1 Basis of property received in liquidations.
effects on corporation
1.337(d)-1 Transitional loss limitation rule.
1.337(d)-1T [Reserved]
1.337(d)-2 Loss limitation window period.
1.337(d)-2T Loss limitation window period (temporary).
1.337(d)-4 Taxable to tax-exempt.
1.337(d)-5 Old transitional rules imposing tax on property owned by a C
corporation that becomes property of a RIC or REIT .
1.337(d)-6 New transitional rules imposing tax on property owned by a C
corporation that becomes property of a RIC or REIT.
[[Page 6]]
1.337(d)-7 Tax on property owned by a C corporation that becomes
property of a RIC or REIT.
1.338-0 Outline of topics.
1.338-1 General principles; status of old target and new target.
1.338-2 Nomenclature and definitions; mechanics of the section 338
election.
1.338-3 Qualification for the section 338 election.
1.338-4 Aggregate deemed sale price; various aspects of taxation of the
deemed asset sale.
1.338-5 Adjusted grossed-up basis.
1.338-6 Allocation of ADSP and AGUB among target assets.
1.338-7 Allocation of redetermined ADSP and AGUB among target assets.
1.338-8 Asset and stock consistency.
1.338-9 International aspects of section 338.
1.338-10 Filing of returns.
1.338(h)(10)-1 Deemed asset sale and liquidation.
1.338(h)(10)-1T Deemed asset sale and liquidation (temporary).
1.338(i)(1)-1 Effective dates.
Collapsible Corporations; Foreign Personal Holding Companies
1.341-1 Collapsible corporations; in general.
1.341-2 Definitions.
1.341-3 Presumptions.
1.341-4 Limitations on application of section.
1.341-5 Application of section.
1.341-6 Exceptions to application of section.
1.341-7 Certain sales of stock of consenting corporations.
1.342-1 General.
definition
1.346-1 Partial liquidation.
1.346-2 Treatment of certain redemptions.
1.346-3 Effect of certain sales.
Corporate Organizations and Reorganizations
corporate organizations
1.351-1 Transfer to corporation controlled by transferor.
1.351-2 Receipt of property.
1.351-3 Records to be kept and information to be filed.
effects on shareholders and security holders
1.354-1 Exchanges of stock and securities in certain reorganizations.
1.355-0 Table of contents.
1.355-1 Distribution of stock and securities of controlled corporation.
1.355-2 Limitations.
1.355-3 Active conduct of a trade or business.
1.355-4 Non pro rata distributions, etc.
1.355-5 Records to be kept and information to be filed.
1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
1.355-7T Recognition of gain on certain distributions of stock or
securities in connection with an acquisition.
1.356-1 Receipt of additional consideration in connection with an
exchange.
1.356-2 Receipt of additional consideration not in connection with an
exchange.
1.356-3 Rules for treatment of securities as ``other property''.
1.356-4 Exchanges for section 306 stock.
1.356-5 Transactions involving gift or compensation.
1.356-6 Rules for treatment of nonqualified preferred stock as other
property.
1.356-7 Rules for treatment of nonqualified preferred stock and other
preferred stock received in certain transactions.
1.357-1 Assumption of liability.
1.357-2 Liabilities in excess of basis.
1.358-1 Basis to distributees.
1.358-2 Allocation of basis among nonrecognition property.
1.358-3 Treatment of assumption of liabilities.
1.358-4 Exceptions.
1.358-5 [Reserved]
1.358-6 Stock basis in certain triangular reorganizations.
effects on corporation
1.361-1 Nonrecognition of gain or loss to corporations.
1.362-1 Basis to corporations.
1.362-2 Certain contributions to capital.
1.367(a)-1T Transfers to foreign corporations subject to section 367(a):
In general (temporary).
1.367(a)-2T Exception for transfers of property for use in the active
conduct of a trade or business (temporary).
1.367(a)-3 Treatment of transfers of stock or securities to foreign
corporations.
1.367(a)-4T Special rules applicable to specified transfers of property
(temporary).
1.367(a)-5T Property subject to section 367(a)(1) regardless of use in
trade or business (temporary).
1.367(a)-6T Transfer of foreign branch with previously deducted losses
(temporary).
1.367(a)-8 Gain recognition agreement requirements.
1.367(b)-0 Table of contents.
1.367(b)-1 Other transfers.
1.367(b)-2 Definitions and special rules.
1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
1.367(b)-3T Repatriation of foreign corporate assets in certain
nonrecognition transactions (temporary).
[[Page 7]]
1.367(b)-4 Acquisition of foreign corporate stock or assets by a foreign
corporation in certain nonrecognition transactions.
1.367(b)-5 Distributions of stock described in section 355.
1.367(b)-6 Effective dates and coordination rules.
1.367(b)-12 Subsequent treatment of amounts attributed or included in
income.
1.367(d)-1T Transfers of intangible property to foreign corporations
(temporary).
1.367(e)-0 Outline of Sec. Sec. 1.367(e)-1 and 1.367(e)-2.
1.367(e)-1 Distributions described in section 367(e)(1).
1.367(e)-2 Distributions described in section 367(e)(2).
special rule; definitions
1.368-1 Purpose and scope of exception of reorganization exchanges.
1.368-2 Definition of terms.
1.368-3 Records to be kept and information to be filed with returns.
Insolvency Reorganizations
1.371-1 Exchanges by corporations.
1.371-2 Exchanges by security holders.
1.372-1 Corporations.
1.374-1 Exchanges by insolvent railroad corporations.
1.374-2 Basis of property acquired after December 31, 1938, by railroad
corporation in a receivership or railroad reorganization
proceeding.
1.374-3 Records to be kept and information to be filed.
1.374-4 Property acquired by electric railway corporation in corporate
reorganization proceeding.
Carryovers
1.381(a)-1 General rule relating to carryovers in certain corporate
acquisitions.
1.381(b)-1 Operating rules applicable to carryovers in certain corporate
acquisitions.
1.381(c)(1)-1 Net operating loss carryovers in certain corporate
acquisitions.
1.381(c)(1)-2 Net operating loss carryovers; two or more dates of
distribution or transfer in the taxable year.
1.381(c)(2)-1 Earnings and profits.
1.381(c)(3)-1 Capital loss carryovers.
1.381(c)(4)-1 Method of accounting.
1.381(c)(5)-1 Inventories.
1.381(c)(6)-1 Depreciation method.
1.381(c)(8)-1 Installment method.
1.381(c)(9)-1 Amortization of bond discount or premium.
1.381(c)(10)-1 Deferred exploration and development expenditures.
1.381(c)(11)-1 Contributions to pension plan, employees' annuity plans,
and stock bonus and profit-sharing plans.
1.381(c)(12)-1 Recovery of bad debts, prior taxes, or delinquency
amounts.
1.381(c)(13)-1 Involuntary conversions.
1.381(c)(14)-1 Dividend carryover to personal holding company.
1.381(c)(15)-1 Indebtedness of certain personal holding companies.
1.381(c)(16)-1 Obligations of distributor or transferor corporation.
1.381(c)(17)-1 Deficiency dividend of personal holding company.
1.381(c)(18)-1 Depletion on extraction of ores or minerals from the
waste or residue of prior mining.
1.381(c)(19)-1 Charitable contribution carryovers in certain
acquisitions.
1.381(c)(21)-1 Pre-1954 adjustments resulting from change in method of
accounting.
1.381(c)(22)-1 Successor life insurance company.
1.381(c)(23)-1 Investment credit carryovers in certain corporate
acquisitions.
1.381(c)(24)-1 Work incentive program credit carryovers in certain
corporate acquisitions.
1.381(c)(25)-1 Deficiency dividend of a qualified investment entity.
1.381(c)(26)-1 Credit for employment of certain new employees.
1.381(d)-1 Operations loss carryovers of life insurance companies.
1.382-1 Table of contents.
1.382-1T [Reserved]
1.382-2 General rules for ownership change.
1.382-2T Definition of ownership change under section 382, as amended by
the Tax Reform Act of 1986 (temporary).
1.382-3 Definitions and rules relating to a 5-percent shareholder.
1.382-4 Constructive ownership of stock.
1.382-5 Section 382 limitation. [Reserved]
1.382-6 Allocation of income and loss to periods before and after the
change date for purposes of section 382.
1.382-7 Built-in gains and loses. [Reserved]
1.382-8 Controlled groups. [Reserved]
1.382-9 Special rules under section 382 for corporations under the
jurisdiction of a court in a title 11 or similar case.
1.382-10 [Reserved]
1.382-10T Special rules of determining time and maner of acquisition of
an interest in a loss corporation (temporary).
1.382-11 Effective dates. [Reserved]
1.383-0 Effective date.
1.383-1 Special limitations on certain capital losses and excess
credits.
1.383-2 Limitations on certain capital losses and excess credits in
computing alternative minimum tax. [Reserved]
Authority: 26 U.S.C. 7805, unless otherwise noted.
Section 1.301-1 also issued under 26 U.S.C. 357(d)(3).
[[Page 8]]
Section 1.301-1T also issued under 26 U.S.C. 357(d)(3).
Section 1.304-5 also issued under 26 U.S.C. 304.
Section 1.305-3 also issued under 26 U.S.C. 305.
Section 1.305-5 also issued under 26 U.S.C. 305.
Section 1.305-7 also issued under 26 U.S.C. 305.
Section 1.337(d)-1 also issued under 26 U.S.C. 337(d).
Section 1.337(d)-2 also issued under 26 U.S.C. 337(d).
Section 1.337(d)-2T also issued under 26 U.S.C. 337(d).
Section 1.337(d)-4 also issued under 26 U.S.C. 337.
Section 1.337(d)-5 also issued under 26 U.S.C. 337.
Section 1.337(d)-6 also issued under 26 U.S.C. 337.
Section 1.337(d)-7 also issued under 26 U.S.C. 337.
Section 1.338-1 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-2 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-3 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-4 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-5 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-6 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-7 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-8 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-9 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338-10 also issued under 26 U.S.C. 337(d), 338, and 1502.
Section 1.338(h)(10)-1 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.338(h)(10)-1T also issued under 26 U.S.C. 337(d), 338 and
1502.
Section 1.338(i)-1 also issued under 26 U.S.C. 337(d), 338, and
1502.
Section 1.351-1 also issued under 26 U.S.C. 351.
Section 1.351-2 also issued under 26 U.S.C. 351(g)(4).
Section 1.354-1 also issued under 26 U.S.C. 351(g)(4).
Section 1.355-1 also issued under 26 U.S.C. 351(g)(4).
Section 1.355-6 also issued under 26 U.S.C. 355(d)(9).
Section 1.356-6 also issued under 26 U.S.C. 351(g)(4).
Section 1.355-7T also issued under 26 U.S.C. 355(e)(5).
Section 1.356-7 also issued under 26 U.S.C. 351(g)(4).
Section 1.367(a)-3 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(a)-8 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-1 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-2 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-3 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-3T also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-4 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-7 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(b)-8 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-9 also issued under 26 U.S.C. 367(b).
Section 1.367(b)-12 also issued under 26 U.S.C. 367(a) and (b).
Section 1.367(e)-1 also issued under 26 U.S.C. 367(e)(1).
Section 1.367(e)-2 also issued under 26 U.S.C. 367(e)(2).
Section 1.382-2 also issued under 26 U.S.C. 382(k)(1), (l)(3), (m),
and 26 U.S.C. 383.
Section 1.382-2T also issued under 26 U.S.C. 382(g)(4)(C), (i),
(k)(1) and (6), (l)(3), (m), and 26 U.S.C. 383.
Section 1.382-3 also issued under 26 U.S.C. 382(m).
Section 1.382-4 also issued under 26 U.S.C. 382(l)(3) and 382(m).
Section 1.382-5 also issued under 26 U.S.C. 382(m).
Section 1.382-5T also issued under 26 U.S.C. 382(m).
Section 1.382-6 also issued under 26 U.S.C. 382(b)(3)(A), 26
U.S.C.(d)(1), 26 U.S.C. 382(m), and 26 U.S.C.383(d).
Section 1.382-8 also issued under 26 U.S.C. 382(m).
Section 1.382-8T also issued under 26 U.S.C. 382(m).
Section 1.382-9 also issued under 26 U.S.C. 382(l)(3) and (m).
Section 1.382-10T is also issued under 26 U.S.C. 382(m).
Section 1.383-1 also issued under 26 U.S.C. 383.
Section 1.383-2 also issued under 26 U.S.C. 383.
Source: T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31,
1960, unless otherwise noted.
[[Page 9]]
CORPORATE DISTRIBUTIONS AND ADJUSTMENTS
DISTRIBUTIONS BY CORPORATIONS
Effects on Recipients
Sec. 1.301-1 Rules applicable with respect to distributions of money
and other property.
(a) General. Section 301 provides the general rule for treatment of
distributions on or after June 22, 1954, of property by a corporation to
a shareholder with respect to its stock. The term property is defined in
section 317(a). Such distributions, except as otherwise provided in this
chapter, shall be treated as provided in section 301(c). Under section
301(c), distributions may be included in gross income, applied against
and reduce the adjusted basis of the stock, treated as gain from the
sale or exchange of property, or (in the case of certain distributions
out of increase in value accrued before March 1, 1913) may be exempt
from tax. The amount of the distributions to which section 301 applies
is determined in accordance with the provisions of section 301(b). The
basis of property received in a distribution to which section 301
applies is determined in accordance with the provisions of section
301(d). Accordingly, except as otherwise provided in this chapter, a
distribution on or after June 22, 1954, of property by a corporation to
a shareholder with respect to its stock shall be included in gross
income to the extent the amount distributed is considered a dividend
under section 316. For examples of distributions treated otherwise, see
sections 116, 301(c)(2), 301(c)(3)(B), 301(e), 302(b), 303, and 305. See
also part II (relating to distributions in partial or complete
liquidation), part III (relating to corporate organizations and
reorganizations), and part IV (relating to insolvency reorganizations),
subchapter C, chapter 1 of the Code.
(b) Time of inclusion in gross income and of determination of fair
market value. A distribution made by a corporation to its shareholders
shall be included in the gross income of the distributees when the cash
or other property is unqualifiedly made subject to their demands.
However, if such distribution is a distribution other than in cash, the
fair market value of the property shall be determined as of the date of
distribution without regard to whether such date is the same as that on
which the distribution is includible in gross income. For example, if a
corporation distributes a taxable dividend in property (the adjusted
basis of which exceeds its fair market value on December 31, 1955) on
December 31, 1955, which is received by, or unqualifiedly made subject
to the demand of, its shareholders on January 2, 1956, the amount to be
included in the gross income of the shareholders will be the fair market
value of such property on December 31, 1955, although such amount will
not be includible in the gross income of the shareholders until January
2, 1956.
(c) Application of section to shareholders. Section 301 is not
applicable to an amount paid by a corporation to a shareholder unless
the amount is paid to the shareholder in his capacity as such.
(d) Distributions to corporate shareholders. (1) If the shareholder
is a corporation, the amount of any distribution to be taken into
account under section 301(c) shall be:
(i) The amount of money distributed,
(ii) An amount equal to the fair market value of any property
distributed which consists of any obligations of the distributing
corporation, stock of the distributing corporation treated as property
under section 305(b), or rights to acquire such stock treated as
property under section 305(b), plus
(iii) In the case of a distribution not described in subdivision
(iv) of this subparagraph, an amount equal to (a) the fair market value
of any other property distributed or, if lesser, (b) the adjusted basis
of such other property in the hands of the distributing corporation
(determined immediately before the distribution and increased for any
gain recognized to the distributing corporation under section 311 (b),
(c), or (d), or under section 341(f), 617(d), 1245(a), 1250(a), 1251(c),
1252(a), or 1254(a)), or
(iv) In the case of a distribution made after November 8, 1971, to a
shareholder which is a foreign corporation, an amount equal to the fair
market value of any other property distributed, but only if the
distribution received by
[[Page 10]]
such shareholder is not effectively connected for the taxable year with
the conduct of a trade or business in the United States by such
shareholder.
(2) In the case of a distribution the amount of which is determined
by reference to the adjusted basis described in subparagraph (1)(iii)(b)
of this paragraph:
(i) That portion of the distribution which is a dividend under
section 301(c)(1) may not exceed such adjusted basis, or
(ii) If the distribution is not out of earnings and profits, the
amount of the reduction in basis of the shareholder's stock, and the
amount of any gain resulting from such distribution, are to be
determined by reference to such adjusted basis of the property which is
distributed.
(3) Notwithstanding paragraph (d)(1)(iii), if a distribution of
property described in such paragraph is made after December 31, 1962, by
a foreign corporation to a shareholder which is a corporation, the
amount of the distribution to be taken into account under section 301(c)
shall be determined under section 301(b)(1)(C) and paragraph (n) of this
section.
(e) Adjusted basis. In determining the adjusted basis of property
distributed in the hands of the distributing corporation immediately
before the distribution for purposes of section 301(b)(1)(B)(ii),
(b)(1)(C)(i), and (d)(2)(B), the basis to be used shall be the basis for
determining gain upon a sale or exchange.
(f) Examples. The application of this section (except paragraph (n))
may be illustrated by the following examples:
Example (1). On January 1, 1955, A, an individual owned all of the
stock of Corporation M with an adjusted basis of $2,000. During 1955, A
received distributions from Corporation M totaling $30,000, consisting
of $10,000 in cash and listed securities having a basis in the hands of
Corporation M and a fair market value on the date distributed of
$20,000. Corporation M's taxable year is the calendar year. As of
December 31, 1954, Corporation M had earnings and profits accumulated
after February 28, 1913, in the amount of $26,000, and it had no
earnings and profits and no deficit for 1955. Of the $30,000 received by
A, $26,000 will be treated as an ordinary dividend; the remaining $4,000
will be applied against the adjusted basis of his stock; the $2,000 in
excess of the adjusted basis of his stock will either be treated as gain
from the sale or exchange of property (under section 301(c)(3)(A)) or,
if out of increase in value accrued before March 1, 1913, will (under
section 301(c)(3)(B)) be exempt from tax. If A subsequently sells his
stock in Corporation M, the basis for determining gain or loss on the
sale will be zero.
Example (2). The facts are the same as in Example 1 with the
exceptions that the shareholder of Corporation M is Corporation W and
that the securities which were distributed had an adjusted basis to
Corporation M of $15,000. The distribution received by Corporation W
totals $25,000 consisting of $10,000 in cash and securities with an
adjusted basis of $15,000. The total $25,000 will be treated as a
dividend to Corporation W since the earnings and profits of Corporation
M ($26,000) are in excess of the amount of the distribution.
Example (3). Corporation X owns timber land which it acquired prior
to March 1, 1913, at a cost of $50,000 with $5,000 allocated as the
separate cost of the land. On March 1, 1913, this property had a fair
market value of $150,000 of which $135,000 was attributable to the
timber and $15,000 to the land. All of the timber was cut prior to 1955
and the full appreciation in the value thereof, $90,000 ($135,000-
$45,000), realized through depletion allowances based on March 1, 1913,
value. None of this surplus from realized appreciation had been
distributed. In 1955, Corporation X sold the land for $20,000 thereby
realizing a gain of $15,000. Of this gain, $10,000 is due to realized
appreciation in value which accrued before March 1, 1913 ($15,000-
$5,000). Of the gain of $15,000, $5,000 is taxable. Therefore, at
December 31, 1955, Corporation X had a surplus from realized
appreciation in the amount of $100,000. It had no accumulated earnings
and profits and no deficit at January 1, 1955. The net earnings for 1955
(including the $5,000 gain on the sale of the land) were $20,000. During
1955, Corporation X distributed $75,000 to its stockholders. Of this
amount, $20,000 will be treated as a dividend. The remaining $55,000,
which is a distribution of realized appreciation, will be applied
against and reduce the adjusted basis of the shareholders' stock. If any
part of the $55,000 is in excess of the adjusted basis of a
shareholder's stock, such part will be exempt from tax.
(h) Basis. The basis of property received in the distribution to
which section 301 applies shall be--
(1) If the shareholder is not a corporation, the fair market value
of such property;
(2) If the shareholder is a corporation--
[[Page 11]]
(i) In the case of a distribution of the obligations of the
distributing corporation or of the stock of such corporation or rights
to acquire such stock (if such stock or rights are treated as property
under section 305(b)), the fair market value of such obligations, stock,
or rights;
(ii) In the case of the distribution of any other property, except
as provided in subdivision (iii) (relating to certain distributions by a
foreign corporation) or subdivision (iv) (relating to certain
distributions to foreign corporate distributees) of this subparagraph,
whichever of the following is the lesser--
(a) The fair market value of such property; or
(b) The adjusted basis (in the hands of the distributing corporation
immediately before the distribution) of such property increased in the
amount of gain to the distributing corporation which is recognized under
section 311(b) (relating to distributions of LIFO inventory), section
311(c) (relating to distributions of property subject to liabilities in
excess of basis), section 311(d) (relating to appreciated proterty used
to redeem stock), section 341(f) (relating to certain sales of stock of
consenting corporations), section 617(d) (relating to gain from
dispositions of certain mining property), section 1245(a) or 1250(a)
(relating to gain from dispositions of certain depreciable property),
section 1251(c) (relating to gain from disposition of farm recapture
property), section 1252(a) (relating to gain from disposition of farm
land), or 1254(a) (relating to gain from disposition of interest in
natural resource recapture property);
(iii) In the case of the distribution by a foreign corporation of
any other property after December 31, 1962, in a distribution not
described in subdivision (iv) of this subparagraph, the amount
determined under paragraph (n) of this section;
(iv) In the case of the distribution of any other property made
after November 8, 1971, to a shareholder which is a foreign corporation,
the fair market value of such property, but only if the distribution
received by such shareholder is not effectively connected for the
taxable year with the conduct of a trade or business in the United
States by such shareholder.
(i) [Reserved]
(j) Transfers for less than fair market value. If property is
transferred by a corporation to a shareholder which is not a corporation
for an amount less than its fair market value in a sale or exchange,
such shareholder shall be treated as having received a distribution to
which section 301 applies. In such case, the amount of the distribution
shall be the difference between the amount paid for the property and its
fair market value. If property is transferred in a sale or exchange by a
corporation to a shareholder which is a corporation, for an amount less
than its fair market value and also less than its adjusted basis, such
shareholder shall be treated as having received a distribution to which
section 301 applies, and--
(1) Where the fair market value of the property equals or exceeds
its adjusted basis in the hands of the distributing corporation the
amount of the distribution shall be the excess of the adjusted basis
(increased by the amount of gain recognized under section 311 (b), (c),
or (d), or under section 341(f), 617(d), 1245(a), 1250(a), 1251(c),
1252(a), or 1254(a) to the distributing corporation) over the amount
paid for the property;
(2) Where the fair market value of the property is less than its
adjusted basis in the hands of the distributing corporation, the amount
of the distribution shall be the excess of such fair market value over
the amount paid for the property. If property is transferred in a sale
or exchange after December 31, 1962, by a foreign corporation to a
shareholder which is a corporation for an amount less than the amount
which would have been computed under paragraph (n) of this section if
such property had been received in a distribution to which section 301
applied, such shareholder shall be treated as having received a
distribution to which section 301 applies, and the amount of the
distribution shall be the excess of the amount which would have been
computed under paragraph (n) of this section with respect to such
property over the amount paid for the property. In all cases, the
earnings and
[[Page 12]]
profits of the distributing corporation shall be decreased by the excess
of the basis of the property in the hands of the distributing
corporation over the amount received therefor. In computing gain or loss
from the subsequent sale of such property, its basis shall be the amount
paid for the property increased by the amount of the distribution.
If property is transferred in a sale or exchange after December 31,
1962, by a foreign corporation to a shareholder which is a corporation
for an amount less than the amount which would have been computed under
paragraph (n) of this section if such property had been received in a
distribution to which section 301 applied, such shareholder shall be
treated as having received a distribution to which section 301 applies,
and the amount of the distribution shall be the excess of the amount
which would have been computed under paragraph (n) of this section with
respect to such property over the amount paid for the property.
Notwithstanding the preceding provisions of this paragraph, if property
is transferred in a sale or exchange after November 8, 1971, by a
corporation to a shareholder which is a foreign corporation, for an
amount less than its fair market value, and if paragraph (d)(1)(iv) of
this section would apply if such property were received in a
distribution to which section 301 applies, such shareholder shall be
treated as having received a distribution to which section 301 applies
and the amount of the distribution shall be the difference between the
amount paid for the property and its fair market value. In all cases,
the earnings and profits of the distributing corporation shall be
decreased by the excess of the basis of the property in the hands of the
distributing corporation over the amount received therefor. In computing
gain or loss from the subsequent sale of such property, its basis shall
be the amount paid for the property increased by the amount of the
distribution.
(k) Application of rule respecting transfers for less than fair
market value. The application of paragraph (j) of this section may be
illustrated by the following examples:
Example (1). On January 1, 1955, A, an individual shareholder of
corporation X, purchased property from that corporation for $20. The
fair market value of such property was $100, and its basis in the hands
of corporation X was $25. The amount of the distribution determined
under section 301(b) is $80. If A were a corporation, the amount of the
distribution would be $5 (assuming that sections 311 (b) and (c),
1245(a), and 1250(a) do not apply), the excess of the basis of the
property in the hands of corporation X over the amount received
therefor. The basis of such property to corporation A would be $25. If
the basis of the property in the hands of corporation X were $10, the
corporate shareholder, A, would not receive a distribution. The basis of
such property to corporation A would be $20. Whether or not A is a
corporation, the excess of the amount paid over the basis of the
property in the hands of corporation X ($20 over $10) would be a taxable
gain to corporation X.
Example (2). On January 1, 1963, corporation A, which is a
shareholder of corporation B (a foreign corporation engaged in business
within the United States), purchased one share of corporation X stock
from B for $20. The fair market value of the share was $100, and its
adjusted basis in the hands of B was $25. Assume that if the share of
corporation X stock had been received by A in a distribution to which
section 301 applied, the amount of the distribution under paragraph (n)
of this section would have been $55. The amount of the distribution
under section 301 is $35, i.e., $55 (amount computed under paragraph (n)
of this section) minus $20 (amount paid for the property). The basis of
such property to A is $55.
(l) Transactions treated as distributions. A distribution to
shareholders with respect to their stock is within the terms of section
301 although it takes place at the same time as another transaction if
the distribution is in substance a separate transaction whether or not
connected in a formal sense. This is most likely to occur in the case of
a recapitalization, a reincorporation, or a merger of a corporation with
a newly organized corporation having substantially no property. For
example, if a corporation having only common stock outstanding,
exchanges one share of newly issued common stock and one bond in the
principal amount of $10 for each share of outstanding common stock, the
distribution of the bonds will be a distribution of property (to the
extent of their fair market value) to which
[[Page 13]]
section 301 applies, even though the exchange of common stock for common
stock may be pursuant to a plan of reorganization under the terms of
section 368(a)(1)(E) (recapitalization) and even though the exchange of
common stock for common stock may be tax free by virtue of section 354.
(m) Cancellation of indebtedness. The cancellation of indebtedness
of a shareholder by a corporation shall be treated as a distribution of
property.
(n) [Reserved]
(o) Distributions of certain property by DISC's to corporate
shareholders. See Sec. 1.997-1 for the rule that if a corporation which
is a DISC or former DISC (as defined in section 992(a)(1) or (3) as the
case may be) makes a distribution of property (other than money and
other than the obligations of the DISC or former DISC) out of
accumulated DISC income (as defined in section 996(f)(1)) or previously
taxed income (as defined in section 996(f)(2)), such distribution of
property shall be treated as if it were made to an individual and that
the basis of the property distributed, in the hands of the recipient
corporation, shall be determined as if such property were distributed to
an individual.
(p) Cross references. For certain rules relating to adjustments to
earnings and profits and for determining the extent to which a
distribution is a dividend, see sections 312 and 316 and regulations
thereunder.
(q) Split-dollar and other life insurance arrangements--(1) Split-
dollar life insurance arrangements--(i) Distribution of economic
benefits. The provision by a corporation to its shareholder pursuant to
a split-dollar life insurance arrangement, as defined in Sec. 1.61-
22(b)(1) or (2), of economic benefits described in Sec. 1.61-22(d) or
of amounts described in Sec. 1.61-22(e) is treated as a distribution of
property, the amount of which is determined under Sec. 1.61-22(d) and
(e), respectively.
(ii) Distribution of entire contract or undivided interest therein.
A transfer (within the meaning of Sec. 1.61-22(c)(3)) of the ownership
of a life insurance contract (or an undivided interest therein) that is
part of a split-dollar life insurance arrangement is a distribution of
property, the amount of which is determined pursuant to Sec. 1.61-
22(g)(1) and (2).
(2) Other life insurance arrangements. A payment by a corporation on
behalf of a shareholder of premiums on a life insurance contract or an
undivided interest therein that is owned by the shareholder constitutes
a distribution of property, even if such payment is not part of a split-
dollar life insurance arrangement under Sec. 1.61-22(b).
(3) When distribution is made--(i) In general. Except as provided in
paragraph (q)(3)(ii) of this section, paragraph (b) of this section
shall apply to determine when a distribution described in paragraph
(q)(1) or (2) of this section is taken into account by a shareholder.
(ii) Exception. Notwithstanding paragraph (b) of this section, a
distribution described in paragraph (q)(1)(ii) of this section shall be
treated as made by a corporation to its shareholder at the time that the
life insurance contract, or an undivided interest therein, is
transferred (within the meaning of Sec. 1.61-22(c)(3)) to the
shareholder.
(4) Effective date--(i) General rule. This paragraph (q) applies to
split-dollar and other life insurance arrangements entered into after
September 17, 2003. For purposes of this paragraph (q)(4), a split-
dollar life insurance arrangement is entered into as determined under
Sec. 1.61-22(j)(1)(ii).
(ii) Modified arrangements treated as new arrangements. If a split-
dollar life insurance arrangement entered into on or before September
17, 2003 is materially modified (within the meaning of Sec. 1.61-
22(j)(2)) after September 17, 2003, the arrangement is treated as a new
arrangement entered into on the date of the modification.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6752, 29 FR
12701, Sept. 9, 1964; T.D. 7084, 36 FR 267, Jan. 8, 1971; T.D. 7209, 37
FR 20800, Oct. 5, 1972; 38 FR 20824, Aug. 3, 1973; 38 FR 32794, Nov. 28,
1973; T.D. 7556, 44 FR 1376, Jan. 5, 1979; T.D. 8474, 58 FR 25557, Apr.
27, 1993; T.D. 8586, 60 FR 2500, Jan. 10, 1995; T.D. 8924, 66 FR 725,
Jan. 4, 2001; T.D. 8964, Sept. 27, 2001, 66 FR 49276; T.D. 9092, 68 FR
54352, Sept. 17, 2003]
Sec. 1.302-1 General.
(a) Under section 302(d), unless otherwise provided in subchapter C,
chapter
[[Page 14]]
1 of the Code, a distribution in redemption of stock shall be treated as
a distribution of property to which section 301 applies if the
distribution is not within any of the provisions of section 302(b). A
distribution in redemption of stock shall be considered a distribution
in part or full payment in exchange for the stock under section 302(a)
provided paragraph (1), (2), (3), or (4) of section 302(b) applies.
Section 318(a) (relating to constructive ownership of stock) applies to
all redemptions under section 302 except that in the termination of a
shareholder's interest certain limitations are placed on the application
of section 318(a)(1) by section 302(c)(2). The term redemption of stock
is defined in section 317(b). Section 302 does not apply to that portion
of any distribution which qualifies as a distribution in partial
liquidation under section 346. For special rules relating to redemption
of stock to pay death taxes see section 303. For special rules relating
to redemption of section 306 stock see section 306. For special rules
relating to redemption of stock in partial or complete liquidation see
section 331.
(b) If, in connection with a partial liquidation under the terms of
section 346, stock is redeemed in an amount in excess of the amount
specified by section 331(a)(2), section 302(b) shall first apply as to
each shareholder to which it is applicable without limitation because of
section 331(a)(2). That portion of the total distribution which is used
in all redemptions from specific shareholders which are within the terms
of section 302(a) shall be excluded in determining the application of
sections 346 and 331(a)(2). For example, Corporation X has $50,000 which
is attributable to the sale of one of two active businesses and which,
if distributed in redemption of stock, would qualify as a partial
liquidation under the terms of section 346(b). Corporation X distributes
$60,000 to its shareholders in redemption of stock, $20,000 of which is
in redemption of all of the stock of shareholder A within the meaning of
section 302(b)(3). The $20,000 distributed in redemption of the stock of
shareholder A will be excluded in determining the application of
sections 346 and 331(a)(2). The entire $60,000 will be treated as in
part or full payment for stock ($20,000 qualifying under section 302(a)
and $40,000 qualifying under sections 346 and 331(a)(2)).
Sec. 1.302-2 Redemptions not taxable as dividends.
(a) The fact that a redemption fails to meet the requirements of
paragraph (2), (3) or (4) of section 302(b) shall not be taken into
account in determining whether the redemption is not essentially
equivalent to a dividend under section 302(b)(1). See, however,
paragraph (b) of this section. For example, if a shareholder owns only
nonvoting stock of a corporation which is not section 306 stock and
which is limited and preferred as to dividends and in liquidation, and
one-half of such stock is redeemed, the distribution will ordinarily
meet the requirements of paragraph (1) of section 302(b) but will not
meet the requirements of paragraph (2), (3) or (4) of such section. The
determination of whether or not a distribution is within the phrase
``essentially equivalent to a dividend'' (that is, having the same
effect as a distribution without any redemption of stock) shall be made
without regard to the earnings and profits of the corporation at the
time of the distribution. For example, if A owns all the stock of a
corporation and the corporation redeems part of his stock at a time when
it has no earnings and profits, the distribution shall be treated as a
distribution under section 301 pursuant to section 302(d).
(b) The question whether a distribution in redemption of stock of a
shareholder is not essentially equivalent to a dividend under section
302(b)(1) depends upon the facts and circumstances of each case. One of
the facts to be considered in making this determination is the
constructive stock ownership of such shareholder under section 318(a).
All distributions in pro rata redemptions of a part of the stock of a
corporation generally will be treated as distributions under section 301
if the corporation has only one class of stock outstanding. However, for
distributions in partial liquidation, see section 346. The redemption of
all of one class of stock (except section 306 stock) either at one time
or in a series of redemptions generally will be considered as a
distribution under section 301 if all
[[Page 15]]
classes of stock outstanding at the time of the redemption are held in
the same proportion. Distribution in redemption of stock may be treated
as distributions under section 301 regardless of the provisions of the
stock certificate and regardless of whether all stock being redeemed was
acquired by the stockholders from whom the stock was redeemed by
purchase or otherwise. In every case in which a shareholder transfers
stock to the corporation which issued such stock in exchange for
property, the facts and circumstances shall be reported on his return
except as provided in paragraph (d) of Sec. 1.331-1. See sections
346(a) and 6043 for requirements relating to returns by corporations.
(c) In any case in which an amount received in redemption of stock
is treated as a distribution of a dividend, proper adjustment of the
basis of the remaining stock will be made with respect to the stock
redeemed. (For adjustments to basis required for certain redemptions of
corporate shareholders that are treated as extraordinary dividends, see
section 1059 and the regulations thereunder.) The following examples
illustrate the application of this rule:
Example (1). A, an individual, purchased all of the stock of
Corporation X for $100,000. In 1955 the corporation redeems half of the
stock for $150,000, and it is determined that this amount constitutes a
dividend. The remaining stock of Corporation X held by A has a basis of
$100,000.
Example (2). H and W, husband and wife, each own half of the stock
of Corporation X. All of the stock was purchased by H for $100,000 cash.
In 1950 H gave one-half of the stock to W, the stock transferred having
a value in excess of $50,000. In 1955 all of the stock of H is redeemed
for $150,000, and it is determined that the distribution to H in
redemption of his shares constitutes the distribution of a dividend.
Immediately after the transaction, W holds the remaining stock of
Corporation X with a basis of $100,000.
Example (3). The facts are the same as in Example (2) with the
additional facts that the outstanding stock of Corporation X consists of
1,000 shares and all but 10 shares of the stock of H is redeemed.
Immediately after the transaction, H holds 10 shares of the stock of
Corporation X with a basis of $50,000, and W holds 500 shares with a
basis of $50,000.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 8724, 62 FR
38028, July 26, 1997]
Sec. 1.302-3 Substantially disproportionate redemption.
(a) Section 302(b)(2) provides for the treatment of an amount
received in redemption of stock as an amount received in exchange for
such stock if--
(1) Immediately after the redemption the shareholder owns less than
50 percent of the total combined voting power of all classes of stock as
provided in section 302(b)(2)(B),
(2) The redemption is a substantially disproportionate redemption
within the meaning of section 302(b)(2)(C), and
(3) The redemption is not pursuant to a plan described in section
302(b)(2)(D).
Section 318(a) (relating to constructive ownership of stock) shall apply
both in making the disproportionate redemption test and in determining
the percentage of stock ownership after the redemption. The requirements
under section 302(b)(2) shall be applied to each shareholder separately
and shall be applied only with respect to stock which is issued and
outstanding in the hands of the shareholders. Section 302(b)(2) only
applies to a redemption of voting stock or to a redemption of both
voting stock and other stock. Section 302(b)(2) does not apply to the
redemption solely of nonvoting stock (common or preferred). However, if
a redemption is treated as an exchange to a particular shareholder under
the terms of section 302(b)(2), such section will apply to the
simultaneous redemption of nonvoting preferred stock (which is not
section 306 stock) owned by such shareholder and such redemption will
also be treated as an exchange. Generally, for purposes of this section,
stock which does not have voting rights until the happening of an event,
such as a default in the payment of dividends on preferred stock, is not
voting stock until the happening of the specified event. Subsection
302(b)(2)(D) provides that a redemption will not be treated as
substantially disproportionate if made pursuant to a plan the purpose or
effect of which is a series of
[[Page 16]]
redemptions which result in the aggregate in a distribution which is not
substantially disproportionate. Whether or not such a plan exists will
be determined from all the facts and circumstances.
(b) The application of paragraph (a) of this section is illustrated
by the following example:
Example. Corporation M has outstanding 400 shares of common stock of
which A, B, C and D each own 100 shares or 25 percent. No stock is
considered constructively owned by A, B, C or D under section 318.
Corporation M redeems 55 shares from A, 25 shares from B, and 20 shares
from C. For the redemption to be disproportionate as to any shareholder,
such shareholder must own after the redemptions less than 20 percent (80
percent of 25 percent) of the 300 shares of stock then outstanding.
After the redemptions, A owns 45 shares (15 percent), B owns 75 shares
(25 percent), and C owns 80 shares (26 2/3 percent). The distribution is
disproportionate only with respect to A.
Sec. 1.302-4 Termination of shareholder's interest.
Section 302(b)(3) provides that a distribution in redemption of all
of the stock of the corporation owned by a shareholder shall be treated
as a distribution in part or full payment in exchange for the stock of
such shareholder. In determining whether all of the stock of the
shareholder has been redeemed, the general rule of section 302(c)(1)
requires that the rules of constructive ownership provided in section
318(a) shall apply. Section 302(c)(2), however, provides that section
318(a)(1) (relating to constructive ownership of stock owned by members
of a family) shall not apply where the specific requirements of section
302(c)(2) are met. The following rules shall be applicable in
determining whether the specific requirements of section 302(c)(2) are
met:
(a)(1) The agreement specified in section 302(c)(2)(A)(iii) shall be
in the form of a separate statement in duplicate signed by the
distributee and attached to the first return filed by the distributee
for the taxable year in which the distribution described in section
302(b)(3) occurs. The agreement shall recite that the distributee has
not acquired, other than by bequest or inheritance, any interest in the
corporation (as described in section 302(c)(2)(A)(i)) since the
distribution and that the distributee agrees to notify the district
director for the internal revenue district in which the distributee
resides of any acquisition, other than by bequest or inheritance, of
such an interest in the corporation within 30 days after the
acquisition, if the acquisition occurs within 10 years from the date of
the distribution.
(2) If the distributee fails to file the agreement specified in
section 302(c)(2)(A)(iii) at the time provided in paragraph (a)(1) of
this section, then the district director for the internal revenue
district in which the distributee resided at the time of filing the
first return for the taxable year in which the distribution occurred
shall grant a reasonable extension of time for filing such agreement,
provided (i) it is established to the satisfaction of the district
director that there was reasonable cause for failure to file the
agreement within the prescribed time and (ii) a request for such
extension is filed within such time as the district director considers
reasonable under the circumstances.
(b) The distributee who files an agreement under section
302(c)(2)(A)(iii) shall retain copies of income tax returns and any
other records indicating fully the amount of tax which would have been
payable had the redemption been treated as a distribution subject to
section 301.
(c) If stock of a parent corporation is redeemed, section
302(c)(2)(A), relating to acquisition of an interest in the corporation
within 10 years after termination shall be applied with reference to an
interest both in the parent corporation and any subsidiary of such
parent corporation. If stock of a parent corporation is sold to a
subsidiary in a transaction described in section 304, section
302(c)(2)(A) shall be applicable to the acquisition of an interest in
such subsidiary corporation or in the parent corporation. If stock of a
subsidiary corporation is redeemed, section 302(c)(2)(A) shall be
applied with reference to an interest both in such subsidiary
corporation and its parent. Section 302(c)(2)(A) shall also be applied
with respect to an interest in a
[[Page 17]]
corporation which is a successor corporation to the corporation the
interest in which has been terminated.
(d) For the purpose of section 302(c)(2)(A)(i), a person will be
considered to be a creditor only if the rights of such person with
respect to the corporation are not greater or broader in scope than
necessary for the enforcement of his claim. Such claim must not in any
sense be proprietary and must not be subordinate to the claims of
general creditors. An obligation in the form of a debt may thus
constitute a proprietary interest. For example, if under the terms of
the instrument the corporation may discharge the principal amount of its
obligation to a person by payments, the amount or certainty of which are
dependent upon the earnings of the corporation, such a person is not a
creditor of the corporation. Furthermore, if under the terms of the
instrument the rate of purported interest is dependent upon earnings,
the holder of such instrument may not, in some cases, be a creditor.
(e) In the case of a distributee to whom section 302(b)(3) is
applicable, who is a creditor after such transaction, the acquisition of
the assets of the corporation in the enforcement of the rights of such
creditor shall not be considered an acquisition of an interest in the
corporation for purposes of section 302(c)(2) unless stock of the
corporation, its parent corporation, or, in the case of a redemption of
stock of a parent corporation, of a subsidiary of such corporation is
acquired.
(f) In determining whether an entire interest in the corporation has
been terminated under section 302(b)(3), under all circumstances
paragraphs (2), (3), (4), and (5) of section 318(a) (relating to
constructive ownership of stock) shall be applicable.
(g) Section 302(c)(2)(B) provides that section 302(c)(2)(A) shall
not apply--
(1) If any portion of the stock redeemed was acquired directly or
indirectly within the 10-year period ending on the date of the
distribution by the distributee from a person, the ownership of whose
stock would (at the time of distribution) be attributable to the
distributee under section 318(a), or
(2) If any person owns (at the time of the distribution) stock, the
ownership of which is attributable to the distributee under section
318(a), such person acquired any stock in the corporation directly or
indirectly from the distributee within the 10-year period ending on the
date of the distribution, and such stock so acquired from the
distributee is not redeemed in the same transaction,unless the
acquisition (described in subparagraph (1) of this paragraph) or the
disposition by the distributee (described in subparagraph (2) of this
paragraph) did not have as one of its principal purposes the avoidance
of Federal income tax. A transfer of stock by the transferor, within the
10-year period ending on the date of the distribution, to a person whose
stock would be attributable to the transferor shall not be deemed to
have as one of its principal purposes the avoidance of Federal income
tax merely because the transferee is in a lower income tax bracket than
the transferor.
(Sec. 302(c)(2)(A)(iii) (68A Stat. 87; 26 U.S.C. 302 (c)(2)(A)(iii)))
[T.D. 7535, 43 FR 10686, Mar. 15, 1978]
Sec. 1.303-1 General.
Section 303 provides that in certain cases a distribution in
redemption of stock, the value of which is included in determining the
value of the gross estate of a decedent, shall be treated as a
distribution in full payment in exchange for the stock so redeemed.
Sec. 1.303-2 Requirements.
(a) Section 303 applies only where the distribution is with respect
to stock of a corporation the value of whose stock in the gross estate
of the decedent for Federal estate tax purposes is an amount in excess
of (1) 35 percent of the value of the gross estate of such decedent, or
(2) 50 percent of the taxable estate of such decedent. For the purposes
of such 35 percent and 50 percent requirements, stock of two or more
corporations shall be treated as the stock of a single corporation if
more than 75 percent in value of the outstanding stock of each such
corporation is included in determining the value of the decedent's gross
estate. For the purpose of the 75 percent requirement, stock which, at
the decedent's death, represents the surviving
[[Page 18]]
spouse's interest in community property shall be considered as having
been included in determining the value of the decedent's gross estate.
(b) For the purpose of section 303(b)(2)(A)(i), the term gross
estate means the gross estate as computed in accordance with section
2031 (or, in the case of the estate of a decedent nonresident not a
citizen of the United States, in accordance with section 2103). For the
purpose of section 303(b)(2)(A)(ii), the term taxable estate means the
taxable estate as computed in accordance with section 2051 (or, in the
case of the estate of a decedent nonresident not a citizen of the United
States, in accordance with section 2106). In case the value of an estate
is determined for Federal estate tax purposes under section 2032
(relating to alternate valuation), then, for purposes of section
303(b)(2), the value of the gross estate, the taxable estate, and the
stock shall each be determined on the applicable date prescribed in
section 2032.
(c)(1) In determining whether the estate of the decedent is
comprised of stock of a corporation of sufficient value to satisfy the
percentage requirements of section 303(b)(2)(A) and section
303(b)(2)(B), the total value, in the aggregate, of all classes of stock
of the corporation includible in determining the value of the gross
estate is taken into account. A distribution under section 303(a) may be
in redemption of the stock of the corporation includible in determining
the value of the gross estate, without regard to the class of such
stock.
(2) The above may be illustrated by the following example:
Example. The gross estate of the decedent has a value of $1,000,000,
the taxable estate is $700,000, and the sum of the death taxes and
funeral and administration expenses is $275,000. Included in determining
the gross estate of the decedent is stock of three corporations which,
for Federal estate tax purposes, is valued as follows:
Corporation A:
Common stock............................................... $100,000
Preferred stock............................................ 100,000
Corporation B:
Common stock............................................... 50,000
Preferred stock............................................ 350,000
Corporation C: Common stock.................................. 200,000
The stock of Corporation A and Corporation C included in the estate of
the decedent constitutes all of the outstanding stock of both
corporations. The stock of Corporation A and the stock of Corporation C,
treated as the stock of a single corporation under section 303(b)(2)(B),
has a value in excess of $350,000 (35 percent of the gross estate or 50
percent of the taxable estate). Likewise, the stock of Corporation B has
a value in excess of $350,000. The distribution by one or more of the
above corporations, within the period prescribed in section 303(b)(1),
of amounts not exceeding, in the aggregate, $275,000, in redemption of
preferred stock or common stock of such corporation or corporations,
will be treated as in full payment in exchange for the stock so
redeemed.
(d) If stock includible in determining the value of the gross estate
of a decedent is exchanged for new stock, the basis of which is
determined by reference to the basis of the old stock, the redemption of
the new stock will be treated the same under section 303 as the
redemption of the old stock would have been. Thus section 303 shall
apply with respect to a distribution in redemption of stock received by
the estate of a decedent (1) in connection with a reorganization under
section 368, (2) in a distribution or exchange under section 355 (or so
much of section 356 as relates to section 355), (3) in an exchange under
section 1036 or (4) in a distribution to which section 305(a) applies.
Similarly, a distribution in redemption of stock will qualify under
section 303, notwithstanding the fact that the stock redeemed is section
306 stock to the extent that the conditions of section 303 are met.
(e) Section 303 applies to distributions made after the death of the
decedent and (1) before the expiration of the 3-year period of
limitations for the assessment of estate tax provided in section 6501(a)
(determined without the application of any provisions of law extending
or suspending the running of such period of limitations), or within 90
days after the expiration of such period, or (2) if a petition for
redetermination of a deficiency in such estate tax has been filed with
the Tax Court within the time prescribed in section 6213, at any time
before the expiration of 60 days after the decision of the Tax Court
becomes final. The extension of the period of distribution provided in
section 303(b)(1)(B) has reference solely to bona fide contests in the
Tax Court
[[Page 19]]
and will not apply in the case of a petition for redetermination of a
deficiency which is initiated solely for the purpose of extending the
period within which section 303 would otherwise be applicable.
(f) While section 303 will most frequently have application in the
case where stock is redeemed from the executor or administrator of an
estate, the section is also applicable to distributions in redemption of
stock included in the decedent's gross estate and held at the time of
the redemption by any person who acquired the stock by any of the means
comprehended by part III, subchapter A, chapter 11 of the Code,
including the heir, legatee, or donee of the decedent, a surviving joint
tenant, surviving spouse, appointee, or taker in default of appointment,
or a trustee of a trust created by the decedent. Thus section 303 may
apply with respect to a distribution in redemption of stock from a donee
to whom the decedent has transferred stock in contemplation of death
where the value of such stock is included in the decedent's gross estate
under section 2035. Similarly, section 303 may apply to the redemption
of stock from a beneficiary of the estate to whom an executor has
distributed the stock pursuant to the terms of the will of the decedent.
However, section 303 is not applicable to the case where stock is
redeemed from a stockholder who has acquired the stock by gift or
purchase from any person to whom such stock has passed from the
decedent. Nor is section 303 applicable to the case where stock is
redeemed from a stockholder who has acquired the stock from the executor
in satisfaction of a specific monetary bequest.
(g)(1) The total amount of the distributions to which section 303
may apply with respect to redemptions of stock included in the gross
estate of a decedent may not exceed the sum of the estate, inheritance,
legacy, and succession taxes (including any interest collected as a part
of such taxes) imposed because of the decedent's death and the amount of
funeral and administration expenses allowable as deductions to the
estate. Where there is more than one distribution in redemption of stock
described in section 303(b)(2) during the period of time prescribed in
section 303(b)(1), the distributions shall be applied against the total
amount which qualifies for treatment under section 303 in the order in
which the distributions are made. For this purpose, all distributions in
redemption of such stock shall be taken into account, including
distributions which under another provision of the Code are treated as
in part or full payment in exchange for the stock redeemed.
(2) Subparagraph (1) of this paragraph may be illustrated by the
following example:
Example. (i) The gross estate of the decedent has a value of
$800,000, the taxable estate is $500,000, and the sum of the death taxes
and funeral and administrative expenses is $225,000. Included in
determining the gross estate of the decedent is the stock of a
corporation which for Federal estate tax purposes is valued at $450,000.
During the first year of administration, one-third of such stock is
distributed to a legatee and shortly thereafter this stock is redeemed
by the corporation for $150,000. During the second year of
administration, another one-third of such stock includible in the estate
is redeemed for $150,000.
(ii) The first distribution of $150,000 is applied against the
$225,000 amount that qualifies for treatment under section 303,
regardless of whether the first distribution was treated as in payment
in exchange for stock under section 302(a). Thus, only $75,000 of the
second distribution may be treated as in full payment in exchange for
stock under section 303. The tax treatment of the remaining $75,000
would be determined under other provisions of the Code.
(h) For the purpose of section 303, the estate tax or any other
estate, inheritance, legacy, or succession tax shall be ascertained
after the allowance of any credit, relief, discount, refund, remission
or reduction of tax.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6724, 29 FR
5343, Apr. 21, 1964; T.D. 7346, 40 FR 10669, Mar. 7, 1975]
Sec. 1.303-3 Application of other sections.
(a) The sole effect of section 303 is to exempt from tax as a
dividend a distribution to which such section is applicable when made in
redemption of stock includible in a decedent's gross estate. Such
section does not, however, in any other manner affect the principles set
forth in sections 302 and 306.
[[Page 20]]
Thus, if stock of a corporation is owned equally by A, B, and the C
Estate, and the corporation redeems one-half of the stock of each
shareholder, the determination of whether the distributions to A and B
are essentially equivalent to dividends shall be made without regard to
the effect which section 303 may have upon the taxability of the
distribution to the C Estate.
(b) See section 304 relative to redemption of stock through the use
of related corporations.
Sec. 1.304-1 General.
(a) Except as provided in paragraph (b) of this section, section 304
is applicable where a shareholder sells stock of one corporation to a
related corporation as defined in section 304. Sales to which section
304 is applicable shall be treated as redemptions subject to sections
302 and 303.
(b) In the case of--
(1) Any acquisition of stock described in section 304 which occurred
before June 22, 1954, and
(2) Any acquisition of stock described in section 304 which occurred
on or after June 22, 1954, and on or before December 31, 1958, pursuant
to a contract entered into before June 22, 1954.
The extent to which the property received in return for such acquisition
shall be treated as a dividend shall be determined as if the Internal
Revenue Code of 1939 continued to apply in respect of such acquisition
and as if the Internal Revenue Code of 1954 had not been enacted. See
section 391. In cases to which this paragraph applies, the basis of the
stock received by the acquiring corporation shall be determined as if
the Internal Revenue Code of 1939 continued to apply in respect of such
acquisition and as if the Internal Revenue Code of 1954 had not been
enacted.
[T.D. 6533, 26 FR 401, Jan. 19, 1961]
Sec. 1.304-2 Acquisition by related corporation (other than subsidiary).
(a) If a corporation, in return for property, acquires stock of
another corporation from one or more persons, and the person or persons
from whom the stock was acquired were in control of both such
corporations before the acquisition, then such property shall be treated
as received in redemption of stock of the acquiring corporation. The
stock received by the acquiring corporation shall be treated as a
contribution to the capital of such corporation. See section 362(a) for
determination of the basis of such stock. The transferor's basis for his
stock in the acquiring corporation shall be increased by the basis of
the stock surrendered by him. (But see below in this paragraph for
subsequent reductions of basis in certain cases.) As to each person
transferring stock, the amount received shall be treated as a
distribution of property under section 302(d), unless as to such person
such amount is to be treated as received in exchange for the stock under
the terms of section 302(a) or section 303. In applying section 302(b),
reference shall be had to the shareholder's ownership of stock in the
issuing corporation and not to his ownership of stock in the acquiring
corporation (except for purposes of applying section 318(a)). In
determining control and applying section 302(b), section 318(a)
(relating to the constructive ownership of stock) shall be applied
without regard to the 50-percent limitation contained in section
318(a)(2)(C) and (3)(C). A series of redemptions referred to in section
302(b)(2)(D) shall include acquisitions by either of the corporations of
stock of the other and stock redemptions by both corporations. If
section 302(d) applies to the surrender of stock by a shareholder, his
basis for his stock in the acquiring corporation after the transaction
(increased as stated above in this paragraph) shall not be decreased
except as provided in section 301. If section 302(d) does not apply, the
property received shall be treated as received in a distribution in
payment in exchange for stock of the acquiring corporation under section
302(a), which stock has a basis equal to the amount by which the
shareholder's basis for his stock in the acquiring corporation was
increased on account of the contribution to capital as provided for
above in this paragraph. Accordingly, such amount shall be applied in
reduction of the shareholder's basis for his stock in the acquiring
corporation. Thus, the basis of each share of the shareholder's stock in
the acquiring corporation will be the same as
[[Page 21]]
the basis of such share before the entire transaction. The holding
period of the stock which is considered to have been redeemed shall be
the same as the holding period of the stock actually surrendered.
(b) In any case in which two or more persons, in the aggregate,
control two corporations, section 304(a)(1) will apply to sales by such
persons of stock in either corporation to the other (whether or not made
simultaneously) provided the sales by each of such persons are related
to each other. The determination of whether the sales are related to
each other shall be dependent upon the facts and circumstances
surrounding all of the sales. For this purpose, the fact that the sales
may occur during a period of one or more years (such as in the case of a
series of sales by persons who together control each of such
corporations immediately prior to the first of such sales and
immediately subsequent to the last of such sales) shall be disregarded,
provided the other facts and circumstances indicate related
transactions.
(c) The application of section 304(a)(1) may be illustrated by the
following examples:
Example (1). Corporation X and corporation Y each have outstanding
200 shares of common stock. One-half of the stock of each corporation is
owned by an individual, A, and one-half by another individual, B, who is
unrelated to A. On or after August 31, 1964, A sells 30 shares of
corporation X stock to corporation Y for $50,000, such stock having an
adjusted basis of $10,000 to A. After the sale, A is considered as
owning corporation X stock as follows: (i) 70 shares directly, and (ii)
15 shares constructively, since by virtue of his 50-percent ownership of
Y he constructively owns 50 percent of the 30 shares owned directly by
Y. Since A's percentage of ownership of X's voting stock after the sale
(85 out of 200 shares, or 42.5%) is not less than 80 percent of his
percentage of ownership of X's voting stock before the sale (100 out of
200 shares, or 50%), the transfer is not ``substantially
disproportionate'' as to him as provided in section 302(b)(2). Under
these facts, and assuming that section 302(b)(1) is not applicable, the
entire $50,000 is treated as a dividend to A to the extent of the
earnings and profits of corporation Y. The basis of the corporation X
stock to corporation Y is $10,000, its adjusted basis to A. The amount
of $10,000 is added to the basis of the stock of corporation Y in the
hands of A.
Example (2). The facts are the same as in Example (1) except that A
sells 80 shares of corporation X stock to corporation Y, and the sale
occurs before August 31, 1964. After the sale, A is considered as owning
corporation X stock as follows: (i) 20 shares directly, and (ii) 90
shares indirectly, since by virtue of his 50-percent ownership of Y he
constructively owns 50 percent of the 80 shares owned directly by Y and
50 percent of the 100 shares attributed to Y because they are owned by
Y's stockholder, B. Since after the sale A owns a total of more than 50
percent of the voting power of all of the outstanding stock of X (110
out of 200 shares, or 55%), the transfer is not ``substantially
disproportionate'' as to him as provided in section 302(b)(2).
Example (3). Corporation X and corporation Y each have outstanding
100 shares of common stock. A, an individual, owns one-half the stock of
corporation X, and C owns one-half the stock of corporation Y. A, B, and
C are unrelated. A sells 30 shares of the stock of corporation X to
corporation Y for $50,000, such stock having an adjusted basis of
$10,000 to him. After the sale, A is considered as owning 35 shares of
the stock of corporation X (20 shares directly and 15 constructively
because one-half of the 30 shares owned by corporation Y are attributed
to him). Since before the sale he owned 50 percent of the stock of
corporation X and after the sale he owned directly and constructively
only 35 percent of such stock, the redemption is substantially
disproportionate as to him pursuant to the provisions of section
302(b)(2). He, therefore, realizes a gain of $40,000 ($50,000 minus
$10,000). If the stock surrendered is a capital asset, such gain is
long-term or short-term capital gain depending on the period of time
that such stock was held. The basis to A for the stock of corporation Y
is not changed as a result of the entire transaction. The basis to
corporation Y for the stock of corporation X is $50,000, i.e., the basis
of the transferor ($10,000), increased in the amount of gain recognized
to the transferor ($40,000) on the transfer.
Example (4). Corporation X and corporation Y each have outstanding
100 shares of common stock. H, an individual, W, his wife, S, his son,
and G, his grandson, each own 25 shares of stock of each corporation. H
sells all of his 25 shares of stock of corporation X to corporation Y.
Since both before and after the transaction H owned directly and
constructively 100 percent of the stock of corporation X, and assuming
that section 302(b)(1) is not applicable, the amount received by him for
his stock of corporation X is treated as a dividend to him to the extent
of the earnings and profits of corporation Y.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11997, Aug. 23, 1968]
[[Page 22]]
Sec. 1.304-3 Acquisition by a subsidiary.
(a) If a subsidiary acquires stock of its parent corporation from a
shareholder of the parent corporation, the acquisition of such stock
shall be treated as though the parent corporation had redeemed its own
stock. For the purpose of this section, a corporation is a parent
corporation if it meets the 50 percent ownership requirements of section
304(c). The determination whether the amount received shall be treated
as an amount received in payment in exchange for the stock shall be made
by applying section 303, or by applying section 302(b) with reference to
the stock of the issuing parent corporation. If such distribution would
have been treated as a distribution of property (pursuant to section
302(d)) under section 301, the entire amount of the selling price of the
stock shall be treated as a dividend to the seller to the extent of the
earnings and profits of the parent corporation determined as if the
distribution had been made to it of the property that the subsidiary
exchanged for the stock. In such cases, the transferor's basis for his
remaining stock in the parent corporation will be determined by
including the amount of the basis of the stock of the parent corporation
sold to the subsidiary.
(b) Section 304(a)(2) may be illustrated by the following example:
Example. Corporation M has outstanding 100 shares of common stock
which are owned as follows: B, 75 shares, C, son of B, 20 shares, and D,
daughter of B, 5 shares. Corporation M owns the stock of Corporation X.
B sells his 75 shares of Corporation M stock to Corporation X. Under
section 302(b)(3) this is a termination of B's entire interest in
Corporation M and the full amount received from the sale of his stock
will be treated as payment in exchange for this stock, provided he
fulfills the requirements of section 302(c)(2) (relating to an
acquisition of an interest in the corporations).
Sec. 1.304-4T Special rule for use of a related corporation to acquire
for property the stock of another commonly owned corporation (temporary).
(a) In general. At the discretion of the District Director, for
purposes of determining the amount constituting a dividend, and source
thereof, under section 304(b)(2), a corporation (deemed acquiring
corporation) will be considered to have acquired for property the stock
of a corporation (issuing corporation) acquired for property by another
corporation (acquiring corporation) that is controlled by the deemed
acquiring corporation, if one of the principal purposes for creating,
organizing, or funding the acquiring corporation, through capital
contributions or debt, is to avoid the application of section 304 to the
deemed acquiring corporation. The following example illustrates the
application of this paragraph (a).
Example. P, a domestic corporation, owns all of the stock of CFC1, a
controlled foreign corporation with substantial accumulated earnings and
profits. CFC1 is organized in Country X, which imposes a high rate of
tax on CFC1's income. P also owns all of the stock of CFC2, another
controlled foreign corporation, which has accumulated earnings and
profits of $200x. CFC2 is organized in Country Y which imposes a low
rate of tax on CFC2's income. P wishes to own all of its foreign
corporations in a direct chain and to effectuate a repatriation of
CFC2's cash to P. In order to avoid having to obtain Country X approval
for the acquisition of CFC1 (a Country X corporation) by CFC2 (a Country
Y corporation) and to avoid a dividend to P out of CFC2's earnings and
profits that would otherwise occur as a result of the application of
section 304, P causes CFC2 to form RFC as a Country X wholly-owned
subsidiary and to contribute $100x to RFC. RFC will purchase, for $100x,
all of the stock of CFC1 from P. Because one of P's principal purposes
for having CFC1 owned by RFC is to avoid section 304, under Sec. 1.304-
4T(a), CFC2 is considered to have acquired the stock of CFC1 for $100x
for purposes of determining the amount constituting a dividend (and
source thereof) for purposes of section 304(b)(2).
(b) Availability to taxpayers. Nothing in this regulation shall be
construed to provide a taxpayer the right to compel the Internal Revenue
Service to disregard the form of its transaction for Federal income tax
purposes.
(c) Effective date. This section is effective June 14, 1988, with
respect to acquisitions of stock occurring on or after June 14, 1988.
[T.D. 8209, 53 FR 22171, June 14, 1988]
Sec. 1.304-5 Control.
(a) Control requirement in general. Section 304(c)(1) provides that,
for purposes of section 304, control means the ownership of stock
possessing at least
[[Page 23]]
50 percent of the total combined voting power of all classes of stock
entitled to vote or at least 50 percent of the total value of shares of
all classes of stock. Section 304(c)(3) makes section 318(a) (relating
to constructive ownership of stock), as modified by section
304(c)(3)(B), applicable to section 304 for purposes of determining
control under section 304(c)(1).
(b) Effect of section 304(c)(2)(B)--(1) In general. In determining
whether the control test with respect to both the issuing and acquiring
corporations is satisfied, section 304(a)(1) considers only the person
or persons that--
(i) Control the issuing corporation before the transaction;
(ii) Transfer issuing corporation stock to the acquiring corporation
for property; and
(iii) Control the acquiring corporation thereafter.
(2) Application. Section 317 defines property to include money,
securities, and any other property except stock (or stock rights) in the
distributing corporation. However, section 304(c)(2)(B) provides a
special rule to extend the relevant group of persons to be tested for
control of both the issuing and acquiring corporations to include the
person or persons that do not acquire property, but rather solely stock
from the acquiring corporation in the transaction. Section 304(c)(2)(B)
provides that if two or more persons in control of the issuing
corporation transfer stock of such corporation to the acquiring
corporation, and if the transferors are in control of the acquiring
corporation after the transfer, the person or persons in control of each
corporation include each of those transferors. Because the purpose of
section 304(c)(2)(B) is to include in the relevant control group the
person or persons that retain or acquire acquiring corporation stock in
the transaction, only the person or persons transferring stock of the
issuing corporation that retain or acquire any proprietary interest in
the acquiring corporation are taken into account for purposes of
applying section 304(c)(2)(B).
(3) Example. This section may be illustrated by the following
example.
Example (a) A, the owner of 20% of T's only class of stock,
transfers that stock to P solely in exchange for all of the P stock.
Pursuant to the same transaction, P, solely in exchange for cash,
acquires the remaining 80% of the T stock from T's other shareholder, B,
who is unrelated to A and P.
(b) Although A and B together were in control of T (the issuing
corporation) before the transaction and A and B each transferred T stock
to P (the acquiring corporation), sections 304(a)(1) and (c)(2)(B) do
not apply to B because B did not retain or acquire any proprietary
interest in P in the transaction. Section 304(a)(1) also does not apply
to A because A (or any control group of which A was a member) did not
control T before the transaction and P after the transaction.
(c) Effective date. This section is effective on January 20, 1994.
[T.D. 8515, 59 FR 2960, Jan. 20, 1994]
Sec. 1.305-1 Stock dividends.
(a) In general. Under section 305, a distribution made by a
corporation to its shareholders in its stock or in rights to acquire its
stock is not included in gross income except as provided in section
305(b) and the regulations promulgated under the authority of section
305(c). A distribution made by a corporation to its shareholders in its
stock or rights to acquire its stock which would not otherwise be
included in gross income by reason of section 305 shall not be so
included merely because such distribution was made out of Treasury stock
or consisted of rights to acquire Treasury stock. See section 307 for
rules as to basis of stock and stock rights acquired in a distribution.
(b) Amount of distribution. (1) In general, where a distribution of
stock or rights to acquire stock of a corporation is treated as a
distribution of property to which section 301 applies by reason of
section 305(b), the amount of the distribution, in accordance with
section 301(b) and Sec. 1.301-1, is the fair market value of such stock
or rights on the date of distribution. See Example (1) of Sec. 1.305-
2(b).
(2) Where a corporation which regularly distributes its earnings and
profits, such as a regulated investment company, declares a dividend
pursuant to which the shareholders may elect to receive either money or
stock of the distributing corporation of equivalent value, the amount of
the distribution of the stock received by any shareholder electing to
receive stock will be
[[Page 24]]
considered to equal the amount of the money which could have been
received instead. See Example (2) of Sec. 1.305-2(b).
(3) For rules for determining the amount of the distribution where
certain transactions, such as changes in conversion ratios or periodic
redemptions, are treated as distributions under section 305(c), see
Examples (6), (8), (9), and (15) of Sec. 1.305-3(e).
(c) Adjustment in purchase price. A transfer of stock (or rights to
acquire stock) or an increase or decrease in the conversion ratio or
redemption price of stock which represents an adjustment of the price to
be paid by the distributing corporation in acquiring property (within
the meaning of section 317(a)) is not within the purview of section 305
because it is not a distribution with respect to its stock. For example,
assume that on January 1, 1970, pursuant to a reorganization,
corporation X acquires all the stock of corporation Y solely in exchange
for its convertible preferred class B stock. Under the terms of the
class B stock, its conversion ratio is to be adjusted in 1976 under a
formula based upon the earnings of corporation Y over the 6-year period
ending on December 31, 1975. Such an adjustment in 1976 is not covered
by section 305.
(d) Definitions. (1) For purposes of this section and Sec. Sec.
1.305-2 through 1.305-7, the term stock includes rights or warrants to
acquire such stock.
(2) For purposes of Sec. Sec. 1.305-2 through 1.305-7, the term
shareholder includes a holder of rights or warrants or a holder of
convertible securities.
[T.D. 7281, 38 FR 18532, July 12, 1973; 38 FR 19910, July 25, 1973]
Sec. 1.305-2 Distributions in lieu of money.
(a) In general. Under section 305(b)(1), if any shareholder has the
right to an election or option with respect to whether a distribution
shall be made either in money or any other property, or in stock or
rights to acquire stock of the distributing corporation, then, with
respect to all shareholders, the distribution of stock or rights to
acquire stock is treated as a distribution of property to which section
301 applies regardless of--
(1) Whether the distribution is actually made in whole or in part in
stock or in stock rights;
(2) Whether the election or option is exercised or exercisable
before or after the declaration of the distribution;
(3) Whether the declaration of the distribution provides that the
distribution will be made in one medium unless the shareholder
specifically requests payment in the other;
(4) Whether the election governing the nature of the distribution is
provided in the declaration of the distribution or in the corporate
charter or arises from the circumstances of the distribution; or
(5) Whether all or part of the shareholders have the election.
(b) Examples. The application of section 305(b)(1) may be
illustrated by the following examples:
Example (1). (i) Corporation X declared a dividend payable in
additional shares of its common stock to the holders of its outstanding
common stock on the basis of two additional shares for each share held
on the record date but with the provision that, at the election of any
shareholder made within a specified period prior to the distribution
date, he may receive one additional share for each share held on the
record date plus $12 principal amount of securities of corporation Y
owned by corporation X. The fair market value of the stock of
corporation X on the distribution date was $10 per share. The fair
market value of $12 principal amount of securities of corporation Y on
the distribution date was $11 but such securities had a cost basis to
corporation X of $9.
(ii) The distribution to all shareholders of one additional share of
stock of corporation X (with respect to which no election applies) for
each share outstanding is not a distribution to which section 301
applies.
(iii) The distribution of the second share of stock of corporation X
to those shareholders who do not elect to receive securities of
corporation Y is a distribution of property to which section 301
applies, whether such shareholders are individuals or corporations. The
amount of the distribution to which section 301 applies is $10 per share
of stock of corporation X held on the record date (the fair market value
of the stock of corporation X on the distribution date).
(iv) The distribution of securities of corporation Y in lieu of the
second share of stock of corporation X to the shareholders of
corporation X whether individuals or corporations, who elect to receive
such securities, is also a distribution of property to which section 301
applies.
[[Page 25]]
(v) In the case of the individual shareholders of corporation X who
elects to receive such securities, the amount of the distribution to
which section 301 applies is $11 per share of stock of corporation X
held on the record date (the fair market value of the $12 principal
amount of securities of corporation Y on the distribution date).
(vi) In the case of the corporate shareholders of corporation X
electing to receive such securities, the amount of the distribution to
which section 301 applies is $9 per share of stock of corporation X held
on the record date (the basis of the securities of corporation Y in the
hands of corporation X).
Example (2). On January 10, 1970, corporation X, a regulated
investment company, declared a dividend of $1 per share on its common
stock payable on February 11, 1970, in cash or in stock of corporation X
of equivalent value determined as of January 22, 1970, at the election
of the shareholder made on or before January 22, 1970. The amount of the
distribution to which section 301 applies is $1 per share whether the
shareholder elects to take cash or stock and whether the shareholder is
an individual or a corporation. Such amount will also be used in
determining the dividend paid deduction of corporation X and the
reduction in earnings and profits of corporation X.
[T.D. 7281, 38 FR 18532, July 12, 1973]
Sec. 1.305-3 Disproportionate distributions.
(a) In general. Under section 305(b)(2), a distribution (including a
deemed distribution) by a corporation of its stock or rights to acquire
its stock is treated as a distribution of property to which section 301
applies if the distribution (or a series of distributions of which such
distribution is one) has the result of (1) the receipt of money or other
property by some shareholders, and (2) an increase in the proportionate
interests of other shareholders in the assets or earnings and profits of
the corporation. Thus, if a corporation has two classes of common stock
outstanding and cash dividends are paid on one class and stock dividends
are paid on the other class, the stock dividends are treated as
distributions to which section 301 applies.
(b) Special rules. (1) As used in section 305(b)(2), the term a
series of distributions encompasses all distributions of stock made or
deemed made by a corporation which have the result of the receipt of
cash or property by some shareholders and an increase in the
proportionate interests of other shareholders.
(2) In order for a distribution of stock to be considered as one of
a series of distributions it is not necessary that such distribution be
pursuant to a plan to distribute cash or property to some shareholders
and to increase the proportionate interests of other shareholders. It is
sufficient if there is an actual or deemed distribution of stock (of
which such distribution is one) and as a result of such distribution or
distributions some shareholders receive cash or property and other
shareholders increase their proportionate interests. For example, if a
corporation pays quarterly stock dividends to one class of common
shareholders and annual cash dividends to another class of common
shareholders the quarterly stock dividends constitute a series of
distributions of stock having the result of the receipt of cash or
property by some shareholders and an increase in the proportionate
interests of other shareholders. This is so whether or not the stock
distributions and the cash distributions are steps in an overall plan or
are independent and unrelated. Accordingly, all the quarterly stock
dividends are distributions to which section 301 applies.
(3) There is no requirement that both elements of section 305(b)(2)
(i.e., receipt of cash or property by some shareholders and an increase
in proportionate interests of other shareholders) occur in the form of a
distribution or series of distributions as long as the result of a
distribution or distributions of stock is that some shareholders'
proportionate interests increase and other shareholders in fact receive
cash or property. Thus, there is no requirement that the shareholders
receiving cash or property acquire the cash or property by way of a
corporate distribution with respect to their shares, so long as they
receive such cash or property in their capacity as shareholders, if
there is a stock distribution which results in a change in the
proportionate interests of some shareholders and other shareholders
receive cash or property. However, in order for a distribution of
property to meet the requirement of section 305(b)(2), such
[[Page 26]]
distribution must be made to a shareholder in his capacity as a
shareholder, and must be a distribution to which section 301, 356(a)(2),
871(a)(1)(A), 881(a)(1), 852(b), or 857(b) applies. (Under section
305(d)(2), the payment of interest to a holder of a convertible
debenture is treated as a distribution of property to a shareholder for
purposes of section 305(b)(2).) For example if a corporation makes a
stock distribution to its shareholders and, pursuant to a prearranged
plan with such corporation, a related corporation purchases such stock
from those shareholders who want cash, in a transaction to which section
301 applies by virtue of section 304, the requirements of section
305(b)(2) are satisfied. In addition, a distribution of property
incident to an isolated redemption of stock (for example, pursuant to a
tender offer) will not cause section 305(b)(2) to apply even though the
redemption distribution is treated as a distribution of property to
which section 301, 871(a)(1)(A), 881(a)(1), or 356(a)(2) applies.
(4) Where the receipt of cash or property occurs more than 36 months
following a distribution or series of distributions of stock, or where a
distribution or series of distributions of stock is made more than 36
months following the receipt of cash or property, such distribution or
distributions will be presumed not to result in the receipt of cash or
property by some shareholders and an increase in the proportionate
interest of other shareholders, unless the receipt of cash or property
and the distribution or series of distributions of stock are made
pursuant to a plan. For example, if, pursuant to a plan, a corporation
pays cash dividends to some shareholders on January 1, 1971 and
increases the proportionate interests of other shareholders on March 1,
1974, such increases in proportionate interests are distributions to
which section 301 applies.
(5) In determining whether a distribution or a series of
distributions has the result of a disproportionate distribution, there
shall be treated as outstanding stock of the distributing corporation
(i) any right to acquire such stock (whether or not exercisable during
the taxable year), and (ii) any security convertible into stock of the
distributing corporation (whether or not convertible during the taxable
year).
(6) In cases where there is more than one class of stock
outstanding, each class of stock is to be considered separately in
determining whether a shareholder has increased his proportionate
interest in the assets or earnings and profits of a corporation. The
individual shareholders of a class of stock will be deemed to have an
increased interest if the class of stock as a whole has an increased
interest in the corporation.
(c) Distributions of cash in lieu of fractional shares. (1) Section
305(b)(2) will not apply if--
(i) A corporation declares a dividend payable in stock of the
corporation and distributes cash in lieu of fractional shares to which
shareholders would otherwise be entitled, or
(ii) Upon a conversion of convertible stock or securities a
corporation distributes cash in lieu of fractional shares to which
shareholders would otherwise be entitled.
Provided the purpose of the distribution of cash is to save the
corporation the trouble, expense, and inconvenience of issuing and
transferring fractional shares (or scrip representing fractional
shares), or issuing full shares representing the sum of fractional
shares, and not to give any particular group of shareholders an
increased interest in the assets or earnings and profits of the
corporation. For purposes of paragraph (c)(1)(i) of this section, if the
total amount of cash distributed in lieu of fractional shares is 5
percent or less of the total fair market value of the stock distributed
(determined as of the date of declaration), the distribution shall be
considered to be for such valid purpose.
(2) In a case to which subparagraph (1) of this paragraph applies,
the transaction will be treated as though the fractional shares were
distributed as part of the stock distribution and then were redeemed by
the corporation. The treatment of the cash received by a shareholder
will be determined under section 302.
(d) Adjustment in conversion ratio. (1)(i) Except as provided in
subparagraph (2) of this paragraph, if a corporation has convertible
stock or convertible securities outstanding (upon
[[Page 27]]
which it pays or is deemed to pay dividends or interest in money or
other property) and distributes a stock dividend (or rights to acquire
such stock) with respect to the stock into which the convertible stock
or securities are convertible, an increase in proportionate interest in
the assets or earnings and profits of the corporation by reason of such
stock dividend shall be considered to have occurred unless a full
adjustment in the conversion ratio or conversion price to reflect such
stock dividend is made. Under certain circumstances, however, the
application of an adjustment formula which in effect provides for a
``credit'' where stock is issued for consideration in excess of the
conversion price may not satisfy the requirement for a ``full
adjustment.'' Thus, if under a ``conversion price'' antidilution formula
the formula provides for a ``credit'' where stock is issued for
consideration in excess of the conversion price (in effect as an offset
against any decrease in the conversion price which would otherwise be
required when stock is subsequently issued for consideration below the
conversion price) there may still be an increase in proportionate
interest by reason of a stock dividend after application of the formula,
since any downward adjustment of the conversion price that would
otherwise be required to reflect the stock dividend may be offset, in
whole or in part, by the effect of prior sales made at prices above the
conversion price. On the other hand, if there were no prior sales of
stock above the conversion price then a full adjustment would occur upon
the application of such an adjustment formula and there would be no
change in proportionate interest. Similarly, if consideration is to be
received in connection with the issuance of stock, such as in the case
of a rights offering or a distribution of warrants, the fact that such
consideration is taken into account in making the antidilution
adjustment will not preclude a full adjustment. See paragraph (b) of the
example in this subparagraph for a case where the application of an
adjustment formula with a cumulative feature does not result in a full
adjustment and where a change in proportionate interest therefore
occurs. See paragraph (c) for a case where the application of an
adjustment formula with a cumulative feature does result in a full
adjustment and where no change in proportionate interest therefore
occurs. See paragraph (d) for an application of an antidilution formula
in the case of a rights offering. See paragraph (e) for a case where the
application of a noncumulative type adjustment formula will in all cases
prevent a change in proportionate interest from occurring in the case of
a stock dividend, because of the omission of the cumulative feature.
(ii) The principles of this subparagraph may be illustrated by the
following example.
Example. (a) Corporation S has two classes of securities
outstanding, convertible debentures and common stock. At the time of
issuance of the debentures the corporation had 100 shares of common
stock outstanding. Each debenture is interest-paying and is convertible
into common stock at a conversion price of $2. The debenture's
conversion price is subject to reduction pursuant to the following
formula:
(Number of common shares outstanding at date of issue of debentures
times initial conversion price) plus (Consideration received upon
issuance of additional common shares) divided by (Number of common
shares outstanding at date of issue of debentures) plus (Number of
additional common shares issued)
Under the formula, common stock dividends are treated as an issue of
common stock for zero consideration. If the computation results in a
figure which is less than the existing conversion price the conversion
price is reduced. However, under the formula, the existing conversion
price is never increased. The formula works upon a cumulative basis
since the numerator includes the consideration received upon the
issuance of all common shares subsequent to the issuance of the
debentures, and the reduction effected by the formula because of a sale
or issuance of common stock below the existing conversion price is thus
limited by any prior sales made above the existing conversion price.
(b) In 1972 corporation S sells 100 common shares at $3 per share.
In 1973 the corporation declares a stock dividend of 20 shares to all
holders of common stock. Under the antidilution formula no adjustment
will be made to the conversion price of the debentures to reflect the
stock dividend to common stockholders since the prior sale of common
stock in excess of the conversion
[[Page 28]]
price in 1972 offsets the reduction in the conversion price which would
otherwise result, as follows:
100x$2+$300/100+120=$500/220=$2.27
Since $2.27 is greater than the existing conversion price of $2 no
adjustment is required. As a result, there is an increase in
proportionate interest of the common stockholders by reason of the stock
dividend and the additional shares of common stock will be treated,
pursuant to section 305(b)(2), as a distribution of property to which
section 301 applies.
(c) Assume the same facts as above, but instead of selling 100
common shares at $3 per share in 1972, assume corporation S sold no
shares. Application of the antidilution formula would give rise to an
adjustment in the conversion price as follows:
100x$2+$0/100+20=$200/120=$1.67
The conversion price, being reduced from $2 to $1.67, fully reflects the
stock dividend distributed to the common stockholders. Hence, the
distribution of common stock is not treated under section 305(b)(2) as
one to which section 301 applies because the distribution does not
increase the proportionate interests of the common shareholders as a
class.
(d) Corporation S distributes to its shareholders rights entitling
the shareholders to purchase a total of 20 shares at $1 per share.
Application of the antidilution formula would produce an adjustment in
the conversion price as follows:
100x$2+20x$1/100+20=$220/120=$1.83
The conversion price, being reduced from $2 to $1.83, fully reflects the
distribution of rights to purchase stock at a price lower than the
conversion price. Hence, the distribution of the rights is not treated
under section 305(b)(2) as one to which section 301 applies because the
distribution does not increase the proportionate interests of the common
shareholders as a class.
(e) Assume the same facts as in (b) above, but instead of using a
``conversion price'' antidilution formula which operates on a cumulative
basis, assume corporation S has employed a formula which operates as
follows with respect to all stock dividends: The conversion price in
effect at the opening of business on the day following the dividend
record date is reduced by multiplying such conversion price by a
fraction the numerator of which is the number of shares of common stock
outstanding at the close of business on the record date and the
denominator of which is the sum of such shares so outstanding and the
number of shares constituting the stock dividend. Under such a formula
the following adjustment would be made to the conversion price upon the
declaration of a stock dividend of 20 shares in 1973:
200/200+20=200/220x$2=$1.82
The conversion price, being reduced from $2 to $1.82, fully reflects the
stock dividend distributed to the common stockholders. Hence, the
distribution of common stock is not treated under section 305(b)(2) as
one to which section 301 applies because the distribution does not
increase the proportionate interests of the common shareholders as a
class.
(2)(i) A distributing corporation either must make the adjustment
required by subparagraph (1) of this paragraph as of the date of the
distribution of the stock dividend, or must elect (in the manner
provided in subdivision (iii) of this subparagraph) to make such
adjustment within the time provided in subdivision (ii) of this
subparagraph.
(ii) If the distributing corporation elects to make such adjustment,
such adjustment must be made no later than the earlier of (a) 3 years
after the date of the stock dividend, or (b) that date as of which the
aggregate stock dividends for which adjustment of the conversion ratio
has not previously been made total at least 3 percent of the issued and
outstanding stock with respect to which such stock dividends were
distributed.
(iii) The election provided by subdivision (ii) of this subparagraph
shall be made by filing with the income tax return for the taxable year
during which the stock dividend is distributed--
(a) A statement that an adjustment will be made as provided by that
subdivision, and
(b) A description of the antidilution provisions under which the
adjustment will be made.
(3) Notwithstanding the preceding subparagraph, if a distribution
has been made before July 12, 1973, and the adjustment required by
subparagraph (1) or the election to make such adjustment was not made
before such date, the adjustment or the election to make such
adjustment, as the case may be, shall be considered valid if made no
later than 15 days following the date of the first annual meeting of the
shareholders after July 12, 1973, or July 12, 1974, whichever is
earlier. If the election is made within such period, and, if the income
tax return has been filed before the time of such election, the
statement of adjustment and the description of the antidilution
provisions
[[Page 29]]
required by subparagraph (2)(iii) shall be filed with the Internal
Revenue Service Center with which the income tax return was filed.
(4) See Sec. 1.305-7(b) for a discussion of antidilution
adjustments in connection with the application of section 305(c) in
conjunction with section 305(b).
(e) Examples. The application of section 305(b)(2) to distributions
of stock and section 305(c) to deemed distributions of stock may be
illustrated by the following examples:
Example 1. Corporation X is organized with two classes of common
stock, class A and class B. Each share of stock is entitled to share
equally in the assets and earnings and profits of the corporation.
Dividends may be paid in stock or in cash on either class of stock
without regard to the medium of payment of dividends on the other class.
A dividend is declared on the class A stock payable in additional shares
of class A stock and a dividend is declared on class B stock payable in
cash. Since the class A shareholders as a class will have increased
their proportionate interests in the assets and earnings and profits of
the corporation and the class B shareholders will have received cash,
the additional shares of class A stock are distributions of property to
which section 301 applies. This is true even with respect to those
shareholders who may own class A stock and class B stock in the same
proportion.
Example 2. Corporation Y is organized with two classes of stock,
class A common, and class B, which is nonconvertible and limited and
preferred as to dividends. A dividend is declared upon the class A stock
payable in additional shares of class A stock and a dividend is declared
on the class B stock payable in cash. The distribution of class A stock
is not one to which section 301 applies because the distribution does
not increase the proportionate interests of the class A shareholders as
a class.
Example 3. Corporation K is organized with two classes of stock,
class A common, and class B, which is nonconvertible preferred stock. A
dividend is declared upon the class A stock payable in shares of class B
stock and a dividend is declared on the class B stock payable in cash.
Since the class A shareholders as a class have an increased interest in
the assets and earnings and profits of the corporation, the stock
distribution is treated as a distribution to which section 301 applies.
If, however, a dividend were declared upon the class A stock payable in
a new class of preferred stock that is subordinated in all respects to
the class B stock, the distribution would not increase the proportionate
interests of the class A shareholders in the assets or earnings and
profits of the corporation and would not be treated as a distribution to
which section 301 applies.
Example 4. (i) Corporation W has one class of stock outstanding,
class A common. The corporation also has outstanding interest paying
securities convertible into class A common stock which have a fixed
conversion ratio that is not subject to full adjustment in the event
stock dividends or rights are distributed to the class A shareholders.
Corporation W distributes to the class A shareholders rights to acquire
additional shares of class A stock. During the year, interest is paid on
the convertible securities.
(ii) The stock rights and convertible securities are considered to
be outstanding stock of the corporation and the distribution increases
the proportionate interests of the class A shareholders in the assets
and earnings and profits of the corporation. Therefore, the distribution
is treated as a distribution to which section 301 applies. The same
result would follow if, instead of convertible securities, the
corporation had outstanding convertible stock. If, however, the
conversion ratio of the securities or stock were fully adjusted to
reflect the distribution of rights to the class A shareholders, the
rights to acquire class A stock would not increase the proportionate
interests of the class A shareholders in the assets and earnings and
profits of the corporation and would not be treated as a distribution to
which section 301 applies.
Example 5. (i) Corporation S is organized with two classes of stock,
class A common and class B convertible preferred. The class B is fully
protected against dilution in the event of a stock dividend or stock
split with respect to the class A stock; however, no adjustment in the
conversion ratio is required to be made until the stock dividends equal
3 percent of the common stock issued and outstanding on the date of the
first such stock dividend except that such adjustment must be made no
later than 3 years after the date of the stock dividend. Cash dividends
are paid annually on the class B stock.
(ii) Corporation S pays a 1 percent stock dividend on the class A
stock in 1970. In 1971, another 1 percent stock dividend is paid and in
1972 another 1 percent stock dividend is paid. The conversion ratio of
the class B stock is increased in 1972 to reflect the three stock
dividends paid on the class A stock. The distributions of class A stock
are not distributions to which section 301 applies because they do not
increase the proportionate interests of the class A shareholders in the
assets and earnings and profits of the corporation.
Example 6. (i) Corporation M is organized with two classes of stock
outstanding, class A and class B. Each class B share may be converted,
at the option of the holder, into class A shares. During the first year,
the conversion ratio is one share of class A stock
[[Page 30]]
for each share of class B stock. At the beginning of each subsequent
year, the conversion ratio is increased by 0.05 share of class A stock
for each share of class B stock. Thus, during the second year, the
conversion ratio would be 1.05 shares of class A stock for each share of
class B stock, during the third year, the ratio would be 1.10 shares,
etc.
(ii) M pays an annual cash dividend on the class A stock. At the
beginning of the second year, when the conversion ratio is increased to
1.05 shares of class A stock for each share of class B stock, a
distribution of 0.05 shares of class A stock is deemed made under
section 305(c) with respect to each share of class B stock, since the
proportionate interests of the class B shareholders in the assets or
earnings and profits of M are increased and the transaction has the
effect described in section 305(b)(2). Accordingly, sections 305(b)(2)
and 301 apply to the transaction.
Example 7. (i) Corporation N has two classes of stock outstanding,
class A and class B. Each class B share is convertible into class A
stock. However, in accordance with a specified formula, the conversion
ratio is decreased each time a cash dividend is paid on the class B
stock to reflect the amount of the cash dividend. The conversion ratio
is also adjusted in the event that cash dividends are paid on the class
A stock to increase the number of class A shares into which the class B
shares are convertible to compensate the class B shareholders for the
cash dividend paid on the class A stock.
(ii) In 1972, a $1 cash dividend per share is declared and paid on
the class B stock. On the date of payment, the conversion ratio of the
class B stock is decreased. A distribution of stock is deemed made under
section 305(c) to the class A shareholders, since the proportionate
interest of the class A shareholders in the assets or earnings and
profits of the corporation is increased and the transaction has the
effect described in section 305(b)(2). Accordingly, sections 305(b)(2)
and 301 apply to the transaction.
(iii) In the following year a cash dividend is paid on the class A
stock and none is paid on the class B stock. The increase in conversion
rights of the class B shares is deemed to be a distribution under
section 305(c) to the class B shareholders since their proportionate
interest in the assets or earnings and profits of the corporation is
increased and since the transaction has the effect described in section
305(b)(2). Accordingly, sections 305(b)(2) and 301 apply to the
transaction.
Example 8. Corporation T has 1,000 shares of stock outstanding. C
owns 100 shares. Nine other shareholders each owns 100 shares. Pursuant
to a plan for periodic redemptions, T redeems up to 5 percent of each
shareholder's stock each year. During the year, each of the nine other
shareholders has 5 shares of his stock redeemed for cash. Thus, C's
proportionate interest in the assets and earnings and profits of T is
increased. Assuming that the cash received by the nine other
shareholders is taxable under section 301, C is deemed under section
305(c) to have received a distribution under section 305(b)(2) of 5.25
shares of T stock to which section 301 applies. The amount of C's
distribution is measured by the fair market value of the number of
shares which would have been distributed to C had the corporation sought
to increase his interest by 0.47 percentage points (C owned 10 percent
of the T stock immediately before the redemption and 10.47 percent
immediately thereafter) and the other shareholders continued to hold 900
shares (i.e.,
(a) 100/955=10.47% (percent of C's ownership after redemption)
(b) 100+x/1000+x=10.47%; x=5.25 (additional shares considered to be
distributed to C)).
Since in computing the amount of additional shares deemed to be
distributed to C the redemption of shares is disregarded, the redemption
of shares will be similarly disregarded in determining the value of the
stock of the corporation which is deemed to be distributed. Thus, in the
example, 1,005.25 shares of stock are considered as outstanding after
the redemption. The value of each share deemed to be distributed to C is
then determined by dividing the 1,005.25 shares into the aggregate fair
market value of the actual shares outstanding (955) after the
redemption.
Example 9. (i) Corporation O has a stock redemption program under
which, instead of paying out earnings and profits to its shareholders in
the form of dividends, it redeems the stock of its shareholders up to a
stated amount which is determined by the earnings and profits of the
corporation. If the stock tendered for redemption exceeds the stated
amount, the corporation redeems the stock on a pro rata basis up to the
stated amount.
(ii) During the year corporation O offers to distribute $10,000 in
redemption of its stock. At the time of the offering, corporation O has
1,000 shares outstanding of which E and F each owns 150 shares and G and
H each owns 350 shares. The corporation redeems 15 shares from E and 35
shares from G. F and H continue to hold all of their stock.
(iii) F and H have increased their proportionate interests in the
assets and earnings and profits of the corporation. Assuming that the
cash E and G receive is taxable under section 301, F will be deemed
under section 305(c) to have received a distribution under section
305(b)(2) of 16.66 shares of stock to which section 301 applies and H
will be deemed under section 305(c) to have received a distribution
under section 305(b)(2) of 38.86 shares of stock to which section 301
applies. The amount of the distribution to F and H is measured by the
number of shares which would have been distributed to F and H had
[[Page 31]]
the corporation sought to increase the interest of F by 0.79 percentage
points (F owned 15 percent of the stock immediately before the
redemption and 15.79 percent immediately thereafter) and the interest of
H by 1.84 percentage points (H owned 35 percent of the stock immediately
before the redemption and 36.84 percent immediately thereafter) and E
and G had continued to hold 150 shares and 350 shares, respectively
(i.e.,
(a) 150/950+350/950=52.63% (percent of F and H's ownership after
redemption)
(b) 500+y/1000+y=52.63%; y=55.52 (additional shares considered to be
distributed to F and H)
(c)(1) 150/500x55.52=16.66 (shares considered to be distributed to
F)
(2) 350/500x55.52=38.86 (shares considered to be distributed to H)).
Since in computing the amount of additional shares deemed to be
distributed to F and H the redemption of shares is disregarded, the
redemption of shares will be similarly disregarded in determining the
value of the stock of the corporation which is deemed to be distributed.
Thus, in the example, 1,055.52 shares of stock are considered as
outstanding after the redemption. The value of each share deemed to be
distributed to F and H is then determined by dividing the 1,055.52
shares into the aggregate fair market value of the actual shares
outstanding (950) after the redemption.
Example 10. Corporation P has 1,000 shares of stock outstanding. T
owns 700 shares of the P stock and G owns 300 shares of the P stock. In
a single and isolated redemption to which section 301 applies, the
corporation redeems 150 shares of T's stock. Since this is an isolated
redemption and is not a part of a periodic redemption plan, G is not
treated as having received a deemed distribution under section 305(c) to
which sections 305(b)(2) and 301 apply even though he has an increased
proportionate interest in the assets and earnings and profits of the
corporation.
Example 11. Corporation Q is a large corporation whose sole class of
stock is widely held. However, the four largest shareholders are
officers of the corporation and each owns 8 percent of the outstanding
stock. In 1974, in a distribution to which section 301 applies, the
corporation redeems 1.5 percent of the stock from each of the four
largest shareholders in preparation for their retirement. From 1970
through 1974, the corporation distributes annual stock dividends to its
shareholders. No other distributions were made to these shareholders.
Since the 1974 redemptions are isolated and are not part of a plan for
periodically redeeming the stock of the corporation, the shareholders
receiving stock dividends will not be treated as having received a
distribution under section 305(b)(2) even though they have an increased
proportionate interest in the assets and earnings and profits of the
corporation and whether or not the redemptions are treated as
distributions to which section 301 applies.
Example 12. Corporation R has 2,000 shares of class A stock
outstanding. Five shareholders own 300 shares each and five shareholders
own 100 shares each. In preparation for the retirement of the five major
shareholders, corporation R, in a single and isolated transaction, has a
recapitalization in which each share of class A stock may be exchanged
either for five shares of new class B nonconvertible preferred stock
plus 0.4 share of new class C common stock, or for two shares of new
class C common stock. As a result of the exchanges, each of the five
major shareholders receives 1,500 shares of class B nonconvertible
preferred stock and 120 shares of class C common stock. The remaining
shareholders each receives 200 shares of class C common stock. None of
the exchanges are within the purview of section 305.
Example 13. Corporation P is a widely-held company whose shares are
listed for trading on a stock exchange. P distributes annual cash
dividends to its shareholders. P purchases shares of its common stock
directly from small stockholders (holders of record of 100 shares or
less) or through brokers where the holders may not be known at the time
of purchase. Where such purchases are made through brokers, they are
pursuant to the rules and regulations of the Securities and Exchange
Commission. The shares are purchased for the purpose of issuance to
employee stock investment plans, to holders of convertible stock or
debt, to holders of stock options, or for future acquisitions. Provided
the purchases are not pursuant to a plan to increase the proportionate
interest of some shareholders and distribute property to other
shareholders, the remaining shareholders of P are not treated as having
received a deemed distribution under section 305(c) to which section
305(b)(2) and 301 apply, even though they have an increased
proportionate interest in the assets and earnings and profits of the
corporation.
Example 14. Corporation U is a large manufacturing company whose
products are sold through independent dealers. In order to assist
individuals who lack capital to become dealers, the corporation has an
established investment plan under which it provides 75 percent of the
capital necessary to form a dealership corporation and the individual
dealer provides the remaining 25 percent. Corporation U receives class A
stock and a note representing its 75 percent interest. The individual
dealer receives class B stock representing his 25 percent interest. The
class B stock is nonvoting until all the class A shares are redeemed. At
least 70 percent of the earnings and profits of the dealership
corporation must be used each year to retire the note and to redeem the
class A stock. The class A stock is redeemed at a fixed
[[Page 32]]
price. The individual dealer has no control over the redemption of stock
and has no right to have his stock redeemed during the period the plan
is in existence. U's investment is thus systematically eliminated and
the individual becomes the sole owner of the dealership corporation.
Since this type of plan is akin to a security arrangement, the
redemptions of the class A stock will not be deemed under section 305(c)
as distributions taxable under sections 305(b)(2) and 301 during the
years in which the class A stock is redeemed.
Example 15. (i) Facts. Corporation V is organized with two classes
of stock, class A common and class B convertible preferred. The class B
stock is issued for $100 per share and is convertible at the holder's
option into class A at a fixed ratio that is not subject to full
adjustment in the event stock dividends or rights are distributed to the
class A shareholders. The class B stock pays no dividends but it is
mandatorily redeemable in 10 years for $200. Under sections 305(c) and
305(b)(4), the entire redemption premium (i.e., the excess of the
redemption price over the issue price) is deemed to be a distribution of
preferred stock on preferred stock which is taxable as a distribution of
property under section 301. This amount is considered to be distributed
over the 10-year period under principles similar to the principles of
section 1272(a). During the year, the corporation declares a dividend on
the class A stock payable in additional shares of class A stock.
(ii) Analysis. The distribution on the class A stock is a
distribution to which sections 305(b)(2) and 301 apply since it
increases the proportionate interests of the class A shareholders in the
assets and earnings and profits of the corporation and the class B
shareholders have received property (i.e., the constructive distribution
described above). If, however, the conversion ratio of the class B stock
were subject to full adjustment to reflect the distribution of stock to
class A shareholders, the distribution of stock dividends on the class A
stock would not increase the proportionate interest of the class A
shareholders in the assets and earnings and profits of the corporation
and such distribution would not be a distribution to which section 301
applies.
(iii) Effective date. This Example 15 applies to stock issued on or
after December 20, 1995. For previously issued stock, see Sec. 1.305-
3(e) Example (15) (as contained in the 26 CFR part 1 edition revised
April 1, 1995).
[T.D. 7281, 38 FR 18532, July 12, 1973; 38 FR 19910, 19911, July 25,
1973; as amended by T.D. 7329, 39 FR 36860, Oct. 15, 1974; T.D. 8643, 60
FR 66136, Dec. 21, 1995]
Sec. 1.305-4 Distributions of common and preferred stock.
(a) In general. Under section 305(b)(3), a distribution (or a series
of distributions) by a corporation which results in the receipt of
preferred stock whether or not convertible into common stock) by some
common shareholders and the receipt of common stock by other common
shareholders is treated as a distribution of property to which section
301 applies. For the meaning of the term a series of distribution, see
subparagraphs (1) through (6) of Sec. 1.305-3(b).
(b) Examples. The application of section 305(b)(3) may be
illustrated by the following examples:
Example (1). Corporation X is organized with two classes of common
stock, class A and class B. Dividends may be paid in stock or in cash on
either class of stock without regard to the medium of payment of
dividends on the other class. A dividend is declared on the class A
stock payable in additional shares of class A stock and a dividend is
declared on class B stock payable in newly authorized class C stock
which is nonconvertible and limited and preferred as to dividends. Both
the distribution of class A shares and the distribution of new class C
shares are distributions to which section 301 applies.
Example (2). Corporation Y is organized with one class of stock,
class A common. During the year the corporation declares a dividend on
the class A stock payable in newly authorized class B preferred stock
which is convertible into class A stock no later than 6 months from the
date of distribution at a price that is only slightly higher than the
market price of class A stock on the date of distribution. Taking into
account the dividend rate, redemption provisions, the marketability of
the convertible stock, and the conversion price, it is reasonable to
anticipate that within a relatively short period of time some
shareholders will exercise their conversion rights and some will not.
Since the distribution can reasonably be expected to result in the
receipt of preferred stock by some common shareholders and the receipt
of common stock by other common shareholders, the distribution is a
distribution of property to which section 301 applies.
[T.D. 7281, 38 FR 18536, July 12, 1973]
Sec. 1.305-5 Distributions on preferred stock.
(a) In general. Under section 305(b)(4), a distribution by a
corporation of its
[[Page 33]]
stock (or rights to acquire its stock) made (or deemed made under
section 305(c)) with respect to its preferred stock is treated as a
distribution of property to which section 301 applies unless the
distribution is made with respect to convertible preferred stock to take
into account a stock dividend, stock split, or any similar event (such
as the sale of stock at less than the fair market value pursuant to a
rights offering) which would otherwise result in the dilution of the
conversion right. For purposes of the preceding sentence, an adjustment
in the conversion ratio of convertible preferred stock made solely to
take into account the distribution by a closed end regulated investment
company of a capital gain dividend with respect to the stock into which
such stock is convertible shall not be considered a ``similar event.''
The term preferred stock generally refers to stock which, in relation to
other classes of stock outstanding, enjoys certain limited rights and
privileges (generally associated with specified dividend and liquidation
priorities) but does not participate in corporate growth to any
significant extent. The distinguishing feature of preferred stock for
the purposes of section 305(b)(4) is not its privileged position as
such, but that such privileged position is limited, and that such stock
does not participate in corporate growth to any significant extent.
However, a right to participate which lacks substance will not prevent a
class of stock from being treated as preferred stock. Thus, stock which
enjoys a priority as to dividends and on liquidation but which is
entitled to participate, over and above such priority, with another less
privileged class of stock in earnings and profits and upon liquidation,
may nevertheless be treated as preferred stock for purposes of section
305 if, taking into account all the facts and circumstances, it is
reasonable to anticipate at the time a distribution is made (or is
deemed to have been made) with respect to such stock that there is
little or no likelihood of such stock actually participating in current
and anticipated earnings and upon liquidation beyond its preferred
interest. Among the facts and circumstances to be considered are the
prior and anticipated earnings per share, the cash dividends per share,
the book value per share, the extent of preference and of participation
of each class, both absolutely and relative to each other, and any other
facts which indicate whether or not the stock has a real and meaningful
probability of actually participating in the earnings and growth of the
corporation. The determination of whether stock is preferred for
purposes of section 305 shall be made without regard to any right to
convert such stock into another class of stock of the corporation. The
term preferred stock, however, does not include convertible debentures.
(b) Redemption premium--(1) In general. If a corporation issues
preferred stock that may be redeemed under the circumstances described
in this paragraph (b) at a price higher than the issue price, the
difference (the redemption premium) is treated under section 305(c) as a
constructive distribution (or series of constructive distributions) of
additional stock on preferred stock that is taken into account under
principles similar to the principles of section 1272(a). However,
constructive distribution treatment does not result under this paragraph
(b) if the redemption premium does not exceed a de minimis amount, as
determined under the principles of section 1273(a)(3). For purposes of
this paragraph (b), preferred stock that may be acquired by a person
other than the issuer (the third person) is deemed to be redeemable
under the circumstances described in this paragraph (b), and references
to the issuer include the third person, if--
(i) This paragraph (b) would apply to the stock if the third person
were the issuer; and
(ii) Either--
(A) The acquisition of the stock by the third person would be
treated as a redemption for federal income tax purposes (under section
304 or otherwise); or
(B) The third person and the issuer are members of the same
affiliated group (having the meaning for this purpose given the term by
section 1504(a), except that section 1504(b) shall not apply) and a
principal purpose of the
[[Page 34]]
arrangement for the third person to acquire the stock is to avoid the
application of section 305 and paragraph (b)(1) of this section.
(2) Mandatory redemption or holder put. Paragraph (b)(1) of this
section applies to stock if the issuer is required to redeem the stock
at a specified time or the holder has the option (whether or not
currently exercisable) to require the issuer to redeem the stock.
However, paragraph (b)(1) of this section will not apply if the issuer's
obligation to redeem or the holder's ability to require the issuer to
redeem is subject to a contingency that is beyond the legal or practical
control of either the holder or the holders as a group (or through a
related party within the meaning of section 267(b) or 707(b)), and that,
based on all of the facts and circumstances as of the issue date,
renders remote the likelihood of redemption. For purposes of this
paragraph, a contingency does not include the possibility of default,
insolvency, or similar circumstances, or that a redemption may be
precluded by applicable law which requires that the issuer have a
particular level of capital, surplus, or similar items. A contingency
also does not include an issuer's option to require earlier redemption
of the stock. For rules applicable if stock may be redeemed at more than
one time, see paragraph (b)(4) of this section.
(3) Issuer call--(i) In general. Paragraph (b)(1) of this section
applies to stock by reason of the issuer's right to redeem the stock
(even if the right is immediately exercisable), but only if, based on
all of the facts and circumstances as of the issue date, redemption
pursuant to that right is more likely than not to occur. However, even
if redemption is more likely than not to occur, paragraph (b)(1) of this
section does not apply if the redemption premium is solely in the nature
of a penalty for premature redemption. A redemption premium is not a
penalty for premature redemption unless it is a premium paid as a result
of changes in economic or market conditions over which neither the
issuer nor the holder has legal or practical control.
(ii) Safe harbor. For purposes of this paragraph (b)(3), redemption
pursuant to an issuer's right to redeem is not treated as more likely
than not to occur if--
(A) The issuer and the holder are not related within the meaning of
section 267(b) or 707(b) (for purposes of applying sections 267(b) and
707(b) (including section 267(f)(1)), the phrase ``20 percent'' shall be
substituted for the phrase ``50 percent'');
(B) There are no plans, arrangements, or agreements that effectively
require or are intended to compel the issuer to redeem the stock
(disregarding, for this purpose, a separate mandatory redemption
obligation described in paragraph (b)(2) of this section); and
(C) Exercise of the right to redeem would not reduce the yield of
the stock, as determined under principles similar to the principles of
section 1272(a) and the regulations under sections 1271 through 1275.
(iii) Effect of not satisfying safe harbor. The fact that a
redemption right is not described in paragraph (b)(3)(ii) of this
section does not affect the determination of whether a redemption
pursuant to the right to redeem is more likely than not to occur.
(4) Coordination of multiple redemption provisions. If stock may be
redeemed at more than one time, the time and price at which redemption
is most likely to occur must be determined based on all of the facts and
circumstances as of the issue date. Any constructive distribution under
paragraph (b)(1) of this section will result only with respect to the
time and price identified in the preceding sentence. However, if
redemption does not occur at that identified time, the amount of any
additional premium payable on any later redemption date, to the extent
not previously treated as distributed, is treated as a constructive
distribution over the period from the missed call or put date to that
later date, to the extent required under the principles of this
paragraph (b).
(5) Consistency. The issuer's determination as to whether there is a
constructive distribution under this paragraph (b) is binding on all
holders of
[[Page 35]]
the stock, other than a holder that explicitly discloses that its
determination as to whether there is a constructive distribution under
this paragraph (b) differs from that of the issuer. Unless otherwise
prescribed by the Commissioner, the disclosure must be made on a
statement attached to the holder's timely filed federal income tax
return for the taxable year that includes the date the holder acquired
the stock. The issuer must provide the relevant information to the
holder in a reasonable manner. For example, the issuer may provide the
name or title and either the address or telephone number of a
representative of the issuer who will make available to holders upon
request the information required for holders to comply with this
provision of this paragraph (b).
(c) Cross reference. For rules for applying sections 305(b)(4) and
305(c) to recapitalizations, see Sec. 1.305-7(c).
(d) Examples. The application of sections 305(b)(4) and 305(c) may
be illustrated by the following examples:
Example 1. (i) Corporation T has outstanding 1,000 shares of $100
par 5-percent cumulative preferred stock and 10,000 shares of no-par
common stock. The corporation is 4 years in arrears on dividends to the
preferred shareholders. The issue price of the preferred stock is $100
per share. Pursuant to a recapitalization under section 368(a)(1)(E),
the preferred shareholders exchange their preferred stock, including the
right to dividend arrearages, on the basis of one old preferred share
for 1.20 newly authorized class A preferred shares. Immediately
following the recapitalization, the new class A shares are traded at
$100 per share. The class A shares are entitled to a liquidation
preference of $100. The preferred shareholders have increased their
proportionate interest in the assets or earnings and profits of
corporation T since the fair market value of 1.20 shares of class A
preferred stock ($120) exceeds the issue price of the old preferred
stock ($100). Accordingly, the preferred shareholders are deemed under
section 305(c) to receive a distribution in the amount of $20 on each
share of old preferred stock and the distribution is one to which
sections 305(b)(4) and 301 apply.
(ii) The same result would occur if the fair market value of the
common stock immediately following the recapitalization were $20 per
share and each share of preferred stock were exchanged for one share of
the new class A preferred stock and one share of common stock.
Example 2. Corporation A, a publicly held company whose stock is
traded on a securities exchange (or in the over-the-counter market) has
two classes of stock outstanding, common and cumulative preferred. Each
share of preferred stock is convertible into .75 shares of common stock.
There are no dividend arrearages. At the time of issue of the preferred
stock, there was no plan or prearrangement by which it was to be
exchanged for common stock. The issue price of the preferred stock is
$100 per share. In order to retire the preferred stock, corporation A
recapitalizes in a transaction to which section 368(a)(1)(E) applies and
each share of preferred stock is exchanged for one share of common
stock. Immediately after the recapitalization the common stock has a
fair market value of $110 per share. Notwithstanding the fact that the
fair market value of the common stock received in the exchange
(determined immediately following the recapitalization) exceeds the
issue price of the preferred stock surrendered, the recapitalization is
not deemed under section 305(c) to result in a distribution to which
sections 305(b)(4) and 301 apply since the recapitalization is not
pursuant to a plan to periodically increase a shareholder's
proportionate interest in the assets or earnings and profits and does
not involve dividend arrearages.
Example 3. Corporation V is organized with two classes of stock,
1,000 shares of class A common and 1,000 shares of class B convertible
preferred. Each share of class B stock may be converted into two shares
of class A stock. Pursuant to a recapitalization under section
368(a)(1)(E), the 1,000 shares of class A stock are surrendered in
exchange for 500 shares of new class A common and 500 shares of newly
authorized class C common. The conversion right of class B stock is
changed to one share of class A stock and one share of class C stock for
each share of class B stock. The change in the conversion right is not
deemed under section 305(c) to be a distribution on preferred stock to
which sections 305(b)(4) and 301 apply.
Example 4 --(i) Facts. Corporation X is a domestic corporation with
only common stock outstanding. In connection with its acquisition of
Corporation T, X issues 100 shares of its 4% preferred stock to the
shareholders of T, who are unrelated to X both before and after the
transaction. The issue price of the preferred stock is $40 per share.
Each share of preferred stock is convertible at the shareholder's
election into three shares of X common stock. At the time the preferred
stock is issued, the X common stock has a value of $10 per share. The
preferred stock does not provide for its mandatory redemption or for
redemption at the option of the holder. It is callable at the option of
X at any time beginning three years from the date of issuance for $100
per share. There are no other plans,
[[Page 36]]
arrangements, or agreements that effectively require or are intended to
compel X to redeem the stock.
(ii) Analysis. The preferred stock is described in the safe harbor
rule of paragraph (b)(3)(ii) of this section because X and the former
shareholders of T are unrelated, there are no plans, arrangements, or
agreements that effectively require or are intended to compel X to
redeem the stock, and calling the stock for $100 per share would not
reduce the yield of the preferred stock. Therefore, the $60 per share
call premium is not treated as a constructive distribution to the
shareholders of the preferred stock under paragraph (b) of this section.
Example 5 --(i) Facts--(A) Corporation Y is a domestic corporation
with only common stock outstanding. On January 1, 1996, Y issues 100
shares of its 10% preferred stock to a holder. The holder is unrelated
to Y both before and after the stock issuance. The issue price of the
preferred stock is $100 per share. The preferred stock is--
(1) Callable at the option of Y on or before January 1, 2001, at a
price of $105 per share plus any accrued but unpaid dividends; and
(2) Mandatorily redeemable on January 1, 2006, at a price of $100
per share plus any accrued but unpaid dividends.
(B) The preferred stock provides that if Y fails to exercise its
option to call the preferred stock on or before January 1, 2001, the
holder will be entitled to appoint a majority of Y's directors. Based on
all of the facts and circumstances as of the issue date, Y is likely to
have the legal and financial capacity to exercise its right to redeem.
There are no other facts and circumstances as of the issue date that
would affect whether Y will call the preferred stock on or before
January 1, 2001.
(ii) Analysis. Under paragraph (b)(3)(i) of this section, paragraph
(b)(1) of this section applies because, by virtue of the change of
control provision and the absence of any contrary facts, it is more
likely than not that Y will exercise its option to call the preferred
stock on or before January 1, 2001. The safe harbor rule of paragraph
(b)(3)(ii) of this section does not apply because the provision that
failure to call will cause the holder to gain control of the corporation
is a plan, arrangement, or agreement that effectively requires or is
intended to compel Y to redeem the preferred stock. Under paragraph
(b)(4) of this section, the constructive distribution occurs over the
period ending on January 1, 2001. Redemption is most likely to occur on
that date, because that is the date on which the corporation minimizes
the rate of return to the holder while preventing the holder from
gaining control. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $5 per share difference between the
redemption price and the issue price exceeds the amount determined under
the principles of section 1273(a)(3) (5x.0025x$105 = $1.31).
Accordingly, $5 per share, the difference between the redemption price
and the issue price, is treated as a constructive distribution received
by the holder on an economic accrual basis over the five-year period
ending on January 1, 2001, under principles similar to the principles of
section 1272(a).
Example 6. Corporation A, a publicly held company whose stock is
traded on a securities exchange (or in the over-the-counter market) has
two classes of stock outstanding, common and preferred. The preferred
stock is nonvoting and nonconvertible, limited and preferred as to
dividends, and has a fixed liquidation preference. There are no dividend
arrearages. At the time of issue of the preferred stock, there was no
plan or prearrangement by which it was to be exchanged for common stock.
In order to retire the preferred stock, corporation A recapitalizes in a
transaction to which section 368(a)(1)(E) applies and the preferred
stock is exchanged for common stock. The transaction is not deemed to be
a distribution under section 305(c) and sections 305(b) and 301 do not
apply to the transaction. The same result would follow if the preferred
stock was exchanged in any reorganization described in section 368(a)(1)
for a new preferred stock having substantially the same market value and
having no greater call price or liquidation preference than the old
preferred stock, whether the new preferred stock has voting rights or is
convertible into common stock of corporation A at a fixed ratio subject
to change solely to take account of stock dividends, stock splits, or
similar transactions with respect to the stock into which the preferred
stock is convertible.
Example 7 --(i) Facts--(A) Corporation Z is a domestic corporation
with only common stock outstanding. On January 1, 1996, Z issues 100
shares of its 10% preferred stock to C, an individual unrelated to Z
both before and after the stock issuance. The issue price of the
preferred stock is $100 per share. The preferred stock is--
(1) Not callable for a period of 5 years from the issue date;
(2) Callable at the option of Z on January 1, 2001, at a price of
$110 per share plus any accrued but unpaid dividends;
(3) Callable at the option of Z on July 1, 2002, at a price of $120
per share plus any accrued but unpaid dividends; and
(4) Mandatorily redeemable on January 1, 2004, at a price of $150
per share plus any accrued but unpaid dividends.
(B) There are no other plans, arrangements, or agreements between Z
and C concerning redemption of the stock. Moreover, there are no other
facts and circumstances
[[Page 37]]
as of the issue date that would affect whether Z will call the preferred
stock on either January 1, 2001, or July 1, 2002.
(ii) Analysis. This stock is described in paragraph (b)(2) of this
section because it is mandatorily redeemable. It is also potentially
described in paragraph (b)(3)(i) of this section because it is callable
at the option of the issuer. The safe harbor rule of paragraph
(b)(3)(ii) of this section does not apply to the option to call on
January 1, 2001, because the call would reduce the yield of the stock
when compared to the yield produced by the January 1, 2004, mandatory
redemption feature. Moreover, absent any other facts indicating a
contrary result, the fact that redemption on January 1, 2001, would
produce the lowest yield indicates that redemption is most likely to
occur on that date. Under paragraph (b)(4) of this section, paragraph
(b)(1) of this section applies with respect to the issuer's right to
call on January 1, 2001, because redemption is most likely to occur on
January 1, 2001, for $110 per share. The de minimis exception of
paragraph (b)(1) of this section does not apply because the $10 per
share difference between the redemption price payable in 2001 and the
issue price exceeds the amount determined under the principles of
section 1273(a)(3) (5x.0025x$110=$1.38). Accordingly, $10 per share, the
difference between the redemption price and the issue price, is treated
as a constructive distribution received by the holder on an economic
accrual basis over the five-year period ending January 1, 2001, under
principles similar to the principles of section 1272(a).
(iii) Coordination rules--(A) If Z does not exercise its option to
call the preferred stock on January 1, 2001, paragraph (b)(4) of this
section provides that the principles of paragraph (b) of this section
must be applied to determine if any remaining constructive distribution
occurs. Under paragraphs (b)(3)(i) and (b)(4) of this section, paragraph
(b)(1) of this section applies because, absent any other facts
indicating a contrary result, the fact that redemption on July 1, 2002,
would produce a lower yield than the yield produced by the mandatory
redemption feature indicates that redemption on that date is most likely
to occur. The safe harbor rule of paragraph (b)(3)(ii) of this section
does not apply to the option to call on July 1, 2002, because, as of
January 1, 2001, a call by Z on July 1, 2002, for $120 would reduce the
yield of the stock. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $10 per share difference between the
redemption price and the issue price (revised as of the missed call date
as provided by paragraph (b)(4) of this section) exceeds the amount
determined under the principles of section 1273(a)(3)
(1x.0025x$120=$.30). Accordingly, the $10 per share of additional
redemption premium that is payable on July 1, 2002, is treated as a
constructive distribution received by the holder on an economic accrual
basis over the period between January 1, 2001, and July 1, 2002, under
principles similar to the principles of section 1272(a).
(B) If Z does not exercise its second option to call the preferred
stock on July 1, 2002, then the $30 additional redemption premium that
is payable on January 1, 2004, is treated as a constructive distribution
under paragraphs (b)(2) and (b)(1) of this section. The de minimis
exception of paragraph (b)(1) of this section does not apply because the
$30 per share difference between the redemption price and the issue
price (revised as of the second missed call date) exceeds the amount
determined under the principles of section 1273(a)(3)
(1x.0025x$150=$.38). The holder is treated as receiving the constructive
distribution on an economic accrual basis over the period between July
1, 2002, and January 1, 2004, under principles similar to the principles
of section 1272(a).
Example 8 --(i) Facts. The facts are the same as in paragraph (i) of
Example 7, except that, based on all of the facts and circumstances as
of the issue date (including an expected lack of funds on the part of
Z), it is unlikely that Z will exercise the right to redeem on either
January 1, 2001, or July 1, 2002.
(ii) Analysis. The safe harbor rule of paragraph (b)(3)(ii) of this
section does not apply to the option to call on either January 1, 2001,
or July 1, 2002, because each call would reduce the yield of the stock.
Under paragraph (b)(3)(i) of this section, neither option to call is
more likely than not to occur, because, based on all of the facts and
circumstances as of the issue date (including an expected lack of funds
on the part of Z), it is not more likely than not that Z will exercise
either option. However, the $50 per share redemption premium that is
payable on January 1, 2004, is treated as a constructive distribution
under paragraphs (b)(1) and (2) of this section, regardless of whether Z
is anticipated to have sufficient funds to redeem on that date, because
Z is required to redeem the stock on that date. The de minimis exception
of paragraph (b)(1) of this section does not apply because the $50 per
share difference between the redemption price and the issue price
exceeds the amount determined under the principles of section
1273(a)(3)(8x.0025x$150=$3).
Example 9. Corporation Q is organized with 10,000 shares of class A
stock and 1,000 shares of class B stock. The terms of the class B stock
require that the class B have a preference of $5 per share with respect
to dividends and $100 per share with respect to liquidation. In
addition, upon a distribution of $10 per share to the class A stock,
class B participates equally in any additional dividends. The terms also
provide that upon liquidation the class B stock participates equally
after the class A stock receives $100
[[Page 38]]
per share. Corporation Q has no accumulated earnings and profits. In
1971 it earned $10,000, the highest earnings in its history. The
corporation is in an industry in which it is reasonable to anticipate a
growth in earnings of 5 percent per year. In 1971 the book value of
corporation Q's assets totalled $100,000. In that year the corporation
paid a dividend of $5 per share to the class B stock and $.50 per share
to the class A. In 1972 the corporation had no earnings and in lieu of a
$5 dividend distributed one share of class B stock for each outstanding
share of class B. No distribution was made to the class A stock. Since,
in 1972, it was not reasonable to anticipate that the class B stock
would participate in the current and anticipated earnings and growth of
the corporation beyond its preferred interest, the class B stock is
preferred stock and the distribution of class B shares to the class B
shareholders is a distribution to which sections 305(b)(4) and 301
apply.
Example 10. Corporation P is organized with 10,000 shares of class A
stock and 1,000 shares of class B stock. The terms of the class B stock
require that the class B have a preference of $5 per share with respect
to dividends and $100 per share with respect to liquidation. In
addition, upon a distribution of $5 per share to the class A stock,
class B participates equally in any additional dividends. The terms also
provide that upon liquidation the class B stock participates equally
after the class A receives $100 per share. Corporation P has accumulated
earnings and profits of $100,000. In 1971 it earned $75,000. The
corporation is in an industry in which it is reasonable to anticipate a
growth in earnings of 10 percent per year. In 1971 the book value of
corporation P's assets totalled $5 million. In that year the corporation
paid a dividend of $5 per share to the class B stock, $5 per share to
the class A stock, and it distributed an additional $1 per share to both
class A and class B stock. In 1972 the corporation had earnings of
$82,500. In that year it paid a dividend of $5 per share to the class B
stock and $5 per share to the class A stock. In addition, the
corporation declared stock dividends of one share of class B stock for
every 10 outstanding shares of class B and one share of class A stock
for every 10 outstanding shares of class A. Since, in 1972, it was
reasonable to anticipate that both the class B stock and the class A
stock would participate in the current and anticipated earnings and
growth of the corporation beyond their preferred interests, neither
class is preferred stock and the stock dividends are not distributions
to which section 305(b)(4) applies.
(e) Effective date. The rules of paragraph (b) of this section and
Examples 4, 5, 7, and 8 of paragraph (d) of this section apply to stock
issued on or after December 20, 1995. For rules applicable to previously
issued stock, see Sec. 1.305-5 (b) and (d) Examples (4), (5), and (7 )
(as contained in the 26 CFR part 1 edition revised April 1, 1995).
Although the rules of paragraph (b) of this section and the revised
examples do not apply to stock issued before December 20, 1995, the
rules of sections 305(c)(1), (2), and (3) apply to stock described
therein issued on or after October 10, 1990, except as provided in
section 11322(b)(2) of the Revenue Reconciliation Act of 1990 (Public
Law 101-508 Stat.). Moreover, except as provided in section 11322(b)(2)
of the Revenue Reconciliation Act of 1990 (Public Law 101-508 Stat.),
with respect to stock issued on or after October 10, 1990, and issued
before December 20, 1995, the economic accrual rule of section 305(c)(3)
will apply to the entire call premium on stock that is not described in
paragraph (b)(2) of this section if the premium is considered to be
unreasonable under the principles of Sec. 1.305-5(b) (as contained in
the 26 CFR part 1 edition revised April 1, 1995). A call premium
described in the preceding sentence will be accrued over the period of
time during which the preferred stock cannot be called for redemption.
[T.D. 7281, 38 FR 18536, July 12, 1973, as amended by T.D. 7329, 39 FR
36860, Oct. 15, 1974; T.D. 8643, 60 FR 66136, Dec. 21, 1995]
Sec. 1.305-6 Distributions of convertible preferred.
(a) In general. (1) Under section 305(b)(5), a distribution by a
corporation of its convertible preferred stock or rights to acquire such
stock made or considered as made with respect to its stock is treated as
a distribution of property to which section 301 applies unless the
corporation establishes that such distribution will not result in a
disproportionate distribution as described in Sec. 1.305-3.
(2) The distribution of convertible preferred stock is likely to
result in a disproportionate distribution when both of the following
conditions exist: (i) The conversion right must be exercised within a
relatively short period of time after the date of distribution of the
stock; and (ii) taking into account such factors as the dividend rate,
the
[[Page 39]]
redemption provisions, the marketability of the convertible stock, and
the conversion price, it may be anticipated that some shareholders will
exercise their conversion rights and some will not. On the other hand,
where the conversion right may be exercised over a period of many years
and the dividend rate is consistent with market conditions at the time
of distribution of the stock, there is no basis for predicting at what
time and the extent to which the stock will be converted and it is
unlikely that a disproportionate distribution will result.
(b) Examples. The application of section 305(b)(5) may be
illustrated by the following examples:
Example (1). Corporation Z is organized with one class of stock,
class A common. During the year the corporation declares a dividend on
the class A stock payable in newly authorized class B preferred stock
which is convertible into class A stock for a period of 20 years from
the date of issuance. Assuming dividend rates are normal in light of
existing conditions so that there is no basis for predicting the extent
to which the stock will be converted, the circumstances will ordinarily
be sufficient to establish that a disproportionate distribution will not
result since it is impossible to predict the extent to which the class B
stock will be converted into class A stock. Accordingly, the
distribution of class B stock is not one to which section 301 applies.
Example (2). Corporation X is organized with one class of stock,
class A common. During the year the corporation declares a dividend on
the class A stock payable in newly authorized redeemable class C
preferred stock which is convertible into class A common stock no later
than 4 months from the date of distribution at a price slightly higher
than the market price of class A stock on the date of distribution. By
prearrangement with corporation X, corporation Y, an insurance company,
agrees to purchase class C stock from any shareholder who does not wish
to convert. By reason of this prearrangement, it is anticipated that the
shareholders will either sell the class C stock to the insurance company
(which expects to retain the shares for investment purposes) or will
convert. As a result, some of the shareholders exercise their conversion
privilege and receive additional shares of class A stock, while other
shareholders sell their class C stock to corporation Y and receive cash.
The distribution is a distribution to which section 301 applies since it
results in the receipt of property by some shareholders and an increase
in the proportionate interests of other shareholders.
[T.D. 7281, 38 FR 18538, July 12, 1973]
Sec. 1.305-7 Certain transactions treated as distributions.
(a) In general. Under section 305(c), a change in conversion ratio,
a change in redemption price, a difference between redemption price and
issue price, a redemption which is treated as a distribution to which
section 301 applies, or any transaction (including a recapitalization)
having a similar effect on the interest of any shareholder may be
treated as a distribution with respect to any shareholder whose
proportionate interest in the earnings and profits or assets of the
corporation is increased by such change, difference, redemption, or
similar transaction. In general, such change, difference, redemption, or
similar transaction will be treated as a distribution to which sections
305(b) and 301 apply where--
(1) The proportionate interest of any shareholder in the earnings
and profits or assets of the corporation deemed to have made such
distribution is increased by such change, difference, redemption, or
similar transaction; and
(2) Such distribution has the result described in paragraph (2),
(3), (4), or (5) of section 305(b).
Where such change, difference, redemption, or similar transaction is
treated as a distribution under the provisions of this section, such
distribution will be deemed made with respect to any shareholder whose
interest in the earnings and profits or assets of the distributing
corporation is increased thereby. Such distribution will be deemed to be
a distribution of the stock of such corporation made by the corporation
to such shareholder with respect to his stock. Depending upon the facts
presented, the distribution may be deemed to be made in common or
preferred stock. For example, where a redemption premium exists with
respect to a class of preferred stock under the circumstances described
in Sec. 1.305-5(b) and the other requirements of this section are also
met, the distribution will be deemed made with respect to such preferred
stock, in stock of the same class. Accordingly, the preferred
shareholders are considered under sections 305(b)(4)
[[Page 40]]
and 305(c) to have received a distribution of preferred stock to which
section 301 applies. See the examples in Sec. Sec. 1.305-3(e) and
1.305-5(d) for further illustrations of the application of section
305(c).
(b) Antidilution provisions. (1) For purposes of applying section
305(c) in conjunction with section 305(b), a change in the conversion
ratio or conversion price of convertible preferred stock (or
securities), or in the exercise price of rights or warrants, made
pursuant to a bona fide, reasonable, adjustment formula (including, but
not limited to, either the so-called ``market price'' or ``conversion
price'' type of formulas) which has the effect of preventing dilution of
the interest of the holders of such stock (or securities) will not be
considered to result in a deemed distribution of stock. An adjustment in
the conversion ratio or price to compensate for cash or property
distributions to other shareholders that are taxable under section 301,
356(a)(2), 871(a)(1)(A), 881(a)(1), 852(b), or 857(b) will not be
considered as made pursuant to a bona fide adjustment formula.
(2) The principles of this paragraph may be illustrated by the
following example:
Example. (i) Corporation U has two classes of stock outstanding,
class A and class B. Each class B share is convertible into class A
stock. In accordance with a bonafide, reasonable, antidilution
provision, the conversion price is adjusted if the corporation transfers
class A stock to anyone for a consideration that is below the conversion
price.
(ii) The corporation sells class A stock to the public at the
current market price but below the conversion price. Pursuant to the
antidilution provision, the conversion price is adjusted downward. Such
a change in conversion price will not be deemed to be a distribution
under section 305(c) for the purposes of section 305(b).
(c) Recapitalizations. (1) A recapitalization (whether or not an
isolated transaction) will be deemed to result in a distribution to
which section 305(c) and this section apply if--
(i) It is pursuant to a plan to periodically increase a
shareholder's proportionate interest in the assets or earnings and
profits of the corporation, or
(ii) A shareholder owning preferred stock with dividends in arrears
exchanges his stock for other stock and, as a result, increases his
proportionate interest in the assets or earnings and profits of the
corporation. An increase in a preferred shareholder's proportionate
interest occurs in any case where the fair market value or the
liquidation preference, whichever is greater, of the stock received in
the exchange (determined immediately following the recapitalization),
exceeds the issue price of the preferred stock surrendered.
(2) In a case to which subparagraph (1)(ii) of this paragraph
applies, the amount of the distribution deemed under section 305(c) to
result from the recapitalization is the lesser of (i) the amount by
which the fair market value or the liquidation preference, whichever is
greater, of the stock received in the exchange (determined immediately
following the recapitalization) exceeds the issue price of the preferred
stock surrendered, or (ii) the amount of the dividends in arrears.
(3) For purposes of applying subparagraphs (1) and (2) of this
paragraph with respect to stock issued before July 12, 1973, the term
issue price of the preferred stock surrendered shall mean the greater of
the issue price or the liquidation preference (not including dividends
in arrears) of the stock surrendered.
(4) For an illustration of the application of this paragraph, see
Example (12) of Sec. 1.305-3(e) and Examples (1), (2), (3), and (6) of
Sec. 1.305-5(d).
(5) For rules relating to redemption premiums on preferred stock,
see Sec. 1.305-5(b).
[T.D. 7281, 38 FR 18538, July 12, 1973, as amended by T.D. 8643, 60 FR
66138, Dec. 21, 1995]
Sec. 1.305-8 Effective dates.
(a) In general. Section 421(b) of the Tax Reform Act of 1969 (83
Stat. 615) provides as follows:
(b) Effective dates. (1) Except as otherwise provided in this
subsection, the amendment made by subsection (a) shall apply with
respect to distributions (or deemed distributions) made after January
10, 1969, in taxable years ending after such date.
(2)(A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as
added by subsection (a) shall not apply to a distribution (or deemed
distribution) of stock made before January 1, 1991, with respect to
stock (i) outstanding on
[[Page 41]]
January 10, 1969, (ii) issued pursuant to a contract binding on January
10, 1969, on the distributing corporation, (iii) which is additional
stock of that class of stock which (as of January 10, 1969) had the
largest fair market value of all classes of stock of the corporation
(taking into account only stock outstanding on January 10, 1969, or
issued pursuant to a contract binding on January 10, 1969), (iv)
described in subparagraph (c)(iii), or (v) issued in a prior
distribution described in clause (i), (ii), (iii), or (iv).
(B) Subparagraph (A) shall apply only if--
(i) The stock as to which there is a receipt of property was
outstanding on January 10, 1969 (or was issued pursuant to a contract
binding on January 10, 1969, on the distributing corporation), and
(ii) If such stock and any stock described in subparagraph (A)(i)
were also outstanding on January 10, 1968, a distribution of property
was made on or before January 10, 1969, with respect to such stock, and
a distribution of stock was made on or before January 10, 1969, with
respect to such stock described in subparagraph (A)(i).
(C) Subparagraph (A) shall cease to apply when at any time after
October 9, 1969, the distributing corporation issues any of its stock
(other than in a distribution of stock with respect to stock of the same
class) which is not--
(i) Nonconvertible preferred stock,
(ii) Additional stock of that class of stock which meets the
requirements of subparagraph (A)(iii), or
(iii) Preferred stock which is convertible into stock which meets
the requirements of subparagraph (A)(iii) at a fixed conversion ratio
which takes account of all stock dividends and stock splits with respect
to the stock into which such convertible stock is convertible.
(D) For purposes of this paragraph, the term stock includes rights
to acquire such stock.
(3) In cases to which Treasury Decision 6990 (promulgated January
10, 1969) would not have applied, in applying paragraphs (1) and (2)
April 22, 1969, shall be substituted for January 10, 1969.
(4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added
by subsection (a)) shall not apply to any distribution (or deemed
distribution) with respect to preferred stock (including any increase in
the conversation ratio of convertible stock) made before January 1,
1991, pursuant to the terms relating to the issuance of such stock which
were in effect on January 10, 1969.
(5) With respect to distributions made or considered as made after
January 10, 1969, in taxable years ending after such date, to the extent
that the amendment made by subsection (a) does not apply by reason of
paragraph (2), (3), or (4) of this subsection, section 305 of the
Internal Revenue Code of 1954 (as in effect before the amendment made by
subsection (a)) shall continue to apply.
(b) Rules of application. (1) The rules contained in section
421(b)(2) of the Tax Reform Act of 1969 (83 Stat. 615), hereinafter
called ``the Act'', shall apply with respect to the application of
section 305(b)(2), section 305(b)(3), and section 305(b)(5). Thus, for
example, section 305(b)(5) of the Code will not apply to a distribution
of convertible preferred stock made before January 1, 1991, with respect
to stock outstanding on January 10, 1969 (or which was issued pursuant
to a contract binding on the distributing corporation on January 10,
1969), provided the distribution is pursuant to the terms relating to
the issuance of such stock which were in effect on January 10, 1969.
(2)(i) For purposes of section 421(b)(2)(A), (B)(i), and (C) of the
Act, stock is considered as outstanding on January 10, 1969, if it could
be acquired on such date or some future date by the exercise of a right
or conversion privilege in existence on such date (including a right or
conversion privilege with respect to stock issued pursuant to a contract
binding, on January 10, 1969, on the distributing corporation). Thus, if
on January 10, 1969, corporation X has outstanding 1,000 shares of class
A common stock and 3,000 shares of class B common stock which are
convertible on a one-to-one basis into class A stock, corporation X is
considered for purposes of section 421(b)(2)(A), (B)(i), and (C) of the
Act to have outstanding on January 10, 1969, 4,000 shares of class A
stock (1,000 shares actually outstanding and 3,000 shares that could be
acquired by the exercise of the conversion privilege contained in the
class B stock) and 3,000 shares of class B stock.
(ii) For the purposes of section 421(b)(2)(A) (other than for the
purpose of determining under section 421(b)(2)(A)(iii) that class of
stock which as of January 10, 1969, had the largest fair market value of
all classes of stock of the corporation), (B)(i), and (C) of the Act,
stock will be considered as outstanding on January 10, 1969, if it is
issued pursuant to a conversion privilege contained in stock issued,
mediately or immediately, as a stock
[[Page 42]]
dividend with respect to stock outstanding on January 10, 1969.
(3) If, after applying subparagraph (2) of this paragraph, the class
of stock which as of January 10, 1969, had the largest fair market value
of all classes of stock of the corporation is a class of stock which is
convertible into another class of nonconvertible stock, then for
purposes of section 421(b)(2)(C)(ii) of the Act stock issued upon
conversion of any such convertible stock (whether or not outstanding on
January 10, 1969) into stock of such other class shall be deemed to be
stock which meets the requirements of section 421(b)(2)(A)(iii) of the
Act.
(4) For purposes of section 421(b) of the Act, stock of a
corporation held in its treasury will not be considered as outstanding
and a distribution of such stock will be considered to be an issuance of
such stock on the date of distribution. Stock of a parent corporation
held by its subsidiary is not considered treasury stock.
(5) The following stock shall not be taken into account for purposes
of applying section 421(b)(2)(B)(i) of the Act: (i) Stock issued after
January 10, 1969, and before October 10, 1969 (other than stock which
was issued pursuant to a contract binding on January 10, 1969, on the
distributing corporation); (ii) stock described in section
421(b)(2)(C)(i), (ii), or (iii) of the Act; and (iii) stock issued,
mediately or immediately, as a stock dividend with respect to stock of
the same class outstanding on January 10, 1969. For example, if on June
1, 1970, corporation Y issues additional stock of that class of stock
which as of January 10, 1969, had the largest fair market value of all
classes of stock of the corporation, such additional stock will not be
taken into account for the purpose of meeting the requirement under
section 421(b)(2)(B)(i) of the Act that the stock as to which there is a
receipt of property must have been outstanding on January 10, 1969, and
thus subparagraph (A) of section 421(b)(2) of the Act will not, where
otherwise applicable, cease to apply.
(6) Section 421(b)(2)(A) of the Act, if otherwise applicable, will
not cease to apply if the distributing corporation issues after October
9, 1969, securities which are convertible into stock that meets the
requirements of section 421(b)(2)(A)(iii) of the Act at a fixed
conversion ratio which takes account of all stock dividends and stock
splits with respect to the stock into which the securities are
convertible.
(7) Under section 421(b)(4) of the Act, section 305(b)(4) does not
apply to any distribution (or deemed distribution) by a corporation with
respect to preferred stock made before January 1, 1991, if such
distribution is pursuant to the terms relating to the issuance of such
stock which were in effect on January 10, 1969. For example, if as of
January 10, 1969, a corporation had followed the practice of paying
stock dividends on preferred stock (or of periodically increasing the
conversion ratio of convertible preferred stock) or if the preferred
stock provided for a redemption price in excess of the issue price, then
section 305(b)(4) would not apply to any distribution of stock made (or
which would be considered made if section 305(b)(4) applied) before
January 1, 1991, pursuant to such practice.
(8) If section 421(b)(2) is not applicable and, for that reason, a
distribution (or deemed distribution) is treated as a distribution to
which section 301 applies by virtue of the application of section
305(b)(2), (b)(3), or (b)(5), it is irrelevant that, by reason of the
application of section 421(b)(4) of such Act, section 305(b)(4) is not
applicable to the distribution.
[T.D. 7281, 38 FR 18539, July 12, 1973]
Sec. 1.306-1 General.
(a) Section 306 provides, in general, that the proceeds from the
sale or redemption of certain stock (referred to as ``section 306
stock'') shall be treated either as ordinary income or as a distribution
of property to which section 301 applies. Section 306 stock is defined
in section 306(c) and is usually preferred stock received either as a
nontaxable dividend or in a transaction in which no gain or loss is
recognized. Section 306(b) lists certain circumstances in which the
special rules of section 306(a) shall not apply.
(b)(1) If a shareholder sells or otherwise disposes of section 306
stock (other than by redemption or within the exceptions listed in
section 306(b)),
[[Page 43]]
the entire proceeds received from such disposition shall be treated as
ordinary income to the extent that the fair market value of the stock
sold, on the date distributed to the shareholder, would have been a
dividend to such shareholder had the distributing corporation
distributed cash in lieu of stock. Any excess of the amount received
over the sum of the amount treated as ordinary income plus the adjusted
basis of the stock disposed of, shall be treated as gain from the sale
of a capital asset or noncapital asset as the case may be. No loss shall
be recognized. No reduction of earnings and profits results from any
disposition of stock other than a redemption. The term disposition under
section 306(a)(1) includes, among other things, pledges of stock under
certain circumstances, particularly where the pledgee can look only to
the stock itself as its security.
(2) Section 306(a)(1) may be illustrated by the following examples:
Example (1). On December 15, 1954, A and B owned equally all of the
stock of Corporation X which files its income tax return on a calendar
year basis. On that date Corporation X distributed pro rata 100 shares
of preferred stock as a dividend on its outstanding common stock. On
December 15, 1954, the preferred stock had a fair market value of
$10,000. On December 31, 1954, the earnings and profits of Corporation X
were $20,000. The 50 shares of preferred stock so distributed to A had
an allocated basis to him of $10 per share or a total of $500 for the 50
shares. Such shares had a fair market value of $5,000 when issued. A
sold the 50 shares of preferred stock on July 1, 1955, for $6,000. Of
this amount $5,000 will be treated as ordinary income; $500 ($6,000
minus $5,500) will be treated as gain from the sale of a capital or
noncapital asset as the case may be.
Example (2). The facts are the same as in Example 1 except that A
sold his 50 shares of preferred stock for $5,100. Of this amount $5,000
will be treated as ordinary income. No loss will be allowed. There will
be added back to the basis of the common stock of Corporation X with
respect to which the preferred stock was distributed, $400, the
allocated basis of $500 reduced by the $100 received.
Example (3). The facts are the same as in Example 1 except that A
sold 25 of his shares of preferred stock for $2,600. Of this amount
$2,500 will be treated as ordinary income. No loss will be allowed.
There will be added back to the basis of the common stock of Corporation
X with respect to which the preferred stock was distributed, $150, the
allocated basis of $250 reduced by the $100 received.
(c) The entire amount received by a shareholder from the redemption
of section 306 stock shall be treated as a distribution of property
under section 301. See also section 303 (relating to distribution in
redemption of stock to pay death taxes).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7556, 43 FR
34128, Aug. 3, 1978]
Sec. 1.306-2 Exception.
(a) If a shareholder terminates his entire stock interest in a
corporation--
(1) By a sale or other disposition within the requirements of
section 306(b)(1)(A), or
(2) By redemption under section 302(b)(3) (through the application
of section 306(b)(1)(B)),
the amount received from such disposition shall be treated as an amount
received in part or full payment for the stock sold or redeemed. In the
case of a sale, only the stock interest need be terminated. In
determining whether an entire stock interest has been terminated under
section 306(b)(1)(A), all of the provisions of section 318(a) (relating
to constructive ownership of stock) shall be applicable. In determining
whether a shareholder has terminated his entire interest in a
corporation by a redemption of his stock under section 302(b)(3), all of
the provisions of section 318(a) shall be applicable unless the
shareholder meets the requirements of section 302(c)(2) (relating to
termination of all interest in the corporation). If the requirements of
section 302(c)(2) are met, section 318(a)(1) (relating to members of a
family) shall be inapplicable. Under all circumstances paragraphs (2),
(3), (4), and (5) of section 318(a) shall be applicable.
(b) Section 306(a) does not apply to--
(1) Redemptions of section 306 stock pursuant to a partial or
complete liquidation of a corporation to which part II (section 331 and
following), subchapter C, chapter 1 of the Code applies,
(2) Exchanges of section 306 stock solely for stock in connection
with a reorganization or in an exchange under
[[Page 44]]
section 351, 355, or section 1036 (relating to exchanges of stock for
stock in the same corporation) to the extent that gain or loss is not
recognized to the shareholder as the result of the exchange of the stock
(see paragraph (d) of Sec. 1.306-3 relative to the receipt of other
property), and
(3) A disposition or redemption, if it is established to the
satisfaction of the Commissioner that the distribution, and the
disposition or redemption, was not in pursuance of a plan having as one
of its principal purposes the avoidance of Federal income tax. However,
in the case of a prior or simultaneous disposition (or redemption) of
the stock with respect to which the section 306 stock disposed of (or
redeemed) was issued, it is not necessary to establish that the
distribution was not in pursuance of such a plan. For example, in the
absence of such a plan and of any other facts the first sentence of this
subparagraph would be applicable to the case of dividends and isolated
dispositions of section 306 stock by minority shareholders. Similarly,
in the absence of such a plan and of any other facts, if a shareholder
received a distribution of 100 shares of section 306 stock on his
holdings of 100 shares of voting common stock in a corporation and sells
his voting common stock before he disposes of his section 306 stock, the
subsequent disposition of his section 306 stock would not ordinarily be
considered a disposition one of the principal purposes of which is the
avoidance of Federal income tax.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11998, Aug. 23, 1968]
Sec. 1.306-3 Section 306 stock defined.
(a) For the purpose of subchapter C, chapter 1 of the code, the term
section 306 stock means stock which meets the requirements of section
306(c)(1). Any class of stock distributed to a shareholder in a
transaction in which no amount is includible in the income of the
shareholder or no gain or loss is recognized may be section 306 stock,
if a distribution of money by the distributing corporation in lieu of
such stock would have been a dividend in whole or in part. However,
except as provided in section 306(g), if no part of a distribution of
money by the distributing corporation in lieu of such stock would have
been a dividend, the stock distributed will not constitute section 306
stock.
(b) For the purpose of section 306, rights to acquire stock shall be
treated as stock. Such rights shall not be section 306 stock if no part
of the distribution would have been a dividend if money had been
distributed in lieu of the rights. When stock is acquired by the
exercise of rights which are treated at section 306 stock, the stock
acquired is section 306 stock. Upon the disposition of such stock (other
than by redemption or within the exceptions listed in section 306(b)),
the proceeds received from the disposition shall be treated as ordinary
income to the extent that the fair market value of the stock rights, on
the date distributed to the shareholder, would have been a dividend to
the shareholder had the distributing corporation distributed cash in
lieu of stock rights. Any excess of the amount realized over the sum of
the amount treated as ordinary income plus the adjusted basis of the
stock, shall be treated as gain from the sale of the stock.
(c) Section 306(c)(1)(A) provides that section 306 stock is any
stock (other than common issued with respect to common) distributed to
the shareholder selling or otherwise disposing thereof if, under section
305(a) (relating to distributions of stock and stock rights) any part of
the distribution was not included in the gross income of the
distributee.
(d) Section 306(c)(1)(B) includes in the definition of section 306
stock any stock except common stock, which is received by a shareholder
in connection with a reorganization under section 368 or in a
distribution or exchange under section 355 (or so much of section 356 as
relates to section 355) provided the effect of the transaction is
substantially the same as the receipt of a stock dividend, or the stock
is received in exchange for section 306 stock. If, in a transaction to
which section 356 is applicable, a shareholder exchanges section 306
stock for stock and money or other property, the entire amount of such
money and of the fair market
[[Page 45]]
value of the other property (not limited to the gain recognized) shall
be treated as a distribution of property to which section 301 applies.
Common stock received in exchange for section 306 stock in a
recapitalization shall not be considered section 306 stock. Ordinarily,
section 306 stock includes stock which is not common stock received in
pursuance of a plan of reorganization (within the meaning of section
368(a)) or received in a distribution or exchange to which section 355
(or so much of section 356 as relates to section 355) applies if cash
received in lieu of such stock would have been treated as a dividend
under section 356(a)(2) or would have been treated as a distribution to
which section 301 applies by virtue of section 356(b) or section 302(d).
The application of the preceding sentence is illustrated by the
following examples:
Example (1). Corporation A, having only common stock outstanding, is
merged in a statutory merger (qualifying as a reorganization under
section 368(a)) with Corporation B. Pursuant to such merger, the
shareholders of Corporation A received both common and preferred stock
in Corporation B. The preferred stock received by such shareholders is
section 306 stock.
Example (2). X and Y each own one-half of the 2,000 outstanding
shares of preferred stock and one-half of the 2,000 outstanding shares
of common stock of Corporation C. Pursuant to a reorganization within
the meaning of section 368(a)(1)(E) (recapitalization) each shareholder
exchanges his preferred stock for preferred stock of a new issue which
is not substantially different from the preferred stock previously held.
Unless the preferred stock exchanged was itself section 306 stock the
preferred stock received is not section 306 stock.
(e) Section 306(c)(1)(C) includes in the definition of section 306
stock any stock (except as provided in section 306(c)(1)(B)) the basis
of which in the hands of the person disposing of such stock, is
determined by reference to section 306 stock held by such shareholder or
any other person. Under this paragraph common stock can be section 306
stock. Thus, if a person owning section 306 stock in Corporation A
transfers it to Corporation B which is controlled by him in exchange for
common stock of Corporation B in a transaction to which section 351 is
applicable, the common stock so received by him would be section 306
stock and subject to the provisions of section 306(a) on its
disposition. In addition, the section 306 stock transferred is section
306 stock in the hands of Corporation B, the transferee. Section 306
stock transferred by gift remains section 306 stock in the hands of the
donee. Stock received in exchange for section 306 stock under section
1036(a) (relating to exchange of stock for stock in the same
corporation) or under so much of section 1031(b) as relates to section
1036(a) becomes section 306 stock and acquires, for purposes of section
306, the characteristics of the section 306 stock exchanged. The entire
amount of the fair market value of the other property received in such
transaction shall be considered as received upon a disposition (other
than a redemption) to which section 306(a) applies. Section 306 stock
ceases to be so classified if the basis of such stock is determined by
reference to its fair market value on the date of the decedent-
stockholder's death or the optional valuation date under section 1014.
(f) If section 306 stock which was distributed with respect to
common stock is exchanged for common stock in the same corporation
(whether or not such exchange is pursuant to a conversion privilege
contained in section 306 stock), such common stock shall not be section
306 stock. This paragraph applies to exchanges not coming within the
purview of section 306(c)(1)(B). Common stock which is convertible into
stock other than common stock or into property, shall not be considered
common stock. It is immaterial whether the conversion privilege is
contained in the stock or in some type of collateral agreement.
(g) If there is a substantial change in the terms and conditions of
any stock, then, for the purpose of this section--
(1) The fair market value of such stock shall be the fair market
value at the time of distribution or the fair market value at the time
of such change, whichever is higher;
(2) Such stock's ratable share of the amount which would have been a
dividend if money had been distributed in lieu of stock shall be
determined by reference to the time of distribution or by reference to
the time of such
[[Page 46]]
change, whichever ratable share is higher; and
(3) Section 306(c)(2) shall be inapplicable if there would have been
a dividend to any extent if money had been distributed in lieu of the
stock either at the time of the distribution or at the time of such
change.
(h) When section 306 stock is disposed of, the amount treated under
section 306(a)(1)(A) as ordinary income, for the purposes of part I,
subchapter N, chapter 1 of the Code, be treated as derived from the same
source as would have been the source if money had been received from the
corporation as a dividend at the time of the distribution of such stock.
If the amount is determined to be derived from sources within the United
States, the amount shall be considered to be fixed or determinable
annual or periodic gains, profits, and income within the meaning of
section 871(a) or section 881(a), relating, respectively, to the tax on
nonresident alien individuals and on foreign corporations not engaged in
business in the United States.
(i) Section 306 shall be inapplicable to stock received before June
22, 1954, and to stock received on or after June 22, 1954, in
transactions subject to the provisions of the Internal Revenue Code of
1939.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7281, 38 FR
18540, July 12, 1973; T.D. 7556, 43 FR 34128, Aug. 3, 1978]
Sec. 1.307-1 General.
(a) If a shareholder receives stock or stock rights as a
distribution on stock previously held and under section 305 such
distribution is not includible in gross income then, except as provided
in section 307(b) and Sec. 1.307-2, the basis of the stock with respect
to which the distribution was made shall be allocated between the old
and new stocks or rights in proportion to the fair market values of each
on the date of distribution. If a shareholder receives stock or stock
rights as a distribution on stock previously held and pursuant to
section 305 part of the distribution is not includible in gross income,
then (except as provided in section 307(b) and Sec. 1.307-2) the basis
of the stock with respect to which the distribution is made shall be
allocated between (1) the old stock and (2) that part of the new stock
or rights which is not includible in gross income, in proportion to the
fair market values of each on the date of distribution. The date of
distribution in each case shall be the date the stock or the rights are
distributed to the stockholder and not the record date. The general rule
will apply with respect to stock rights only if such rights are
exercised or sold.
(b) The application of paragraph (a) of this section is illustrated
by the following example:
Example A taxpayer in 1947 purchased 100 shares of common stock at
$100 per share and in 1954 by reason of the ownership of such stock
acquired 100 rights entitling him to subscribe to 100 additional shares
of such stock at $90 a share. Immediately after the issuance of the
rights, each of the shares of stock in respect of which the rights were
acquired had a fair market value, ex-rights, of $110 and the rights had
a fair market value of $19 each. The basis of the rights and the common
stock for the purpose of determining the basis for gain or loss on a
subsequent sale or exercise of the rights or a sale of the old stock is
computed as follows:
100 (shares)x$100=$10,000, cost of old stock (stock in respect of which
the rights were acquired).
100 (shares)x$110=$11,000, market value of old stock.
100 (rights)x$19=$1,900, market value of rights.
11,000/12,900 of $10,000=$8,527.13, cost of old stock apportioned to
such stock.
1,900/12,900 of $10,000=$1,472.87, cost of old stock apportioned to
rights.
If the rights are sold, the basis for determining gain or loss will be
$14.7287 per right. If the rights are exercised, the basis of the new
stock acquired will be the subscription price paid therefor ($90) plus
the basis of the rights exercised ($14.7287 each) or $104.7287 per
share. The remaining basis of the old stock for the purpose of
determining gain or loss on a subsequent sale will be $85.2713 per
share.
Sec. 1.307-2 Exception.
The basis of rights to buy stock which are excluded from gross
income under section 305(a), shall be zero if the fair market value of
such rights on the date of distribution is less than 15 percent of the
fair market value of the old stock on that date, unless the shareholder
elects to allocate part of the basis of the old stock to the rights as
provided in paragraph (a) of Sec. 1.307-1.
[[Page 47]]
The election shall be made by a shareholder with respect to all the
rights received by him in a particular distribution in respect of all
the stock of the same class owned by him in the issuing corporation at
the time of such distribution. Such election to allocate basis to rights
shall be in the form of a statement attached to the shareholder's return
for the year in which the rights are received. This election, once made,
shall be irrevocable with respect to the rights for which the election
was made. Any shareholder making such an election shall retain a copy of
the election and of the tax return with which it was filed, in order to
substantiate the use of an allocated basis upon a subsequent disposition
of the stock acquired by exercise.
effects on corporation
Sec. 1.312-1 Adjustment to earnings and profits reflecting distributions
by corporations.
(a) In general, on the distribution of property by a corporation
with respect to its stock, its earnings, and profits (to the extent
thereof) shall be decreased by--
(1) The amount of money,
(2) The principal amount of the obligations of such corporation
issued in such distribution, and
(3) The adjusted basis of other property.
For special rule with respect to distributions to which section 312(e)
applies, see Sec. 1.312-5.
(b) The adjustment provided in section 312(a)(3) and paragraph
(a)(3) of this section with respect to a distribution of property (other
than money or its own obligations) shall be made notwithstanding the
fact that such property has appreciated or depreciated in value since
acquisition.
(c) The application of paragraphs (a) and (b) of this section may be
illustrated by the following examples:
Example (1). Corporation A distributes to its sole shareholder
property with a value of $10,000 and a basis of $5,000. It has $12,500
in earnings and profits. The reduction in earnings and profits by reason
of such distribution is $5,000. Such is the reduction even though the
amount of $10,000 is includible in the income of the shareholder (other
than a corporation) as a dividend.
Example (2). The facts are the same as in Example (1) above except
that the property has a basis of $15,000 and the earnings and profits of
the corporation are $20,000. The reduction in earnings and profits is
$15,000. Such is the reduction even though only the amount of $10,000 is
includible in the income of the shareholder as a dividend.
(d) In the case of a distribution of stock or rights to acquire
stock a portion of which is includible in income by reason of section
305(b), the earnings and profits shall be reduced by the fair market
value of such portion. No reduction shall be made if a distribution of
stock or rights to acquire stock is not includible in income under the
provisions of section 305.
(e) No adjustment shall be made in the amount of the earnings and
profits of the issuing corporation upon a disposition of section 306
stock unless such disposition is a redemption.
Sec. 1.312-2 Distribution of inventory assets.
Section 312(b) provides for the increase and the decrease of the
earnings and profits of a corporation which distributes, with respect to
its stock, inventory assets as defined in section 312(b)(2), where the
fair market value of such assets exceeds their adjusted basis. The rules
provided in section 312(b) (relating to distributions of certain
inventory assets) shall be applicable without regard to the method used
in computing inventories for the purpose of the computation of taxable
income. Section 312(b) does not apply to distributions described in
section 312(e).
Sec. 1.312-3 Liabilities.
The amount of any reductions in earnings and profits described in
section 312 (a) or (b) shall be (a) reduced by the amount of any
liability to which the property distributed was subject and by the
amount of any other liability of the corporation assumed by the
shareholder in connection with such distribution, and (b) increased by
the amount of gain recognized to the corporation under section 311 (b),
(c), or (d), or under section 341(f), 617(d),
[[Page 48]]
1245(a), 1250(a), 1251(c), 1252(a), or 1254(a).
[T.D. 7209, 37 FR 20804, Oct. 5, 1972, as amended by T.D. 8586, 60 FR
2500, Jan. 10, 1995]
Sec. 1.312-4 Examples of adjustments provided in section 312(c).
The adjustments provided in section 312(c) may be illustrated by the
following examples:
Example (1). On December 2, 1954, Corporation X distributed to its
sole shareholder, A, an individual, as a dividend in kind a vacant lot
which was not an inventory asset. On that date, the lot had a fair
market value of $5,000 and was subject to a mortgage of $2,000. The
adjusted basis of the lot was $3,100. The amount of the earnings and
profits was $10,000. The amount of the dividend received by A is $3,000
($5,000, the fair market value, less $2,000, the amount of the mortgage)
and the reduction in the earnings and profits of Corporation X is $1,100
($3,100, the basis, less $2,000, the amount of mortgage).
Example (2). The facts are the same as in Example (1) above with the
exception that the amount of the mortgage to which the property was
subject was $4,000. The amount of the dividend received by A is $1,000,
and there is no reduction in the earnings and profits of the corporation
as a result of the distribution (disregarding such reduction as may
result from an increase in tax to Corporation X because, of gain
resulting from the distribution). There is a gain of $900 recognized to
Corporation X, the difference between the basis of the property ($3,100)
and the amount of the mortgage ($4,000), under section 311(c) and an
increase in earnings and profits of $900.
Example (3). Corporation A, having accumulated earnings and profits
of $100,000, distributed in kind to its shareholders, not in
liquidation, inventory assets which had a basis to it on the ``Lifo''
method (section 472) of $46,000 and on the basis of cost or market
(section 471) of $50,000. The inventory had a fair market value of
$55,000 and was subject to a liability of $35,000. This distribution
results in a net decrease in earnings and profits of Corporation A of
$11,000, (without regard to any tax on Corporation A) computed as
follows:
``Fifo'' basis of inventory.......................... $50,000 .......
Less: ``Lifo'' basis of inventory.................... 46,000 .......
----------
Gain recognized--addition to earnings and profits (section $4,000
311(b)).......................................................
Adjustment to earnings and profits required by
section 312(b)(1)(A):
Fair market value of inventory..................... $55,000 .......
Less: ``Lifo'' basis plus adjustment under section 50,000 5,000
311(b)............................................
-----------
Total increase in earnings and profits........................ 9,000
Decrease in earnings and profits--under section $55,000 .......
312(b)(1)(B)(i).....................................
Less: Liability assumed.............................. 35,000 .......
----------
Net amount of distribution (decrease in earnings).............. 20,000
-----------
Net decrease in earnings and profits.......................... 11,000
Sec. 1.312-5 Special rule for partial liquidations and certain redemptions.
The part of the distribution properly chargeable to capital account
within the provisions of section 312(e) shall not be considered a
distribution of earnings and profits within the meaning of section 301
for the purpose of determining taxability of subsequent distributions by
the corporation.
Sec. 1.312-6 Earnings and profits.
(a) In determining the amount of earnings and profits (whether of
the taxable year, or accumulated since February 28, 1913, or accumulated
before March 1, 1913) due consideration must be given to the facts, and,
while mere bookkeeping entries increasing or decreasing surplus will not
be conclusive, the amount of the earnings and profits in any case will
be dependent upon the method of accounting properly employed in
computing taxable income (or net income, as the case may be). For
instance, a corporation keeping its books and filing its income tax
returns under subchapter E, chapter 1 of the Code, on the cash receipts
and disbursements basis may not use the accrual basis in determining
earnings and profits; a corporation computing income on the installment
basis as provided in section 453 shall, with respect to the installment
transactions, compute earnings and profits on such basis; and an
insurance company subject to taxation under section 831 shall exclude
from earnings and profits that portion of any premium which is unearned
under the provisions of section 832(b)(4) and which is segregated
accordingly in the unearned premium reserve.
(b) Among the items entering into the computation of corporate
earnings and profits for a particular period are all income exempted by
statute, income not taxable by the Federal Government under the
Constitution, as well as all items includible in gross income under
section 61 or corresponding provisions of prior revenue acts. Gains
[[Page 49]]
and losses within the purview of section 1002 or corresponding
provisions of prior revenue acts are brought into the earnings and
profits at the time and to the extent such gains and losses are
recognized under that section. Interest on State bonds and certain other
obligations, although not taxable when received by a corporation, is
taxable to the same extent as other dividends when distributed to
shareholders in the form of dividends.
(c)(1) In the case of a corporation in which depletion or
depreciation is a factor in the determination of income, the only
depletion or depreciation deductions to be considered in the computation
of the total earnings and profits are those based on cost or other basis
without regard to March 1, 1913, value. In computing the earnings and
profits for any period beginning after February 28, 1913, the only
depletion or depreciation deductions to be considered are those based on
(i) cost or other basis, if the depletable or depreciable asset was
acquired subsequent to February 28, 1913, or (ii) adjusted cost or March
1, 1913, value, whichever is higher, if acquired before March 1, 1913.
Thus, discovery or percentage depletion under all revenue acts for mines
and oil and gas wells is not to be taken into consideration in computing
the earnings and profits of a corporation. Similarly, where the basis of
property in the hands of a corporation is a substituted basis, such
basis, and not the fair market value of the property at the time of the
acquisition by the corporation, is the basis for computing depletion and
depreciation for the purpose of determining earnings and profits of the
corporation.
(2) The application of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example Oil producing property which A had acquired in 1949 at a
cost of $28,000 was transferred to Corporation Y in December 1951, in
exchange for all of its capital stock. The fair market value of the
stock and of the property as of the date of the transfer was $247,000.
Corporation Y, after four years' operation, effected in 1955 a cash
distribution to A in the amount of $165,000. In determining the extent
to which the earnings and profits of Corporation Y available for
dividend distributions have been increased as the result of production
and sale of oil, the depletion to be taken into account is to be
computed upon the basis of $28,000 established in the nontaxable
exchange in 1951 regardless of the fair market value of the property or
of the stock issued in exchange therefor.
(d) A loss sustained for a year before the taxable year does not
affect the earnings and profits of the taxable year. However, in
determining the earnings and profits accumulated since February 28,
1913, the excess of a loss sustained for a year subsequent to February
28, 1913, over the undistributed earnings and profits accumulated since
February 28, 1913, and before the year for which the loss was sustained,
reduces surplus as of March 1, 1913, to the extent of such excess. If
the surplus as of March 1, 1913, was sufficient to absorb such excess,
distributions to shareholders after the year of the loss are out of
earnings and profits accumulated since the year of the loss to the
extent of such earnings.
(e) With respect to the effect on the earnings and profits
accumulated since February 28, 1913, of distributions made on or after
January 1, 1916, and before August 6, 1917, out of earnings or profits
accumulated before March 1, 1913, which distributions were specifically
declared to be out of earnings and profits accumulated before March 1,
1913, see section 31(b) of the Revenue Act of 1916, as added by section
1211 of the Revenue Act of 1917 (40 Stat. 336).
Sec. 1.312-7 Effect on earnings and profits of gain or loss realized
after February 28, 1913.
(a) In order to determine the effect on earnings and profits of gain
or loss realized from the sale or other disposition (after February 28,
1913) of property by a corporation, section 312(f)(1) prescribed certain
rules for--
(1) The computation of the total earnings and profits of the
corporation of most frequent application in determining invested
capital; and
(2) The computation of earnings and profits of the corporation for
any period beginning after February 28, 1913, of most frequent
application in determining the source of dividend distributions.
Such rules are applicable whenever under any provision of subtitle A of
the
[[Page 50]]
Code it is necessary to compute either the total earnings and profits of
the corporation or the earnings and profits for any period beginning
after February 28, 1913. For example, since the earnings and profits
accumulated after February 28, 1913, or the earnings and profits of the
taxable year, are earnings and profits for a period beginning after
February 28, 1913, the determination of either must be in accordance
with the regulations prescribed by this section for the ascertainment of
earnings and profits for any period beginning after February 28, 1913.
Under subparagraph (1) of this paragraph, such gain or loss is
determined by using the adjusted basis (under the law applicable to the
year in which the sale or other disposition was made) for determining
gain, but disregarding value as of March 1, 1913. Under subparagraph (2)
of this paragraph, there is used such adjusted basis for determining
gain, giving effect to the value as of March 1, 1913, whenever
applicable. In both cases the rules are the same as those governing
depreciation and depletion in computing earnings and profits (see Sec.
1.312-6). Under both subparagraphs (1) and (2) of this paragraph, the
adjusted basis is subject to the limitations of the third sentence of
section 312(f)(1) requiring the use of adjustments proper in determining
earnings and profits. The proper adjustments may differ under section
312(f)(1)(A) and (B) depending upon the basis to which the adjustments
are to be made. If the application of section 312(f)(1)(B) results in a
loss and if the application of section 312(f)(1)(A) to the same
transaction reaches a different result, then the loss under section
312(f)(1)(B) will be subject to the adjustment thereto required by
section 312(g)(2). (See Sec. 1.312-9.)
(b)(1) The gain or loss so realized increases or decreases the
earnings and profits to, but not beyond, the extent to which such gain
or loss was recognized in computing taxable income (or net income, as
the case may be) under the law applicable to the year in which such sale
or disposition was made. As used in this paragraph, the term
``recognized'' has reference to that kind of realized gain or loss which
is recognized for income tax purposes by the statute applicable to the
year in which the gain or loss was realized. For example, see section
356. A loss (other than a wash sale loss with respect to which a
deduction is disallowed under the provisions of section 1091 or
corresponding provisions of prior revenue laws) may be recognized though
not allowed as a deduction (by reason, for example, of the operation of
sections 267 and 1211 and corresponding provisions of prior revenue
laws) but the mere fact that it is not allowed does not prevent decrease
in earnings and profits by the amount of such disallowed loss. Wash sale
losses, however, disallowed under section 1091 and corresponding
provisions of prior revenue laws, are deemed nonrecognized losses and do
not reduce earnings or profits. The recognized gain or loss for the
purpose of computing earnings and profits is determined by applying the
recognition provisions to the realized gain or loss computed under the
provisions of section 312(f)(1) as distinguished from the realized gain
or loss used in computing taxable income (or net income, as the case may
be).
(2) The application of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example (1). Corporation X on January 1, 1952, owned stock in
Corporation Y which it had acquired from Corporation Y in December 1951,
in an exchange transaction in which no gain or loss was recognized. The
adjusted basis to Corporation X of the property exchanged by it for the
stock in Corporation Y was $30,000. The fair market value of the stock
in Corporation Y when received by Corporation X was $930,000. On April
9, 1955, Corporation X made a cash distribution of $900,000 and, except
for the possible effect of the transaction in 1951, had no earnings or
profits accumulated after February 28, 1913, and had no earnings or
profits for the taxable year. The amount of $900,000 representing the
excess of the fair market value of the stock of Corporation Y over the
adjusted basis of the property exchanged therefor was not recognized
gain to Corporation X under the provisions of section 112 of the
Internal Revenue Code of 1939. Accordingly, the earnings and profits of
Corporation X are not increased by $900,000, the amount of the gain
realized but not recognized in the exchange, and the distribution was
not a taxable dividend. The basis in the hands of Corporation Y of the
property acquired by it from Corporation X is $30,000. If such property
is thereafter sold by Corporation Y, gain or loss will be computed on
such basis
[[Page 51]]
of $30,000, and earnings and profits will be increased or decreased
accordingly.
Example (2). On January 2, 1910, Corporation M acquired
nondepreciable property at a cost of $1,000. On March 1, 1913, the fair
market value of such property in the hands of Corporation M was $2,200.
On December 31, 1952, Corporation M transfers such property to
Corporation N in exchange for $1,900 in cash and all Corporation N's
stock, which has a fair market value of $1,100. For the purpose of
computing the total earnings and profits of Corporation M, the gain on
such transaction is $2,000 (the sum of $1,900 in cash and stock worth
$1,100 minus $1,000, the adjusted basis for computing gain, determined
without regard to March 1, 1913, value), $1,900 of which is recognized
under section 356, since this was the amount of money received, although
for the purpose of computing net income the gain is only $800 (the sum
of $1,900 in cash and stock worth $1,100, minus $2,200, the adjusted
basis for computing gain determined by giving effect to March 1, 1913,
value). Such earnings and profits will therefore be increased by only
$800 as a reputing the earnings and profits of Corporation M for any
period beginning after February 28, 1913, however, the gain arising from
the transaction, like the taxable gain, is only $800, all of which is
recognized under section 112(c) of the Internal Revenue Code of 1939,
the money received being in excess of such amount. Such earnings and
profits will therefore be increased by only $800 as a result of the
transaction. For increase in that part of the earnings and profits
consisting of increase in value of property accrued before, but realized
on or after March 1, 1913, see Sec. 1.312-9.
Example (3). On July 31, 1955, Corporation R owned oil-producing
property acquired after February 28, 1913, at a cost of $200,000, but
having an adjusted basis (by reason of taking percentage depletion) of
$100,000 for determining gain. However, the adjusted basis of such
property to be used in computing gain or loss for the purpose of
earnings and profits is, because of the provisions of the third sentence
of section 312(f)(1), $150,000. On such day Corporation R transferred
such property to Corporation S in exchange for $25,000 in cash and all
of the stock of Corporation S, which had a fair market value of
$100,000. For the purpose of computing taxable income, Corporation R has
realized a gain of $25,000 as a result of this transaction, all of which
is recognized under section 356. For the purpose of computing earnings
and profits, however, Corporation R has realized a loss of $25,000, none
of which is recognized owing to the provisions of section 356(c). The
earnings and profits of Corporation R are therefore neither increased
nor decreased as a result of the transaction. The adjusted basis of the
Corporation S stock in the hands of Corporation R for purposes of
computing earnings and profits, however, will be $125,000 (though only
$100,000 for the purpose of computing taxable income), computed as
follows:
Basis of property transferred................................ $200,000
Less money received on exchange.............................. 25,000
Plus gain or minus loss recognized on exchange............... None
----------
Basis of stock.............................................. 175,000
Less adjustments (same as those used in determining adjusted 50,000
basis of property transferred)..............................
----------
Adjusted basis of stock..................................... 125,000
If, therefore, Corporation R should subsequently sell the Corporation S
stock for $100,000, a loss of $25,000 will again be realized for the
purpose of computing earnings and profits, all of which will be
recognized and will be applied to decrease the earnings and profits of
Corporation R.
(c)(1) The third sentence of section 312(f)(1) provides for cases in
which the adjustments, prescribed in section 1016, to the basis
indicated in section 312(f)(1)(A) or (B), as the case may be, differ
from the adjustments to such basis proper for the purpose of determining
earnings or profits. The adjustments provided by such third sentence
reflect the treatment provided by Sec. Sec. 1.312-6 and 1.312-15
relative to cases where the deductions for depletion and depreciation in
computing taxable income (or net income, as the case may be) differ from
the deductions proper for the purpose of computing earnings and profits.
(2) The effect of the third sentence of section 312(f)(1) may be
illustrated by the following examples:
Example (1). Corporation X purchased on January 2, 1931, an oil
lease at a cost of $10,000. The lease was operated only for the years
1931 and 1932. The deduction for depletion in each of the years 1931 and
1932 amounted to $2,750, of which amount $1,750 represented percentage
depletion in excess of depletion based on cost. The lease was sold in
1955 for $15,000. Under section 1016(a)(2), in determining the gain or
loss from the sale of the property, the basis must be adjusted for cost
depletion of $1,000 in 1931 and percentage depletion of $2,750 in 1932.
However, the adjustment of such basis, proper for the determination of
earnings and profits, is $1,000 for each year, or $2,000. Hence, the
cost is to be adjusted only to the extent of $2,000, leaving an adjusted
basis of $8,000 and the earnings and profits will be increased by
$7,000, and not by $8,750. The difference of $1,750 is equal to the
amount by which the percentage depletion for the year 1932 ($2,750)
exceeds the depletion on cost for that year ($1,000) and has already
been applied in the computation
[[Page 52]]
of earnings and profits for the year 1932 by taking into account only
$1,000 instead of $2,750 for depletion in the computation of such
earnings and profits. (See Sec. 1.316-1.)
Example (2). If, in Example (1), above, the property, instead of
being sold, is exchanged in a transaction described in section 1031 for
like property having a fair market value of $7,750 and cash of $7,250,
then the increase in earnings and profits amounts to $7,000, that is,
$15,000 ($7,750 plus $7,250) minus the basis of $8,000. However, in
computing taxable income of Corporation X, the gain is $8,750, that is,
$15,000 minus $6,250 ($10,000 less depletion of $3,750), of which only
$7,250 is recognized because the recognized gain cannot exceed the sum
of money received in the transaction. See section 1031(b) and the
corresponding provisions of prior revenue laws. If, however, the cash
received was only $2,250 and the value of the property received was
$12,750, then the increase in earnings and profits would be $2,250, that
amount being the gain recognized under section 1031.
Example (3). On January 1, 1973, corporation X purchased for $10,000
a depreciable asset with an estimated useful life of 20 years and no
salvage value. In computing depreciation on the asset, corporation X
used the declining balance method with a rate twice the straight line
rate. On December 31, 1976, the asset was sold for $9,000. Under section
1016(a)(2), the basis of the asset is adjusted for depreciation allowed
for the years 1973 through 1976, or a total of $3,439. Thus, X realizes
a gain of $2,439 (the excess of the amount realized, $9,000, over the
adjusted basis, $6,561). However, the proper adjustment to basis for the
purpose of determining earnings and profits is only $2,000, i.e., the
total amount which, under Sec. 1.312-15, was applied in the computation
of earnings and profits for the years 1973-76. Hence, upon sale of the
asset, earnings and profits are increased by only $1,000, i.e., the
excess of the amount realized, $9,000, over the adjusted basis for
earnings and profits purposes, $8,000.
(d) For adjustment and allocation of the earnings and profits of the
transferor as between the transferor and the transferee in cases where
the transfer of property by one corporation to another corporation
results in the nonrecognition in whole or in part of gain or loss, see
Sec. 1.312-10; and see section 381 for earnings and profits of
successor corporations in certain transactions.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7221, 37 FR
24746, Nov. 21, 1972]
Sec. 1.312-8 Effect on earnings and profits of receipt of tax-free
distributions requiring adjustment or allocation of basis of stock.
(a) In order to determine the effect on earnings and profits, where
a corporation receives (after February 28, 1913) from a second
corporation a distribution which (under the law applicable to the year
in which the distribution was made) was not a taxable dividend to the
shareholders of the second corporation, section 312(f) prescribes
certain rules. It provides that the amount of such distribution shall
not increase the earnings and profits of the first or receiving
corporation in the following cases: (1) No such increase shall be made
in respect of the part of such distribution which (under the law
applicable to the year in which the distribution was made) is directly
applied in reduction of the basis of the stock in respect of which the
distribution was made and (2) no such increase shall be made if (under
the law applicable to the year in which the distribution was made) the
distribution causes the basis of the stock in respect of which the
distribution was made to be allocated between such stock and the
property received (or such basis would but for section 307(b) be so
allocated). Where, therefore, the law (applicable to the year in which
the distribution was made, as, for example, a distribution in 1934 from
earnings and profits accumulated before March 1, 1913) requires that the
amount of such distribution shall be applied against and reduce the
basis of the stock with respect to which the distribution was made,
there is no increase in the earnings and profits by reason of the
receipt of such distribution. Similarly, where there is received by a
corporation a distribution from another corporation in the form of a
stock dividend and the law applicable to the year in which such
distribution was made requires the allocation, as between the old stock
and the stock received as a dividend, of the basis of the old stock (or
such basis would but for section 307(b) be so allocated), then there is
no increase in the earnings and profits by reason of the receipt of such
stock dividend even though such stock dividend constitutes income within
the
[[Page 53]]
meaning of the sixteenth amendment to the Constitution.
(b) The principles set forth in paragraph (a) of this section may be
illustrated by the following examples:
Example (1). Corporation X in 1955 distributed to Corporation Y, one
of its shareholders, $10,000 which was out of earnings or profits
accumulated before March 1, 1913, and did not exceed the adjusted basis
of the stock in respect of which the distribution was made. This amount
of $10,000 was, therefore, a tax-free distribution and under the
provisions of section 301(c)(2) must be applied against and reduce the
adjusted basis of the stock in respect of which the distribution was
made. The earnings and profits of Corporation Y are not increased by
reason of the receipt of this distribution.
Example (2). Corporation Z in 1955 had outstanding common and
preferred stock of which Corporation Y held 100 shares of the common and
no preferred. The stock had a cost basis to Corporation Y of $100 per
share, or a total cost of $10,000. In December of that year it received
a dividend of 100 shares of the preferred stock of Corporation Z. Such
distribution is a stock dividend which, under section 305, was not
taxable and was accordingly not included in the gross income of
Corporation Y. The original cost of $10,000 is allocated to the 200
shares of Corporation Z none of which has been sold or otherwise
disposed of by Corporation Y. See section 307 and Sec. 1.307-1. The
earnings and profits of Corporation Y are not increased by reason of the
receipt of such stock dividend.
Sec. 1.312-9 Adjustments to earnings and profits reflecting increase
in value accrued before March 1, 1913.
(a) In order to determine, for the purpose of ascertaining the
source of dividend distributions, that part of the earnings and profits
which is represented by increase in value of property accrued before,
but realized on or after, March 1, 1913, section 312(g) prescribes
certain rules.
(b)(1) Section 312(g)(1) sets forth the general rule with respect to
computing the increase to be made in that part of the earnings and
profits consisting of increase in value of property accrued before, but
realized on or after, March 1, 1913.
(2) The effect of section 312(g)(1) may be illustrated by the
following examples:
Example (1). Corporation X acquired nondepreciable property before
March 1, 1913, at a cost of $10,000. Its fair market value as of March
1, 1913, was $12,000 and it was sold in 1955 for $15,000. The increase
in earnings and profits based on the value as of March 1, 1913,
representing earnings and profits accumulated since February 28, 1913,
is $3,000. If the basis is determined without regard to the value as of
March 1, 1913, there would be an increase in earnings and profits of
$5,000. The difference of $2,000 ($5,000 minus $3,000) represents the
increase to be made in that part of the earnings and profits of
Corporation X consisting of the increase in value of property accrued
before, but realized on or after, March 1, 1913.
Example (2). Corporation Y acquired depreciable property in 1908 at
a cost of $100,000. Assuming no additions or betterments, and that the
depreciation sustained before March 1, 1913, was $10,000, the adjusted
cost as of that date was $90,000. Its fair market value as of March 1,
1913, was $94,000 and on February 28, 1955, it was sold for $25,000. For
the purpose of determining gain from the sale, the basis of the property
is the fair market value of $94,000 as of March 1, 1913, adjusted for
depreciation for the period subsequent to February 28, 1913, computed on
such fair market value. If the amount of the depreciation deduction
allowed after February 28, 1913, and properly allowable for each of such
years to the date of the sale in 1955 is the aggregate sum of $81,467,
the adjusted basis for determining gain in 1955 ($94,000 less $81,467)
is $12,533 and the gain would be $12,467 ($25,000 less $12,533). The
increase in earnings and profits accumulated since February 28, 1913, by
reason of the sale, based on the value as of March 1, 1913, adjusted for
depreciation is $12,467. If the depreciation since February 28, 1913,
had been based on the adjusted cost of $90,000 ($100,000 less $10,000)
instead of the March 1, 1913, value of $94,000, the depreciation
sustained from that date to the date of sale would have been $78,000
instead of $81,467 and the actual gain on the sale based on the cost of
$100,000 adjusted by depreciation on such cost to $12,000 ($100,000
reduced by the sum of $10,000 and $78,000) would be $13,000 ($25,000
less $12,000). If the adjusted basis of the property was determined
without regard to the value as of March 1, 1913, there would be an
increase in earnings and profits of $13,000. The difference of $533
($13,000 minus $12,467) represents the increase to be made in that part
of the earnings and profits of Corporation Y consisting of the increase
in value of property accrued before, but realized on or after, March 1,
1913 (assuming that the proper increase in such surplus had been made
each year for the difference between depreciation based on cost and the
depreciation based on March 1, 1913, value). Thus, the total increase in
that part of earnings and profits consisting of the increase in value of
property accrued before, but realized on or after, March 1, 1913, is
$4,000 ($94,000 less $90,000).
[[Page 54]]
(c)(1) Section 312(g)(2) is an exception to the general rule in
section 312(g)(1) and also operates as a limitation on the application
of section 312(f). It provides that, if the application of section
312(f)(1)(B) to a sale or other disposition after February 28, 1913,
results in a loss which is to be applied in decrease of earnings and
profits for any period beginning after February 28, 1913, then,
notwithstanding section 312(f) and in lieu of the rule provided in
section 312(g)(1), the amount of such loss so to be applied shall be
reduced by the amount, if any, by which the adjusted basis of the
property used in determining the loss, exceeds the adjusted basis
computed without regard to the fair market value of the property on
March 1, 1913. If the amount so applied in reduction of the loss exceeds
such loss, the excess over such loss shall increase that part of the
earnings and profits consisting of increase in value of property accrued
before, but realized on or after March 1, 1913.
(2) The application of section 312(g)(2) may be illustrated by the
following examples:
Example (1). Corporation Y acquired nondepreciable property before
March 1, 1913, at a cost of $8,000. Its fair market value as of March 1,
1913, was $13,000, and it was sold in 1955 for $10,000. Under section
312(f)(1)(B) the adjusted basis would be $13,000 and there would be a
loss of $3,000. The application of section 312(f)(1)(B) would result in
a loss from the sale in 1955 to be applied in decrease of earnings and
profits for that year. Section 312(g)(2), however, applies and the loss
of $3,000 is reduced by the amount by which the adjusted basis of
$13,000 exceeds the cost of $8,000 (the adjusted basis computed without
regard to the value on March 1, 1913), namely $5,000. The amount of the
loss is, accordingly, reduced from $3,000 to zero and there is no
decrease in earnings and profits of Corporation Y for the year 1955 as a
result of the sale. The amount applied in reduction of the decrease,
namely, $5,000, exceeds $3,000. Accordingly, as a result of the sale the
excess of $2,000 increases that part of the earnings and profits of
Corporation Y consisting of increase in value of property accrued
before, but realized on or after March 1, 1913.
Example (2). Corporation Z acquired nondepreciable property before
March 1, 1913, at a cost of $10,000. Its fair market value as of March
1, 1913, was $12,000, and it was sold in 1955 for $8,000. Under section
312(f)(1)(B) the adjusted basis would be $12,000 and there would be a
loss of $4,000. The application of section 312(f)(1)(B) would result in
a loss from the sale in 1955 to be applied in decrease of earnings and
profits for that year. Section 312(g)(2), however, applies and the loss
of $4,000 is reduced by the amount by which the adjusted basis of
$12,000 exceeds the cost of $10,000 (the adjusted basis computed without
regard to the value on March 1, 1913), namely, $2,000. The amount of the
loss is, accordingly, reduced from $4,000 to $2,000 and the decrease in
earnings and profits of Corporation Z for the year 1955 as a result of
the sale is $2,000 instead of $4,000. The amount applied in reduction of
the decrease, namely, $2,000, does not exceed $4,000. Accordingly, as a
result of the sale there is no increase in that part of the earnings and
profits of Corporation Z consisting of increase in value of property
accrued before, but realized on or after, March 1, 1913.
Sec. 1.312-10 Allocation of earnings in certain corporate separations.
(a) If one corporation transfers part of its assets constituting an
active trade or business to another corporation in a transaction to
which section 368(a)(1)(4) applies and immediately thereafter the stock
and securities of the controlled corporation are distributed in a
distribution or exchange to which section 355 (or so much of section 356
as relates to section 355) applies, the earnings and profits of the
distributing corporation immediately before the transaction shall be
allocated between the distributing corporation and the controlled
corporation. In the case of a newly created controlled corporation, such
allocation generally shall be made in proportion to the fair market
value of the business or businesses (and interests in any other
properties) retained by the distributing corporation and the business or
businesses (and interests in any other properties) of the controlled
corporation immediately after the transaction. In a proper case,
allocation shall be made between the distributing corporation and the
controlled corporation in proportion to the net basis of the assets
transferred and of the assets retained or by such other method as may be
appropriate under the facts and circumstances of the case. The term net
basis means the basis of the assets less liabilities assumed or
liabilities to which such assets are subject. The part
[[Page 55]]
of the earnings and profits of the taxable year of the distributing
corporation in which the transaction occurs allocable to the controlled
corporation shall be included in the computation of the earnings and
profits of the first taxable year of the controlled corporation ending
after the date of the transaction.
(b) If a distribution or exchange to which section 355 applies (or
so much of section 356 as relates to section 355) is not in pursuance of
a plan meeting the requirements of a reorganization as defined in
section 368(a)(1)(D), the earnings and profits of the distributing
corporation shall be decreased by the lesser of the following amounts:
(1) The amount by which the earnings and profits of the distributing
corporation would have been decreased if it had transferred the stock of
the controlled corporation to a new corporation in a reorganization to
which section 368(a)(1)(D) applied and immediately thereafter
distributed the stock of such new corporation or,
(2) The net worth of the controlled corporation. (For this purpose
the term net worth means the sum of the basis of all of the properties
plus cash minus all liabilities.)
If the earnings and profits of the controlled corporation immediately
before the transaction are less than the amount of the decrease in
earnings and profits of the distributing corporation (including a case
in which the controlled corporation has a deficit) the earnings and
profits of the controlled corporation, after the transaction, shall be
equal to the amount of such decrease. If the earnings and profits of the
controlled corporation immediately before the transaction are more than
the amount of the decrease in the earnings and profits of the
distributing corporation, they shall remain unchanged.
(c) In no case shall any part of a deficit of a distributing
corporation within the meaning of section 355 be allocated to a
controlled corporation.
Sec. 1.312-11 Effect on earnings and profits of certain other tax-free
exchanges, tax-free distributions, and tax-free transfers from one
corporation to another.
(a) If property is transferred by one corporation to another, and,
under the law applicable to the year in which the transfer was made, no
gain or loss was recognized (or was recognized only to the extent of the
property received other than that permitted by such law to be received
without the recognition of gain), then proper adjustment and allocation
of the earnings and profits of the transferor shall be made as between
the transferor and the transferee. Transfers to which the preceding
sentence applies include contributions to capital, transfers under
section 351, transfers in connection with reorganizations under section
368, transfers in liquidations under section 332 and intercompany
transfers during a period of affiliation. However, if, for example,
property is transferred from one corporation to another in a transaction
under section 351 or as a contribution to capital and the transfer is
not followed or preceded by a reorganization, a transaction under
section 302(a) involving a substantial part of the transferor's stock,
or a total or partial liquidation, then ordinarily no allocation of the
earnings and profits of the transferor shall be made. For specific rules
as to allocation of earnings and profits in certain reorganizations
under section 368 and in certain liquidations under section 332 see
section 381 and the regulations thereunder. For allocation of earnings
and profits in certain corporate separations see section 312(i) and
Sec. 1.312-10.
(b) The general rule provided in section 316 that every distribution
is made out of earnings or profits to the extent thereof and from the
most recently accumulated earnings or profits does not apply to:
(1) The distribution, in pursuance of a plan of reorganization, by
or on behalf of a corporation a party to the reorganization, or in a
transaction subject to section 355, to its shareholders--
(i) Of stock or securities in such corporation or in another
corporation a party to the reorganization in any taxable year beginning
before January 1,
[[Page 56]]
1934, without the surrender by the distributees of stock or securities
in such corporation (see section 112(g) of the Revenue Act of 1932 (47
Stat. 197)); or
(ii) Of stock (other than preferred stock) in another corporation
which is a party to the reorganization without the surrender by the
distributees of stock in the distributing corporation if the
distribution occurs after October 20, 1951, and is subject to section
112(b)(11) of the Internal Revenue Code of 1939; or
(iii) Of stock or securities in such corporation or in another
corporation a party to the reorganization in any taxable year beginning
before January 1, 1939, or on or after such date, in exchange for its
stock or securities in a transaction to which section 112(b)(3) of the
Internal Revenue Code of 1939 was applicable; or
(iv) Of stock or securities in such corporation or in another
corporation in exchange for its stock or securities in a transaction
subject to section 354 or 355,
if no gain to the distributees from the receipt of such stock or
securities was recognized by law.
(2) The distribution in any taxable year (beginning before January
1, 1939, or on or after such date) of stock or securities, or other
property or money, to a corporation in complete liquidation of another
corporation, under the circumstances described in section 112(b)(6) of
the Revenue Act of 1936 (49 Stat. 1679), the Revenue Act of 1938 (52
Stat. 485), of the Internal Revenue Code of 1939, or section 332 of the
Internal Revenue Code of 1954.
(3) The distribution in any taxable year (beginning after December
31, 1938), of stock or securities, or other property or money, in the
case of an exchange or distribution described in section 371 of the
Internal Revenue Code of 1939 or in section 1081 of the Internal Revenue
Code of 1954 (relating to exchanges and distributions in obedience to
orders of the Securities and Exchange Commission), if no gain to the
distributee from the receipt of such stock, securities, or other
property or money was recognized by law.
(4) A stock dividend which was not subject to tax in the hands of
the distributee because either it did not constitute income to him
within the meaning of the sixteenth amendment to the Constitution or
because exempt to him under section 115(f) of the Revenue Act of 1934
(48 Stat. 712) or a corresponding provision of a prior Revenue Act, or
section 305 of the Code.
(5) The distribution, in a taxable year of the distributee beginning
after December 31, 1931, by or on behalf of an insolvent corporation, in
connection with a section 112(b)(10) reorganization under the Internal
Revenue Code of 1939, or in a transaction subject to section 371 of the
Internal Revenue Code of 1954, of stock or securities in a corporation
organized or made use of to effectuate the plan of reorganization, if
under section 112(e) of the Internal Revenue Code of 1939 or section 371
of the Internal Revenue Code of 1954 no gain to the distributee from the
receipt of such stock or securities was recognized by law.
(c) A distribution described in paragraph (b) of this section does
not diminish the earnings or profits of any corporation. In such cases,
the earnings or profits remain intact and available for distribution as
dividends by the corporation making such distribution, or by another
corporation to which the earnings or profits are transferred upon such
reorganization or other exchange. In the case, however, of amounts
distributed in liquidation (other than a taxfree liquidation or
reorganization described in paragraph (b)(1), (2), (3), or (5) of this
section) the earnings or profits of the corporation making the
distribution are diminished by the portion of such distribution properly
chargeable to earnings or profits accumulated after February 28, 1913,
after first deducting from the amount of such distribution the portion
thereof allocable to capital account.
(d) For the purposes of this section, the terms reorganization and
party to the reorganization shall, for any taxable year beginning before
January 1, 1934, have the meanings assigned to such terms in section 112
of the Revenue Act of 1932 (47 Stat. 196); for any taxable year
beginning after December 31, 1933, and before January 1, 1936, have the
meanings assigned to such terms in
[[Page 57]]
section 112 of the Revenue Act of 1934 (48 Stat. 704); for any taxable
year beginning after December 31, 1935, and before January 1, 1938, have
the meanings assigned to such terms in section 112 of the Revenue Act of
1936 (49 Stat. 1678); for any taxable year beginning after December 31,
1937, and before January 1, 1939, have the meanings assigned to such
terms in section 112 of the Revenue Act of 1938 (52 Stat. 485); and for
any taxable year beginning after December 31, 1938, and ending before
June 22, 1954, providing no election is made under section 393(b)(2) of
the Internal Revenue Code of 1954, have the meanings assigned to such
terms in section 112(g)(1) of the Internal Revenue Code of 1939.
Sec. 1.312-12 Distributions of proceeds of loans guaranteed by the
United States.
(a) The provisions of section 312(j) are applicable with respect to
a loan, any portion of which is guaranteed by an agency of the United
States Government without regard to the percentage of such loan subject
to such guarantee.
(b) The application of section 312(j) is illustrated by the
following example:
Example. Corporation A borrowed $1,000,000 for the purpose of
construction of an apartment house, the cost and adjusted basis of which
was $900,000. This loan was guaranteed by an agency of the United States
Government. One year after such loan was made and after the completion
of construction of the building (but before such corporation had
received any income) it distributed $100,000 cash to its shareholders.
The earnings and profits of the taxable year of such corporation are
increased (pursuant to section 312(j)) by $100,000 immediately prior to
such distribution and are decreased by $100,000 immediately after such
distribution. Such decrease, however, does not reduce the earnings and
profits below zero. Two years later, it has no accumulated earnings and
has earnings of the taxable year of $100,000. Before it has made any
payments on the loan, it distributes $200,000 to its shareholders. The
earnings and profits of the taxable year of the corporation ($100,000)
are increased by $100,000, the excess of the amount of the guaranteed
loan over the adjusted basis of the apartment house (calculated without
adjustment for depreciation). The entire amount of each distribution is
treated as a distribution out of earnings and profits and, accordingly,
as a taxable dividend.
Sec. 1.312-15 Effect of depreciation on earnings and profits.
(a) Depreciation for taxable years beginning after June 30, 1972--
(1) In general. Except as provided in subparagraph (2) of this paragraph
and paragraph (c) of this section, for purposes of computing the
earnings and profits of a corporation (including a real estate
investment trust as defined in section 856) for any taxable year
beginning after June 30, 1972, the allowance for depreciation (and
amortization, if any) shall be deemed to be the amount which would be
allowable for such year if the straight line method of depreciation had
been used for all property for which depreciation is allowable for each
taxable year beginning after June 30, 1972. Thus, for taxable years
beginning after June 30, 1972, in determining the earnings and profits
of a corporation, depreciation must be computed under the straight line
method, notwithstanding that in determining taxable income the
corporation uses an accelerated method of depreciation described in
subparagraph (A), (B), or (C) of section 312(m)(2) or elects to amortize
the basis of property under section 169, 184, 187, or 188, or any
similar provision.
(2) Exception. (i) If, for any taxable year beginning after June 30,
1972, a method of depreciation is used by a corporation in computing
taxable income which the Secretary or his delegate has determined
results in a reasonable allowance under section 167(a) and which is not
a declining balance method of depreciation (described in Sec. 1.167(b)-
2), the sum of the years-digits method (described in Sec. 1.167(b)-3),
or any other method allowed solely by reason of the application of
subsection (b)(4) or (j)(1)(C) of section 167, then the adjustment to
earnings and profits for depreciation for such year shall be determined
under the method so used (in lieu of the straight line method).
(ii) The Commissioner has determined that the ``unit of production''
(see Sec. 1.167(b)-0(b)), and the ``machine hour'' methods of
depreciation, when properly used under appropriate circumstances, meet
the requirements of subdivision (i) of this subparagraph. Thus, the
adjustment to earnings and profits for depreciation (for the taxable
[[Page 58]]
year for which either of such methods is properly used under appropriate
circumstances) shall be determined under whichever of such methods is
used to compute taxable income.
(3) Determinations under straight line method. (i) In the case of
property with respect to which an allowance for depreciation is claimed
in computing taxable income, the determination of the amount which would
be allowable under the straight line method shall be based on the manner
in which the corporation computes depreciation in determining taxable
income. Thus, if an election under Sec. 1.167(a)-11 is in effect with
respect to the property, the amount of depreciation which would be
allowable under the straight line method shall be determined under Sec.
1.167(a)-11(g)(3). On the other hand, if property is not depreciated
under the provisions of Sec. 1.167(a)-11, the amount of depreciation
which would be allowable under the straight line method shall be
determined under Sec. 1.167(b)-1. Any election made under section
167(f), with respect to reducing the amount of salvage value taken into
account in computing the depreciation allowance for certain property, or
any convention adopted under Sec. 1.167(a)-10(b) or Sec. 1.167(a)-
11(c)(2), with respect to additions and retirements from multiple asset
accounts, which is used in computing depreciation for taxable income
shall be used in computing depreciation for earnings and profits
purposes.
(ii) In the case of property with respect to which an election to
amortize is in effect under section 169, 184, 187, or 188, or any
similar provision, the amount which would be allowable under the
straight line method of depreciation shall be determined under the
provisions of Sec. 1.167(b)-1. Thus, the cost or other basis of the
property, less its estimated salvage value, is to be deducted in equal
annual amounts over the period of the estimated useful life of the
property. In computing the amount of depreciation for earnings and
profits purposes, a taxpayer may utilize the provisions of section
167(f) (relating to the reduction in the amount of salvage value taken
into account in computing the depreciation allowance for certain
property) and any convention which could have been adopted for such
property under Sec. 1.167(a)-10(b) (relating to additions and
retirements from multiple asset accounts).
(b) Transitional rules--(1) Depreciation. If, for the taxable year
which includes June 30, 1972, (i) the allowance for depreciation of any
property is computed under a method other than the straight line method
or a method described in paragraph (a)(2) of this section, and (ii)
paragraph (a)(1) of this section applies to such property for the first
taxable year beginning after June 30, 1972, then adjustments to earnings
and profits for depreciation of such property for taxable years
beginning after June 30, 1972, shall be determined as if the corporation
changed to the straight line method with respect to such property as of
the first day of the first taxable year beginning after June 30, 1972.
Thus, if an election under Sec. 1.167 (a)-11 is in effect with respect
to the property, the change shall be made under the provisions of Sec.
1.167(a)-11(c)(1)(iii), except that no statement setting forth the
vintage accounts for which the change is made shall be furnished with
the income tax return of the year of change if the change is only for
purposes of computing earnings and profits. In all other cases, the
unrecovered cost or other basis of the property (less a reasonable
estimate for salvage) as of such first day shall be recovered through
equal annual allowances over the estimated remaining useful life
determined in accordance with the circumstances existing at that time.
See paragraph (a)(3)(i) of this section for rules relating to the
applicability of section 167(f) in determining salvage value.
(2) Amortization. If, for the taxable year which includes June 30,
1972, the basis of any property is amortized under section 169, 184,
187, or 188, or any similar provision, then adjustments to earnings and
profits for depreciation or amortization of such property for taxable
years beginning after June 30, 1972, shall be determined as if the
unrecovered cost or other basis of the property (less a reasonable
estimate for salvage) as of the first day of the first taxable year
beginning after June 30, 1972, were recovered through equal annual
[[Page 59]]
allowances over the estimated remaining useful life of the property
determined in accordance with the circumstances existing at that time.
See paragraph (a)(3)(ii) of this section for rules relating to the
applicability of section 167(f).
(c) Certain foreign corporations. Paragraphs (a) and (b) of this
section shall not apply in computing the earnings and profits of a
foreign corporation for any taxable year for which less than 20 percent
of the gross income from all sources of such corporation is derived from
sources within the United States.
(d) Books and records. Wherever different methods of depreciation
are used for taxable income and earnings and profits purposes, records
shall be maintained which show the depreciation taken for earnings and
profits purposes each year and which will allow computation of the
adjusted basis of the property in each account using the depreciation
taken for earnings and profits purposes.
[T.D. 7221, 37 FR 24746, Nov. 21, 1972]
definitions; constructive ownership of stock
Sec. 1.316-1 Dividends.
(a)(1) The term dividend for the purpose of subtitle A of the Code
(except when used in subchapter L, chapter 1 of the Code, in any case
where the reference is to dividends and similar distributions of
insurance companies paid to policyholders as such) comprises any
distribution of property as defined in section 317 in the ordinary
course of business, even though extraordinary in amount, made by a
domestic or foreign corporation to its shareholders out of either--
(i) Earnings and profits accumulated since February 28, 1913, or
(ii) Earnings and profits of the taxable year computed without
regard to the amount of the earnings and profits (whether of such year
or accumulated since February 28, 1913) at the time the distribution was
made.
The earnings and profits of the taxable year shall be computed as of the
close of such year, without diminution by reason of any distributions
made during the taxable year. For the purpose of determining whether a
distribution constitutes a dividend, it is unnecessary to ascertain the
amount of the earnings and profits accumulated since February 28, 1913,
if the earnings and profits of the taxable year are equal to or in
excess of the total amount of the distributions made within such year.
(2) Where a corporation distributes property to its shareholders on
or after June 22, 1954, the amount of the distribution which is a
dividend to them may not exceed the earnings and profits of the
distributing corporation.
(3) The rule of (2) above may be illustrated by the following
example:
Example X and Y, individuals, each own one-half of the stock of
Corporation A which has earnings and profits of $10,000. Corporation A
distributes property having a basis of $6,000 and a fair market value of
$16,000 to its shareholders, each shareholder receiving property with a
basis of $3,000 and with a fair market value of $8,000 in a distribution
to which section 301 applies. The amount taxable to each shareholder as
a dividend under section 301(c) is $5,000.
(b)(1) In the case of a corporation which, under the law applicable
to the taxable year in which a distribution is made, is a personal
holding company or which, for the taxable year in respect of which a
distribution is made under section 563 (relating to dividends paid
within 2 1/2 months after the close of the taxable year), or section 547
(relating to deficiency dividends), or corresponding provisions of a
prior income tax law, was under the applicable law a personal holding
company, the term dividend, in addition to the meaning set forth in the
first sentence of section 316, also means a distribution to its
shareholders as follows: A distribution within a taxable year of the
corporation, or of a shareholder, is a dividend to the extent of the
corporation's undistributed personal holding company income (determined
under section 545 without regard to distributions under section
316(b)(2)) for the taxable year in which, or, in the case of a
distribution under section 563 or section 547, the taxable year in
respect of which, the distribution was made. This subparagraph does not
apply to distributions in partial or complete liquidation of a personal
holding company. In the case of certain complete liquidations of a
[[Page 60]]
personal holding company see subparagraph (2) of this paragraph.
(2) In the case of a corporation which, under the law applicable to
the taxable year in which a distribution is made, is a personal holding
company or which, for the taxable year in respect of which a
distribution is made under section 563, or section 547, or corresponding
provisions of a prior income tax law, was under the applicable law a
personal holding company, the term dividend, in addition to the meaning
set forth in the first sentence of section 316, also means, in the case
of a complete liquidation occurring within 24 months after the adoption
of a plan of liquidation, a distribution of property to its shareholders
within such period, but--
(i) Only to the extent of the amounts distributed to distributees
other than corporate shareholders, and
(ii) Only to the extent that the corporation designates such amounts
as a dividend distribution and duly notifies such distributees in
accordance with subparagraph (5) of this paragraph, but
(iii) Not in excess of the sum of such distributees' allocable share
of the undistributed personal holding company income for such year
(determined under section 545 without regard to sections 562(b) and
316(b)(2)(B)).
Section 316(b)(2)(B) and this subparagraph apply only to distributions
made in any taxable year of the distributing corporation beginning after
December 31, 1963. The amount designated with respect to a noncorporate
distributee may not exceed the amount actually distributed to such
distributee. For purposes of determining a noncorporate distributee's
gain or loss on liquidation, amounts distributed in complete liquidation
to such distributee during a taxable year are reduced by the amounts
designated as a dividend with respect to such distributee for such year.
For purposes of section 333(e)(1), a shareholder's ratable share of the
earnings and profits of the corporation accumulated after February 28,
1913, shall be reduced by the amounts designated as a dividend with
respect to such shareholder (even though such designated amounts are
distributed during the 1-month period referred to in section 333).
(3) For purposes of subparagraph (2)(iii) of this paragraph--
(i) Except as provided in subdivision (ii) of this subparagraph, the
sum of the noncorporate distributees' allocable share of undistributed
personal holding company income for the taxable year in which, or in
respect of which, the distribution was made (computed without regard to
sections 562(b) and 316(b)(2)(B)) shall be determined by multiplying
such undistributed personal holding company income by the ratio which
the aggregate value of the stock held by all noncorporate shareholders
immediately before the record date of the last liquidating distribution
in such year bears to the total value of all stock outstanding on such
date. For rules applicable in a case where the distributing corporation
has more than one class of stock, see subdivision (iii) of this
subparagraph.
(ii) If more than one liquidating distribution was made during the
year, and if, after the record date of the first distribution but before
the record date of the last distribution, there was a change in the
relative shareholdings as between noncorporate shareholders and
corporate shareholders, then the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income for the
taxable year in which, or in respect of which, the distributions were
made (computed without regard to sections 562(b) and 316(b)(2)(B)) shall
be determined as follows:
(a) First, allocate the corporation's undistributed personal holding
company income among the distributions made during the taxable year by
reference to the ratio which the aggregate amount of each distribution
bears to the total amount of all distributions during such year;
(b) Second, determine the noncorporate distributees' allocable share
of the corporation's undistributed personal holding company income for
each distribution by multiplying the amount determined under (a) of this
subdivision (ii) for each distribution by the ratio which the aggregate
value of the stock held by all noncorporate shareholders immediately
before the record date of such distribution bears
[[Page 61]]
to the total value of all stock outstanding on such date; and
(c) Last, determine the sum of the noncorporate distributees'
allocable share of the corporation's undistributed personal holding
company income for all such distributions.
For rules applicable in a case where the distributing corporation has
more than one class of stock, see subdivision (iii) of this
subparagraph.
(iii) Where the distributing corporation has more than one class of
stock--
(a) The undistributed personal holding company income for the
taxable year in which, or in respect of which the distribution was made
shall be treated as a fund from which dividends may properly be paid and
shall be allocated between or among the classes of stock in a manner
consistent with the dividend rights of such classes under local law and
the pertinent governing instruments, such as, for example, the
distributing corporation's articles or certificate of incorporation and
bylaws;
(b) The noncorporate distributees' allocable share of the
undistributed personal holding company income for each class of stock
shall be determined separately in accordance with the rules set forth in
subdivisions (i) or (ii) of this subparagraph, as if each class of stock
were the only class of stock outstanding; and
(c) The sum of the noncorporate distributees' allocable share of the
undistributed personal holding company income for the taxable year in
which, or in respect of which, the distribution was made shall be the
sum of the noncorporate distributees' allocable share of the
undistributed personal holding company income for all classes of stock.
(iv) For purposes of this subparagraph, in any case where the record
date of a liquidating distribution cannot be ascertained, the record
date of the distribution shall be the date on which the liquidating
distribution was actually made.
(4) The amount designated as a dividend to a noncorporate
distributee for any taxable year of the distributing corporation may not
exceed an amount equal to the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income (as
determined under subparagraph (3) of this paragraph) for such year
multiplied by the ratio which the aggregate value of the stock held by
such distributee immediately before the record date of the liquidating
distribution or, if the record date cannot be ascertained, immediately
before the date on which the liquidating distribution was actually made,
bears to the aggregate value of stock outstanding held by all
noncorporate distributees on such date. In any case where more than one
liquidating distribution is made during the taxable year, the aggregate
amount which may be designated as a dividend to a noncorporate
distributee for such year may not exceed the aggregate of the amounts
determined by applying the principle of the preceding sentence to the
amounts determined under subparagraphs (3)(ii)(a) and (b) of this
paragraph for each distribution. Where the distributing corporation has
more than one class of stock, the limitation on the amount which may be
designated as a dividend to a noncorporate distributee for any taxable
year shall be determined by applying the rules of this subparagraph
separately with respect to the noncorporate distributees' allocable
share of the undistributed personal holding company income for each
class of stock (as determined under subparagraphs (3)(iii)(a) and (b) of
this paragraph).
(5) A corporation may designate as a dividend to a shareholder all
or part of a distribution in complete liquidation described in section
316(b)(2)(B) of this paragraph by:
(i) Claiming a dividends paid deduction for such amount in its
return for the year in which, or in respect of which, the distribution
is made,
(ii) Including such amount as a dividend in Form 1099 filed in
respect of such shareholder pursuant to section 6042(a) and the
regulations thereunder and in a written statement of dividend payments
furnished to such shareholder pursuant to section 6042(c) and Sec.
1.6042-4, and
(iii) Indicating on the written statement of dividend payments
furnished
[[Page 62]]
to such shareholder the amount included in such statement which is
designated as a dividend under section 316(b)(2)(B) and this paragraph.
If a corporation complies with the procedure prescribed in the preceding
sentence, it satisfies both the designation and notification
requirements of section 316(b)(2)(B)(ii) and paragraph (b)(2)(ii) of
this section. An amount designated as a dividend shall not be included
as a distribution in liquidation on Form 1099L filed pursuant to Sec.
1.6043-2 (relating to returns of information respecting distributions in
liquidation). If a corporation designates a dividend in accordance with
this subparagraph, it shall attach to the return in which it claims a
deduction for such designated dividend a schedule indicating all facts
necessary to determine the sum of the noncorporate distributees'
allocable share of undistributed personal holding company income
(determined in accordance with subparagraph (3) of this paragraph) for
the year in which, or in respect of which, the distribution is made.
(c) Except as provided in section 316(b)(1), the term dividend
includes any distribution of property to shareholders to the extent made
out of accumulated or current earnings and profits. See, however,
section 331 (relating to distributions in complete or partial
liquidation), section 301(e) (relating to distributions by personal
service corporations), section 302(b) (relating to redemptions treated
as amounts received from the sale or exchange of stock), and section 303
(relating to distributions in redemption of stock to pay death taxes).
See also section 305(b) for certain distributions of stock or stock
rights treated as distributions of property.
(d) In the case of a corporation which, under the law applicable to
the taxable year in respect of which a distribution is made under
section 860 (relating to deficiency dividends), was a regulated
investment company (within the meaning of section 851), or a real estate
investment trust (within the meaning of section 856), the term dividend,
in addition to the meaning set forth in paragraphs (a) and (b) of
section 316, means a distribution of property to its shareholders which
constitutes a ``deficiency dividend'' as defined in section 860(f).
(e) The application of section 316 may be illustrated by the
following examples:
Example (1). At the beginning of the calendar year 1955, Corporation
M had an operating deficit of $200,000 and the earnings and profits for
the year amounted to $100,000. Beginning on March 16, 1955, the
corporation made quarterly distributions of $25,000 during the taxable
year to its shareholders. Each distribution is a taxable dividend in
full, irrespective of the actual or the pro rata amount of the earnings
and profits on hand at any of the dates of distribution, since the total
distributions made during the year ($100,000) did not exceed the total
earnings and profits of the year ($100,000).
Example (2). At the beginning of the calendar year 1955, Corporation
N, a personal holding company, had no accumulated earnings and profits.
During that year it made no earnings and profits but, due to the
disallowance of certain deductions, its undistributed personal holding
company income (determined under section 545 without regard to
distributions under section 316(b)(2)) was $16,000. It distributed to
shareholders on December 15, 1955, $15,000, and on February 1, 1956,
$1,000, the latter amount being claimed as a deduction under section 563
in its personal holding company schedule for 1955 filed with its return
for 1955 on March 15, 1956. Both distributions are taxable dividends in
full, since they do not exceed the undistributed personal holding
company income (determined without regard to such distributions) for
1955, the taxable year in which the distribution of $15,000 was made and
with respect to which the distribution of $1,000 was made. It is
immaterial whether Corporation N is a personal holding company for the
taxable year 1956 or whether it had any income for that year.
Example (3). In 1959, a deficiency in personal holding company tax
was established against Corporation O for the taxable year 1955 in the
amount of $35,500 based on an undistributed personal holding company
income of $42,000. Corporation O complied with the provisions of section
547 and in December 1959 distributed $42,000 to its stockholders as
``deficiency dividends.'' The distribution of $42,000 is a taxable
dividend since it does not exceed $42,000 (the undistributed personal
holding company income for 1955, the taxable year with respect to which
the distribution was made). It is immaterial whether Corporation O is a
personal holding company for the taxable year 1959 or whether it had any
income for that year.
Example (4). At the beginning of the taxable year 1955, Corporation
P, a personal holding company, had a deficit in earnings and profits of
$200,000. During that year it
[[Page 63]]
made earnings and profits of $90,000. For that year, however, it had an
undistributed personal holding income (determined under section 545
without regard to distributions under section 316(b)(2)) of $80,000.
During such taxable year it distributed to its shareholders $100,000.
The distribution of $100,000 is a taxable dividend to the extent of
$90,000 since its earnings and profits for that year, $90,000, exceed
$80,000, the undistributed personal holding company income determined
without regard to such distribution.
Example (5). Corporation O, a calendar year taxpayer, is completely
liquidated on December 31, 1964, pursuant to a plan of liquidation
adopted July 1, 1964. No distributions in liquidation were made pursuant
to the plan of liquidation adopted July 1, 1964, until the distribution
in complete liquidation on December 31, 1964. Corporation O has
undistributed personal holding company income of $300,000 for the year
1964 (computed without regard to section 562(b) or section
316(b)(2)(B)). On December 31, 1964, immediately before the record date
of the distribution in complete liquidation, individual A owns 200
shares of Corporation O's outstanding stock and Corporation P owns the
remaining 100 shares of outstanding stock. All shares are equal in
value. The noncorporate distributees' allocable share of undistributed
personal holding company income for 1964 is $200,000
200 shares/300 sharesx$300,000.
If at least $200,000 is distributed to A in the liquidation, then
Corporation O may designate $200,000 to A as a dividend in accordance
with paragraph (b)(5) of this section, and, if such amount is
designated, then A must treat $200,000 as a dividend to which section
301 applies. For an example of the treatment of the distribution to
Corporation P see paragraph (b)(2)(iii) of Sec. 1.562-1.
Example (6). Corporation Q, a calendar year taxpayer, is completely
liquidated on December 31, 1964, pursuant to a plan of liquidation
adopted July 1, 1964. No distributions in liquidation were made pursuant
to the plan of liquidation adopted July 1, 1964, until the distribution
in complete liquidation on December 31, 1964. Corporation Q has
undistributed personal holding company income of $40,000 for the year
1964 (computed without regard to section 562(b) or section
316(b)(2)(B)). On December 31, 1964, immediately before the record date
of the distribution in complete liquidation, Corporation Q has
outstanding 300 shares of common stock and 100 shares of noncumulative
preferred stock. Corporation Q's articles of incorporation provide that
the preferred stock is entitled to dividends of $10 per share per year.
Of Corporation Q's stock, individual B owns 200 shares of the common
stock and 50 shares of the preferred stock, and Corporation R owns all
remaining shares. All of the common shares are equal in value, and all
of the preferred shares are equal in value. No dividends had been paid
on the preferred stock during the year 1964. Of the $40,000 of
undistributed personal holding company income, $1,000 must be allocated
to the preferred stock because of the rights of the holders of such
stock, under Q's articles of incorporation, to receive that amount in
dividends for the year 1964. The noncorporate distributees' allocable
share of undistributed personal holding company income for 1964 is
$26,500.
50 preferred shares/100 preferred sharesx$1,000+200 common shares / 300
common sharesx$39,000
If at least $26,500 is distributed to B in the liquidation, then
corporation Q may designate $26,500 to B as a dividend in accordance
with paragraph (b)(5) of this section, and, if such amount is
designated, then B must treat $26,500 as a dividend to which section 301
applies.
Example (7). In 1979, a deficiency of $46,000 in the tax on real
estate investment trust taxable income is established against
corporation R for the taxable year 1977, based on an increase in real
estate investment trust taxable income of $100,000. Corporation R
complied with the provisions of section 860 and in December 1979
distributed to its stockholders $100,000, which qualified as
``deficiency dividends'' under section 860. The distribution of $100,000
is a taxable dividend. It is immaterial whether corporation R is a real
estate investment trust for the taxable year 1979 or whether it had
accumulated or current earnings and profits in 1979. See section
316(b)(3).
(Sec. 860(l) (92 Stat. 2849, 26 U.S.C. 860(l)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6625, 27 FR
12541, Dec. 19, 1962; T.D. 6949, 33 FR 5519, Apr. 9, 1968; T.D. 7767, 46
FR 11264, Feb. 6, 1981; T.D. 7936, 49 FR 2105, Jan. 18, 1984]
Sec. 1.316-2 Sources of distribution in general.
(a) For the purpose of income taxation every distribution made by a
corporation is made out of earnings and profits to the extent thereof
and from the most recently accumulated earnings and profits. In
determining the source of a distribution, consideration should be given
first, to the earnings and profits of the taxable year; second, to the
earnings and profits accumulated since February 28, 1913, only in the
case where, and to the extent that, the distributions made during the
taxable year are not regarded as out of the
[[Page 64]]
earnings and profits of that year; third, to the earnings and profits
accumulated before March 1, 1913, only after all the earnings and
profits of the taxable year and all the earnings and profits accumulated
since February 28, 1913, have been distributed; and, fourth, to sources
other than earnings and profits only after the earnings and profits have
been distributed.
(b) If the earnings and profits of the taxable year (computed as of
the close of the year without diminution by reason of any distributions
made during the year and without regard to the amount of earnings and
profits at the time of the distribution) are sufficient in amount to
cover all the distributions made during that year, then each
distribution is a taxable dividend. See Sec. 1.316-1. If the
distributions made during the taxable year consist only of money and
exceed the earnings and profits of such year, then that proportion of
each distribution which the total of the earnings and profits of the
year bears to the total distributions made during the year shall be
regarded as out of the earnings and profits of that year. The portion of
each such distribution which is not regarded as out of earnings and
profits of the taxable year shall be considered a taxable dividend to
the extent of the earnings and profits accumulated since February 28,
1913, and available on the date of the distribution. In any case in
which it is necessary to determine the amount of earnings and profits
accumulated since February 28, 1913, and the actual earnings and profits
to the date of a distribution within any taxable year (whether beginning
before January 1, 1936, or, in the case of an operating deficit, on or
after that date) cannot be shown, the earnings and profits for the year
(or accounting period, if less than a year) in which the distribution
was made shall be prorated to the date of the distribution not counting
the date on which the distribution was made.
(c) The provisions of the section may be illustrated by the
following example:
Example At the beginning of the calendar year 1955, Corporation M
had $12,000 in earnings and profits accumulated since February 28, 1913.
Its earnings and profits for 1955 amounted to $30,000. During the year
it made quarterly cash distributions of $15,000 each. Of each of the
four distributions made, $7,500 (that portion of $15,000 which the
amount of $30,000, the total earnings and profits of the taxable year,
bears to $60,000, the total distributions made during the year) was paid
out of the earnings and profits of the taxable year; and of the first
and second distributions, $7,500 and $4,500, respectively, were paid out
of the earnings and profits accumulated after February 28, 1913, and
before the taxable year, as follows:
----------------------------------------------------------------------------------------------------------------
Distributions during 1955 Portion Portion out
---------------------------------------------------------------------------- out of of earnings
earnings accumulated
and since Feb. Taxable amt.
profits 28, 1913, of each
Date Amount of the and before distribution
taxable the taxable
year year
----------------------------------------------------------------------------------------------------------------
March 10......................................................... $15,000 $7,500 $7,500 $15,000
June 10.......................................................... 15,000 7,500 4,500 12,000
September 10..................................................... 15,000 7,500 ........... 7,500
December 10...................................................... 15,000 7,500 ........... 7,500
-----------
Total amount taxable as dividends.............................. ........ ........ ........... 42,000
----------------------------------------------------------------------------------------------------------------
(d) Any distribution by a corporation out of earnings and profits
accumulated before March 1, 1913, or out of increase in value of
property accrued before March 1, 1913 (whether or not realized by sale
or other disposition, and, if realized, whether before, on, or after
March 1, 1913), is not a dividend within the meaning of subtitle A of
the Code.
(e) A reserve set up out of gross income by a corporation and
maintained for the purpose of making good any loss of capital assets on
account of depletion or depreciation is not a part of surplus out of
which ordinary dividends may be paid. A distribution made from a
depletion or a depreciation reserve based upon the cost or other basis
of the property will not be considered as having been paid out of
earnings and profits, but the amount thereof shall be applied against
and reduce the cost or other basis of the stock upon which declared. If
such a distribution is in excess of the basis, the excess shall be taxed
as a gain from the sale or other disposition of property as provided in
section 301(c)(3)(A). A distribution from a depletion reserve based upon
discovery value to the extent that such
[[Page 65]]
reserve represents the excess of the discovery value over the cost or
other basis for determining gain or loss, is, when received by the
shareholders, taxable as an ordinary dividend. The amount by which a
corporation's percentage depletion allowance for any year exceeds
depletion sustained on cost or other basis, that is, determined without
regard to discovery or percentage depletion allowances for the year of
distribution or prior years, constitutes a part of the corporation's
``earnings and profits accumulated after February 28, 1913,'' within the
meaning of section 316, and, upon distribution to shareholders, is
taxable to them as a dividend. A distribution made from that portion of
a depletion reserve based upon a valuation as of March 1, 1913, which is
in excess of the depletion reserve based upon cost, will not be
considered as having been paid out of earnings and profits, but the
amount of the distribution shall be applied against and reduce the cost
or other basis of the stock upon which declared. See section 301. No
distribution, however, can be made from such a reserve until all the
earnings and profits of the corporation have first been distributed.
Sec. 1.317-1 Property defined.
The term property, for purposes of part 1, subchapter C, chapter 1
of the Code, means any property (including money, securities, and
indebtedness to the corporation) other than stock, or rights to acquire
stock, in the corporation making the distribution.
Sec. 1.318-1 Constructive ownership of stock; introduction.
(a) For the purposes of certain provisions of chapter 1 of the Code,
section 318(a) provides that stock owned by a taxpayer includes stock
constructively owned by such taxpayer under the rules set forth in such
section. An individual is considered to own the stock owned, directly or
indirectly, by or for his spouse (other than a spouse who is legally
separated from the individual under a decree of divorce or separate
maintenance), and by or for his children, grandchildren, and parents.
Under section 318(a)(2) and (3), constructive ownership rules are
established for partnerships and partners, estates and beneficiaries,
trusts and beneficiaries, and corporations and stockholders. If any
person has an option to acquire stock, such stock is considered as owned
by such person. The term option includes an option to acquire such an
option and each of a series of such options.
(b) In applying section 318(a) to determine the stock ownership of
any person for any one purpose--
(1) A corporation shall not be considered to own its own stock by
reason of section 318(a)(3)(C);
(2) In any case in which an amount of stock owned by any person may
be included in the computation more than one time, such stock shall be
included only once, in the manner in which it will impute to the person
concerned the largest total stock ownership; and
(3) In determining the 50-percent requirement of section
318(a)(2)(C) and (3)(C), all of the stock owned actually and
constructively by the person concerned shall be aggregated.
[T.D. 6969, 33 FR 11999, Aug. 23, 1968]
Sec. 1.318-2 Application of general rules.
(a) The application of paragraph (b) of Sec. 1.318-1 may be
illustrated by the following examples:
Example (1). H, an individual, owns all of the stock of corporation
A. Corporation A is not considered to own the stock owned by H in
corporation A.
Example (2). H, an individual, his wife, W, and his son, S, each own
one-third of the stock of the Green Corporation. For purposes of
determining the amount of stock owned by H, W, or S for purposes of
section 318(a)(2)(C) and (3)(C), the amount of stock held by the other
members of the family shall be added pursuant to paragraph (b)(3) of
Sec. 1.318-1 in applying the 50-percent requirement of such section. H,
W, or S, as the case may be, is for this purpose deemed to own 100
percent of the stock of the Green Corporation.
(b) The application of section 318(a)(1), relating to members of a
family, may be illustrated by the following example:
Example An individual, H, his wife, W, his son, S, and his grandson
(S's son), G, own the 100 outstanding shares of stock of a corporation,
each owning 25 shares. H, W, and S are each considered as owning 100
shares. G is
[[Page 66]]
considered as owning only 50 shares, that is, his own and his father's.
(c) The application of section 318(a)(2) and (3), relating to
partnerships, trusts and corporations, may be illustrated by the
following examples:
Example (1). A, an individual, has a 50 percent interest in a
partnership. The partnership owns 50 of the 100 outstanding shares of
stock of a corporation, the remaining 50 shares being owned by A. The
partnership is considered as owning 100 shares. A is considered as
owning 75 shares.
Example (2). A testamentary trust owns 25 of the outstanding 100
shares of stock of a corporation. A, an individual, who holds a vested
remainder in the trust having a value, computed actuarially equal to 4
percent of the value of the trust property, owns the remaining 75
shares. Since the interest of A in the trust is a vested interest rather
than a contingent interest (whether or not remote), the trust is
considered as owning 100 shares. A is considered as owning 76 shares.
Example (3). The facts are the same as in (2), above, except that
A's interest in the trust is a contingent remainder. A is considered as
owning 76 shares. However, since A's interest in the trust is a remote
contingent interest, the trust is not considered as owning any of the
shares owned by A.
Example (4). A and B, unrelated individuals, own 70 percent and 30
percent, respectively, in value of the stock of Corporation M.
Corporation M owns 50 of the 100 outstanding shares of stock of
Corporation O, the remaining 50 shares being owned by A. Corporation M
is considered as owning 100 shares of Corporation O, and A is considered
as owning 85 shares.
Example (5). A and B, unrelated individuals, own 70 percent and 30
percent, respectively, of the stock of corporation M. A, B, and
corporation M all own stock of corporation O. Since B owns less than 50
percent in value of the stock of corporation M, neither B nor
corporation M constructively owns the stock of corporation O owned by
the other. However, for purposes of certain sections of the Code, such
as sections 304 and 856(d), the 50-percent limitation of section
318(a)(2)(C) and (3)(C) is disregarded or is reduced to less than 30
percent. For such purposes, B constructively owns his proportionate
share of the stock of corporation O owned directly by corporation M, and
corporation M constructively owns the stock of corporation O owned by B.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11999, Aug. 23, 1968]
Sec. 1.318-3 Estates, trusts, and options.
(a) For the purpose of applying section 318(a), relating to estates,
property of a decedent shall be considered as owned by his estate if
such property is subject to administration by the executor or
administrator for the purpose of paying claims against the estate and
expenses of administration notwithstanding that, under local law, legal
title to such property vests in the decedent's heirs, legatees or
devisees immediately upon death. The term beneficiary includes any
person entitled to receive property of a decedent pursuant to a will or
pursuant to laws of descent and distribution. A person shall no longer
be considered a beneficiary of an estate when all the property to which
he is entitled has been received by him, when he no longer has a claim
against the estate arising out of having been a beneficiary, and when
there is only a remote possibility that it will be necessary for the
estate to seek the return of property or to seek payment from him by
contribution or otherwise to satisfy claims against the estate or
expenses of administration. When, pursuant to the preceding sentence, a
person ceases to be a beneficiary, stock owned by him shall not
thereafter be considered owned by the estate, and stock owned by the
estate shall not thereafter be considered owned by him. The application
of section 318(a) relating to estates may be illustrated by the
following examples:
Example (1). (a) A decedent's estate owns 50 of the 100 outstanding
shares of stock of corporation X. The remaining shares are owned by
three unrelated individuals, A, B, and C, who together own the entire
interest in the estate. A owns 12 shares of stock of corporation X
directly and is entitled to 50 percent of the estate. B owns 18 shares
directly and has a life estate in the remaining 50 percent of the
estate. C owns 20 shares directly and also owns the remainder interest
after B's life estate.
(b) If section 318(a)(5)(C) applies (see paragraph (c)(3) of Sec.
1.318-4), the stock of corporation X is considered to be owned as
follows: the estate is considered as owning 80 shares, 50 shares
directly, 12 shares constructively through A, and 18 shares
constructively through B; A is considered as owning 37 shares, 12 shares
directly, and 25 shares constructively (50 percent of the 50 shares
owned directly by the estate); B is considered as owning 43 shares, 18
shares directly and 25
[[Page 67]]
shares constructively (50 percent of the 50 shares owned directly by the
estate); C is considered as owning 20 shares directly and no shares
constructively. C is not considered a beneficiary of the estate under
section 318(a) since he has no direct present interest in the property
held by the estate nor in the income produced by such property.
(c) If section 318(a)(5)(C) does not apply, A is considered as
owning nine additional shares (50 percent of the 18 shares owned
constructively by the estate through B), and B is considered as owning
six additional shares (50 percent of the 12 shares owned constructively
by the estate through A).
Example (2). Under the will of A, Blackacre is left to B for life,
remainder to C, an unrelated individual. The residue of the estate
consisting of stock of a corporation is left to D. B and D are
beneficiaries of the estate under section 318(a). C is not considered a
beneficiary since he has no direct present interest in Blackacre nor in
the income produced by such property. The stock owned by the estate is
considered as owned proportionately by B and D.
(b) For the purpose of section 318(a)(2)(B) stock owned by a trust
will be considered as being owned by its beneficiaries only to the
extent of the interest of such beneficiaries in the trust. Accordingly,
the interest of income beneficiaries, remainder beneficiaries, and other
beneficiaries will be computed on an actuarial basis. Thus, if a trust
owns 100 percent of the stock of Corporation A, and if, on an actuarial
basis, W's life interest in the trust is 15 percent, Y's life interest
is 25 percent, and Z's remainder interest is 60 percent, under this
provision W will be considered to be the owner of 15 percent of the
stock of Corporation A, Y will be considered to be the owner of 25
percent of such stock, and Z will be considered to be the owner of 60
percent of such stock. The factors and methods prescribed in Sec.
20.2031-7 of this chapter (Estate Tax Regulations) for use in
ascertaining the value of an interest in property for estate tax
purposes shall be used in determining a beneficiary's actuarial interest
in a trust for purposes of this section. See Sec. 20.2031-7 of this
chapter (Estate Tax Regulations) for examples illustrating the use of
these factors and methods.
(c) The application of section 318(a) relating to options may be
illustrated by the following example:
Example. A and B, unrelated individuals, own all of the 100
outstanding shares of stock of a corporation, each owning 50 shares. A
has an option to acquire 25 of B's shares and has an option to acquire a
further option to acquire the remaining 25 of B's shares. A is
considered as owning the entire 100 shares of stock of the corporation.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6969, 33 FR
11999, Aug. 23, 1968]
Sec. 1.318-4 Constructive ownership as actual ownership; exceptions.
(a) In general. Section 318(a)(5)(A) provides that, except as
provided in section 318(a)(5) (B) and (C), stock constructively owned by
a person by reason of the application of section 318(a) (1), (2), (3),
or (4) shall be considered as actually owned by such person for purposes
of applying section 318(a) (1), (2), (3), and (4). For example, if a
trust owns 50 percent of the stock of corporation X, stock of
corporation Y owned by corporation X which is attributed to the trust
may be further attributed to the beneficiaries of the trust.
(b) Constructive family ownership. Section 318(a)(5)(B) provides
that stock constructively owned by an individual by reason of ownership
by a member of his family shall not be considered as owned by him for
purposes of making another family member the constructive owner of such
stock under section 318(a)(1). For example, if F and his two sons, A and
B, each own one-third of the stock of a corporation, under section
318(a)(1), A is treated as owning constructively the stock owned by his
father but is not treated as owning the stock owned by B. Section
318(a)(5)(B) prevents the attribution of the stock of one brother
through the father to the other brother, an attribution beyond the scope
of section 318(a)(1) directly.
(c) Reattribution. (1) Section 318(a)(5)(C) provides that stock
constructively owned by a partnership, estate, trust, or corporation by
reason of the application of section 318(a)(3) shall not be considered
as owned by it for purposes of applying section 318(a)(2) in order to
make another the constructive owner of such stock. For example, if two
unrelated individuals are beneficiaries of the same trust, stock held by
one which is attributed to the trust
[[Page 68]]
under section 318(a)(3) is not reattributed from the trust to the other
beneficiary. However, stock constructively owned by reason of section
318(a)(2) may be reattributed under section 318(a)(3). Thus, for
example, if all the stock of corporations X and Y is owned by A, stock
of corporation Z held by X is attributed to Y through A.
(2) Section 318(a)(5)(C) does not prevent reattribution under
section 318(a)(2) of stock constructively owned by an entity under
section 318(a)(3) if the stock is also constructively owned by the
entity under section 318(a)(4). For example, if individuals A and B are
beneficiaries of a trust and the trust has an option to buy stock from
A, B is considered under section 318(a)(2)(B) as owning a proportionate
part of such stock.
(3) Section 318(a)(5)(C) is effective on and after August 31, 1964,
except that for purposes of sections 302 and 304 it does not apply with
respect to distributions in payment for stock acquisitions or
redemptions if such acquisitions or redemptions occurred before August
31, 1964.
[T.D. 6969, 33 FR 11999, Aug. 23, 1968]
Corporate Liquidations
effects on recipients
Sec. 1.331-1 Corporate liquidations.
(a) Section 331 contains rules governing the extent to which gain or
loss is recognized to a shareholder receiving a distribution in complete
or partial liquidation of a corporation. Under section 331(a)(1), it is
provided that amounts distributed in complete liquidation of a
corporation shall be treated as in full payment in exchange for the
stock. Under section 331(a)(2), it is provided that amounts distributed
in partial liquidation of a corporation shall be treated as in full or
part payment in exchange for the stock. For this purpose, the term
partial liquidation shall have the meaning ascribed in section 346. If
section 331 is applicable to the distribution of property by a
corporation, section 301 (relating to the effects on a shareholder of
distributions of property) has no application other than to a
distribution in complete liquidation to which section 316(b)(2)(B)
applies. See paragraph (b)(2) of Sec. 1.316-1.
(b) The gain or loss to a shareholder from a distribution in partial
or complete liquidation is to be determined under section 1001 by
comparing the amount of the distribution with the cost or other basis of
the stock. The gain or loss will be recognized to the extent provided in
section 1002 and will be subject to the provisions of parts I, II, and
III (section 1201 and following), subchapter P, chapter 1 of the Code.
(c) A liquidation which is followed by a transfer to another
corporation of all or part of the assets of the liquidating corporation
or which is preceded by such a transfer may, however, have the effect of
the distribution of a dividend or of a transaction in which no loss is
recognized and gain is recognized only to the extent of ``other
property.'' See sections 301 and 356.
(d) In every case in which a shareholder transfers stock in exchange
for property to the corporation which issued such stock, the facts and
circumstances shall be reported on his return unless the property is
part of a distribution made pursuant to a corporate resolution reciting
that the distribution is made in liquidation of the corporation and the
corporation is completely liquidated and dissolved within one year after
the distribution. See section 6043 for requirements relating to returns
by corporations.
(e) The provisions of this section may be illustrated by the
following example:
Example A, an individual who makes his income tax returns on the
calendar year basis, owns 20 shares of stock of the P Corporation, a
domestic corporation, 10 shares of which were acquired in 1951 at a cost
of $1,500 and the remainder of 10 shares in December 1954 at a cost of
$2,900. He receives in April 1955 a distribution of $250 per share in
complete liquidation, or $2,500 on the 10 shares acquired in 1951, and
$2,500 on the 10 shares acquired in December 1954. The gain of $1,000 on
the shares acquired in 1951 is a long-term capital gain to be treated as
provided in parts I, II, and III (section 1201 and following),
subchapter P, chapter 1 of the Code. The loss of $400 on the shares
acquired in 1954 is a short-term capital loss to be treated as provided
in parts I, II, and III (section 1201 and following), subchapter P,
chapter 1 of the Code.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6949, 33 FR
5521, Apr. 9, 1968]
[[Page 69]]
Sec. 1.332-1 Distributions in liquidation of subsidiary corporation;
general.
Under the general rule prescribed by section 331 for the treatment
of distributions in liquidation of a corporation, amounts received by
one corporation in complete liquidation of another corporation are
treated as in full payment in exchange for stock in such other
corporation, and gain or loss from the receipt of such amounts is to be
determined as provided in section 1001. Section 332 excepts from the
general rule property received, under certain specifically described
circumstances, by one corporation as a distribution in complete
liquidation of the stock of another corporation and provides for the
nonrecognition of gain or loss in those cases which meet the statutory
requirements. Section 367 places a limitation on the application of
section 332 in the case of foreign corporations. See section 334(b) for
the basis for determining gain or loss from the subsequent sale of
property received upon complete liquidations such as described in this
section. See section 453(d)(4)(A) relative to distribution of
installment obligations by subsidiary.
Sec. 1.332-2 Requirements for nonrecognition of gain or loss.
(a) The nonrecognition of gain or loss is limited to the receipt of
such property by a corporation which is the actual owner of stock (in
the liquidating corporation) possessing at least 80 percent of the total
combined voting power of all classes of stock entitled to vote and the
owner of at least 80 percent of the total number of shares of all other
classes of stock (except nonvoting stock which is limited and preferred
as to dividends). The recipient corporation must have been the owner of
the specified amount of such stock on the date of the adoption of the
plan of liquidation and have continued so to be at all times until the
receipt of the property. If the recipient corporation does not continue
qualified with respect to the ownership of stock of the liquidating
corporation and if the failure to continue qualified occurs at any time
prior to the completion of the transfer of all the property, the
provisions for the nonrecognition of gain or loss do not apply to any
distribution received under the plan.
(b) Section 332 applies only to those cases in which the recipient
corporation receives at least partial payment for the stock which it
owns in the liquidating corporation. If section 332 is not applicable,
see section 165(g) relative to allowance of losses on worthless
securities.
(c) To constitute a distribution in complete liquidation within the
meaning of section 332, the distribution must be (1) made by the
liquidating corporation in complete cancellation or redemption of all of
its stock in accordance with a plan of liquidation, or (2) one of a
series of distributions in complete cancellation or redemption of all
its stock in accordance with a plan of liquidation. Where there is more
than one distribution, it is essential that a status of liquidation
exist at the time the first distribution is made under the plan and that
such status continue until the liquidation is completed. Liquidation is
completed when the liquidating corporation and the receiver or trustees
in liquidation are finally divested of all the property (both tangible
and intangible). A status of liquidation exists when the corporation
ceases to be a going concern and its activities are merely for the
purpose of winding up its affairs, paying its debts, and distributing
any remaining balance to its shareholders. A liquidation may be
completed prior to the actual dissolution of the liquidating
corporation. However, legal dissolution of the corporation is not
required. Nor will the mere retention of a nominal amount of assets for
the sole purpose of preserving the corporation's legal existence
disqualify the transaction. (See 26 CFR (1939) 39.22(a)-20 (Regulations
118).)
(d) If a transaction constitutes a distribution in complete
liquidation within the meaning of the Internal Revenue Code of 1954 and
satisfies the requirements of section 332, it is not material that it is
otherwise described under the local law. If a liquidating corporation
distributes all of its property in complete liquidation and if pursuant
to the plan for such complete liquidation a corporation owning the
specified
[[Page 70]]
amount of stock in the liquidating corporation receives property
constituting amounts distributed in complete liquidation within the
meaning of the Code and also receives other property attributable to
shares not owned by it, the transfer of the property to the recipient
corporation shall not be treated, by reason of the receipt of such other
property, as not being a distribution (or one of a series of
distributions) in complete cancellation or redemption of all of the
stock of the liquidating corporation within the meaning of section 332,
even though for purposes of those provisions relating to corporate
reorganizations the amount received by the recipient corporation in
excess of its ratable share is regarded as acquired upon the issuance of
its stock or securities in a tax-free exchange as described in section
361 and the cancellation or redemption of the stock not owned by the
recipient corporation is treated as occurring as a result of a taxfree
exchange described in section 354.
(e) The application of these rules may be illustrated by the
following example:
Example On September 1, 1954, the M Corporation had outstanding
capital stock consisting of 3,000 shares of common stock, par value $100
a share, and 1,000 shares of preferred stock, par value $100 a share,
which preferred stock was limited and preferred as to dividends and had
no voting rights. On that date, and thereafter until the date of
dissolution of the M Corporation, the O Corporation owned 2,500 shares
of common stock of the M Corporation. By statutory merger consummated on
October 1, 1954, pursuant to a plan of liquidation adopted on September
1, 1954, the M Corporation was merged into the O Corporation, the O
Corporation under the plan issuing stock which was received by the other
holders of the stock of the M Corporation. The receipt by the O
Corporation of the properties of the M Corporation is a distribution
received by the O Corporation in complete liquidation of the M
Corporation within the meaning of section 332, and no gain or loss is
recognized as the result of the receipt of such properties.
Sec. 1.332-3 Liquidations completed within one taxable year.
If in a liquidation completed within one taxable year pursuant to a
plan of complete liquidation, distributions in complete liquidation are
received by a corporation which owns the specified amount of stock in
the liquidating corporation and which continues qualified with respect
to the ownership of such stock until the transfer of all the property
within such year is completed (see paragraph (a) of Sec. 1.332-2), then
no gain or loss shall be recognized with respect to the distributions
received by the recipient corporation. In such case no waiver or bond is
required of the recipient corporation under section 332.
Sec. 1.332-4 Liquidations covering more than one taxable year.
(a) If the plan of liquidation is consummated by a series of
distributions extending over a period of more than one taxable year, the
nonrecognition of gain or loss with respect to the distributions in
liquidation shall, in addition to the requirements of Sec. 1.332-2, be
subject to the following requirements:
(1) In order for the distribution in liquidation to be brought
within the exception provided in section 332 to the general rule for
computing gain or loss with respect to amounts received in liquidation
of a corporation, the entire property of the corporation shall be
transferred in accordance with a plan of liquidation, which plan shall
include a statement showing the period within which the transfer of the
property of the liquidating corporation to the recipient corporation is
to be completed. The transfer of all the property under the liquidation
must be completed within three years from the close of the taxable year
during which is made the first of the series of distributions under the
plan.
(2) For each of the taxable years which falls wholly or partly
within the period of liquidation, the recipient corporation shall, at
the time of filing its return, file with the district director of
internal revenue a waiver of the statute of limitations on assessment.
The waiver shall be executed on such form as may be prescribed by the
Commissioner and shall extend the period of assessment of all income and
profits taxes for each such year to a date not earlier than one year
after the last date of the period for assessment of such taxes for the
last taxable year in which the transfer of the property of such
liquidating corporation to the
[[Page 71]]
controlling corporation may be completed in accordance with section 332.
Such waiver shall also contain such other terms with respect to
assessment as may be considered by the Commissioner to be necessary to
insure the assessment and collection of the correct tax liability for
each year within the period of liquidation.
(3) For each of the taxable years which falls wholly or partly
within the period of liquidation, the recipient corporation may be
required to file a bond, the amount of which shall be fixed by the
district director. The bond shall contain all terms specified by the
Commissioner, including provisions unequivocally assuring prompt payment
of the excess of income and profits taxes (plus penalty, if any, and
interest) as computed by the district director without regard to the
provisions of sections 332 and 334(b) over such taxes computed with
regard to such provisions, regardless of whether such excess may or may
not be made the subject of a notice of deficiency under section 6212 and
regardless of whether it may or may not be assessed. Any bond required
under section 332 shall have such surety or sureties as the Commissioner
may require. However, see 6 U.S.C. 15, providing that where a bond is
required by law or regulations, in lieu of surety or sureties there may
be deposited bonds or notes of the United States. Only surety companies
holding certificates of authority from the Secretary as acceptable
sureties on Federal bonds will be approved as sureties. The bonds shall
be executed in triplicate so that the Commissioner, the taxpayer, and
the surety or the depositary may each have a copy. On and after
September 1, 1953, the functions of the Commissioner with respect to
such bonds shall be performed by the district director for the internal
revenue district in which the return was filed and any bond filed on or
after such date shall be filed with such district director.
(b) Pending the completion of the liquidation, if there is a
compliance with paragraph (a) (1), (2), and (3) of this section and
Sec. 1.332-2 with respect to the nonrecognition of gain or loss, the
income and profits tax liability of the recipient corporation for each
of the years covered in whole or in part by the liquidation shall be
determined without the recognition of any gain or loss on account of the
receipt of the distributions in liquidation. In such determination, the
basis of the property or properties received by the recipient
corporation shall be determined in accordance with section 334(b).
However, if the transfer of the property is not completed within the
three-year period allowed by section 332 or if the recipient corporation
does not continue qualified with respect to the ownership of stock of
the liquidating corporation as required by that section, gain or loss
shall be recognized with respect to each distribution and the tax
liability for each of the years covered in whole or in part by the
liquidation shall be recomputed without regard to the provisions of
section 332 or section 334(b) and the amount of any additional tax due
upon such recomputation shall be promptly paid.
Sec. 1.332-5 Distributions in liquidation as affecting minority interests.
Upon the liquidation of a corporation in pursuance of a plan of
complete liquidation, the gain or loss of minority shareholders shall be
determined without regard to section 332, since it does not apply to
that part of distributions in liquidation received by minority
shareholders.
Sec. 1.332-6 Records to be kept and information to be filed with return.
(a) Permanent records in substantial form shall be kept by every
corporation receiving distributions in complete liquidation within the
exception provided in section 332 showing the information required by
this section to be submitted with its return. The plan of liquidation
must be adopted by each of the corporations parties thereto; and the
adoption must be shown by the acts of its duly constituted responsible
officers, and appear upon the official records of each such corporation.
(b) For the taxable year in which the liquidation occurs, or, if the
plan of liquidation provides for a series of distributions over a period
of more than one year, for each taxable year in which a distribution is
received under the plan the recipient must file with
[[Page 72]]
its return a complete statement of all facts pertinent to the
nonrecognition of gain or loss, including:
(1) A certified copy of the plan for complete liquidation, and of
the resolutions under which the plan was adopted and the liquidation was
authorized, together with a statement under oath showing in detail all
transactions incident to, or pursuant to, the plan.
(2) A list of all the properties received upon the distribution,
showing the cost or other basis of such properties to the liquidating
corporation at the date of distribution and the fair market value of
such properties on the date distributed.
(3) A statement of any indebtedness of the liquidating corporation
to the recipient corporation on the date the plan of liquidation was
adopted and on the date of the first liquidating distribution. If any
such indebtedness was acquired at less than face value, the cost thereof
to the recipient corporation must also be shown.
(4) A statement as to its ownership of all classes of stock of the
liquidating corporation (showing as to each class the number of shares
and percentage owned and the voting power of each share) as of the date
of the adoption of the plan of liquidation, and at all times since, to
and including the date of the distribution in liquidation. The cost or
other basis of such stock and the date or dates on which purchased must
also be shown.
Sec. 1.332-7 Indebtedness of subsidiary to parent.
If section 332(a) is applicable to the receipt of the subsidiary's
property in complete liquidation, then no gain or loss shall be
recognized to the subsidiary upon the transfer of such properties even
though some of the properties are transferred in satisfaction of the
subsidiary's indebtedness to its parent. However, any gain or loss
realized by the parent corporation on such satisfaction of indebtedness,
shall be recognized to the parent corporation at the time of the
liquidation. For example, if the parent corporation purchased its
subsidiary's bonds at a discount and upon liquidation of the subsidiary
the parent corporation receives payment for the face amount of such
bonds, gain shall be recognized to the parent corporation. Such gain
shall be measured by the difference between the cost or other basis of
the bonds to the parent and the amount received in payment of the bonds.
Sec. 1.334-1 Basis of property received in liquidations.
(a) In general. Section 334 sets forth rules prescribing the basis
of property received in a distribution in partial or complete
liquidation of a corporation. The general rule of section 334 is set
forth in section 334(a) to the effect that if property is received in a
distribution in partial or complete liquidation and if gain or loss is
recognized on the receipt of such property, then the basis of the
property in the hands of the distributee shall be the fair market value
of such property at the time of the distribution. Such general rule has
no application to a liquidation to which section 332 or section 333
applies. See section 334 (b) and (c).
(b) Transferor's basis. Unless section 334(b)(2) and subsection (c)
of this section apply, property received by a parent corporation in a
complete liquidation to which section 332 is applicable shall, under
section 334(b)(1), have the same basis in the hands of the parent as its
adjusted basis in the hands of the subsidiary. The rule stated above is
applicable even though the subsidiary was indebted to the parent on the
date the plan of liquidation was adopted and part of such property was
received in satisfaction of such indebtedness in a transfer to which
section 332(c) is applicable. See Sec. 1.460-4(k)(3)(iv)(B)(2) for
rules relating to adjustments to the basis of certain contracts
accounted for using a long-term contract method of accounting that are
acquired in certain liquidations described in section 332.
[T.D. 7231, 37 FR 28287, Dec. 22, 1972, as amended at T.D. 8474, 58 FR
25557, Apr. 27, 1993; T.D. 8995, 67 FR 34605, May 15, 2002]
effects on corporation
Sec. 1.337(d)-1 Transitional loss limitation rule.
(a) Loss limitation rule for transitional subsidiary--(1) General
rule. No deduction is allowed for any loss recognized by a member of a
consolidated group
[[Page 73]]
with respect to the disposition of stock of a transitional subsidiary.
(2) Allowable loss--(i) In general. Paragraph (a)(1) of this section
does not apply to the extent the taxpayer establishes that the loss is
not attributable to the recognition of built-in gain by any transitional
subsidiary on the disposition of an asset (including stock and
securities) after January 6, 1987.
(ii) Statement of allowable loss. Paragraph (a)(2)(i) of this
section applies only if a separate statement entitled ``Allowable Loss
Under Sec. 1.337(d)-1(a)'' is filed with the taxpayer's return for the
year of the stock disposition. If the separate statement is required to
be filed with a return the due date (including extensions) of which is
before January 16, 1991, or with a return due (including extensions)
after January 15, 1991 but filed before that date, the statement may be
filed with an amended return for the year of the disposition or with the
taxpayer's first subsequent return the due date (including extensions)
of which is after January 15, 1991.
(iii) Contents of statement. The statement required under paragraph
(a)(2)(ii) of this section must contain--
(A) The name and employer identification number (E.I.N.) of the
transitional subsidiary.
(B) The basis of the stock of the transitional subsidiary
immediately before the disposition.
(C) The amount realized on the disposition.
(D) The amount of the deduction not disallowed under paragraph
(a)(1) of this section by reason of this paragraph (a)(2).
(E) The amount of loss disallowed under paragraph (a)(1) of this
section.
(3) Coordination with loss deferral and other disallowance rules.
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3)
apply, with appropriate adjustments to reflect differences between the
approach of this section and that of Sec. 1.1502-20.
(ii) Other loss deferral rules. If paragraph (a)(1) of this section
applies to a loss subject to deferral or disallowance under any other
provision of the Code or the regulations, the other provision applies to
the loss only to the extent it is not disallowed under paragraph (a)(1).
(4) Definitions. For purposes of this section--
(i) The definitions in Sec. 1.1502-1 apply.
(ii) Transitional subsidiary means any corporation that became a
subsidiary of the group (whether or not the group was a consolidated
group) after January 6, 1987. Notwithstanding the preceding sentence, a
subsidiary is not a transitional subsidiary if the subsidiary (and each
predecessor) was a member of the group at all times after the
subsidiary's (and each predecessor's) organization.
(iii) Built-in gain of a transitional subsidiary means gain
attributable, directly or indirectly, in whole or in part, to any excess
of value over basis, determined immediately before the transitional
subsidiary became a subsidiary, with respect to any asset owned directly
or indirectly by the transitional subsidiary at that time.
(iv) Disposition means any event in which gain or loss is
recognized, in whole or in part.
(v) Value means fair market value.
(5) Examples. For purposes of the examples in this section, unless
otherwise stated, the group files consolidated returns on a calendar
year basis, the facts set forth the only corporate activity, and all
sales and purchases are with unrelated buyers or sellers. The basis of
each asset is the same determining earnings and profits adjustments and
taxable income. Tax liability and its effect on basis, value, and
earnings and profits are disregarded. Investment adjustment system means
the rules of Sec. 1.1502-32. The principles of this paragraph (a) are
illustrated by the following examples:
Example 1. Loss attributable to recognized built-in gain. (i) P buys
all the stock of T for $100 on February 1, 1987, and T becomes a member
of the P group. T has an asset with a value of $100 and basis of $0. T
sells the asset in 1989 and recognizes $100 of built-in gain on the sale
(i.e., the asset's value exceeded its basis by $100 at the time T became
a member of the P group). Under the investment adjustment system, P's
basis in the T stock increases to $200. P sells all the stock of T on
December 31, 1989, and recognizes a loss of $100. Under paragraph (a)(1)
of this section, no deduction is allowed to P for the $100 loss.
[[Page 74]]
(ii) Assume that, after T sells its asset but before P sells the T
stock, T issues additional stock to unrelated persons and ceases to be a
member of the P group. P then sells all its stock of T in 1997. Although
T ceases to be a subsidiary within the meaning of Sec. 1.1502-1, T
continues to be a transitional subsidiary within the meaning of this
section. Consequently, under paragraph (a)(1) of this section, no
deduction is allowed to P for its $100 loss.
Example 2. Loss attributable to post-acquisition loss.
P buys all the stock of T for $100 on February 1, 1987, and T
becomes a member of the P group. T has $50 cash and an asset with $50 of
built-in gain. During 1988, T retains the asset but loses $40 of the
cash. The P group is unable to use the loss, and the loss becomes a net
operating loss carryover attributable to T. Under the investment
adjustment system, P's basis in the stock of T remains $100. P sells all
the stock of T on December 31, 1988, for $60 and recognizes a $40 loss.
Under paragraph (a)(2)(i) of this section, P establishes that it did not
dispose of the built-in gain asset. None of P's loss is disallowed under
paragraph (a)(1) if P satisfies the requirements of paragraph (a)(2)(ii)
of this section.
Example 3. Stacking rules--postacquisition loss offsets
postacquisition gain. (i) P buys all the stock of T for $100 on February
1, 1987, and T becomes a member of the P group. T has 2 assets. Asset 1
has a basis and value of $50, and asset 2 has a basis of $0 and a value
of $50. During 1989, asset 1 declines in value to $0, and T sells asset
2 for $50, and reinvests the proceeds in asset 3. The value of asset 3
appreciates to $90. Under the investment adjustment system, P's basis in
the stock of T increases from $100 to $150 as a result of the gain
recognized on the sale of asset 2 but is unaffected by the unrealized
post-acquisition decline in the value of asset 1. On December 31, 1989,
P sells all the stock of T for $90 and recognizes a $60 loss.
(ii) Although T incurred a $50 post-acquisition loss of built-in
gain because of the decline in the value of asset 1, T also recognized
$50 of built-in gain. Under paragraph (a)(2) of this section, any loss
on the sale of stock is treated first as attributable to recognized
built-in gain. Thus, for purposes of determining under paragraph (a)(2)
of this section whether P's $60 loss on the disposition of the T stock
is attributable to the recognition of built-in gain on the disposition
of an asset, T's unrealized post-acquisition gain of $40 offsets $40 of
the $50 of unrealized post-acquisition loss. Therefore, $50 of the $60
loss is attributable to the recognition of built-in gain on the
disposition of an asset and is disallowed under paragraph (a)(1) of this
section.
Example 4. Stacking rules--built-in loss offsets built-in gain. (i)
P buys all the stock of T for $50 on February 1, 1987, and T becomes a
member of the P group. T has 2 assets. Asset 1 has a basis of $50 and a
value of $0, and asset 2 has a basis of $0 and a value of $50. During
1989, T sells asset 1 for $0 and asset 2 for $50, and reinvests the $50
proceeds in asset 3. The value of asset 3 declines to $40. Under the
investment adjustment system, P's basis in the stock of T remains $50 as
a result of the offsetting gain and loss recognized on the sale of
assets 1 and 2 and is unaffected by the unrealized post-acquisition
decline in the value of asset 3. On December 31, 1989, P sells all the
stock of T for $40 and recognizes a $10 loss.
(ii) Although T recognized a $50 built-in gain on the sale of asset
2, T also recognized a $50 built-in loss on the sale of asset 1. For
purposes of determining under paragraph (a)(2) of this section whether
P's $10 loss on the disposition of the T stock is attributable to the
recognition of built-in gain on the disposition of an asset, T's
recognized built-in gain is offset by its recognized built-in loss. Thus
none of P's $10 loss is attributable to the recognition of built-in gain
on the disposition of an asset.
(iii) The result would be the same if, instead of a $50 built-in
loss in asset 2, T has a $50 net operating loss carryover when P buys
the T stock, and the net operating loss carryover is used to offset the
built-in gain.
Example 5. Outside basis partially corresponds to inside basis. (i)
Individual A owns all the stock of T, for which A has a basis of $60. On
February 1, 1987, T owns 1 asset with a basis of $0 and a value of $100,
P acquires all the stock of T from A in an exchange to which section
351(a) applies, and T becomes a member of the P group. P has a carryover
basis of $60 in the T stock. During 1988, T sells the asset and
recognizes $100 of gain. Under the investment adjustment system, P's
basis in the T stock increases from $60 to $160. T reinvests the $100
proceeds in another asset, which declines in value to $90. On January 1,
1989, P sells all the stock of T for $90 and recognizes a loss of $70.
(ii) Although P's basis in the T stock was increased by $100 as a
result of the recognition of built-in gain on the disposition of T's
asset, only $60 of the $70 loss on the sale of the stock is attributable
under paragraph (a)(2) of this section to the recognition of built-in
gain from the disposition of the asset. (Had T's asset not declined in
value to $90, the T stock would have been sold for $100, and a $60 loss
would have been attributable to the recognition of the built-in gain.)
Therefore, $60 of the $70 loss is disallowed under paragraph (a)(2), and
$10 is not disallowed if P satisfies the requirements of paragraph
(a)(2). If P had sold the stock of T for $95 because T's other assets
had unrealized appreciation of $5, $60 of the $65 loss would still be
attributable to T's recognition of built-in gain on the disposition of
assets.
[[Page 75]]
Example 6. Creeping acquisition. P owns 60 percent of the stock of S
on January 6, 1987. On February 1, 1987, P buys an additional 20 percent
of the stock of S, and S becomes a member of the P group. P sells all
the S stock on March 1, 1989 and recognizes a loss of $100. All 80
percent of the stock of S owned by P is subject to the rules of this
section and, under paragraph (a) (1) and (2) of this section, P is not
allowed to deduct the $100 loss, except to the extent P establishes the
loss is not attributable to the recognition by S of built-in gain on the
disposition of assets.
Example 7. Effect of post-acquisition appreciation. P buys all the
stock of T for $100, and T becomes a member of the P group. T has an
asset with a basis of $0 and a value of $100. T sells the asset for
$100. Under the investment adjustment system, P's basis in the T stock
increases to $200. T reinvests the proceeds of the sale in an asset that
appreciates in value to $180. Five years after the sale, P sells all the
stock of T for $180 and recognizes a $20 loss. Under paragraph (a)(1) of
this section, no deduction is allowed to P for the $20 loss.
Example 8. Deferred loss and recognized gain. (i) P is the common
parent of a consolidated group, S is a wholly owned subsidiary of P, and
T is a wholly owned subsidiary of S. S purchased all of the T stock on
February 1, 1987 for $100, and T has an asset with a basis of $40 and a
value of $100. T sells the asset for $100, recognizing $60 of gain.
Under the investment adjustment system, S's basis in the T stock
increases from $100 to $160. S sells its T stock to P for $100 in a
deferred intercompany transaction, recognizing a $60 loss that is
deferred under section 267(f) and Sec. 1.1502-13. P subsequently sells
all the stock of T for $100 to X, a member of the same controlled group
(as defined in section 267(f)) as P but not a member of the P
consolidated group.
(ii) Under paragraph (a)(3) of this section, the application of
paragraph (a)(1) of this section to S's $60 loss is deferred, because
S's loss is deferred under section 267(f) and Sec. 1.1502-13. Although
P's sale of the T stock to X would cause S's deferred loss to be taken
into account under Sec. 1.1502-13, Sec. 1.267(f)-1 provides that the
loss is not taken into account because X is a member of the same
controlled group as P and S. Nevertheless, under paragraph (a)(3) of
this section, because the T stock ceases to be owned by a member of the
P consolidated group, S's deferred loss is disallowed immediately before
the sale and is never taken into account under section 267(f).
(b) Indirect disposition of transitional subsidiary--(1) Loss
limitation rule for transitional parent. No deduction is allowed for any
loss recognized by a member of a consolidated group with respect to the
disposition of stock of a transitional parent.
(2) Allowable loss--(i) In general. Paragraph (b)(1) of this section
does not apply to the extent the taxpayer establishes that the loss
exceeds the amount that would be disallowed under paragraph (a) of this
section if each highest tier transitional subsidiary's stock in which
the transitional parent has a direct or indirect interest had been sold
immediately before the disposition of the transitional parent's stock.
In applying the preceding sentence, appropriate adjustments shall be
made to take into account circumstances where less than all the stock of
a transitional parent owned by members of a consolidated group is
disposed of in the same transaction, or the stock of a transitional
subsidiary or a transitional parent is directly owned by more than 1
member.
(ii) Statement of allowable loss. Paragraph (b)(2)(i) of this
section applies only if a separate statement entitled ``Allowable Loss
Under Section 1.337(d)-1(b)'' is filed with the taxpayer's return for
the year of the stock disposition. If the separate statement is required
to be filed with a return the due date (including extensions) of which
is before January 16, 1991, or with a return due (including extensions)
after January 15, 1991 but filed before that date, the statement may be
filed with an amended return for the year of the disposition or with the
taxpayer's first subsequent return the due date (including extensions)
of which is after January 15, 1991.
(iii) Contents of statement. The statement required under paragraph
(b)(2)(ii) of this section must contain--
(A) The name and employer identification number (E.I.N.) of the
transitional parent.
(B) The basis of the stock of the transitional parent immediately
before the disposition.
(C) The amount realized on the disposition.
(D) The amount of the deduction not disallowed under paragraph
(b)(1) of this section by reason of this paragraph (b)(2).
(E) The amount of loss disallowed under paragraph (b)(1) of this
section.
[[Page 76]]
(3) Coordination with loss deferral and other disallowance rules.
(i) For purposes of this section, the rules of Sec. 1.1502-20(a)(3)
apply, with appropriate adjustments to reflect differences between the
approach of this section and that of Sec. 1.1502-20.
(ii) Other loss deferral rules. If paragraph (b)(1) of this section
applies to a loss subject to deferral or disallowance under any other
provision of the Code or the regulations, the other provision applies to
the loss only to the extent it is not disallowed under paragraph (b)(1).
(4) Definitions. For purposes of this section--
(i) Transitional parent means any subsidiary, other than a
transitional subsidiary, that owned at any time after January 6, 1987, a
direct or indirect interest in the stock of a corporation that is a
transitional subsidiary.
(ii) Highest tier transitional subsidiary means the transitional
subsidiary (or subsidiaries) in which the transitional parent has a
direct or indirect interest and that is the highest transitional
subsidiary (or subsidiaries) in a chain of members.
(5) Examples. The principles of this paragraph (b) are illustrated
by the following examples:
Example 1. Ownership of chain of transitional subsidiaries. (i) P
forms S with $200 on January 1, 1985, and S becomes a member of the P
group. On February 1, 1987, S buys all the stock of T, and T buys all
the stock of T1, and both T and T1 become members of the P group. On
January 1, 1988, P sells all the stock of S and recognizes a $90 loss on
the sale.
(ii) Under paragraph (a)(4)(ii) of this section, both T and T1 are
transitional subsidiaries, because they became members of the P group
after January 6, 1987. Under paragraph (b)(4)(i) of this section, S is a
transitional parent, because it owns a direct interest in stock of
transitional subsidiaries and is not itself a transitional subsidiary.
(iii) Under paragraph (b) (1) and (2) of this section, because S is
a transitional parent, no deduction is allowed to P for its $90 loss
except to the extent the loss exceeds the amount of S's loss that would
have been disallowed if S had sold all the stock of T, S's highest tier
transitional subsidiary, immediately before P's sale of all the S stock.
Assume all the T stock would have been sold for a $90 loss and that all
the loss would be attributable to the recognition of built-in gain from
the disposition of assets. Because in that case $90 of loss would be
disallowed, all of P's loss on the sale of the S stock is disallowed
under paragraph (b).
Example 2. Ownership of brother-sister transitional subsidiaries.
(i) P forms S with $200 on January 1, 1985, and S becomes a member of
the P group. On February 1, 1987, S buys all the stock of both T and T1,
and T and T1 become members of the P group. On January 1, 1988, P sells
all the stock of S and recognizes a $90 loss on the sale.
(ii) Under paragraph (b) (1) and (2) of this section, no deduction
is allowed to P for its $90 loss except to the extent P establishes that
the loss exceeds the amount of S's stock losses that would be disallowed
if S sold all the stock of T and T1, S's highest tier transitional
subsidiaries, immediately before P's sale of all the S stock. Assume
that all the T stock would have been sold for a $50 loss, all the T1
stock of a $40 loss, and that the entire amount of each loss would be
attributable to the recognition of built-in gain on the disposition of
assets. Because $90 of loss would be disallowed with respect to the sale
of S's T and T1 stock, P's $90 loss on the sale of all the S stock is
disallowed under paragraph (b).
(c) Successors--(1) General rule. This section applies, to the
extent necessary to effectuate the purposes of this section, to--
(i) Any property owned by a member or former member, the basis of
which is determined, directly or indirectly, in whole or in part, by
reference to the basis in a subsidiary's stock, and
(ii) Any property owned by any other person whose basis in the
property is determined, directly or indirectly, in whole or in part, by
reference to a member's (or former member's) basis in a subsidiary's
stock.
(2) Examples. The principles of this paragraph (c) are illustrated
by the following examples:
Example 1. Merger into grandfathered subsidiary. P, the common
parent of a group, owns all the stock of T, a transitional subsidiary.
On January 1, 1989, T merges into S, a wholly owned subsidiary of P that
is not a transitional subsidiary. Under paragraph (c)(1) of this
section, all the stock of S is treated as stock of a transitional
subsidiary. As a result, no deduction is allowed for any loss recognized
by P on the disposition of any S stock, except to the extent the P group
establishes under paragraph (a)(2) that the loss is not attributable to
the recognition of built-in gain on the disposition of assets of T.
Example 2. Nonrecognition exchange of transitional stock. (i) P, the
common parent of a
[[Page 77]]
group, owns all the stock of T, a transitional subsidiary. On January 1,
1989, P transfers the stock of T to X, a corporation that is not a
member of the P group, in exchange for 20 percent of its stock in a
transaction to which section 351(a) applies. T and X file separate
returns.
(ii) Under paragraph (c)(1) of this section, all the stock of X
owned by P is treated as stock of a transitional subsidiary because P's
basis for the X stock is determined by reference to its basis for the T
stock. As a result, no deduction is allowed to P for any loss recognized
on the disposition of the X stock, except to the extent permitted under
paragraph (a) of this section.
(iii) Under paragraph (c)(1), X is treated as a member subject to
paragraph (a) of this section with respect to the T stock because X's
basis for the stock is determined by reference to P's basis for the
stock. Moreover, all of the T stock owned by X continues to be stock of
a transitional subsidiary. As a result, no deduction is allowed to X for
any loss recognized on the disposition of any T stock, except to the
extent permitted under paragraph (a) of this section.
(d) Investment adjustments and earnings and profits--(1) In general.
For purposes of determining investment adjustments under Sec. 1.1502-32
and earnings and profits under Sec. 1.1502-33(c) with respect to a
member of a consolidated group that owns stock in a subsidiary, any
deduction that is disallowed under this section is treated as a loss
arising and absorbed by the member in the tax year in which the
disallowance occurs.
(2) Example. (i) In 1986, P forms S with a contribution of $100, and
S becomes a member of the P group. On February 1, 1987, S buys all the
stock of T for $100. T has an asset with a basis of $0 and a value of
$100. In 1988, T sells the asset for $100. Under the investment
adjustment system, S's basis in the T stock increases to adjustment
system, S's basis in the T stock increases to $200, P's basis in the S
stock increases to $200, and P's earnings and profits and S's earnings
and profits increase by $100. In 1989, S sells all of the T stock for
$100, and S's recognized loss of $100 is disallowed under paragraph
(a)(1) of this section.
(ii) Under paragraph (d)(1) of this section, S's earnings and
profits for 1989 are reduced by $100, the amount of the loss disallowed
under paragraph (a)(1). As a result, P's basis in the S stock is reduced
from $200 to $100 under the investment adjustment system. P's earnings
and profits for 1989 are correspondingly reduced by $100.
(e) Effective dates--(1) General rule. This section applies with
respect to dispositions after January 6, 1987. For dispositions on or
after November 19, 1990, however, this section applies only if the stock
was deconsolidated (as that term is defined in Sec. 1.337(d)-2(b)(2))
before November 19, 1990, and only to the extent the disposition is not
subject to Sec. 1.337(d)-2 or Sec. 1.1502-20.
(2) Binding contract rule. For purposes of this paragraph (e), if a
corporation became a subsidiary pursuant to a binding written contract
entered into before January 6, 1987, and in continuous effect until the
corporation became a subsidiary, or a disposition was pursuant to a
binding written contract entered into before March 9, 1990, and in
continuous effect until the disposition, the date the contract became
binding shall be treated as the date the corporation became a subsidiary
or as the date of disposition.
(3) Application of Sec. 1.1502-20T to certain transactions--(i) In
general. If a group files the certification described in paragraph
(e)(3)(ii) of this section, it may apply Sec. 1.1502-20T (as contained
in the CFR edition revised as of April 1, 1990), to all of its members
with respect to all dispositions and deconsolidations by the certifying
group to which Sec. 1.1502-20T otherwise applied by its terms
occurring--
(A) On or after March 9, 1990 (but only if not pursuant to a binding
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR
edition revised as of April 1, 1990) that was entered into before March
9, 1990); and
(B) Before November 19, 1990 (or thereafter, if pursuant to a
binding contract described in Sec. 1.1502-20T(g)(3) that was entered
into on or after March 9, 1990 and before November 19, 1990).
The certification under this paragraph (e)(3)(i) with respect to the
application of Sec. 1.1502-20T to any transaction described in this
paragraph (e)(3)(i) may not be withdrawn and, if the certification is
filed, Sec. 1.1502-20T must be applied to all such transactions on all
returns (including amended returns) on which such transactions are
included.
[[Page 78]]
(ii) Time and manner of filing certification. The certification
described in paragraph (e)(3)(i) of this section must be made in a
separate statement entitled ``[insert name and employer identification
number of common parent] hereby certifies under Sec. 1.337(d)-1 (e)(3)
that the group of which it is the common parent is applying Sec.
1.1502-20T to all transactions to which that section otherwise applied
by it terms.'' The statement must be signed by the common parent and
filed with the group's income tax return for the taxable year of the
first disposition or deconsolidation to which the certification applies.
If the separate statement required under this paragraph (e)(3) is to be
filed with a return the due date (including extensions) of which is
before November 16, 1991, the statement may be filed with an amended
return for the year of the disposition or deconsolidation that is filed
within 180 days after September 13, 1991. Any other filings required
under Sec. 1.1502-20T, such as the statement required under Sec.
1.1502-20T(f)(5), may be made with the amended return, regardless of
whether Sec. 1.1502-20T permits such filing by amended return.
[T.D. 8319, 55 FR 49031, Nov. 26, 1990, as amended by T.D. 8364, 56 FR
47389, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992; T.D. 8560, 59 FR
41674, 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36679, July 18, 1995]
Sec. 1.337(d)-1T [Reserved]
Sec. 1.337(d)-2 Loss limitation window period.
(a) Loss disallowance--(1) General rule. No deduction is allowed for
any loss recognized by a member of a consolidated group with respect to
the disposition of stock of a subsidiary.
(2) Definitions. For purposes of this section--
(i) The definitions in Sec. 1.1502-1 apply.
(ii) Disposition means any event in which gain or loss is
recognized, in whole or in part.
(3) Coordination with loss deferral and other disallowance rules.
For purposes of this section, the rules of Sec. 1.1502-20(a)(3) apply,
with appropriate adjustments to reflect differences between the approach
of this section and that of Sec. 1.1502-20.
(b) Basis reduction on deconsolidation--(1) General rule. If the
basis of a member of a consolidated group in a share of stock of a
subsidiary exceeds its value immediately before a deconsolidation of the
share, the basis of the share is reduced at that time to an amount equal
to its value. If both a disposition and a deconsolidation occur with
respect to a share in the same transaction, paragraph (a) of this
section applies and, to the extent necessary to effectuate the purposes
of this section, this paragraph (b) applies following the application of
paragraph (a) of this section.
(2) Deconsolidation. ``Deconsolidation'' means any event that causes
a share of stock of a subsidiary that remains outstanding to be no
longer owned by a member of any consolidated group of which the
subsidiary is also a member.
(3) Value. ``Value'' means fair market value.
(4) Loss within 2 years after basis reduction--(i) In general. If a
share is deconsolidated and a direct or indirect disposition of the
share occurs within 2 years after the date of the deconsolidation, a
separate statement entitled ``statement pursuant to Sec. 1.337(d)-
2(b)(4)'' must be filed with the taxpayer's return for the year of
disposition. If the taxpayer fails to file the statement as required, no
deduction is allowed for any loss recognized with respect to the
disposition. If the separate statement is required to be filed with a
return the due date (including extensions) of which is before January
16, 1991, or with a return due (including extensions) after January 15,
1991 but filed before that date, the statement may be filed with an
amended return for the year of the disposition or with the taxpayer's
first subsequent return the due date (including extensions) of which is
after January 15, 1991. A disposition after the 2-year period described
in this paragraph (b)(4) that is pursuant to an agreement, option, or
other arrangement entered into within the 2-year period is treated as a
disposition within the 2-year period for purposes of this section.
(ii) Contents of statement. The statement required under paragraph
(b)(4)(i) of this section must contain--
[[Page 79]]
(A) The name and employer identification number (E.I.N.) of the
subsidiary.
(B) The amount of prior basis reduction with respect to the stock of
the subsidiary under paragraph (b)(1) of this section.
(C) The basis of the stock of the subsidiary immediately before the
disposition.
(D) The amount realized on the disposition.
(E) The amount of the loss recognized on the disposition.
(c) Allowable loss--(1) Application. This paragraph (c) applies with
respect to stock of a subsidiary only if--
(i) Before February 1, 1991, the consolidated group either--
(A) Disposes (in one or more transactions) of its entire equity
interest in the subsidiary to persons not related to any member of the
consoldiated group within the meaning of section 267(b) or section
707(b)(1) (substituting ``10 percent'' for ``50 percent'' each place
that it appears); or
(B) Sustains a worthless stock loss under section 165(g); and
(ii) A separate statement entitled ``allowed loss under Sec.
1.337(d)-2(c)'' is filed in accordance with paragraph (c)(3) of this
section.
(2) General rule. Loss is not disallowed under paragraph (a)(1) of
this section and basis is not reduced under paragraph (b)(1) of this
section to the extent the taxpayer establishes that the loss or basis is
not attributable to the recognition of built-in gain on the disposition
of an asset (including stock and securities). Loss or basis may be
attributable to the recognition of built-in gain on the disposition of
an asset by a prior group. For purposes of this section, gain recognized
on the disposition of an asset is built-in gain to the extent
attributable, directly or indirectly, in whole or in part, to any excess
of value over basis that is reflected, before the disposition of the
asset, in the basis of the share, directly or indirectly, in whole or in
part, after applying section 1503(e) and other applicable provisions of
the Code and regulations.
(3) Contents of statement and time of filing. The statement required
under paragraph (c)(1)(ii) of this section must be filed with the
taxpayer's return for the year of the disposition or deconsolidation,
and must contain--
(i) The name and employer identification number (E.I.N.) of the
subsidiary.
(ii) The basis of the stock of the subsidiary immediately before the
disposition or deconsolidation.
(iii) The amount realized on the disposition and the amount of fair
market value on the deconsolidation.
(iv) The amount of the deduction not disallowed under paragraph
(a)(1) of this section by reason of this paragraph (c) and the amount of
basis not reduced under paragraph (b)(1) of this section by reason of
this paragraph (c).
(v) The amount of loss disallowed under paragraph (a)(1) of this
section and the amount of basis reduced under paragraph (b)(1) of this
section.
If the separate statement is required to be filed with a return the
due date (including extensions) of which is before January 16, 1991, or
with a return due (including extensions) after January 15, 1991 but
filed before that date, the statement may be filed with an amended
return for the year of the disposition or deconsolidation or with the
taxpayer's first subsequent return the due date (including extensions)
of which is after January 15, 1991.
(4) Example. The principles of paragraphs (a), (b), and (c) of this
section are illustrated by the examples in Sec. Sec. 1.337(d)-1(a) and
1.1502-20(a) (other than Examples 3, 4, and 5) and (b), with appropriate
adjustments to reflect differences between the approach of this section
and that of Sec. 1.1502-20, and by the following example. For purposes
of the examples in this section, unless otherwise stated, the group
files consolidated returns on a calendar year basis, the facts set forth
the only corporate activity, and all sales and purchases are with
unrelated buyers or sellers. The basis of each asset is the same for
determining earnings and profits adjustments and taxable income. Tax
liability and its effect on basis, value, and earnings and profits are
disregarded. Investment adjustment system means the rules of Sec.
1.1502-32.
Example. Loss offsetting built-in gain in a prior group. (i) P buys
all the stock of T for $50 in Year 1, and T becomes a member of the
[[Page 80]]
P group. T has 2 assets. Asset 1 has a basis of $50 and a value of $0,
and asset 2 has a basis of $0 and a value of $50. T sells asset 2 during
Year 3 for $50, and recognizes a $50 gain. Under the investment
adjustment system, P's basis in the T stock increases to $100 as a
result of the recognition of gain. In year 5, all of the stock of P is
acquired by the P1 group, and the former members of the P group become
members of the P1 group. T then sells asset 1 for $0, and recognizes a
$50 loss. Under the investment adjustment system. P's basis in the T
stock decreases to $50 as a result of the loss. T's assets decline in
value from $50 to $40. P then sells all the stock of T for $40 and
recognizes a $10 loss.
(ii) P's basis in the T stock reflects both T's unrecognized gain
and unrecognized loss with respect to its assets. The gain T recognizes
on the disposition of asset 2 is built-in gain with respect to both the
P and the P1 groups for purposes of paragraph (c)(2) of this section. In
addition, the loss T recognizes on the disposition of asset 2 is built-
in loss with respect to the P and P1 groups for purposes of paragraph
(c)(2) of this section. T's recognition of the built-in loss while a
member of the P1 group offsets the effect on T's stock basis of T's
recognition of the built-in gain while a member of the P group. Thus,
P's $10 loss on the sale of the T stock is not attributable to the
recognition of built-in gain, and the loss is therefore not disallowed
under paragraph (c)(2) of this section.
(iii) The result would be the same if, instead of having a $50
built-in loss in asset 2 when it becomes a member of the P group, T has
a $50 net operating loss carryover and the carryover is used by the P
group.
(d) Successors. For purposes of this section, the rules and examples
of Sec. 1.1502-20(d) apply, with appropriate adjustments to reflect
differences between the approach of this section and that of Sec.
1.1502-20.
(e) Anti-avoidance rules. For purposes of this section, the rules
and examples of Sec. 1.1502-20(e) apply, with appropriate adjustments
to reflect differences between the approach of this section and that of
Sec. 1.1502-20.
(f) Investment adjustments and earnings and profits. For purposes of
this section, the rules and examples of Sec. 1.1502-20 (f) apply, with
appropriate adjustments to reflect differences between the approach of
this section and that of Sec. 1.1502-20.
(g) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (g), this section applies with respect to dispositions
and deconsolidations on or after November 19, 1990, but only to the
extent the disposition or deconsolidation is not subject to Sec.
1.1502-20. For this purpose, dispositions deferred under Sec. Sec.
1.1502-13 and 1.1502-14 (as contained in the 26 CFR part 1 edition
revised as of April 1, 1995) are deemed to occur at the time the
deferred gain or loss is taken into account unless the stock was
deconsolidated before November 19, 1990. If stock of a subsidiary became
worthless during a taxable year including November 19, 1990, the
disposition with respect to the stock is treated as occurring on the
date the stock became worthless.
(2) Binding contract rule. For purposes of this paragraph (g), if a
disposition or deconsolidation is pursuant to a binding written contract
entered into before March 9, 1990, and in continuous effect until the
disposition or deconsolidation, the date the contract became binding is
treated as the date of the disposition or deconsolidation.
(3) Application of Sec. 1.1502-20T to certain transactions--(i) In
general. If a group files the certification described in paragraph
(g)(3)(ii) of this section, it may apply Sec. 1.1502-20T (as contained
in the CFR edition revised as of April 1, 1990), to all of its members
with respect to all dispositions and deconsolidations by the certifying
group to which Sec. 1.1502-20T otherwise applied by its terms
occurring--
(A) On or after March 9, 1990 (but only if not pursuant to a binding
contract described in Sec. 1.337(d)-1T(e)(2) (as contained in the CFR
edition revised as of April 1, 1990) that was entered into before March
9, 1990); and
(B) Before November 19, 1990 (or thereafter, if pursuant to a
binding contract described in Sec. 1.1502-20T(g)(3) that was entered
into on or after March 9, 1990 and before November 19, 1990).
The certification under this paragraph (g)(3)(i) with respect to the
application of Sec. 1.1502-20T to any transaction described in this
paragraph (g)(3)(i) may not be withdrawn and, if the certification is
filed, Sec. 1.1502-20T must be applied to all such transactions on all
returns (including amended returns) on which such transactions are
included.
(ii) Time and manner of filing certification. The certification
described in
[[Page 81]]
paragraph (g)(3)(i) of this section must be made in a separate statement
entitled ``[insert name and employer identification number of common
parent] hereby certifies under Sec. 1.337(d)-2(g)(3) that the group of
which it is the common parent is applying Sec. 1.1502-20T to all
transactions to which that section otherwise applied by its terms.'' The
statement must be signed by the common parent and filed with the group's
income tax return for the taxable year of the first disposition or
deconsolidation to which the certification applies. If the separate
statement required under this paragraph (g)(3) is to be filed with a
return the due date (including extensions) of which is before November
16, 1991, the statement may be filed with an amended return for the year
of the disposition or deconsolidation that is filed within 180 days
after September 13, 1991. Any other filings required under Sec. 1.1502-
20T, such as the statement required under Sec. 1.1502-20T(f)(5), may be
made with the amended return, regardless of whether Sec. 1.1502-20T
permits such filing by amended return.
(4) For dispositions and deconsolidations on and after March 7,
2002, see Sec. 1.337(d)-2T.
[T.D. 8364, 56 FR 47390, Sept. 19, 1991; 57 FR 53550, Nov. 12, 1992;
T.D. 8560, 59 FR 41674, Aug. 15, 1994; T.D. 8597, 60 FR 36679, July 18,
1995; T.D. 8984, 67 FR 11036, Mar. 12, 2002]
Sec. 1.337(d)-2T Loss limitation window period (temporary).
(a) Loss disallowance--(1) General rule. No deduction is allowed for
any loss recognized by a member of a consolidated group with respect to
the disposition of stock of a subsidiary.
(2) Definitions. For purposes of this section:
(i) The definitions in Sec. 1.1502-1 apply.
(ii) Disposition means any event in which gain or loss is
recognized, in whole or in part.
(3) Coordination with loss deferral and other disallowance rules.
For purposes of this section, the rules of Sec. 1.1502-20(a)(3) apply,
with appropriate adjustments to reflect differences between the approach
of this section and that of Sec. 1.1502-20.
(4) Netting. Paragraph (a)(1) of this section does not apply to loss
with respect to the disposition of stock of a subsidiary, to the extent
that, as a consequence of the same plan or arrangement, gain is taken
into account by members with respect to stock of the same subsidiary
having the same material terms. If the gain to which this paragraph
applies is less than the amount of the loss with respect to the
disposition of the subsidiary's stock, the gain is applied to offset
loss with respect to each share disposed of as a consequence of the same
plan or arrangement in proportion to the amount of the loss deduction
that would have been disallowed under paragraph (a)(1) of this section
with respect to such share before the application of this paragraph
(a)(4). If the same item of gain could be taken into account more than
once in limiting the application of paragraphs (a)(1) and (b)(1) of this
section, the item is taken into account only once.
(b) Basis reduction on deconsolidation--(1) General rule. If the
basis of a member of a consolidated group in a share of stock of a
subsidiary exceeds its value immediately before a deconsolidation of the
share, the basis of the share is reduced at that time to an amount equal
to its value. If both a disposition and a deconsolidation occur with
respect to a share in the same transaction, paragraph (a) of this
section applies and, to the extent necessary to effectuate the purposes
of this section, this paragraph (b) applies following the application of
paragraph (a) of this section.
(2) Deconsolidation. Deconsolidation means any event that causes a
share of stock of a subsidiary that remains outstanding to be no longer
owned by a member of any consolidated group of which the subsidiary is
also a member.
(3) Value. Value means fair market value.
(4) Netting. Paragraph (b)(1) of this section does not apply to
reduce the basis of stock of a subsidiary, to the extent that, as a
consequence of the same plan or arrangement, gain is taken into account
by members with respect to stock of the same subsidiary having the same
material terms. If the gain to which this paragraph applies is less than
the amount of basis reduction
[[Page 82]]
with respect to shares of the subsidiary's stock, the gain is applied to
offset basis reduction with respect to each share deconsolidated as a
consequence of the same plan or arrangement in proportion to the amount
of the reduction that would have been required under paragraph (b)(1) of
this section with respect to such share before the application of this
paragraph (b)(4).
(c) Allowable Loss--(1) Application. This paragraph (c) applies with
respect to stock of a subsidiary only if a separate statement entitled
``Sec. 1.337(d)-2T(c) statement'' is included with the return in
accordance with paragraph (c)(3) of this section.
(2) General rule. Loss is not disallowed under paragraph (a)(1) of
this section and basis is not reduced under paragraph (b)(1) of this
section to the extent the taxpayer establishes that the loss or basis is
not attributable to the recognition of built-in gain, net of directly
related expenses, on the disposition of an asset (including stock and
securities). Loss or basis may be attributable to the recognition of
built-in gain on the disposition of an asset by a prior group. For
purposes of this section, gain recognized on the disposition of an asset
is built-in gain to the extent attributable, directly or indirectly, in
whole or in part, to any excess of value over basis that is reflected,
before the disposition of the asset, in the basis of the share, directly
or indirectly, in whole or in part, after applying section 1503(e) and
other applicable provisions of the Internal Revenue Code and
regulations. Federal income taxes may be directly related to built-in
gain recognized on the disposition of an asset only to the extent of the
excess (if any) of the group's income tax liability actually imposed
under Subtitle A of the Internal Revenue Code for the taxable year of
the disposition of the asset over the group's income tax liability for
the taxable year redetermined by not taking into account the built-in
gain recognized on the disposition of the asset. For this purpose, the
group's income tax liability actually imposed and its redetermined
income tax liability are determined without taking into account the
foreign tax credit under section 27(a) of the Internal Revenue Code.
This paragraph (c)(2) applies to dispositions and deconsolidations on or
after March 18, 2004. Taxpayers, however, may choose to apply this
paragraph (c)(2) to dispositions and deconsolidations on or after March
7, 2002; otherwise, paragraph (c)(2) of Sec. 1.337(d)-2T as contained
in 26 CFR part 1 edition revised as of April 1, 2003, shall apply.
(3) Contents of statement and time of filing. The statement required
under paragraph (c)(1) of this section must be included with or as part
of the taxpayer's return for the year of the disposition or
deconsolidation and must contain:
(i) The name and employer identification number (E.I.N.) of the
subsidiary.
(ii) The amount of the loss not disallowed under paragraph (a)(1) of
this section by reason of this paragraph (c) and the amount of basis not
reduced under paragraph (b)(1) of this section by reason of this
paragraph (c).
(4) Example. The principles of paragraphs (a), (b), and (c) of this
section are illustrated by the examples in Sec. Sec. 1.337(d)-1(a)(5)
and 1.1502-20(a)(5) (other than Examples 3, 4, and 5) and (b), with
appropriate adjustments to reflect differences between the approach of
this section and that of Sec. 1.1502-20, and by the following example.
For purposes of the examples in this section, unless otherwise stated,
the group files consolidated returns on a calendar year basis, the facts
set forth the only corporate activity, and all sales and purchases are
with unrelated buyers or sellers. The basis of each asset is the same
for determining earnings and profits adjustments and taxable income. Tax
liability and its effect on basis, value, and earnings and profits are
disregarded. Investment adjustment system means the rules of Sec.
1.1502-32.
Example. Loss offsetting built-in gain in a prior group. (i) P buys
all the stock of T for $50 in Year 1, and T becomes a member of the P
group. T has 2 assets. Asset 1 has a basis of $50 and a value of $0, and
asset 2 has a basis of $0 and a value of $50. T sells asset 2 during
Year 3 for $50 and recognizes a $50 gain. Under the investment
adjustment system, P's basis in the T stock increased to $100 as a
result of the recognition of gain. In Year 5, all of the stock of P is
acquired by
[[Page 83]]
the P1 group, and the former members of the P group become members of
the P1 group. T then sells asset 1 for $0, and recognizes a $50 loss.
Under the investment adjustment system, P's basis in the T stock
decreases to $50 as a result of the loss. T's assets decline in value
from $50 to $40. P then sells all the stock of T for $40 and recognizes
a $10 loss.
(ii) P's basis in the T stock reflects both T's unrecognized gain
and unrecognized loss with respect to its assets. The gain T recognizes
on the disposition of asset 2 is built-in gain with respect to both the
P and P1 groups for purposes of paragraph (c)(2) of this section. In
addition, the loss T recognizes on the disposition of asset 1 is built-
in loss with respect to the P and P1 groups for purposes of paragraph
(c)(2) of this section. T's recognition of the built-in loss while a
member of the P1 group offsets the effect on T's stock basis of T's
recognition of the built-in gain while a member of the P group. Thus,
P's $10 loss on the sale of the T stock is not attributable to the
recognition of built-in gain, and the loss is therefore not disallowed
under paragraph (c)(2) of this section.
(iii) The result would be the same if, instead of having a $50
built-in loss in asset 1 when it becomes a member of the P group, T has
a $50 net operating loss carryover and the carryover is used by the P
group.
(d) Successors. For purposes of this section, the rules and examples
of Sec. 1.1502-20(d) apply, with appropriate adjustments to reflect
differences between the approach of this section and that of Sec.
1.1502-20.
(e) Anti-avoidance rules. For purposes of this section, the rules
and examples of Sec. 1.1502-20(e) apply, with appropriate adjustments
to reflect differences between the approach of this section and that of
Sec. 1.1502-20.
(f) Investment adjustments. For purposes of this section, the rules
and examples of Sec. 1.1502-20(f) apply, with appropriate adjustments
to reflect differences between the approach of this section and that of
Sec. 1.1502-20.
(g) Effective dates. This section applies with respect to
dispositions and deconsolidations on or after March 7, 2002, unless the
disposition or deconsolidation was effected pursuant to a binding
written contract entered into before March 7, 2002, that was in
continuous effect until the disposition or deconsolidation. In addition,
this section applies to dispositions and deconsolidations for which an
election is made under Sec. 1.1502-20T(i)(2) to determine allowable
loss under this section. If loss is recognized because stock of a
subsidiary became worthless, the disposition with respect to the stock
is treated as occurring on the date the stock became worthless. For
dispositions and deconsolidations prior to March 7, 2002, see Sec. Sec.
1.337(d)-1 and 1.337(d)-2 as contained in the 26 CFR part 1 edition
revised as of April 1, 2001.
[T.D. 8984, 67 FR 11036, Mar. 12, 2002, as amended by T.D. 8998, 67 FR
37999, May 31, 2002; 69 FR 12800, Mar. 18, 2004]
Sec. 1.337(d)-4 Taxable to tax-exempt.
(a) Gain or loss recognition--(1) General rule. Except as provided
in paragraph (b) of this section, if a taxable corporation transfers all
or substantially all of its assets to one or more tax-exempt entities,
the taxable corporation must recognize gain or loss immediately before
the transfer as if the assets transferred were sold at their fair market
values. But see section 267 and paragraph (d) of this section concerning
limitations on the recognition of loss.
(2) Change in corporation's tax status treated as asset transfer.
Except as provided in paragraphs (a)(3) and (b) of this section, a
taxable corporation's change in status to a tax-exempt entity will be
treated as if it transferred all of its assets to a tax-exempt entity
immediately before the change in status becomes effective in a
transaction to which paragraph (a)(1) of this section applies. For
example, if a State, a political subdivision thereof, or an entity any
portion of whose income is excluded from gross income under section 115,
acquires the stock of a taxable corporation and thereafter any of the
taxable corporation's income is excluded from gross income under section
115, the taxable corporation will be treated as if it transferred all of
its assets to a tax-exempt entity immediately before the stock
acquisition.
(3) Exceptions for certain changes in status--(i) To whom available.
Paragraph (a)(2) of this section does not apply to the following
corporations--
(A) A corporation previously tax-exempt under section 501(a) which
regains its tax-exempt status under section 501(a) within three years
from the later of a final adverse adjudication on the corporation's tax
exempt status, or the filing by the corporation, or by the
[[Page 84]]
Secretary or his delegate under section 6020(b), of a federal income tax
return of the type filed by a taxable corporation;
(B) A corporation previously tax-exempt under section 501(a) or that
applied for but did not receive recognition of exemption under section
501(a) before January 15, 1997, if such corporation is tax-exempt under
section 501(a) within three years from January 28, 1999;
(C) A newly formed corporation that is tax-exempt under section
501(a) (other than an organization described in section 501(c)(7))
within three taxable years from the end of the taxable year in which it
was formed;
(D) A newly formed corporation that is tax-exempt under section
501(a) as an organization described in section 501(c)(7) within seven
taxable years from the end of the taxable year in which it was formed;
(E) A corporation previously tax-exempt under section 501(a) as an
organization described in section 501(c)(12), which, in a given taxable
year or years prior to again becoming tax-exempt, is a taxable
corporation solely because less than 85 percent of its income consists
of amounts collected from members for the sole purpose of meeting losses
and expenses; if, in a taxable year, such a corporation would be a
taxable corporation even if 85 percent or more of its income consists of
amounts collected from members for the sole purpose of meeting losses
and expenses (a non-85 percent violation), paragraph (a)(3)(i)(A) of
this section shall apply as if the corporation became a taxable
corporation in its first taxable year that a non-85 percent violation
occurred; or
(F) A corporation previously taxable that becomes tax-exempt under
section 501(a) as an organization described in section 501(c)(15) if
during each taxable year in which it is described in section 501(c)(15)
the organization is the subject of a court supervised rehabilitation,
conservatorship, liquidation, or similar state proceeding; if such a
corporation continues to be described in section 501(c)(15) in a taxable
year when it is no longer the subject of a court supervised
rehabilitation, conservatorship, liquidation, or similar state
proceeding, paragraph (a)(2) of this section shall apply as if the
corporation first became tax-exempt for such taxable year.
(ii) Application for recognition. An organization is deemed to have
or regain tax-exempt status within one of the periods described in
paragraph (a)(3)(i)(A), (B), (C), or (D) of this section if it files an
application for recognition of exemption with the Commissioner within
the applicable period and the application either results in a
determination by the Commissioner or a final adjudication that the
organization is tax-exempt under section 501(a) during any part of the
applicable period. The preceding sentence does not require the filing of
an application for recognition of exemption by any organization not
otherwise required, such as by Sec. 1.501(a)-1, Sec. 1.505(c)-1T, and
Sec. 1.508-1(a), to apply for recognition of exemption.
(iii) Anti-abuse rule. This paragraph (a)(3) does not apply to a
corporation that, with a principal purpose of avoiding the application
of paragraph (a)(1) or (a)(2) of this section, acquires all or
substantially all of the assets of another taxable corporation and then
changes its status to that of a tax-exempt entity.
(4) Related transactions. This section applies to any series of
related transactions having an effect similar to any of the transactions
to which this section applies.
(b) Exceptions. Paragraph (a) of this section does not apply to--
(1) Any assets transferred to a tax-exempt entity to the extent that
the assets are used in an activity the income from which is subject to
tax under section 511(a) (referred to hereinafter as a ``section 511(a)
activity''). However, if assets used to any extent in a section 511(a)
activity are disposed of by the tax-exempt entity, then, notwithstanding
any other provision of law (except section 1031 or section 1033), any
gain (not in excess of the amount not recognized by reason of the
preceding sentence) shall be included in the tax-exempt entity's
unrelated business taxable income. To the extent that the tax-exempt
entity ceases to
[[Page 85]]
use the assets in a section 511(a) activity, the entity will be treated
for purposes of this paragraph (b)(1) as having disposed of the assets
on the date of the cessation for their fair market value. For purposes
of paragraph (a)(1) of this section and this paragraph (b)(1)--
(i) If during the first taxable year following the transfer of an
asset or the corporation's change to tax-exempt status the asset will be
used by the tax-exempt entity partly or wholly in a section 511(a)
activity, the taxable corporation will recognize an amount of gain or
loss that bears the same ratio to the asset's built-in gain or loss as
100 percent reduced by the percentage of use for such taxable year in
the section 511(a) activity bears to 100 percent. For purposes of
determining the gain or loss, if any, to be recognized, the taxable
corporation may rely on a written representation from the tax-exempt
entity estimating the percentage of the asset's anticipated use in a
section 511(a) activity for such taxable year, using a reasonable method
of allocation, unless the taxable corporation has reason to believe that
the tax-exempt entity's representation is not made in good faith;
(ii) If for any taxable year the percentage of an asset's use in a
section 511(a) activity decreases from the estimate used in computing
gain or loss recognized under paragraph (b)(1)(i) of this section,
adjusted for any decreases taken into account under this paragraph
(b)(1)(ii) in prior taxable years, the tax-exempt entity shall recognize
an amount of gain or loss that bears the same ratio to the asset's
built-in gain or loss as the percentage point decrease in use in the
section 511(a) activity for the taxable year bears to 100 percent;
(iii) If property on which all or a portion of the gain or loss is
not recognized by reason of the first sentence of paragraph (b)(1) of
this section is disposed of in a transaction that qualifies for
nonrecognition treatment under section 1031 or section 1033, the tax-
exempt entity must treat the replacement property as remaining subject
to paragraph (b)(1) of this section to the extent that the exchanged or
involuntarily converted property was so subject;
(iv) The tax-exempt entity must use the same reasonable method of
allocation for determining the percentage that it uses the assets in a
section 511(a) activity as it uses for other tax purposes, such as
determining the amount of depreciation deductions. The tax-exempt entity
also must use this same reasonable method of allocation for each taxable
year that it holds the assets; and
(v) An asset's built-in gain or loss is the amount that would be
recognized under paragraph (a)(1) of this section except for this
paragraph (b)(1);
(2) Any transfer of assets to the extent gain or loss otherwise is
recognized by the taxable corporation on the transfer. See, for example,
sections 336, 337(b)(2), 367, and 1001;
(3) Any transfer of assets to the extent the transaction qualifies
for nonrecognition treatment under section 1031 or section 1033; or
(4) Any forfeiture of a taxable corporation's assets in a criminal
or civil action to the United States, the government of a possession of
the United States, a state, the District of Columbia, the government of
a foreign country, or a political subdivision of any of the foregoing;
or any expropriation of a taxable corporation's assets by the government
of a foreign country.
(c) Definitions. For purposes of this section:
(1) Taxable corporation. A taxable corporation is any corporation
that is not a tax-exempt entity as defined in paragraph (c)(2) of this
section.
(2) Tax-exempt entity. A tax-exempt entity is--
(i) Any entity that is exempt from tax under section 501(a) or
section 529;
(ii) A charitable remainder annuity trust or charitable remainder
unitrust as defined in section 664(d);
(iii) The United States, the government of a possession of the
United States, a state, the District of Columbia, the government of a
foreign country, or a political subdivision of any of the foregoing;
(iv) An Indian Tribal Government as defined in section 7701(a)(40),
a subdivision of an Indian Tribal Government determined in accordance
with section
[[Page 86]]
7871(d), or an agency or instrumentality of an Indian Tribal Government
or subdivision thereof;
(v) An Indian Tribal Corporation organized under section 17 of the
Indian Reorganization Act of 1934, 25 U.S.C. 477, or section 3 of the
Oklahoma Welfare Act, 25 U.S.C. 503;
(vi) An international organization as defined in section
7701(a)(18);
(vii) An entity any portion of whose income is excluded under
section 115; or
(viii) An entity that would not be taxable under the Internal
Revenue Code for reasons substantially similar to those applicable to
any entity listed in this paragraph (c)(2) unless otherwise explicitly
made exempt from the application of this section by statute or by action
of the Commissioner.
(3) Substantially all. The term substantially all has the same
meaning as under section 368(a)(1)(C).
(d) Loss limitation rule. For purposes of determining the amount of
gain or loss recognized by a taxable corporation on the transfer of its
assets to a tax-exempt entity under paragraph (a) of this section, if
assets are acquired by the taxable corporation in a transaction to which
section 351 applied or as a contribution to capital, or assets are
distributed from the taxable corporation to a shareholder or another
member of the taxable corporation's affiliated group, and in either case
such acquisition or distribution is made as part of a plan a principal
purpose of which is to recognize loss by the taxable corporation on the
transfer of such assets to the tax-exempt entity, the losses recognized
by the taxable corporation on such assets transferred to the tax-exempt
entity will be disallowed. For purposes of the preceding sentence, the
principles of section 336(d)(2) apply.
(e) Effective date. This section is applicable to transfers of
assets as described in paragraph (a) of this section occurring after
January 28, 1999, unless the transfer is pursuant to a written agreement
which is (subject to customary conditions) binding on or before January
28, 1999.
[T.D. 8802, 63 FR 71594, Dec. 29, 1998]
Sec. 1.337(d)-5 Old transitional rules imposing tax on property owned
by a C corporation that becomes property of a RIC or REIT
(a) Treatment of C corporations--(1) Scope. This section applies to
the net built-in gain of C corporation assets that become assets of a
RIC or REIT by--
(i) The qualification of a C corporation as a RIC or REIT; or
(ii) The transfer of assets of a C corporation to a RIC or REIT in a
transaction in which the basis of such assets are determined by
reference to the C corporation's basis (a carryover basis).
(2) Net built-in gain. Net built-in gain is the excess of aggregate
gains (including items of income) over aggregate losses.
(3) General rule. Unless an election is made pursuant to paragraph
(b) of this section, the C corporation will be treated, for all purposes
including recognition of net built-in gain, as if it had sold all of its
assets at their respective fair market values on the deemed liquidation
date described in paragraph (a)(7) of this section and immediately
liquidated.
(4) Loss. Paragraph(a)(3) of this section shall not apply if its
application would result in the recognition of net built-in loss.
(5) Basis adjustment. If a corporation is subject to corporate-level
tax under paragraph (a)(3) of this section, the bases of the assets in
the hands of the RIC or REIT will be adjusted to reflect the recognized
net built-in gain. This adjustment is made by taking the C corporation's
basis in each asset, and, as appropriate, increasing it by the amount of
any built-in gain attributable to that asset, or decreasing it by the
amount of any built-in loss attributable to that asset.
(6) Exception--(i) In general. Paragraph (a)(3) of this section does
not apply to any C corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC was subject
to tax as a C corporation for a period not exceeding one taxable year;
and
(B) Immediately prior to being subject to tax as a C corporation was
subject to the RIC tax provisions for a period of at least one taxable
year.
[[Page 87]]
(ii) Additional requirement. The exception described in paragraph
(a)(6)(i) of this section applies only to assets acquired by the
corporation during the year when it was subject to tax as a C
corporation in a transaction that does not result in its basis in the
asset being determined by reference to a corporate transferor's basis.
(7) Deemed liquidation date--(i) Conversions. In the case of a C
corporation that qualifies to be taxed as a RIC or REIT, the deemed
liquidation date is the last day of its last taxable year before the
taxable year in which it qualifies to be taxed as a RIC or REIT.
(ii) Carryover basis transfers. In the case of a C corporation that
transfers property to a RIC or REIT in a carryover basis transaction,
the deemed liquidation date is the day before the date of the transfer.
(b) Section 1374 treatment--(1) In general. Paragraph (a) of this
section will not apply if the transferee RIC or REIT elects (as
described in paragraph (b)(3) of this section) to be subject to the
rules of section 1374, and the regulations thereunder. The electing RIC
or REIT will be subject to corporate-level taxation on the built-in gain
recognized during the 10-year period on assets formerly held by the
transferor C corporation. The built-in gains of electing RICs and REITs,
and the corporate-level tax imposed on such gains, are subject to rules
similar to the rules relating to net income from foreclosure property of
REITs. See sections 857(a)(1)(A)(ii), and 857(b)(2)(B), (D), and (E). An
election made under this paragraph (b) shall be irrevocable.
(2) Ten-year recognition period. In the case of a C corporation that
qualifies to be taxed as a RIC or REIT, the 10-year recognition period
described in section 1374(d)(7) begins on the first day of the RIC's or
REIT's taxable year for which the corporation qualifies to be taxed as a
RIC or REIT. In the case of a C corporation that transfers property to a
RIC or REIT in a carryover basis transaction, the 10-year recognition
period begins on the day the assets are acquired by the RIC or REIT.
(3) Making the election. A RIC or REIT validly makes a section 1374
election with the following statement: ``[Insert name and employer
identification number of electing RIC or REIT] elects under paragraph
(b) of this section to be subject to the rules of section 1374 and the
regulations thereunder with respect to its assets which formerly were
held by a C corporation, [insert name and employer identification number
of the C corporation, if different from name and employer identification
number of RIC or REIT].'' This statement must be signed by an official
authorized to sign the income tax return of the RIC or REIT and attached
to the RIC's or REIT's Federal income tax return for the first taxable
year in which the assets of the C corporation become assets of the RIC
or REIT.
(c) Special rule. In cases where the first taxable year in which the
assets of the C corporation become assets of the RIC or REIT ends after
June 10, 1987 but before March 8, 2000, the section 1374 election may be
filed with the first Federal income tax return filed by the RIC or REIT
after March 8, 2000.
(d) Effective date. In the case of carryover basis transactions
involving the transfer of property of a C corporation to a RIC or REIT,
the regulations apply to transactions occurring on or after June 10,
1987, and before January 2, 2002. In the case of a C corporation that
qualifies to be taxed as a RIC or REIT, the regulations apply to such
qualifications that are effective for taxable years beginning on or
after June 10, 1987, and before January 2, 2002. However, RICs and REITs
that are subject to section 1374 treatment under this section may not
rely on paragraph (b)(1) of this section, but must apply paragraphs
(c)(1)(i), (c)(2)(i), (c)(2)(ii), and (c)(3) of Sec. 1.337(d)-6, with
respect to built-in gains and losses recognized in taxable years
beginning on or after January 2, 2002. In lieu of applying this section,
taxpayers may rely on Sec. 1.337(d)-6 to determine the tax consequences
(for all taxable years) of any conversion transaction. For transactions
and qualifications that occur on or after January 2, 2002, see Sec.
1.337(d)-7.
[T.D. 8872, 65 FR 5776, Feb. 7, 2000, as amended by T.D. 8975, 67 FR 12,
Jan. 2, 2002. Redesignated and amended by T.D. 9047, 68 FR 12819, Mar.
19, 2003]
[[Page 88]]
Sec. 1.337(d)-6 New transitional rules imposing tax on property owned
by a C corporation that becomes property of a RIC or REIT.
(a) General rule--(1) Property owned by a C corporation that becomes
property of a RIC or REIT. If property owned by a C corporation (as
defined in paragraph (a)(2)(i) of this section) becomes the property of
a RIC or REIT (the converted property) in a conversion transaction (as
defined in paragraph (a)(2)(ii) of this section), then deemed sale
treatment will apply as described in paragraph (b) of this section,
unless the RIC or REIT elects section 1374 treatment with respect to the
conversion transaction as provided in paragraph (c) of this section. See
paragraph (d) of this section for exceptions to this paragraph (a).
(2) Definitions--(i) C corporation. For purposes of this section,
the term C corporation has the meaning provided in section 1361(a)(2)
except that the term does not include a RIC or REIT.
(ii) Conversion transaction. For purposes of this section, the term
conversion transaction means the qualification of a C corporation as a
RIC or REIT or the transfer of property owned by a C corporation to a
RIC or REIT.
(b) Deemed sale treatment--(1) In general. If property owned by a C
corporation becomes the property of a RIC or REIT in a conversion
transaction, then the C corporation recognizes gain and loss as if it
sold the converted property to an unrelated party at fair market value
on the deemed sale date (as defined in paragraph (b)(3) of this
section). This paragraph (b) does not apply if its application would
result in the recognition of a net loss. For this purpose, net loss is
the excess of aggregate losses over aggregate gains (including items of
income), without regard to character.
(2) Basis adjustment. If a corporation recognizes a net gain under
paragraph (b)(1) of this section, then the converted property has a
basis in the hands of the RIC or REIT equal to the fair market value of
such property on the deemed sale date.
(3) Deemed sale date--(i) RIC or REIT qualifications. If the
conversion transaction is a qualification of a C corporation as a RIC or
REIT, then the deemed sale date is the end of the last day of the C
corporation's last taxable year before the first taxable year in which
it qualifies to be taxed as a RIC or REIT.
(ii) Other conversion transactions. If the conversion transaction is
a transfer of property owned by a C corporation to a RIC or REIT, then
the deemed sale date is the end of the day before the day of the
transfer.
(4) Example. The rules of this paragraph (b) are illustrated by the
following example:
Example. Deemed sale treatment on merger into RIC. (i) X, a
calendar-year taxpayer, has qualified as a RIC since January 1, 1991. On
May 31, 1994, Y, a C corporation and calendar-year taxpayer, transfers
all of its property to X in a transaction that qualifies as a
reorganization under section 368(a)(1)(C). X does not elect section 1374
treatment under paragraph (c) of this section and chooses not to rely on
Sec. 1.337(d)-5. As a result of the transfer, Y is subject to deemed
sale treatment under this paragraph (b) on its tax return for the short
taxable year ending May 31, 1994. On May 31, 1994, Y's only assets are
Capital Asset, which has a fair market value of $100,000 and a basis of
$40,000 as of the end of May 30, 1994, and $50,000 cash. Y also has an
unrestricted net operating loss carryforward of $12,000 and accumulated
earnings and profits of $50,000. Y has no taxable income for the short
taxable year ending May 31, 1994, other than gain recognized under this
paragraph (b). In 1997, X sells Capital Asset for $110,000. Assume the
applicable corporate tax rate is 35%.
(ii) Under this paragraph (b), Y is treated as if it sold the
converted property (Capital Asset and $50,000 cash) at fair market value
on May 30, 1994, recognizing $60,000 of gain ($150,000 amount realized--
$90,000 basis). Y must report the gain on its tax return for the short
taxable year ending May 31, 1994. Y may offset this gain with its
$12,000 net operating loss carryforward and will pay tax of $16,800 (35%
of $48,000).
(iii) Under section 381, X succeeds to Y's accumulated earnings and
profits. Y's accumulated earnings and profits of $50,000 increase by
$60,000 and decrease by $16,800 as a result of the deemed sale. Thus,
the aggregate amount of subchapter C earnings and profits that must be
distributed to satisfy section 852(a)(2)(B) is $93,200 ($50,000 +
$60,000 - $16,800). X's basis in Capital Asset is $100,000. On X's sale
of Capital Asset in 1997, X recognizes $10,000 of gain, which is taken
into account in computing X's net capital gain for purposes of section
852(b)(3).
(c) Election of section 1374 treatment--(1) In general--(i) Property
owned by a C corporation that becomes property of a
[[Page 89]]
RIC or REIT. Paragraph (b) of this section does not apply if the RIC or
REIT that was formerly a C corporation or that acquired property from a
C corporation makes the election described in paragraph (c)(4) of this
section. A RIC or REIT that makes such an election will be subject to
tax on the net built-in gain in the converted property under the rules
of section 1374 and the regulations thereunder, as modified by this
paragraph (c), as if the RIC or REIT were an S corporation.
(ii) Property subject to the rules of section 1374 owned by a RIC,
REIT, or S corporation that becomes property of a RIC or REIT. If
property subject to the rules of section 1374 owned by a RIC, a REIT, or
an S corporation (the predecessor) becomes the property of a RIC or REIT
(the successor) in a continuation transaction, the rules of section 1374
apply to the successor to the same extent that the predecessor was
subject to the rules of section 1374 with respect to such property, and
the 10-year recognition period of the successor with respect to such
property is reduced by the portion of the 10-year recognition period of
the predecessor that expired before the date of the continuation
transaction. For this purpose, a continuation transaction means the
qualification of the predecessor as a RIC or REIT or the transfer of
property from the predecessor to the successor in a transaction in which
the successor's basis in the transferred property is determined, in
whole or in part, by reference to the predecessor's basis in that
property.
(2) Modification of section 1374 treatment--(i) Net recognized
built-in gain for REITs--(A) Prelimitation amount. The prelimitation
amount determined as provided in Sec. 1.1374-2(a)(1) is reduced by the
portion of such amount, if any, that is subject to tax under section
857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT's
recognized built-in gain that is subject to tax under section 857(b)(5)
is computed as follows:
(1) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(A), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(2) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(2).
(2) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(B), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(3) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(3).
(B) Taxable income limitation. The taxable income limitation
determined as provided in Sec. 1.1374-2(a)(2) is reduced by an amount
equal to the tax imposed under sections 857(b)(5), (6), and (7).
(ii) Loss carryforwards, credits and credit carryforwards--(A) Loss
carryforwards. Consistent with paragraph (c)(1)(i) of this section, net
operating loss carryforwards and capital loss carryforwards arising in
taxable years for which the corporation that generated the loss was not
subject to subchapter M of chapter 1 of the Internal Revenue Code are
allowed as a deduction against net recognized built-in gain to the
extent allowed under section 1374 and the regulations thereunder. Such
loss carryforwards must be used as a deduction against net recognized
built-in gain for a taxable year to the greatest extent possible before
such losses can be used to reduce other investment company taxable
income for purposes of section 852(b) or other real estate investment
trust taxable income for purposes of section 857(b) for that taxable
year.
[[Page 90]]
(B) Credits and credit carryforwards. Consistent with paragraph
(c)(1)(i) of this section, minimum tax credits and business credit
carryforwards arising in taxable years for which the corporation that
generated the credit was not subject to subchapter M of chapter 1 of the
Internal Revenue Code are allowed to reduce the tax imposed on net
recognized built-in gain under this paragraph (c) to the extent allowed
under section 1374 and the regulations thereunder. Such credits and
credit carryforwards must be used to reduce the tax imposed under this
paragraph (c) on net recognized built-in gain for a taxable year to the
greatest extent possible before such credits and credit carryforwards
can be used to reduce the tax, if any, on other investment company
taxable income for purposes of section 852(b) or on other real estate
investment trust taxable income for purposes of section 857(b) for that
taxable year.
(iii) 10-year recognition period. In the case of a conversion
transaction that is a qualification of a C corporation as a RIC or REIT,
the 10-year recognition period described in section 1374(d)(7) begins on
the first day of the RIC's or REIT's first taxable year. In the case of
other conversion transactions, the 10-year recognition period begins on
the day the property is acquired by the RIC or REIT.
(3) Coordination with subchapter M rules--(i) Recognized built-in
gains and losses subject to subchapter M. Recognized built-in gains and
losses of a RIC or REIT are included in computing investment company
taxable income for purposes of section 852(b)(2), real estate investment
trust taxable income for purposes of section 857(b)(2), capital gains
for purposes of sections 852(b)(3) and 857(b)(3), gross income derived
from sources within any foreign country or possession of the United
States for purposes of section 853, and the dividends paid deduction for
purposes of sections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and
857(b)(3)(A). In computing such income and deduction items, capital loss
carryforwards and net operating loss carryforwards that are used by the
RIC or REIT to reduce recognized built-in gains are allowed as a
deduction, but only to the extent that they are otherwise allowable as a
deduction against such income under the Internal Revenue Code (including
section 852(b)(2)(B)).
(ii) Treatment of tax imposed. The amount of tax imposed under this
paragraph (c) on net recognized built-in gain for a taxable year is
treated as a loss sustained by the RIC or the REIT during such taxable
year. The character of the loss is determined by allocating the tax
proportionately (based on recognized built-in gain) among the items of
recognized built-in gain included in net recognized built-in gain. With
respect to RICs, the tax imposed under this paragraph (c) on net
recognized built-in gain is treated as attributable to the portion of
the RIC's taxable year occurring after October 31.
(4) Making the section 1374 election--(i) In general. A RIC or REIT
makes a section 1374 election with the following statement: ``[Insert
name and employer identification number of electing RIC or REIT] elects
under Sec. 1.337-6(c) to be subject to the rules of section 1374 and
the regulations thereunder with respect to its property that formerly
was held by a C corporation, [insert name and employer identification
number of the C corporation, if different from name and employer
identification number of the RIC or REIT].'' However, a RIC or REIT need
not file an election under this paragraph (c), but will be deemed to
have made such an election if it can demonstrate that it informed the
Internal Revenue Service prior to January 2, 2002 of its intent to make
a section 1374 election. An election under this paragraph (c) is
irrevocable.
(ii) Time for making the election. An election under this paragraph
(c) may be filed by the RIC or REIT with any Federal income tax return
filed by the RIC or REIT on or before September 15, 2003, provided that
the RIC or REIT has reported consistently with such election for all
periods.
(5) Example. The rules of this paragraph (c) are illustrated by the
following example:
Example. Section 1374 treatment on REIT election. (i) X, a C
corporation that is a calendar-year taxpayer, elects to be taxed as a
REIT on its 1994 tax return, which it files on March 15, 1995. As a
result, X is a REIT for its 1994 taxable year and would be subject to
deemed
[[Page 91]]
sale treatment under paragraph (b) of this section but for X's timely
election of section 1374 treatment under this paragraph (c). X chooses
not to rely on Sec. 1.337(d)-5. As of the beginning of the 1994 taxable
year, X's property consisted of Real Property, which is not section
1221(a)(1) property and which had a fair market value of $100,000 and an
adjusted basis of $80,000, and $25,000 cash. X also had accumulated
earnings and profits of $25,000, unrestricted capital loss carryforwards
of $3,000, and unrestricted business credit carryforwards of $2,000. On
July 1, 1997, X sells Real Property for $110,000. For its 1997 taxable
year, X has no other income or deduction items. Assume the highest
corporate tax rate is 35%.
(ii) Upon its election to be taxed as a REIT, X retains its $80,000
basis in Real Property and its $25,000 accumulated earnings and profits.
X retains its $3,000 of capital loss carryforwards and its $2,000 of
business credit carryforwards. To satisfy section 857(a)(2)(B), X must
distribute $25,000, an amount equal to its earnings and profits
accumulated in non-REIT years, to its shareholders by the end of its
1994 taxable year.
(iii) Upon X's sale of Real Property in 1997, X recognizes gain of
$30,000 ($110,000--$80,000). X's recognized built-in gain for purposes
of applying section 1374 is $20,000 ($100,000 fair market value as of
the beginning of X's first taxable year as a REIT--$80,000 basis).
Because X's $30,000 of net income for the 1997 taxable year exceeds the
net recognized built-in gain of $20,000, the taxable income limitation
does not apply. X, therefore, has $20,000 net recognized built-in gain
for the year. Assuming that X has not used its $3,000 of capital loss
carryforwards in a prior taxable year and that their use is allowed
under section 1374(b)(2) and Sec. 1.1374-5, X is allowed a $3,000
deduction against the $20,000 net recognized built-in gain. X would owe
tax of $5,950 (35% of $17,000) on its net recognized built-in gain,
except that X may use its $2,000 of business credit carryforwards to
reduce this tax, assuming that X has not used the credit carryforwards
in a prior taxable year and that their use is allowed under section
1374(b)(3) and Sec. 1.1374-6. Thus, X owes tax of $3,950 under this
paragraph (c).
(iv) For purposes of subchapter M of chapter 1 of the Internal
Revenue Code, X's earnings and profits for the year increase by $26,050
($30,000 capital gain on the sale of Real Property--$3,950 tax under
this paragraph (c)). For purposes of section 857(b)(2) and (b)(3), X's
net capital gain for the year is $23,050 ($30,000 capital gain reduced
by $3,000 capital loss carryforward and further reduced by $3,950 tax).
(d) Exceptions--(1) Gain otherwise recognized. Paragraph (a) of this
section does not apply to any conversion transaction to the extent that
gain or loss otherwise is recognized on such conversion transaction.
See, for example, sections 336, 351(b), 351(e), 356, 357(c), 367,
368(a)(2)(F), and 1001.
(2) Re-election of RIC or REIT status--(i) Generally. Except as
provided in paragraphs (d)(2)(ii) and (iii) of this section, paragraph
(a)(1) of this section does not apply to any corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC or REIT was
subject to tax as a C corporation for a period not exceeding two taxable
years; and
(B) Immediately prior to being subject to tax as a C corporation was
subject to tax as a RIC or REIT for a period of at least one taxable
year.
(ii) Property acquired from another corporation while a C
corporation. The exception described in paragraph (d)(2)(i) of this
section does not apply to property acquired by the corporation while it
was subject to tax as a C corporation from any person in a transaction
that results in the acquirer's basis in the property being determined by
reference to a C corporation's basis in the property.
(iii) RICs and REITs previously subject to section 1374 treatment.
If the RIC or REIT had property subject to paragraph (c) of this section
before the RIC or REIT became subject to tax as a C corporation as
described in paragraph (d)(2)(i) of this section, then paragraph (c) of
this section applies to the RIC or REIT upon its requalification as a
RIC or REIT, except that the 10-year recognition period with respect to
such property is reduced by the portion of the 10-year recognition
period that expired before the RIC or REIT became subject to tax as a C
corporation and by the period of time that the corporation was subject
to tax as a C corporation.
(e) Effective date. This section applies to conversion transactions
that occur on or after June 10, 1987, and before January 2, 2002. In
lieu of applying this section, taxpayers generally may apply Sec.
1.337(d)-5 to determine the tax consequences (for all taxable years) of
any conversion transaction that occurs on or after June 10, 1987 and
before January 2, 2002, except that RICs and REITs
[[Page 92]]
that are subject to section 1374 treatment with respect to a conversion
transaction may not rely on Sec. 1.337(d)-5(b)(1), but must apply
paragraphs (c)(1)(i), (c)(2)(i), (c)(2)(ii), and (c)(3) of this section,
with respect to built-in gains and losses recognized in taxable years
beginning on or after January 2, 2002. Taxpayers are not prevented from
relying on Sec. 1.337(d)-5 merely because they elect section 1374
treatment in the manner described in paragraph (c)(4) of this section
instead of in the manner described in Sec. 1.337(d)-5(b)(3) and (c).
For conversion transactions that occur on or after January 2, 2002, see
Sec. 1.337(d)-7.
[T.D. 9047, 68 FR 12820, Mar. 18, 2003]
Sec. 1.337(d)-7 Tax on property owned by a C corporation that becomes
property of a RIC or REIT.
(a) General rule--(1) Property owned by a C corporation that becomes
property of a RIC or REIT. If property owned by a C corporation (as
defined in paragraph (a)(2)(i) of this section) becomes the property of
a RIC or REIT (the converted property) in a conversion transaction (as
defined in paragraph (a)(2)(ii) of this section), then section 1374
treatment will apply as described in paragraph (b) of this section,
unless the C corporation elects deemed sale treatment with respect to
the conversion transaction as provided in paragraph (c) of this section.
See paragraph (d) of this section for exceptions to this paragraph (a).
(2) Definitions--(i) C corporation. For purposes of this section,
the term C corporation has the meaning provided in section 1361(a)(2)
except that the term does not include a RIC or REIT.
(ii) Conversion transaction. For purposes of this section, the term
conversion transaction means the qualification of a C corporation as a
RIC or REIT or the transfer of property owned by a C corporation to a
RIC or REIT.
(b) Section 1374 treatment--(1) In general--(i) Property owned by a
C corporation that becomes property of a RIC or REIT. If property owned
by a C corporation becomes the property of a RIC or REIT in a conversion
transaction, then the RIC or REIT will be subject to tax on the net
built-in gain in the converted property under the rules of section 1374
and the regulations thereunder, as modified by this paragraph (b), as if
the RIC or REIT were an S corporation.
(ii) Property subject to the rules of section 1374 owned by a RIC,
REIT, or S corporation that becomes property of a RIC or REIT. If
property subject to the rules of section 1374 owned by a RIC, a REIT, or
an S corporation (the predecessor) becomes the property of a RIC or REIT
(the successor) in a continuation transaction, the rules of section 1374
apply to the successor to the same extent that the predecessor was
subject to the rules of section 1374 with respect to such property, and
the 10-year recognition period of the successor with respect to such
property is reduced by the portion of the 10-year recognition period of
the predecessor that expired before the date of the continuation
transaction. For this purpose, a continuation transaction means the
qualification of the predecessor as a RIC or REIT or the transfer of
property from the predecessor to the successor in a transaction in which
the successor's basis in the transferred property is determined, in
whole or in part, by reference to the predecessor's basis in that
property.
(2) Modification of section 1374 treatment--(i) Net recognized
built-in gain for REITs--(A) Prelimitation amount. The prelimitation
amount determined as provided in Sec. 1.1374-2(a)(1) is reduced by the
portion of such amount, if any, that is subject to tax under section
857(b)(4), (5), (6), or (7). For this purpose, the amount of a REIT's
recognized built-in gain that is subject to tax under section 857(b)(5)
is computed as follows:
(1) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(A), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(2) and the
denominator of which is the gross income (without regard to gross income
from
[[Page 93]]
prohibited transactions) of the REIT that is not derived from sources
referred to in section 856(c)(2).
(2) Where the tax under section 857(b)(5) is computed by reference
to section 857(b)(5)(B), the amount of a REIT's recognized built-in gain
that is subject to tax under section 857(b)(5) is the tax imposed by
section 857(b)(5) multiplied by a fraction the numerator of which is the
amount of recognized built-in gain (without regard to recognized built-
in loss and recognized built-in gain from prohibited transactions) that
is not derived from sources referred to in section 856(c)(3) and the
denominator of which is the gross income (without regard to gross income
from prohibited transactions) of the REIT that is not derived from
sources referred to in section 856(c)(3).
(B) Taxable income limitation. The taxable income limitation
determined as provided in Sec. 1.1374-2(a)(2) is reduced by an amount
equal to the tax imposed under section 857(b)(5), (6), and (7).
(ii) Loss carryforwards, credits and credit carryforwards --(A) Loss
carryforwards. Consistent with paragraph (b)(1)(i) of this section, net
operating loss carryforwards and capital loss carryforwards arising in
taxable years for which the corporation that generated the loss was not
subject to subchapter M of chapter 1 of the Internal Revenue Code are
allowed as a deduction against net recognized built-in gain to the
extent allowed under section 1374 and the regulations thereunder. Such
loss carryforwards must be used as a deduction against net recognized
built-in gain for a taxable year to the greatest extent possible before
such losses can be used to reduce other investment company taxable
income for purposes of section 852(b) or other real estate investment
trust taxable income for purposes of section 857(b) for that taxable
year.
(B) Credits and credit carryforwards. Consistent with paragraph
(b)(1)(i) of this section, minimum tax credits and business credit
carryforwards arising in taxable years for which the corporation that
generated the credit was not subject to subchapter M of chapter 1 of the
Internal Revenue Code are allowed to reduce the tax imposed on net
recognized built-in gain under this paragraph (b) to the extent allowed
under section 1374 and the regulations thereunder. Such credits and
credit carryforwards must be used to reduce the tax imposed under this
paragraph (b) on net recognized built-in gain for a taxable year to the
greatest extent possible before such credits and credit carryforwards
can be used to reduce the tax, if any, on other investment company
taxable income for purposes of section 852(b) or on other real estate
investment trust taxable income for purposes of section 857(b) for that
taxable year.
(iii) 10-year recognition period. In the case of a conversion
transaction that is a qualification of a C corporation as a RIC or REIT,
the 10-year recognition period described in section 1374(d)(7) begins on
the first day of the RIC's or REIT's first taxable year. In the case of
other conversion transactions, the 10-year recognition period begins on
the day the property is acquired by the RIC or REIT.
(3) Coordination with subchapter M rules--(i) Recognized built-in
gains and losses subject to subchapter M. Recognized built-in gains and
losses of a RIC or REIT are included in computing investment company
taxable income for purposes of section 852(b)(2), real estate investment
trust taxable income for purposes of section 857(b)(2), capital gains
for purposes of sections 852(b)(3) and 857(b)(3), gross income derived
from sources within any foreign country or possession of the United
States for purposes of section 853, and the dividends paid deduction for
purposes of sections 852(b)(2)(D), 852(b)(3)(A), 857(b)(2)(B), and
857(b)(3)(A). In computing such income and deduction items, capital loss
carryforwards and net operating loss carryforwards that are used by the
RIC or REIT to reduce recognized built-in gains are allowed as a
deduction, but only to the extent that they are otherwise allowable as a
deduction against such income under the Internal Revenue Code (including
section 852(b)(2)(B)).
(ii) Treatment of tax imposed. The amount of tax imposed under this
paragraph (b) on net recognized built-in gain for a taxable year is
treated as a loss sustained by the RIC or the REIT
[[Page 94]]
during such taxable year. The character of the loss is determined by
allocating the tax proportionately (based on recognized built-in gain)
among the items of recognized built-in gain included in net recognized
built-in gain. With respect to RICs, the tax imposed under this
paragraph (b) on net recognized built-in gain is treated as attributable
to the portion of the RIC's taxable year occurring after October 31.
(4) Example. The rules of this paragraph (b) are illustrated by the
following example:
Example. Section 1374 treatment on REIT election. (i) X, a C
corporation that is a calendar-year taxpayer, elects to be taxed as a
REIT on its 2004 tax return, which it files on March 15, 2005. As a
result, X is a REIT for its 2004 taxable year and is subject to section
1374 treatment under this paragraph (b). X does not elect deemed sale
treatment under paragraph (c) of this section. As of the beginning of
the 2004 taxable year, X's property consisted of Real Property, which is
not section 1221(a)(1) property and which had a fair market value of
$100,000 and an adjusted basis of $80,000, and $25,000 cash. X also had
accumulated earnings and profits of $25,000, unrestricted capital loss
carryforwards of $3,000, and unrestricted business credit carryforwards
of $2,000. On July 1, 2007, X sells Real Property for $110,000. For its
2007 taxable year, X has no other income or deduction items. Assume the
highest corporate tax rate is 35%.
(ii) Upon its election to be taxed as a REIT, X retains its $80,000
basis in Real Property and its $25,000 accumulated earnings and profits.
X retains its $3,000 of capital loss carryforwards and its $2,000 of
business credit carryforwards. To satisfy section 857(a)(2)(B), X must
distribute $25,000, an amount equal to its earnings and profits
accumulated in non-REIT years, to its shareholders by the end of its
2004 taxable year.
(iii) Upon X's sale of Real Property in 2007, X recognizes gain of
$30,000 ($110,000--$80,000). X's recognized built-in gain for purposes
of applying section 1374 is $20,000 ($100,000 fair market value as of
the beginning of X's first taxable year as a REIT--$80,000 basis).
Because X's $30,000 of net income for the 2007 taxable year exceeds the
net recognized built-in gain of $20,000, the taxable income limitation
does not apply. X, therefore, has $20,000 net recognized built-in gain
for the year. Assuming that X has not used its $3,000 of capital loss
carryforwards in a prior taxable year and that their use is allowed
under section 1374(b)(2) and Sec. 1.1374-5, X is allowed a $3,000
deduction against the $20,000 net recognized built-in gain. X would owe
tax of $5,950 (35% of $17,000) on its net recognized built-in gain,
except that X may use its $2,000 of business credit carryforwards to
reduce the tax, assuming that X has not used the credit carryforwards in
a prior taxable year and that their use is allowed under section
1374(b)(3) and Sec. 1.1374-6. Thus, X owes tax of $3,950 under this
paragraph (b).
(iv) For purposes of subchapter M of chapter 1 of the Internal
Revenue Code, X's earnings and profits for the year increase by $26,050
($30,000 capital gain on the sale of Real Property--$3,950 tax under
this paragraph (b)). For purposes of section 857(b)(2) and (b)(3), X's
net capital gain for the year is $23,050 ($30,000 capital gain reduced
by $3,000 capital loss carryforward and further reduced by $3,950 tax).
(c) Election of deemed sale treatment--(1) In general. Paragraph (b)
of this section does not apply if the C corporation that qualifies as a
RIC or REIT or transfers property to a RIC or REIT makes the election
described in paragraph (c)(5) of this section. A C corporation that
makes such an election recognizes gain and loss as if it sold the
converted property to an unrelated party at fair market value on the
deemed sale date (as defined in paragraph (c)(3) of this section). See
paragraph (c)(4) of this section concerning limitations on the use of
loss in computing gain. This paragraph (c) does not apply if its
application would result in the recognition of a net loss. For this
purpose, net loss is the excess of aggregate losses over aggregate gains
(including items of income), without regard to character.
(2) Basis adjustment. If a corporation recognizes a net gain under
paragraph (c)(1) of this section, then the converted property has a
basis in the hands of the RIC or REIT equal to the fair market value of
such property on the deemed sale date.
(3) Deemed sale date--(i) RIC or REIT qualifications. If the
conversion transaction is a qualification of a C corporation as a RIC or
REIT, then the deemed sale date is the end of the last day of the C
corporation's last taxable year before the first taxable year in which
it qualifies to be taxed as a RIC or REIT.
(ii) Other conversion transactions. If the conversion transaction is
a transfer of property owned by a C corporation to a RIC or REIT, then
the deemed sale date is the end of the day before the day of the
transfer.
[[Page 95]]
(4) Anti-stuffing rule. A C corporation must disregard converted
property in computing gain or loss recognized on the conversion
transaction under this paragraph (c), if--
(i) The converted property was acquired by the C corporation in a
transaction to which section 351 applied or as a contribution to
capital;
(ii) Such converted property had an adjusted basis immediately after
its acquisition by the C corporation in excess of its fair market value
on the date of acquisition; and
(iii) The acquisition of such converted property by the C
corporation was part of a plan a principal purpose of which was to
reduce gain recognized by the C corporation in connection with the
conversion transaction. For purposes of this paragraph (c)(4), the
principles of section 336(d)(2) apply.
(5) Making the deemed sale election. A C corporation (or a
partnership to which the principles of this section apply under
paragraph (e) of this section) makes the deemed sale election with the
following statement: ``[Insert name and employer identification number
of electing corporation or partnership] elects deemed sale treatment
under Sec. 1.337(d)-7(c) with respect to its property that was
converted to property of, or transferred to, a RIC or REIT, [insert name
and employer identification number of the RIC or REIT, if different from
the name and employer identification number of the C corporation or
partnership].'' This statement must be attached to the Federal income
tax return of the C corporation or partnership for the taxable year in
which the deemed sale occurs. An election under this paragraph (c) is
irrevocable.
(6) Examples. The rules of this paragraph (c) are illustrated by the
following examples:
Example 1. Deemed sale treatment on merger into RIC. (i) X, a
calendar-year taxpayer, has qualified as a RIC since January 1, 2001. On
May 31, 2004, Y, a C corporation and calendar-year taxpayer, transfers
all of its property to X in a transaction that qualifies as a
reorganization under section 368(a)(1)(C). As a result of the transfer,
Y would be subject to section 1374 treatment under paragraph (b) of this
section but for its timely election of deemed sale treatment under this
paragraph (c). As a result of such election, Y is subject to deemed sale
treatment on its tax return for the short taxable year ending May 31,
2004. On May 31, 2004, Y's only assets are Capital Asset, which has a
fair market value of $100,000 and a basis of $40,000 as of the end of
May 30, 2004, and $50,000 cash. Y also has an unrestricted net operating
loss carryforward of $12,000 and accumulated earnings and profits of
$50,000. Y has no taxable income for the short taxable year ending May
31, 2004, other than gain recognized under this paragraph (c). In 2007,
X sells Capital Asset for $110,000. Assume the applicable corporate tax
rate is 35%.
(ii) Under this paragraph (c), Y is treated as if it sold the
converted property (Capital Asset and $50,000 cash) at fair market value
on May 30, 2004, recognizing $60,000 of gain ($150,000 amount realized--
$90,000 basis). Y must report the gain on its tax return for the short
taxable year ending May 31, 2004. Y may offset this gain with its
$12,000 net operating loss carryforward and will pay tax of $16,800 (35%
of $48,000).
(iii) Under section 381, X succeeds to Y's accumulated earnings and
profits. Y's accumulated earnings and profits of $50,000 increase by
$60,000 and decrease by $16,800 as a result of the deemed sale. Thus,
the aggregate amount of subchapter C earnings and profits that must be
distributed to satisfy section 852(a)(2)(B) is $93,200 ($50,000 +
$60,000-$16,800). X's basis in Capital Asset is $100,000. On X's sale of
Capital Asset in 2007, X recognizes $10,000 of gain which is taken into
account in computing X's net capital gain for purposes of section
852(b)(3).
Example 2. Loss limitation. (i) Assume the facts are the same as
those described in Example 1, but that, prior to the reorganization, a
shareholder of Y contributed to Y a capital asset, Capital Asset 2,
which has a fair market value of $10,000 and a basis of $20,000, in a
section 351 transaction.
(ii) Assuming that Y's acquisition of Capital Asset 2 was made
pursuant to a plan a principal purpose of which was to reduce the amount
of gain that Y would recognize in connection with the conversion
transaction, Capital Asset 2 would be disregarded in computing the
amount of Y's net gain on the conversion transaction.
(d) Exceptions--(1) Gain otherwise recognized. Paragraph (a) of this
section does not apply to any conversion transaction to the extent that
gain or loss otherwise is recognized on such conversion transaction.
See, for example, sections 336, 351(b), 351(e), 356, 357(c), 367,
368(a)(2)(F), and 1001.
(2) Re-election of RIC or REIT status--(i) Generally. Except as
provided in paragraphs (d)(2)(ii) and (iii) of this section, paragraph
(a)(1) of this section
[[Page 96]]
does not apply to any corporation that--
(A) Immediately prior to qualifying to be taxed as a RIC or REIT was
subject to tax as a C corporation for a period not exceeding two taxable
years; and
(B) Immediately prior to being subject to tax as a C corporation was
subject to tax as a RIC or REIT for a period of at least one taxable
year.
(ii) Property acquired from another corporation while a C
corporation. The exception described in paragraph (d)(2)(i) of this
section does not apply to property acquired by the corporation while it
was subject to tax as a C corporation from any person in a transaction
that results in the acquirer's basis in the property being determined by
reference to a C corporation's basis in the property.
(iii) RICs and REITs previously subject to section 1374 treatment.
If the RIC or REIT had property subject to paragraph (b) of this section
before the RIC or REIT became subject to tax as a C corporation as
described in paragraph (d)(2)(i) of this section, then paragraph (b) of
this section applies to the RIC or REIT upon its requalification as a
RIC or REIT, except that the 10-year recognition period with respect to
such property is reduced by the portion of the 10-year recognition
period that expired before the RIC or REIT became subject to tax as a C
corporation and by the period of time that the corporation was subject
to tax as a C corporation.
(e) Special rule for partnerships. The principles of this section
apply to property transferred by a partnership to a RIC or REIT to the
extent of any C corporation partner's distributive share of the gain or
loss in the transferred property. If the partnership were to elect
deemed sale treatment under paragraph (c) of this section in lieu of
section 1374 treatment under paragraph (b) of this section with respect
to such transfer, then any net gain recognized by the partnership on the
deemed sale must be allocated to the C corporation partner, but does not
increase the capital account of any partner. Any adjustment to the
partnership's basis in the RIC or REIT stock as a result of deemed sale
treatment under paragraph (c) of this section shall constitute an
adjustment to the basis of that stock with respect to the C corporation
partner only. The principles of section 743 apply to such basis
adjustment.
(f) Effective date. This section applies to conversion transactions
that occur on or after January 2, 2002. For conversion transactions that
occurred on or after June 10, 1987, and before January 2, 2002, see
Sec. Sec. 1.337(d)-5 and 1.337(d)-6.
[T.D. 9047, 68 FR 12822, Mar. 18, 2003]
Sec. 1.338-0 Outline of topics.
This section lists the captions contained in the regulations under
section 338 as follows:
Sec. 1.338-1 General principles; status of old target and new target.
(a) In general.
(1) Deemed transaction.
(2) Application of other rules of law.
(3) Overview.
(b) Treatment of target under other provisions of the Internal
Revenue Code.
(1) General rule for subtitle A.
(2) Exceptions for subtitle A.
(3) General rule for other provisions of the Internal Revenue Code.
(c) Anti-abuse rule.
(1) In general.
(2) Examples.
(d) Next day rule for post-closing transactions.
Sec. 1.338-2 Nomenclature and definitions; mechanics of the section 338
election.
(a) Scope.
(b) Nomenclature.
(c) Definitions.
(1) Acquisition date.
(2) Acquisition date assets.
(3) Affiliated group.
(4) Common parent.
(5) Consistency period.
(6) Deemed asset sale.
(7) Deemed sale tax consequences.
(8) Deemed sale return.
(9) Domestic corporation.
(10) Old target's final return.
(11) Purchasing corporation.
(12) Qualified stock purchase.
(13) Related persons.
(14) Section 338 election.
(15) Section 338(h)(10) election.
(16) Selling group.
(17) Target; old target; new target.
(18) Target affiliate.
(19) 12-month acquisition period.
(d) Time and manner of making election.
[[Page 97]]
(e) Special rules for foreign corporations or DISCs.
(1) Elections by certain foreign purchasing corporations.
(i) General rule.
(ii) Qualifying foreign purchasing corporation.
(iii) Qualifying foreign target.
(iv) Triggering event.
(v) Subject to United States tax.
(2) Acquisition period.
(3) Statement of section 338 may be filed by United States
shareholders in certain cases.
(4) Notice requirement for U.S. persons holding stock in foreign
target.
(i) General rule.
(ii) Limitation.
(iii) Form of notice.
(iv) Timing of notice.
(v) Consequence of failure to comply.
(vi) Good faith effort to comply.
Sec. 1.338-3 Qualification for the section 338 election.
(a) Scope.
(b) Rules relating to qualified stock purchases.
(1) Purchasing corporation requirement.
(2) Purchase.
(3) Acquisitions of stock from related corporations.
(i) In general.
(ii) Time for testing relationship.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions treated
as purchases.
(iv) Examples.
(4) Acquisition date for tiered targets.
(i) Stock sold in deemed asset sale.
(ii) Examples.
(5) Effect of redemptions.
(i) General rule.
(ii) Redemptions from persons unrelated to the purchasing
corporation.
(iii) Redemptions from the purchasing corporation or related persons
during 12-month acquisition period.
(A) General rule.
(B) Exception for certain redemptions from related corporations.
(iv) Examples.
(c) Effect of post-acquisition events on eligibility for section 338
election.
(1) Post-acquisition elimination of target.
(2) Post-acquisition elimination of the purchasing corporation.
(d) Consequences of post-acquisition elimination of target where
section 338 election not made.
(1) Scope.
(2) Continuity of interest.
(3) Control requirement.
(4) Solely for voting stock requirement.
(5) Example.
Sec. 1.338-4 Aggregate deemed sale price; various aspects of taxation
of the deemed asset sale.
(a) Scope.
(b) Determination of ADSP.
(1) General rule.
(2) Time and amount of ADSP.
(i) Original determination.
(ii) Redetermination of ADSP.
(iii) Example.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock.
(1) Determination of amount.
(2) Example.
(d) Liabilities of old target.
(1) In general.
(2) Time and amount of liabilities.
(e) Deemed sale tax consequences.
(f) Other rules apply in determining ADSP.
(g) Examples.
(h) Deemed sale of target affiliate stock.
(1) Scope.
(2) In general.
(3) Deemed sale of foreign target affiliate by a domestic target.
(4) Deemed sale producing effectively connected income.
(5) Deemed sale of insurance company target affiliate electing under
section 953(d).
(6) Deemed sale of DISC target affiliate.
(7) Anti-stuffing rule.
(8) Examples.
Sec. 1.338-5 Adjusted grossed-up basis.
(a) Scope.
(b) Determination of AGUB.
(1) General rule.
(2) Time and amount of AGUB.
(i) Original determination.
(ii) Redetermination of AGUB.
(iii) Examples.
(c) Grossed-up basis of recently purchased stock.
(d) Basis of nonrecently purchased stock; gain recognition election.
(1) No gain recognition election.
(2) Procedure for making gain recognition election.
(3) Effect of gain recognition election.
(i) In general.
(ii) Basis amount.
(iii) Losses not recognized.
(iv) Stock subject to election.
(e) Liabilities of new target.
(1) In general.
(2) Time and amount of liabilities.
(3) Interaction with deemed sale tax consequences.
(f) Adjustments by the Internal Revenue Service.
(g) Examples.
Sec. 1.338-6 Allocation of ADSP and AGUB among target assets.
(a) Scope.
(1) In general.
(2) Fair market value.
(i) In general.
[[Page 98]]
(ii) Transaction costs.
(iii) Internal Revenue Service authority.
(b) General rule for allocating ADSP and AGUB.
(1) Reduction in the amount of consideration for Class I assets.
(2) Other assets.
(i) In general.
(ii) Class II assets.
(iii) Class III assets.
(iv) Class IV assets.
(v) Class V assets.
(vi) Class VI assets.
(vii) Class VII assets.
(3) Other items designated by the Internal Revenue Service.
(c) Certain limitations and other rules for allocation to an asset.
(1) Allocation not to exceed fair market value.
(2) Allocation subject to other rules.
(3) Special rule for allocating AGUB when purchasing corporation has
nonrecently purchased stock.
(i) Scope.
(ii) Determination of hypothetical purchase price.
(iii) Allocation of AGUB.
(4) Liabilities taken into account in determining amount realized on
subsequent disposition.
(d) Examples.
Sec. 1.338-7 Allocation of redetermined ADSP and AGUB among target
assets.
(a) Scope.
(b) Allocation of redetermined ADSP and AGUB.
(c) Special rules for ADSP.
(1) Increases or decreases in deemed sale tax consequences taxable
notwithstanding old target ceases to exist.
(2) Procedure for transactions in which section 338(h)(10) is not
elected.
(i) Deemed sale tax consequences included in new target's return.
(ii) Carryovers and carrybacks.
(A) Loss carryovers to new target taxable years.
(B) Loss carrybacks to taxable years of old target.
(C) Credit carryovers and carrybacks.
(3) Procedure for transactions in which section 338(h)(10) is
elected.
(d) Special rules for AGUB.
(1) Effect of disposition or depreciation of acquisition date
assets.
(2) Section 38 property.
(e) Examples.
Sec. 1.338-8 Asset and stock consistency.
(a) Introduction.
(1) Overview.
(2) General application.
(3) Extension of the general rules.
(4) Application where certain dividends are paid.
(5) Application to foreign target affiliates.
(6) Stock consistency.
(b) Consistency for direct acquisitions.
(1) General rule.
(2) Section 338(h)(10) elections.
(c) Gain from disposition reflected in basis of target stock.
(1) General rule.
(2) Gain not reflected if section 338 election made for target.
(3) Gain reflected by reason of distributions.
(4) Controlled foreign corporations.
(5) Gain recognized outside the consolidated group.
(d) Basis of acquired assets.
(1) Carryover basis rule.
(2) Exceptions to carryover basis rule for certain assets.
(3) Exception to carryover basis rule for de minimis assets.
(4) Mitigation rule.
(i) General rule.
(ii) Time for transfer.
(e) Examples.
(1) In general.
(2) Direct acquisitions.
(f) Extension of consistency to indirect acquisitions.
(1) Introduction.
(2) General rule.
(3) Basis of acquired assets.
(4) Examples.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid.
(1) General rule for direct acquisitions from target.
(2) Other direct acquisitions having same effect.
(3) Indirect acquisitions.
(4) Examples.
(h) Consistency for target affiliates that are controlled foreign
corporations.
(1) In general.
(2) Income or gain resulting from asset dispositions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Operating rule.
(iv) Increase in asset or stock basis.
(3) Stock issued by target affiliate that is a controlled foreign
corporation.
(4) Certain distributions.
(i) General rule.
(ii) Basis of controlled foreign corporation stock.
(iii) Increase in asset or stock basis.
(5) Examples.
(i) [Reserved]
(j) Anti-avoidance rules.
(1) Extension of consistency period.
(2) Qualified stock purchase and 12-month acquisition period.
(3) Acquisitions by conduits.
(i) Asset ownership.
[[Page 99]]
(A) General rule.
(B) Application of carryover basis rule.
(ii) Stock acquisitions.
(A) Purchase by conduit.
(B) Purchase of conduit by corporation.
(C) Purchase of conduit by conduit.
(4) Conduit.
(5) Existence of arrangement.
(6) Predecessor and successor.
(i) Persons.
(ii) Assets.
(7) Examples.
Sec. 1.338-9 International aspects of section 338.
(a) Scope.
(b) Application of section 338 to foreign targets.
(1) In general.
(2) Ownership of FT stock on the acquisition date.
(3) Carryover FT stock.
(i) Definition.
(ii) Carryover of earnings and profits.
(iii) Cap on carryover of earnings and profits.
(iv) Post-acquisition date distribution of old FT earnings and
profits.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition.
(4) Passive foreign investment company stock.
(c) Dividend treatment under section 1248(e).
(d) Allocation of foreign taxes.
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples.
Sec. 1.338-10 Filing of returns.
(a) Returns including tax liability from deemed asset sale.
(1) In general.
(2) Old target's final taxable year otherwise included in
consolidated return of selling group.
(i) General rule.
(ii) Separate taxable year.
(iii) Carryover and carryback of tax attributes.
(iv) Old target is a component member of purchasing corporation's
controlled group.
(3) Old target is an S corporation.
(4) Combined deemed sale return.
(i) General rule.
(ii) Gain and loss offsets.
(iii) Procedure for filing a combined return.
(iv) Consequences of filing a combined return.
(5) Deemed sale excluded from purchasing corporation's consolidated
return.
(6) Due date for old target's final return.
(i) General rule.
(ii) Application of Sec. 1.1502-76(c).
(A) In general.
(B) Deemed extension.
(C) Erroneous filing of deemed sale return.
(D) Erroneous filing of return for regular tax year.
(E) Last date for payment of tax.
(7) Examples.
(b) Waiver.
(1) Certain additions to tax.
(2) Notification.
(3) Elections or other actions required to be specified on a timely
filed return.
(i) In general.
(ii) New target in purchasing corporation's consolidated return.
(4) Examples.
Sec. 1.338(h)(10)-1 Deemed asset sale and liquidation.
(a) Scope.
(b) Definitions.
(1) Consolidated target.
(2) Selling consolidated group.
(3) Selling affiliate; affiliated target.
(4) S corporation target.
(5) S corporation shareholders.
(6) Liquidation.
(c) Section 338(h)(10) election.
(1) In general.
(2) Simultaneous joint election requirement.
(3) Irrevocability.
(4) Effect of invalid election.
(d) Certain consequences of section 338(h)(10) election.
(1) P.
(2) New T.
(3) Old T--deemed sale.
(i) In general.
(ii) Tiered targets.
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization.
(i) In general.
(ii) Tiered targets.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders.
(i) In general.
(ii) Basis and holding period of T stock not acquired.
(iii) T stock sale.
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders.
(i) In general.
(ii) T stock sale.
(iii) T stock not acquired.
(7) Consolidated return of selling consolidated group.
(8) Availability of the section 453 installment method.
(i) In deemed asset sale.
(ii) In deemed liquidation.
(9) Treatment consistent with an actual asset sale.
(e) Examples.
(f) Inapplicability of provisions.
[[Page 100]]
(g) Required information.
Sec. 1.338(i)-1 Effective dates.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-1 General principles; status of old target and new target.
(a) In general--(1) Deemed transaction. Elections are available
under section 338 when a purchasing corporation acquires the stock of
another corporation (the target) in a qualified stock purchase. One type
of election, under section 338(g), is available to the purchasing
corporation. Another type of election, under section 338(h)(10), is, in
more limited circumstances, available jointly to the purchasing
corporation and the sellers of the stock. (Rules concerning eligibility
for these elections are contained in Sec. Sec. 1.338-2, 1.338-3, and
1.338(h)(10)-1.) Although target is a single corporation under corporate
law, if a section 338 election is made, then two separate corporations,
old target and new target, generally are considered to exist for
purposes of subtitle A of the Internal Revenue Code. Old target is
treated as transferring all of its assets to an unrelated person in
exchange for consideration that includes the discharge of its
liabilities (see Sec. 1.1001-2(a)), and new target is treated as
acquiring all of its assets from an unrelated person in exchange for
consideration that includes the assumption of those liabilities. (Such
transaction is, without regard to its characterization for Federal
income tax purposes, referred to as the deemed asset sale and the income
tax consequences thereof as the deemed sale tax consequences.) If a
section 338(h)(10) election is made, old target is deemed to liquidate
following the deemed asset sale.
(2) Application of other rules of law. Other rules of law apply to
determine the tax consequences to the parties as if they had actually
engaged in the transactions deemed to occur under section 338 and the
regulations thereunder except to the extent otherwise provided in those
regulations. See also Sec. 1.338-6(c)(2). Other rules of law may
characterize the transaction as something other than or in addition to a
sale and purchase of assets; however, the transaction between old and
new target must be a taxable transaction. For example, if target is an
insurance company for which a section 338 election is made, the deemed
asset sale would be characterized and taxed as an assumption-reinsurance
transaction under applicable Federal income tax law. See Sec. 1.817-
4(d).
(3) Overview. Definitions and special nomenclature and rules for
making the section 338 election are provided in Sec. 1.338-2.
Qualification for the section 338 election is addressed in Sec. 1.338-
3. The amount for which old target is treated as selling all of its
assets (the aggregate deemed sale price, or ADSP) is addressed in Sec.
1.338-4. The amount for which new target is deemed to have purchased all
its assets (the adjusted grossed-up basis, or AGUB) is addressed in
Sec. 1.338-5. Section 1.338-6 addresses allocation both of ADSP among
the assets old target is deemed to have sold and of AGUB among the
assets new target is deemed to have purchased. Section 1.338-7 addresses
allocation of ADSP or AGUB when those amounts subsequently change. Asset
and stock consistency are addressed in Sec. 1.338-8. International
aspects of section 338 are covered in Sec. 1.338-9. Rules for the
filing of returns are provided in Sec. 1.338-10. Eligibility for and
treatment of section 338(h)(10) elections is addressed in Sec.
1.338(h)(10)-1.
(b) Treatment of target under other provisions of the Internal
Revenue Code--(1) General rule for subtitle A. Except as provided in
this section, new target is treated as a new corporation that is
unrelated to old target for purposes of subtitle A of the Internal
Revenue Code. Thus--
(i) New target is not considered related to old target for purposes
of section 168 and may make new elections under section 168 without
taking into account the elections made by old target; and
(ii) New target may adopt, without obtaining prior approval from the
Commissioner, any taxable year that meets the requirements of section
441 and any method of accounting that meets the requirements of section
446. Notwithstanding Sec. 1.441-1T(b)(2), a new target may adopt a
taxable year on or before the last day for making the election
[[Page 101]]
under section 338 by filing its first return for the desired taxable
year on or before that date.
(2) Exceptions for subtitle A. New target and old target are treated
as the same corporation for purposes of--
(i) The rules applicable to employee benefit plans (including those
plans described in sections 79, 104, 105, 106, 125, 127, 129, 132, 137,
and 220), qualified pension, profit-sharing, stock bonus and annuity
plans (sections 401(a) and 403(a)), simplified employee pensions
(section 408(k)), tax qualified stock option plans (sections 422 and
423), welfare benefit funds (sections 419, 419A, 512(a)(3), and 4976),
and voluntary employee benefit associations (section 501(c)(9) and the
regulations thereunder);
(ii) Sections 1311 through 1314 (relating to the mitigation of the
effect of limitations), if a section 338(h)(10) election is not made for
target;
(iii) Section 108(e)(5) (relating to the reduction of purchase money
debt);
(iv) Section 45A (relating to the Indian Employment Credit), section
51 (relating to the Work Opportunity Credit), section 51A (relating to
the Welfare to Work Credit), and section 1396 (relating to the
Empowerment Zone Act);
(v) Sections 401(h) and 420 (relating to medical benefits for
retirees);
(vi) Section 414 (relating to definitions and special rules); and
(vii) Any other provision designated in the Internal Revenue
Bulletin by the Internal Revenue Service. See Sec. 601.601(d)(2)(ii) of
this chapter. See, for example, Sec. 1.1001-3(e)(4)(i)(F) providing
that an election under section 338 does not result in the substitution
of a new obligor on target's debt. See also, for example, Sec. 1.1502-
77(e)(4), providing that an election under section 338 does not result
in a deemed termination of target's existence for purposes of the rules
applicable to the agent for a consolidated group.
(3) General rule for other provisions of the Internal Revenue Code.
Except as provided in the regulations under section 338 or in the
Internal Revenue Bulletin by the Internal Revenue Service (see Sec.
601.601(d)(2)(ii) of this chapter), new target is treated as a
continuation of old target for purposes other than subtitle A of the
Internal Revenue Code. For example--
(i) New target is liable for old target's Federal income tax
liabilities, including the tax liability for the deemed sale tax
consequences and those tax liabilities of the other members of any
consolidated group that included old target that are attributable to
taxable years in which those corporations and old target joined in the
same consolidated return (see Sec. 1.1502-6(a));
(ii) Wages earned by the employees of old target are considered
wages earned by such employees from new target for purposes of sections
3101 and 3111 (Federal Insurance Contributions Act) and section 3301
(Federal Unemployment Tax Act); and
(iii) Old target and new target must use the same employer
identification number.
(c) Anti-abuse rule--(1) In general. The rules of this paragraph (c)
apply for purposes of applying the residual method as provided for under
the regulations under sections 338 and 1060. The Commissioner is
authorized to treat any property (including cash) transferred by old
target in connection with the transactions resulting in the application
of the residual method (and not held by target at the close of the
acquisition date) as, nonetheless, property of target at the close of
the acquisition date if the property so transferred is, within 24 months
after the deemed asset sale, owned by new target, or is owned, directly
or indirectly, by a member of the affiliated group of which new target
is a member and continues after the acquisition date to be held or used
primarily in connection with one or more of the activities of new
target. In addition, the Commissioner is authorized to treat any
property (including cash) transferred to old target in connection with
the transactions resulting in the application of the residual method
(and held by target at the close of the acquisition date) as,
nonetheless, not being property of target at the close of the
acquisition date if the property so transferred is, within 24 months
after the deemed asset sale, not owned by new target but owned, directly
or indirectly, by a member of the affiliated group of which new target
is a member, or
[[Page 102]]
owned by new target but held or used primarily in connection with an
activity conducted, directly or indirectly, by another member of the
affiliated group of which new target is a member in combination with
other property retained by or acquired, directly or indirectly, from the
transferor of the property (or a member of the same affiliated group) to
old target. For purposes of this paragraph (c)(1), an interest in an
entity is considered held or used in connection with an activity if
property of the entity is so held or used. The authority of the
Commissioner under this paragraph (c)(1) includes the making of any
appropriate correlative adjustments (avoiding, to the extent possible,
the duplication or omission of any item of income, gain, loss,
deduction, or basis).
(2) Examples. The following examples illustrate this paragraph (c):
Example 1. Prior to a qualified stock purchase under section 338,
target transfers one of its assets to a related party. The purchasing
corporation then purchases the target stock and also purchases the
transferred asset from the related party. After its purchase of target,
the purchasing corporation and target are members of the same affiliated
group. A section 338 election is made. Under an arrangement with the
purchaser, the separately transferred asset is used primarily in
connection with target's activities. Applying the anti-abuse rule of
this paragraph (c), the Commissioner may consider target to own the
transferred asset for purposes of applying the residual method under
section 338.
Example 2. T owns all the stock of T1. T1 leases intellectual
property to T, which T uses in connection with its own activities. P, a
purchasing corporation, wishes to buy the T-T1 chain of corporations. P,
in connection with its planned purchase of the T stock, contracts to
consummate a purchase of all the stock of T1 on March 1 and of all the
stock of T on March 2. Section 338 elections are thereafter made for
both T and T1. Immediately after the purchases, P, T and T1 are members
of the same affiliated group. T continues to lease the intellectual
property from T1 and that is the primary use of the intellectual
property. Thus, an asset of T, the T1 stock, was removed from T's own
assets prior to the qualified stock purchase of the T stock, T1's own
assets are used after the deemed asset sale in connection with T's own
activities, and the T1 stock is after the deemed asset sale owned by P,
a member of the same affiliated group of which T is a member. Applying
the anti-abuse rule of this paragraph (c), the Commissioner may, for
purposes of application of the residual method under section 338 both to
T and to T1, consider P to have bought only the stock of T, with T at
the time of the qualified stock purchases of both T and T1 (the
qualified stock purchase of T1 being triggered by the deemed sale under
section 338 of T's assets) owning T1. The Commissioner accordingly would
allocate consideration to T's assets as though the T1 stock were one of
those assets, and then allocate consideration within T1 based on the
amount allocated to the T1 stock at the T level.
(d) Next day rule for post-closing transactions. If a target
corporation for which an election under section 338 is made engages in a
transaction outside the ordinary course of business on the acquisition
date after the event resulting in the qualified stock purchase of the
target or a higher tier corporation, the target and all persons related
thereto (either before or after the qualified stock purchase) under
section 267(b) or section 707 must treat the transaction for all Federal
income tax purposes as occurring at the beginning of the day following
the transaction and after the deemed purchase by new target.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001, as amended by T.D. 9002, 67 FR
43540, June 28, 2002]
Sec. 1.338-2 Nomenclature and definitions; mechanics of the section 338
election.
(a) Scope. This section prescribes rules relating to elections under
section 338.
(b) Nomenclature. For purposes of the regulations under section 338
(except as otherwise provided):
(1) T is a domestic target corporation that has only one class of
stock outstanding. Old T refers to T for periods ending on or before the
close of T's acquisition date; new T refers to T for subsequent periods.
(2) P is the purchasing corporation.
(3) The P group is an affiliated group of which P is a member.
(4) P1, P2, etc., are domestic corporations that are members of the
P group.
(5) T1, T2, etc., are domestic corporations that are target
affiliates of T. These corporations (T1, T2, etc.) have only one class
of stock outstanding and may also be targets.
[[Page 103]]
(6) S is a domestic corporation (unrelated to P and B) that owns T
prior to the purchase of T by P. (S is referred to in cases in which it
is appropriate to consider the effects of having all of the outstanding
stock of T owned by a domestic corporation.)
(7) A, a U.S. citizen or resident, is an individual (unrelated to P
and B) who owns T prior to the purchase of T by P. (A is referred to in
cases in which it is appropriate to consider the effects of having all
of the outstanding stock of T owned by an individual who is a U.S.
citizen or resident. Ownership of T by A and ownership of T by S are
mutually exclusive circumstances.)
(8) B, a U.S. citizen or resident, is an individual (unrelated to T,
S, and A) who owns the stock of P.
(9) F, used as a prefix with the other terms in this paragraph (b),
connotes foreign, rather than domestic, status. For example, FT is a
foreign corporation (as defined in section 7701(a)(5)) and FA is an
individual other than a U.S. citizen or resident.
(10) CFC, used as a prefix with the other terms in this paragraph
(b) referring to a corporation, connotes a controlled foreign
corporation (as defined in section 957, taking into account section
953(c)). A corporation identified with the prefix F may be a controlled
foreign corporation. (The prefix CFC is used when the corporation's
status as a controlled foreign corporation is significant.)
(c) Definitions. For purposes of the regulations under section 338
(except as otherwise provided):
(1) Acquisition date. The term acquisition date has the same meaning
as in section 338(h)(2).
(2) Acquisition date assets. Acquisition date assets are the assets
of the target held at the beginning of the day after the acquisition
date (but see Sec. 1.338-1(d) (regarding certain transactions on the
acquisition date)).
(3) Affiliated group. The term affiliated group has the same meaning
as in section 338(h)(5). Corporations are affiliated on any day they are
members of the same affiliated group.
(4) Common parent. The term common parent has the same meaning as in
section 1504.
(5) Consistency period. The consistency period is the period
described in section 338(h)(4)(A) unless extended pursuant to Sec.
1.338-8(j)(1).
(6) Deemed asset sale. The deemed asset sale is the transaction
described in Sec. 1.338-1(a)(1) that is deemed to occur for purposes of
subtitle A of the Internal Revenue Code if a section 338 election is
made.
(7) Deemed sale tax consequences. Deemed sale tax consequences
refers to, in the aggregate, the Federal income tax consequences
(generally, the income, gain, deduction, and loss) of the deemed asset
sale. Deemed sale tax consequences also refers to the Federal income tax
consequences of the transfer of a particular asset in the deemed asset
sale.
(8) Deemed sale return. The deemed sale return is the return on
which target's deemed sale tax consequences are reported that does not
include any other items of target. Target files a deemed sale return
when a section 338 election (but not a section 338(h)(10) election) is
filed for target and target is a member of a selling group (defined in
paragraph (c)(16) of this section) that files a consolidated return for
the period that includes the acquisition date. See Sec. 1.338-10. If
target is an S corporation for the period that ends on the day before
the acquisition date and a section 338 election (but not a section
338(h)(10) election) is filed for target, see Sec. 1.338-10(a)(3).
(9) Domestic corporation. A domestic corporation is a corporation--
(i) That is domestic within the meaning of section 7701(a)(4) or
that is treated as domestic for purposes of subtitle A of the Internal
Revenue Code (e.g., to which an election under section 953(d) or 1504(d)
applies); and
(ii) That is not a DISC, a corporation described in section 1248(e),
or a corporation to which an election under section 936 applies.
(10) Old target's final return. Old target's final return is the
income tax return of old target for the taxable year ending at the close
of the acquisition date that includes the deemed sale tax consequences.
However, if a deemed sale return is filed for old target, the deemed
sale return is considered old target's final return.
[[Page 104]]
(11) Purchasing corporation. The term purchasing corporation has the
same meaning as in section 338(d)(1). The purchasing corporation may
also be referred to as purchaser. Unless otherwise provided, any
reference to the purchasing corporation is a reference to all members of
the affiliated group of which the purchasing corporation is a member.
See sections 338(h)(5) and (8). Also, unless otherwise provided, any
reference to the purchasing corporation is, with respect to a deemed
purchase of stock under section 338(a)(2), a reference to new target
with respect to its own deemed purchase of stock in another target.
(12) Qualified stock purchase. The term qualified stock purchase has
the same meaning as in section 338(d)(3).
(13) Related persons. Two persons are related if stock in a
corporation owned by one of the persons would be attributed under
section 318(a) (other than section 318(a)(4)) to the other.
(14) Section 338 election. A section 338 election is an election to
apply section 338(a) to target. A section 338 election is made by filing
a statement of section 338 election pursuant to paragraph (d) of this
section. The form on which this statement is filed is referred to in the
regulations under section 338 as the Form 8023, ``Elections Under
Section 338 For Corporations Making Qualified Stock Purchases.''
(15) Section 338(h)(10) election. A section 338(h)(10) election is
an election to apply section 338(h)(10) to target. A section 338(h)(10)
election is made by making a joint election for target under Sec.
1.338(h)(10)-1 on Form 8023.
(16) Selling group. The selling group is the affiliated group (as
defined in section 1504) eligible to file a consolidated return that
includes target for the taxable period in which the acquisition date
occurs. However, a selling group is not an affiliated group of which
target is the common parent on the acquisition date.
(17) Target; old target; new target. Target is the target
corporation as defined in section 338(d)(2). Old target refers to target
for periods ending on or before the close of target's acquisition date.
New target refers to target for subsequent periods.
(18) Target affiliate. The term target affiliate has the same
meaning as in section 338(h)(6) (applied without section
338(h)(6)(B)(i)). Thus, a corporation described in section
338(h)(6)(B)(i) is considered a target affiliate for all purposes of
section 338. If a target affiliate is acquired in a qualified stock
purchase, it is also a target.
(19) 12-month acquisition period. The 12-month acquisition period is
the period described in section 338(h)(1), unless extended pursuant to
Sec. 1.338-8(j)(2).
(d) Time and manner of making election. The purchasing corporation
makes a section 338 election for target by filing a statement of section
338 election on Form 8023 in accordance with the instructions to the
form. The section 338 election must be made not later than the 15th day
of the 9th month beginning after the month in which the acquisition date
occurs. A section 338 election is irrevocable. See Sec. 1.338(h)(10)-
1(c)(2) for section 338(h)(10) elections.
(e) Special rules for foreign corporations or DISCs--(1) Elections
by certain foreign purchasing corporations--(i) General rule. A
qualifying foreign purchasing corporation is not required to file a
statement of section 338 election for a qualifying foreign target before
the earlier of 3 years after the acquisition date and the 180th day
after the close of the purchasing corporation's taxable year within
which a triggering event occurs.
(ii) Qualifying foreign purchasing corporation. A purchasing
corporation is a qualifying foreign purchasing corporation only if,
during the acquisition period of a qualifying foreign target, all the
corporations in the purchasing corporation's affiliated group are
foreign corporations that are not subject to United States tax.
(iii) Qualifying foreign target. A target is a qualifying foreign
target only if target and its target affiliates are foreign corporations
that, during target's acquisition period, are not subject to United
States tax (and will not become subject to United States tax during such
period because of a section 338 election). A target affiliate is taken
into account for purposes of the preceding sentence only if, during
target's 12-month acquisition period, it is or becomes a member of the
affiliated group
[[Page 105]]
that includes the purchasing corporation.
(iv) Triggering event. A triggering event occurs in the taxable year
of the qualifying foreign purchasing corporation in which either that
corporation or any corporation in its affiliated group becomes subject
to United States tax.
(v) Subject to United States tax. For purposes of this paragraph
(e)(1), a foreign corporation is considered subject to United States
tax--
(A) For the taxable year for which that corporation is required
under Sec. 1.6012-2(g) (other than Sec. 1.6012-2(g)(2)(i)(B)(2)) to
file a United States income tax return; or
(B) For the period during which that corporation is a controlled
foreign corporation, a passive foreign investment company for which an
election under section 1295 is in effect, a foreign investment company,
or a foreign corporation the stock ownership of which is described in
section 552(a)(2).
(2) Acquisition period. For purposes of this paragraph (e), the term
acquisition period means the period beginning on the first day of the
12-month acquisition period and ending on the acquisition date.
(3) Statement of section 338 election may be filed by United States
shareholders in certain cases. The United States shareholders (as
defined in section 951(b)) of a foreign purchasing corporation that is a
controlled foreign corporation (as defined in section 957 (taking into
account section 953(c))) may file a statement of section 338 election on
behalf of the purchasing corporation if the purchasing corporation is
not required under Sec. 1.6012-2(g) (other than Sec. 1.6012-
2(g)(2)(i)(B)(2)) to file a United States income tax return for its
taxable year that includes the acquisition date. Form 8023 must be filed
as described in the form and its instructions and also must be attached
to the Form 5471, ``Information Returns Of U.S. Persons With Respect To
Certain Foreign Corporations,'' filed with respect to the purchasing
corporation by each United States shareholder for the purchasing
corporation's taxable year that includes the acquisition date (or, if
paragraph (e)(1)(i) of this section applies to the election, for the
purchasing corporation's taxable year within which it becomes a
controlled foreign corporation). The provisions of Sec. 1.964-1(c)
(including Sec. 1.964-1(c)(7)) do not apply to an election made by the
United States shareholders.
(4) Notice requirement for U.S. persons holding stock in foreign
target--(i) General rule. If a target subject to a section 338 election
was a controlled foreign corporation, a passive foreign investment
company, or a foreign personal holding company at any time during the
portion of its taxable year that ends on its acquisition date, the
purchasing corporation must deliver written notice of the election (and
a copy of Form 8023, its attachments and instructions) to--
(A) Each U.S. person (other than a member of the affiliated group of
which the purchasing corporation is a member (the purchasing group
member)) that, on the acquisition date of the foreign target, holds
stock in the foreign target; and
(B) Each U.S. person (other than a purchasing group member) that
sells stock in the foreign target to a purchasing group member during
the foreign target's 12-month acquisition period.
(ii) Limitation. The notice requirement of this paragraph (e)(4)
applies only where the section 338 election for the foreign target
affects income, gain, loss, deduction, or credit of the U.S. person
described in paragraph (e)(4)(i) of this section under section 551, 951,
1248, or 1293.
(iii) Form of notice. The notice to U.S. persons must be identified
prominently as a notice of section 338 election and must--
(A) Contain the name, address, and employer identification number
(if any) of, and the country (and, if relevant, the lesser political
subdivision) under the laws of which are organized the purchasing
corporation and the relevant target (i.e., the target the stock of which
the particular U.S. person held or sold under the circumstances
described in paragraph (e)(4)(i) of this section);
(B) Identify those corporations as the purchasing corporation and
the foreign target, respectively; and
[[Page 106]]
(C) Contain the following declaration (or a substantially similar
declaration):
THIS DOCUMENT SERVES AS NOTICE OF AN ELECTION UNDER SECTION 338 FOR
THE ABOVE CITED FOREIGN TARGET THE STOCK OF WHICH YOU EITHER HELD OR
SOLD UNDER THE CIRCUMSTANCES DESCRIBED IN TREASURY REGULATIONS SECTION
1.338-2(e)(4). FOR POSSIBLE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES UNDER SECTION 551, 951, 1248, OR 1293 OF THE INTERNAL
REVENUE CODE OF 1986 THAT MAY APPLY TO YOU, SEE TREASURY REGULATIONS
SECTION 1.338-9(b). YOU MAY BE REQUIRED TO ATTACH THE INFORMATION
ATTACHED TO THIS NOTICE TO CERTAIN RETURNS.
(iv) Timing of notice. The notice required by this paragraph (e)(4)
must be delivered to the U.S. person on or before the later of the 120th
day after the acquisition date of the particular target or the day on
which Form 8023 is filed. The notice is considered delivered on the date
it is mailed to the proper address (or an address similar enough to
complete delivery), unless the date it is mailed cannot be reasonably
determined. The date of mailing will be determined under the rules of
section 7502. For example, the date of mailing is the date of U.S.
postmark or the applicable date recorded or marked by a designated
delivery service.
(v) Consequence of failure to comply. A statement of section 338
election is not valid if timely notice is not given to one or more U.S.
persons described in this paragraph (e)(4). If the form of notice fails
to comply with all requirements of this paragraph (e)(4), the section
338 election is valid, but the waiver rule of Sec. 1.338-10(b)(1) does
not apply.
(vi) Good faith effort to comply. The purchasing corporation will be
considered to have complied with this paragraph (e)(4), even though it
failed to provide notice or provide timely notice to each person
described in this paragraph (e)(4), if the Commissioner determines that
the purchasing corporation made a good faith effort to identify and
provide timely notice to those U.S. persons.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-3 Qualification for the section 338 election.
(a) Scope. This section provides rules on whether certain
acquisitions of stock are qualified stock purchases and on other
miscellaneous issues under section 338.
(b) Rules relating to qualified stock purchases--(1) Purchasing
corporation requirement. An individual cannot make a qualified stock
purchase of target. Section 338(d)(3) requires, as a condition of a
qualified stock purchase, that a corporation purchase the stock of
target. If an individual forms a corporation (new P) to acquire target
stock, new P can make a qualified stock purchase of target if new P is
considered for tax purposes to purchase the target stock. Facts that may
indicate that new P does not purchase the target stock include new P's
merging downstream into target, liquidating, or otherwise disposing of
the target stock following the purported qualified stock purchase.
(2) Purchase. The term purchase has the same meaning as in section
338(h)(3). Stock in a target (or target affiliate) may be considered
purchased if, under general principles of tax law, the purchasing
corporation is considered to own stock of the target (or target
affiliate) meeting the requirements of section 1504(a)(2),
notwithstanding that no amount may be paid for (or allocated to) the
stock.
(3) Acquisitions of stock from related corporations--(i) In general.
Stock acquired by a purchasing corporation from a related corporation
(R) is generally not considered acquired by purchase. See section
338(h)(3)(A)(iii).
(ii) Time for testing relationship. For purposes of section
338(h)(3)(A)(iii), a purchasing corporation is treated as related to
another person if the relationship specified in section
338(h)(3)(A)(iii) exists--
(A) In the case of a single transaction, immediately after the
purchase of target stock;
(B) In the case of a series of acquisitions otherwise constituting a
qualified stock purchase within the meaning of section 338(d)(3),
immediately after the last acquisition in such series; and
(C) In the case of a series of transactions effected pursuant to an
integrated plan to dispose of target stock,
[[Page 107]]
immediately after the last transaction in such series.
(iii) Cases where section 338(h)(3)(C) applies--acquisitions treated
as purchases. If section 338(h)(3)(C) applies and the purchasing
corporation is treated as acquiring stock by purchase from R, solely for
purposes of determining when the stock is considered acquired, target
stock acquired from R is considered to have been acquired by the
purchasing corporation on the day on which the purchasing corporation is
first considered to own that stock under section 318(a) (other than
section 318(a)(4)).
(iv) Examples. The following examples illustrate this paragraph
(b)(3):
Example 1. (i) S is the parent of a group of corporations that are
engaged in various businesses. Prior to January 1, Year 1, S decided to
discontinue its involvement in one line of business. To accomplish this,
S forms a new corporation, Newco, with a nominal amount of cash. Shortly
thereafter, on January 1, Year 1, S transfers all the stock of the
subsidiary conducting the unwanted business (T) to Newco in exchange for
100 shares of Newco common stock and a Newco promissory note. Prior to
January 1, Year 1, S and Underwriter (U) had entered into a binding
agreement pursuant to which U would purchase 60 shares of Newco common
stock from S and then sell those shares in an Initial Public Offering
(IPO). On January 6, Year 1, the IPO closes.
(ii) Newco's acquisition of T stock is one of a series of
transactions undertaken pursuant to one integrated plan. The series of
transactions ends with the closing of the IPO and the transfer of all
the shares of stock in accordance with the agreements. Immediately after
the last transaction effected pursuant to the plan, S owns 40 percent of
Newco, which does not give rise to a relationship described in section
338(h)(3)(A)(iii). See Sec. 1.338-3(b)(3)(ii)(C). Accordingly, S and
Newco are not related for purposes of section 338(h)(3)(A)(iii).
(iii) Further, because Newco's basis in the T stock is not
determined by reference to S's basis in the T stock and because the
transaction is not an exchange to which section 351, 354, 355, or 356
applies, Newco's acquisition of the T stock is a purchase within the
meaning of section 338(h)(3).
Example 2. (i) On January 1 of Year 1, P purchases 75 percent in
value of the R stock. On that date, R owns 4 of the 100 shares of T
stock. On June 1 of Year 1, R acquires an additional 16 shares of T
stock. On December 1 of Year 1, P purchases 70 shares of T stock from an
unrelated person and 12 of the 20 shares of T stock held by R.
(ii) Of the 12 shares of T stock purchased by P from R on December 1
of Year 1, 3 of those shares are deemed to have been acquired by P on
January 1 of Year 1, the date on which 3 of the 4 shares of T stock held
by R on that date were first considered owned by P under section
318(a)(2)(C) (i.e., 4 x .75). The remaining 9 shares of T stock
purchased by P from R on December 1 of Year 1 are deemed to have been
acquired by P on June 1 of Year 1, the date on which an additional 12 of
the 20 shares of T stock owned by R on that date were first considered
owned by P under section 318(a)(2)(C) (i.e., (20 x .75)-3). Because
stock acquisitions by P sufficient for a qualified stock purchase of T
occur within a 12-month period (i.e., 3 shares constructively on January
1 of Year 1, 9 shares constructively on June 1 of Year 1, and 70 shares
actually on December 1 of Year 1), a qualified stock purchase is made on
December 1 of Year 1.
Example 3. (i) On February 1 of Year 1, P acquires 25 percent in
value of the R stock from B (the sole shareholder of P). That R stock is
not acquired by purchase. See section 338(h)(3)(A)(iii). On that date, R
owns 4 of the 100 shares of T stock. On June 1 of Year 1, P purchases an
additional 25 percent in value of the R stock, and on January 1 of Year
2, P purchases another 25 percent in value of the R stock. On June 1 of
Year 2, R acquires an additional 16 shares of the T stock. On December 1
of Year 2, P purchases 68 shares of the T stock from an unrelated person
and 12 of the 20 shares of the T stock held by R.
(ii) Of the 12 shares of the T stock purchased by P from R on
December 1 of Year 2, 2 of those shares are deemed to have been acquired
by P on June 1 of Year 1, the date on which 2 of the 4 shares of the T
stock held by R on that date were first considered owned by P under
section 318(a)(2)(C) (i.e., 4 x .5). For purposes of this attribution,
the R stock need not be acquired by P by purchase. See section
338(h)(1). (By contrast, the acquisition of the T stock by P from R does
not qualify as a purchase unless P has acquired at least 50 percent in
value of the R stock by purchase. Section 338(h)(3)(C)(i).) Of the
remaining 10 shares of the T stock purchased by P from R on December 1
of Year 2, 1 of those shares is deemed to have been acquired by P on
January 1 of Year 2, the date on which an additional 1 share of the 4
shares of the T stock held by R on that date was first considered owned
by P under section 318(a)(2)(C) (i.e., (4 x .75)-2). The remaining 9
shares of the T stock purchased by P from R on December 1 of Year 2, are
deemed to have been acquired by P on June 1 of Year 2, the date on which
an additional 12 shares of the T stock held by R on that date were first
considered owned by P under section 318(a)(2)(C) (i.e., (20 x .75)-3).
Because a qualified stock purchase of T by P is made
[[Page 108]]
on December 1 of Year 2 only if all 12 shares of the T stock purchased
by P from R on that date are considered acquired during a 12-month
period ending on that date (so that, in conjunction with the 68 shares
of the T stock P purchased on that date from the unrelated person, 80 of
T's 100 shares are acquired by P during a 12-month period) and because 2
of those 12 shares are considered to have been acquired by P more than
12 months before December 1 of Year 2 (i.e., on June 1 of Year 1), a
qualified stock purchase is not made. (Under Sec. 1.338-8(j)(2), for
purposes of applying the consistency rules, P is treated as making a
qualified stock purchase of T if, pursuant to an arrangement, P
purchases T stock satisfying the requirements of section 1504(a)(2) over
a period of more than 12 months.)
Example 4. Assume the same facts as in Example 3, except that on
February 1 of Year 1, P acquires 25 percent in value of the R stock by
purchase. The result is the same as in Example 3.
(4) Acquisition date for tiered targets--(i) Stock sold in deemed
asset sale. If an election under section 338 is made for target, old
target is deemed to sell target's assets and new target is deemed to
acquire those assets. Under section 338(h)(3)(B), new target's deemed
purchase of stock of another corporation is a purchase for purposes of
section 338(d)(3) on the acquisition date of target. If new target's
deemed purchase causes a qualified stock purchase of the other
corporation and if a section 338 election is made for the other
corporation, the acquisition date for the other corporation is the same
as the acquisition date of target. However, the deemed sale and purchase
of the other corporation's assets is considered to take place after the
deemed sale and purchase of target's assets.
(ii) Example. The following example illustrates this paragraph
(b)(4):
Example. A owns all of the T stock. T owns 50 of the 100 shares of X
stock. The other 50 shares of X stock are owned by corporation Y, which
is unrelated to A, T, or P. On January 1 of Year 1, P makes a qualified
stock purchase of T from A and makes a section 338 election for T. On
December 1 of Year 1, P purchases the 50 shares of X stock held by Y. A
qualified stock purchase of X is made on December 1 of Year 1, because
the deemed purchase of 50 shares of X stock by new T because of the
section 338 election for T and the actual purchase of 50 shares of X
stock by P are treated as purchases made by one corporation. Section
338(h)(8). For purposes of determining whether those purchases occur
within a 12-month acquisition period as required by section 338(d)(3), T
is deemed to purchase its X stock on T's acquisition date, i.e., January
1 of Year 1.
(5) Effect of redemptions--(i) General rule. Except as provided in
this paragraph (b)(5), a qualified stock purchase is made on the first
day on which the percentage ownership requirements of section 338(d)(3)
are satisfied by reference to target stock that is both--
(A) Held on that day by the purchasing corporation; and
(B) Purchased by the purchasing corporation during the 12-month
period ending on that day.
(ii) Redemptions from persons unrelated to the purchasing
corporation. Target stock redemptions from persons unrelated to the
purchasing corporation that occur during the 12-month acquisition period
are taken into account as reductions in target's outstanding stock for
purposes of determining whether target stock purchased by the purchasing
corporation in the 12-month acquisition period satisfies the percentage
ownership requirements of section 338(d)(3).
(iii) Redemptions from the purchasing corporation or related persons
during 12-month acquisition period--(A) General rule. For purposes of
the percentage ownership requirements of section 338(d)(3), a redemption
of target stock during the 12-month acquisition period from the
purchasing corporation or from any person related to the purchasing
corporation is not taken into account as a reduction in target's
outstanding stock.
(B) Exception for certain redemptions from related corporations. A
redemption of target stock during the 12-month acquisition period from a
corporation related to the purchasing corporation is taken into account
as a reduction in target's outstanding stock to the extent that the
redeemed stock would have been considered purchased by the purchasing
corporation (because of section 338(h)(3)(C)) during the 12-month
acquisition period if the redeemed stock had been acquired by the
purchasing corporation from the related corporation on the day of the
redemption. See paragraph (b)(3) of this section.
(iv) Examples. The following examples illustrate this paragraph
(b)(5):
[[Page 109]]
Example 1. QSP on stock purchase date; redemption from unrelated
person during 12-month period. A owns all 100 shares of T stock. On
January 1 of Year 1, P purchases 40 shares of the T stock from A. On
July 1 of Year 1, T redeems 25 shares from A. On December 1 of Year 1, P
purchases 20 shares of the T stock from A. P makes a qualified stock
purchase of T on December 1 of Year 1, because the 60 shares of T stock
purchased by P within the 12-month period ending on that date satisfy
the 80-percent ownership requirements of section 338(d)(3) (i.e., 60/75
shares), determined by taking into account the redemption of 25 shares.
Example 2. QSP on stock redemption date; redemption from unrelated
person during 12-month period. The facts are the same as in Example 1,
except that P purchases 60 shares of T stock on January 1 of Year 1 and
none on December 1 of Year 1. P makes a qualified stock purchase of T on
July 1 of Year 1, because that is the first day on which the T stock
purchased by P within the preceding 12-month period satisfies the 80-
percent ownership requirements of section 338(d)(3) (i.e., 60/75
shares), determined by taking into account the redemption of 25 shares.
Example 3. Redemption from purchasing corporation not taken into
account. On December 15 of Year 1, T redeems 30 percent of its stock
from P. The redeemed stock was held by P for several years and
constituted P's total interest in T. On December 1 of Year 2, P
purchases the remaining T stock from A. P does not make a qualified
stock purchase of T on December 1 of Year 2. For purposes of the 80-
percent ownership requirements of section 338(d)(3), the redemption of
P's T stock on December 15 of Year 1 is not taken into account as a
reduction in T's outstanding stock.
Example 4. Redemption from related person taken into account. On
January 1 of Year 1, P purchases 60 of the 100 shares of X stock. On
that date, X owns 40 of the 100 shares of T stock. On April 1 of Year 1,
T redeems X's T stock and P purchases the remaining 60 shares of T stock
from an unrelated person. For purposes of the 80-percent ownership
requirements of section 338(d)(3), the redemption of the T stock from X
(a person related to P) is taken into account as a reduction in T's
outstanding stock. If P had purchased the 40 redeemed shares from X on
April 1 of Year 1, all 40 of the shares would have been considered
purchased (because of section 338(h)(3)(C)(i)) during the 12-month
period ending on April 1 of Year 1 (24 of the 40 shares would have been
considered purchased by P on January 1 of Year 1 and the remaining 16
shares would have been considered purchased by P on April 1 of Year 1).
See paragraph (b)(3) of this section. Accordingly, P makes a qualified
stock purchase of T on April 1 of Year 1, because the 60 shares of T
stock purchased by P on that date satisfy the 80-percent ownership
requirements of section 338(d)(3) (i.e., 60/60 shares), determined by
taking into account the redemption of 40 shares.
(c) Effect of post-acquisition events on eligibility for section 338
election--(1) Post-acquisition elimination of target. (i) The purchasing
corporation may make an election under section 338 for target even
though target is liquidated on or after the acquisition date. If target
liquidates on the acquisition date, the liquidation is considered to
occur on the following day and immediately after new target's deemed
purchase of assets. The purchasing corporation may also make an election
under section 338 for target even though target is merged into another
corporation, or otherwise disposed of by the purchasing corporation
provided that, under the facts and circumstances, the purchasing
corporation is considered for tax purposes as the purchaser of the
target stock. See Sec. 1.338(h)(10)-1T(c)(2) for special rules
concerning section 338(h)(10) elections in certain multi-step
transactions.
(ii) The following examples illustrate this paragraph (c)(1):
Example 1. On January 1 of Year 1, P purchases 100 percent of the
outstanding common stock of T. On June 1 of Year 1, P sells the T stock
to an unrelated person. Assuming that P is considered for tax purposes
as the purchaser of the T stock, P remains eligible, after June 1 of
Year 1, to make a section 338 election for T that results in a deemed
asset sale of T's assets on January 1 of Year 1.
Example 2. On January 1 of Year 1, P makes a qualified stock
purchase of T. On that date, T owns the stock of T1. On March 1 of Year
1, T sells the T1 stock to an unrelated person. On April 1 of Year 1, P
makes a section 338 election for T. Notwithstanding that the T1 stock
was sold on March 1 of Year 1, the section 338 election for T on April 1
of Year 1 results in a qualified stock purchase by T of T1 on January 1
of Year 1. See paragraph (b)(4)(i) of this section.
(2) Post-acquisition elimination of the purchasing corporation. An
election under section 338 may be made for target after the acquisition
of assets of the purchasing corporation by another corporation in a
transaction described in section 381(a), provided that the purchasing
corporation is considered for tax purposes as the purchaser of the
[[Page 110]]
target stock. The acquiring corporation in the section 381(a)
transaction may make an election under section 338 for target.
(d) Consequences of post-acquisition elimination of target where
section 338 election not made--(1) Scope. The rules of this paragraph
(d) apply to the transfer of target assets to the purchasing corporation
(or another member of the same affiliated group as the purchasing
corporation) (the transferee) following a qualified stock purchase of
target stock, if the purchasing corporation does not make a section 338
election for target. Notwithstanding the rules of this paragraph (d),
section 354(a) (and so much of section 356 as relates to section 354)
cannot apply to any person other than the purchasing corporation or
another member of the same affiliated group as the purchasing
corporation unless the transfer of target assets is pursuant to a
reorganization as determined without regard to this paragraph (d).
(2) Continuity of interest. By virtue of section 338, in determining
whether the continuity of interest requirement of Sec. 1.368-1(b) is
satisfied on the transfer of assets from target to the transferee, the
purchasing corporation's target stock acquired in the qualified stock
purchase represents an interest on the part of a person who was an owner
of the target's business enterprise prior to the transfer that can be
continued in a reorganization.
(3) Control requirement. By virtue of section 338, the acquisition
of target stock in the qualified stock purchase will not prevent the
purchasing corporation from qualifying as a shareholder of the target
transferor for the purpose of determining whether, immediately after the
transfer of target assets, a shareholder of the transferor is in control
of the corporation to which the assets are transferred within the
meaning of section 368(a)(1)(D).
(4) Solely for voting stock requirement. By virtue of section 338,
the acquisition of target stock in the qualified stock purchase for
consideration other than voting stock will not prevent the subsequent
transfer of target assets from satisfying the solely for voting stock
requirement for purposes of determining if the transfer of target assets
qualifies as a reorganization under section 368(a)(1)(C).
(5) Example. The following example illustrates this paragraph (d):
Example. (i) Facts. P, T, and X are domestic corporations. T and X
each operate a trade or business. A and K, individuals unrelated to P,
own 85 and 15 percent, respectively, of the stock of T. P owns all of
the stock of X. The total adjusted basis of T's property exceeds the sum
of T's liabilities plus the amount of liabilities to which T's property
is subject. P purchases all of A's T stock for cash in a qualified stock
purchase. P does not make an election under section 338(g) with respect
to its acquisition of T stock. Shortly after the acquisition date, and
as part of the same plan, T merges under applicable state law into X in
a transaction that, but for the question of continuity of interest,
satisfies all the requirements of section 368(a)(1)(A). In the merger,
all of T's assets are transferred to X. P and K receive X stock in
exchange for their T stock. P intends to retain the stock of X
indefinitely.
(ii) Status of transfer as a reorganization. By virtue of section
338, for the purpose of determining whether the continuity of interest
requirement of Sec. 1.368-1(b) is satisfied, P's T stock acquired in
the qualified stock purchase represents an interest on the part of a
person who was an owner of T's business enterprise prior to the transfer
that can be continued in a reorganization through P's continuing
ownership of X. Thus, the continuity of interest requirement is
satisfied and the merger of T into X is a reorganization within the
meaning of section 368(a)(1)(A). Moreover, by virtue of section 338, the
requirement of section 368(a)(1)(D) that a target shareholder control
the transferee immediately after the transfer is satisfied because P
controls X immediately after the transfer. In addition, all of T's
assets are transferred to X in the merger and P and K receive the X
stock exchanged therefor in pursuance of the plan of reorganization.
Thus, the merger of T into X is also a reorganization within the meaning
of section 368(a)(1)(D).
(iii) Treatment of T and X. Under section 361(a), T recognizes no
gain or loss in the merger. Under section 362(b), X's basis in the
assets received in the merger is the same as the basis of the assets in
T's hands. X succeeds to and takes into account the items of T as
provided in section 381.
(iv) Treatment of P. By virtue of section 338, the transfer of T
assets to X is a reorganization. Pursuant to that reorganization, P
exchanges its T stock solely for stock of X, a party to the
reorganization. Because P is the purchasing corporation, section 354
applies to P's exchange of T stock for X stock in the merger of T into
X. Thus, P recognizes no gain or loss on the exchange. Under section
[[Page 111]]
358, P's basis in the X stock received in the exchange is the same as
the basis of P's T stock exchanged therefor.
(v) Treatment of K. Because K is not the purchasing corporation (or
an affiliate thereof), section 354 cannot apply to K's exchange of T
stock for X stock in the merger of T into X unless the transfer of T's
assets is pursuant to a reorganization as determined without regard to
this paragraph (d). Under general principles of tax law applicable to
reorganizations, the continuity of interest requirement is not satisfied
because P's stock purchase and the merger of T into X are pursuant to an
integrated transaction in which A, the owner of 85 percent of the stock
of T, received solely cash in exchange for A's T stock. See, e.g., Sec.
1.368-1(e)(1)(i); Yoc Heating v. Commissioner, 61 T.C. 168 (1973); Kass
v. Commissioner, 60 T.C. 218 (1973), aff'd, 491 F.2d 749 (3d Cir. 1974).
Thus, the requisite continuity of interest under Sec. 1.368-1(b) is
lacking and section 354 does not apply to K's exchange of T stock for X
stock. K recognizes gain or loss, if any, pursuant to section 1001(c)
with respect to its T stock.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17363, Mar. 30, 2001, as
amended by T.D. 9071, 68 FR 40768, July 9, 2003]
Sec. 1.338-4 Aggregate deemed sale price; various aspects of taxation
of the deemed asset sale.
(a) Scope. This section provides rules under section 338(a)(1) to
determine the aggregate deemed sale price (ADSP) for target. ADSP is the
amount for which old target is deemed to have sold all of its assets in
the deemed asset sale. ADSP is allocated among target's assets in
accordance with Sec. 1.338-6 to determine the amount for which each
asset is deemed to have been sold. When a subsequent increase or
decrease is required under general principles of tax law with respect to
an element of ADSP, the redetermined ADSP is allocated among target's
assets in accordance with Sec. 1.338-7. This Sec. 1.338-4 also
provides rules regarding the recognition of gain or loss on the deemed
sale of target affiliate stock. Notwithstanding section
338(h)(6)(B)(ii), stock held by a target affiliate in a foreign
corporation or in a corporation that is a DISC or that is described in
section 1248(e) is not excluded from the operation of section 338.
(b) Determination of ADSP--(1) General rule. ADSP is the sum of--
(i) The grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock (as defined in section 338(b)(6)(A)); and
(ii) The liabilities of old target.
(2) Time and amount of ADSP--(i) Original determination. ADSP is
initially determined at the beginning of the day after the acquisition
date of target. General principles of tax law apply in determining the
timing and amount of the elements of ADSP.
(ii) Redetermination of ADSP. ADSP is redetermined at such time and
in such amount as an increase or decrease would be required, under
general principles of tax law, for the elements of ADSP. For example,
ADSP is redetermined because of an increase or decrease in the amount
realized for recently purchased stock or because liabilities not
originally taken into account in determining ADSP are subsequently taken
into account. Increases or decreases with respect to the elements of
ADSP result in the reallocation of ADSP among target's assets under
Sec. 1.338-7.
(iii) Example. The following example illustrates this paragraph
(b)(2):
Example. In Year 1, T, a manufacturer, purchases a customized
delivery truck from X with purchase money indebtedness having a stated
principal amount of $100,000. P acquires all of the stock of T in Year 3
for $700,000 and makes a section 338 election for T. Assume T has no
liabilities other than its purchase money indebtedness to X. In Year 4,
when T is neither insolvent nor in a title 11 case, T and X agree to
reduce the amount of the purchase money indebtedness to $80,000. Assume
further that the reduction would be a purchase price reduction under
section 108(e)(5). T and X's agreement to reduce the amount of the
purchase money indebtedness would not, under general principles of tax
law that would apply if the deemed asset sale had actually occurred,
change the amount of liabilities of old target taken into account in
determining its amount realized. Accordingly, ADSP is not redetermined
at the time of the reduction. See Sec. 1.338-5(b)(2)(iii) Example 1 for
the effect on AGUB.
(c) Grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock--(1) Determination of
[[Page 112]]
amount. The grossed-up amount realized on the sale to the purchasing
corporation of the purchasing corporation's recently purchased target
stock is an amount equal to--
(i) The amount realized on the sale to the purchasing corporation of
the purchasing corporation's recently purchased target stock determined
as if the selling shareholder(s) were required to use old target's
accounting methods and characteristics and the installment method were
not available and determined without regard to the selling costs taken
into account under paragraph (c)(1)(iii) of this section;
(ii) Divided by the percentage of target stock (by value, determined
on the acquisition date) attributable to that recently purchased target
stock;
(iii) Less the selling costs incurred by the selling shareholders in
connection with the sale to the purchasing corporation of the purchasing
corporation's recently purchased target stock that reduce their amount
realized on the sale of the stock (e.g., brokerage commissions and any
similar costs to sell the stock).
(2) Example. The following example illustrates this paragraph (c):
Example. T has two classes of stock outstanding, voting common stock
and preferred stock described in section 1504(a)(4). On March 1 of Year
1, P purchases 40 percent of the outstanding T stock from S1 for $500,
20 percent of the outstanding T stock from S2 for $225, and 20 percent
of the outstanding T stock from S3 for $275. On that date, the fair
market value of all the T voting common stock is $1,250 and the
preferred stock $750. S1, S2, and S3 incur $40, $35, and $25
respectively of selling costs. S1 continues to own the remaining 20
percent of the outstanding T stock. The grossed-up amount realized on
the sale to P of P's recently purchased T stock is calculated as
follows: The total amount realized (without regard to selling costs) is
$1,000 (500 + 225 + 275). The percentage of T stock by value on the
acquisition date attributable to the recently purchased T stock is 50%
(1,000/(1,250 + 750)). The selling costs are $100 (40 + 35 + 25). The
grossed-up amount realized is $1,900 (1,000/.5 - 100).
(d) Liabilities of old target--(1) In general. In general, the
liabilities of old target are measured as of the beginning of the day
after the acquisition date. (But see Sec. 1.338-1(d) (regarding certain
transactions on the acquisition date).) In order to be taken into
account in ADSP, a liability must be a liability of target that is
properly taken into account in amount realized under general principles
of tax law that would apply if old target had sold its assets to an
unrelated person for consideration that included the discharge of its
liabilities. See Sec. 1.1001-2(a). Such liabilities may include
liabilities for the tax consequences resulting from the deemed sale.
(2) Time and amount of liabilities. The time for taking into account
liabilities of old target in determining ADSP and the amount of the
liabilities taken into account is determined as if old target had sold
its assets to an unrelated person for consideration that included the
discharge of the liabilities by the unrelated person. For example, if no
amount of a target liability is properly taken into account in amount
realized as of the beginning of the day after the acquisition date, the
liability is not initially taken into account in determining ADSP
(although it may be taken into account at some later date).
(e) Deemed sale tax consequences. Gain or loss on each asset in the
deemed sale is computed by reference to the ADSP allocated to that
asset. ADSP is allocated under the rules of Sec. 1.338-6. Though deemed
sale tax consequences may increase or decrease ADSP by creating or
reducing a tax liability, the amount of the tax liability itself may be
a function of the size of the deemed sale tax consequences. Thus, these
determinations may require trial and error computations.
(f) Other rules apply in determining ADSP. ADSP may not be applied
in such a way as to contravene other applicable rules. For example, a
capital loss cannot be applied to reduce ordinary income in calculating
the tax liability on the deemed sale for purposes of determining ADSP.
(g) Examples. The following examples illustrate this section. For
purposes of the examples in this paragraph (g), unless otherwise stated,
T is a calendar year taxpayer that files separate returns and that has
no loss, tax credit, or other carryovers to Year 1. Depreciation for
Year 1 is not taken into account. T has no liabilities other than
[[Page 113]]
the Federal income tax liability resulting from the deemed asset sale,
and the T shareholders have no selling costs. Assume that T's tax rate
for any ordinary income or net capital gain resulting from the deemed
sale of assets is 34 percent and that any capital loss is offset by
capital gain. On July 1 of Year 1, P purchases all of the stock of T and
makes a section 338 election for T. The examples are as follows:
Example 1. One class. (i) On July 1 of Year 1, T's only asset is an
item of section 1245 property with an adjusted basis to T of $50,400, a
recomputed basis of $80,000, and a fair market value of $100,000. P
purchases all of the T stock for $75,000, which also equals the amount
realized for the stock determined as if the selling shareholder(s) were
required to use old target's accounting methods and characteristics.
(ii) ADSP is determined as follows (for purposes of this section
(g), G is the grossed-up amount realized on the sale to P of P's
recently purchased T stock, L is T's liabilities other than T's tax
liability for the deemed sale tax consequences, TR is the
applicable tax rate, and B is the adjusted basis of the asset deemed
sold):
ADSP = G + L + TR x (ADSP-B)
ADSP = ($75,000/1) + $0 + .34 x (ADSP - $50,400)
ADSP = $75,000 + .34ADSP - $17,136 .66ADSP = $57,864
ADSP = $87,672.72
(iii) Because ADSP for T ($87,672.72) does not exceed the fair
market value of T's asset ($100,000), a Class V asset, T's entire ADSP
is allocated to that asset. Thus, T's deemed sale results in $37,272.72
of taxable income (consisting of $29,600 of ordinary income and
$7,672.72 of capital gain).
(iv) The facts are the same as in paragraph (i) of this Example 1,
except that on July 1 of Year 1, P purchases only 80 of the 100 shares
of T stock for $60,000. The grossed-up amount realized on the sale to P
of P's recently purchased T stock (G) is $75,000 ($60,000/.8).
Consequently, ADSP and the deemed sale tax consequences are the same as
in paragraphs (ii) and (iii) of this Example 1.
(v) The facts are the same as in paragraph (i) of this Example 1,
except that T also has goodwill (a Class VII asset) with an appraised
value of $10,000. The results are the same as in paragraphs (ii) and
(iii) of this Example 1. Because ADSP does not exceed the fair market
value of the Class V asset, no amount is allocated to the Class VII
asset (goodwill).
Example 2. More than one class. (i) P purchases all of the T stock
for $140,000, which also equals the amount realized for the stock
determined as if the selling shareholder(s) were required to use old
target's accounting methods and characteristics. On July 1 of Year 1, T
has liabilities (not including the tax liability for the deemed sale tax
consequences) of $50,000, cash (a Class I asset) of $10,000, actively
traded securities (a Class II asset) with a basis of $4,000 and a fair
market value of $10,000, goodwill (a Class VII asset) with a basis of
$3,000, and the following Class V assets:
------------------------------------------------------------------------
Ratio of
asset FMV
Asset Basis FMV to total
Class V FMV
------------------------------------------------------------------------
Land............................. $5,000 $35,000 .14
Building......................... 10,000 50,000 .20
Equipment A (Recomputed basis 5,000 90,000 .36
$80,000)........................
Equipment B (Recomputed basis 10,000 75,000 .30
$20,000)........................
--------------
Totals....................... $30,000 $250,000 1.00
------------------------------------------------------------------------
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to the
cash and $10,000 to the actively traded securities. The amount allocated
to an asset (other than a Class VII asset) cannot exceed its fair market
value (however, the fair market value of any property subject to
nonrecourse indebtedness is treated as being not less than the amount of
such indebtedness; see Sec. 1.338-6(a)(2)). See Sec. 1.338-6(c)(1)
(relating to fair market value limitation).
(iii) The portion of ADSP allocable to the Class V assets is
preliminarily determined as follows (in the formula, the amount
allocated to the Class I assets is referred to as I and the amount
allocated to the Class II assets as II):
ADSPV = (G-(I + II)) + L+ TR x [(II -
BII) + (ADSPV - BV)]
ADSPV = ($140,000 - ($10,000 + $10,000)) + $50,000 + .34 x
[($10,000 - $4,000) + (ADSPV - ($5,000 + $10,000 + $5,000 +
$10,000))]
ADSPV = $161,840 + .34ADSPV
.66 ADSPV = $161,840
ADSPV = $245,212.12
[[Page 114]]
(iv) Because, under the preliminary calculations of ADSP, the amount
to be allocated to the Class I, II, III, IV, V, and VI assets does not
exceed their aggregate fair market value, no ADSP amount is allocated to
goodwill. Accordingly, the deemed sale of the goodwill results in a
capital loss of $3,000. The portion of ADSP allocable to the Class V
assets is finally determined by taking into account this loss as
follows:
ADSPV = (G - (I + II)) + L + T R x [(II -
BII)+ (ADSPV - BV) + (ADSPVII - B
VII)]
ADSPV = ($140,000 - ($10,000 + $10,000))+ $50,000 + .34 x
[($10,000 - $4,000) + (ADSPV - $30,000) + ($0 - $3,000)]
ADSPV = $160,820 + .34ADSPV
.66 ADSPV = $160,820
ADSPV = $243,666.67
(v) The allocation of ADSPV among the Class V assets is
in proportion to their fair market values, as follows:
------------------------------------------------------------------------
Asset ADSP Gain
------------------------------------------------------------------------
Land.......................... $34,113.33 $29,113.33 (capital
gain).
Building...................... 48,733.34 38,733.34 (capital
gain).
Equipment A................... 87,720.00 82,720.00 (75,000
ordinary income 7,720
capital gain).
Equipment B................... 73,100.00 63,100.00 (10,000
ordinary income
53,100 capital gain).
-------------------
Totals.................... 243,666.67 213,666.67.
------------------------------------------------------------------------
Example 3. More than one class. (i) The facts are the same as in
Example 2, except that P purchases the T stock for $150,000, rather than
$140,000. The amount realized for the stock determined as if the selling
shareholder(s) were required to use old target's accounting methods and
characteristics is also $150,000.
(ii) As in Example 2, ADSP exceeds $20,000. Thus, $10,000 of ADSP is
allocated to the cash and $10,000 to the actively traded securities.
(iii) The portion of ADSP allocable to the Class V assets as
preliminarily determined under the formula set forth in paragraph (iii)
of Example 2 is $260,363.64. The amount allocated to the Class V assets
cannot exceed their aggregate fair market value ($250,000). Thus,
preliminarily, the ADSP amount allocated to Class V assets is $250,000.
(iv) Based on the preliminary allocation, the ADSP is determined as
follows (in the formula, the amount allocated to the Class I assets is
referred to as I, the amount allocated to the Class II assets as II, and
the amount allocated to the Class V assets as V):
ADSP = G + L + TR x [(II - BII) + (V -
BV) + (ADSP - (I + II + V + BVII))]
ADSP = $150,000 + $50,000 + .34 x [($10,000 - $4,000) + ($250,000 -
$30,000) + (ADSP - ($10,000 + $10,000 + $250,000 + $3,000))]
ADSP = $200,000 + .34ADSP - $15,980
.66ADSP = $184,020
ADSP = $278,818.18
(v) Because ADSP as determined exceeds the aggregate fair market
value of the Class I, II, III, IV, V, and VI assets, the $250,000 amount
preliminarily allocated to the Class V assets is appropriate. Thus, the
amount of ADSP allocated to Class V assets equals their aggregate fair
market value ($250,000), and the allocated ADSP amount for each Class V
asset is its fair market value. Further, because there are no Class VI
assets, the allocable ADSP amount for the Class VII asset (goodwill) is
$8,818.18 (the excess of ADSP over the aggregate ADSP amounts for the
Class I, II, III, IV, V and VI assets).
Example 4. Amount allocated to T1 stock. (i) The facts are the same
as in Example 2, except that T owns all of the T1 stock (instead of the
building), and T1's only asset is the building. The T1 stock and the
building each have a fair market value of $50,000, and the building has
a basis of $10,000. A section 338 election is made for T1 (as well as
T), and T1 has no liabilities other than the tax liability for the
deemed sale tax consequences. T is the common parent of a consolidated
group filing a final consolidated return described in Sec. 1.338-
10(a)(1).
(ii) ADSP exceeds $20,000. Thus, $10,000 of ADSP is allocated to the
cash and $10,000 to the actively traded securities.
(iii) Because T does not recognize any gain on the deemed sale of
the T1 stock under paragraph (h)(2) of this section, appropriate
adjustments must be made to reflect accurately the fair market value of
the T and T1 assets in determining the allocation of ADSP among T's
Class V assets (including the T1 stock). In preliminarily calculating
ADSPV in this case, the T1 stock can be disregarded and,
because T owns all of the T1 stock, the T1 asset can be treated as a T
asset. Under this assumption, ADSPV is $243,666.67. See
paragraph (iv) of Example 2.
(iv) Because the portion of the preliminary ADSP allocable to Class
V assets ($243,666.67) does not exceed their fair market value
($250,000), no amount is allocated to Class VII assets for T. Further,
this amount ($243,666.67) is allocated among T's Class V
[[Page 115]]
assets in proportion to their fair market values. See paragraph (v) of
Example 2. Tentatively, $48,733.34 of this amount is allocated to the T1
stock.
(v) The amount tentatively allocated to the T1 stock, however,
reflects the tax incurred on the deemed sale of the T1 asset equal to
$13,169.34 (.34x($48,733.34-$10,000)). Thus, the ADSP allocable to the
Class V assets of T, and the ADSP allocable to the T1 stock, as
preliminarily calculated, each must be reduced by $13,169.34.
Consequently, these amounts, respectively, are $230,497.33 and
$35,564.00. In determining ADSP for T1, the grossed-up amount realized
on the deemed sale to new T of new T's recently purchased T1 stock is
$35,564.00.
(vi) The facts are the same as in paragraph (i) of this Example 4,
except that the T1 building has a $12,500 basis and a $62,500 value, all
of the outstanding T1 stock has a $62,500 value, and T owns 80 percent
of the T1 stock. In preliminarily calculating ADSPV, the T1
stock can be disregarded but, because T owns only 80 percent of the T1
stock, only 80 percent of T1 asset basis and value should be taken into
account in calculating T's ADSP. By taking into account 80 percent of
these amounts, the remaining calculations and results are the same as in
paragraphs (ii), (iii), (iv), and (v) of this Example 4, except that the
grossed-up amount realized on the sale of the recently purchased T1
stock is $44,455.00 ($35,564.00/0.8).
(h) Deemed sale of target affiliate stock--(1) Scope. This paragraph
(h) prescribes rules relating to the treatment of gain or loss realized
on the deemed sale of stock of a target affiliate when a section 338
election (but not a section 338(h)(10) election) is made for the target
affiliate. For purposes of this paragraph (h), the definition of
domestic corporation in Sec. 1.338-2(c)(9) is applied without the
exclusion therein for DISCs, corporations described in section 1248(e),
and corporations to which an election under section 936 applies.
(2) In general. Except as otherwise provided in this paragraph (h),
if a section 338 election is made for target, target recognizes no gain
or loss on the deemed sale of stock of a target affiliate having the
same acquisition date and for which a section 338 election is made if--
(i) Target directly owns stock in the target affiliate satisfying
the requirements of section 1504(a)(2);
(ii) Target and the target affiliate are members of a consolidated
group filing a final consolidated return described in Sec. 1.338-
10(a)(1); or
(iii) Target and the target affiliate file a combined return under
Sec. 1.338-10(a)(4).
(3) Deemed sale of foreign target affiliate by a domestic target. A
domestic target recognizes gain or loss on the deemed sale of stock of a
foreign target affiliate. For the proper treatment of such gain or loss,
see, e.g., sections 1246, 1248, 1291 et seq., and 338(h)(16) and Sec.
1.338-9.
(4) Deemed sale producing effectively connected income. A foreign
target recognizes gain or loss on the deemed sale of stock of a foreign
target affiliate to the extent that such gain or loss is effectively
connected (or treated as effectively connected) with the conduct of a
trade or business in the United States.
(5) Deemed sale of insurance company target affiliate electing under
section 953(d). A domestic target recognizes gain (but not loss) on the
deemed sale of stock of a target affiliate that has in effect an
election under section 953(d) in an amount equal to the lesser of the
gain realized or the earnings and profits described in section
953(d)(4)(B).
(6) Deemed sale of DISC target affiliate. A foreign or domestic
target recognizes gain (but not loss) on the deemed sale of stock of a
target affiliate that is a DISC or a former DISC (as defined in section
992(a)) in an amount equal to the lesser of the gain realized or the
amount of accumulated DISC income determined with respect to such stock
under section 995(c). Such gain is included in gross income as a
dividend as provided in sections 995(c)(2) and 996(g).
(7) Anti-stuffing rule. If an asset the adjusted basis of which
exceeds its fair market value is contributed or transferred to a target
affiliate as transferred basis property (within the meaning of section
7701(a)(43)) and a purpose of such transaction is to reduce the gain (or
increase the loss) recognized on the deemed sale of such target
affiliate's stock, the gain or loss recognized by target on the deemed
sale of stock of the target affiliate is determined as if such asset had
not been contributed or transferred.
(8) Examples. The following examples illustrate this paragraph (h):
Example 1. (i) P makes a qualified stock purchase of T and makes a
section 338 election for T. T's sole asset, all of the T1 stock,
[[Page 116]]
has a basis of $50 and a fair market value of $150. T's deemed purchase
of the T1 stock results in a qualified stock purchase of T1 and a
section 338 election is made for T1. T1's assets have a basis of $50 and
a fair market value of $150.
(ii) T realizes $100 of gain on the deemed sale of the T1 stock, but
the gain is not recognized because T directly owns stock in T1
satisfying the requirements of section 1504(a)(2) and a section 338
election is made for T1.
(iii) T1 recognizes gain of $100 on the deemed sale of its assets.
Example 2. The facts are the same as in Example 1, except that P
does not make a section 338 election for T1. Because a section 338
election is not made for T1, the $100 gain realized by T on the deemed
sale of the T1 stock is recognized.
Example 3. (i) P makes a qualified stock purchase of T and makes a
section 338 election for T. T owns all of the stock of T1 and T2. T's
deemed purchase of the T1 and T2 stock results in a qualified stock
purchase of T1 and T2 and section 338 elections are made for T1 and T2.
T1 and T2 each own 50 percent of the vote and value of T3 stock. The
deemed purchases by T1 and T2 of the T3 stock result in a qualified
stock purchase of T3 and a section 338 election is made for T3. T is the
common parent of a consolidated group and all of the deemed asset sales
are reported on the T group's final consolidated return. See Sec.
1.338-10(a)(1).
(ii) Because T, T1, T2 and T3 are members of a consolidated group
filing a final consolidated return, no gain or loss is recognized by T,
T1 or T2 on their respective deemed sales of target affiliate stock.
Example 4. (i) T's sole asset, all of the FT1 stock, has a basis of
$25 and a fair market value of $150. FT1's sole asset, all of the FT2
stock, has a basis of $75 and a fair market value of $150. FT1 and FT2
each have $50 of accumulated earnings and profits for purposes of
section 1248(c) and (d). FT2's assets have a basis of $125 and a fair
market value of $150, and their sale would not generate subpart F income
under section 951. The sale of the FT2 stock or assets would not
generate income effectively connected with the conduct of a trade or
business within the United States. FT1 does not have an election in
effect under section 953(d) and neither FT1 nor FT2 is a passive foreign
investment company.
(ii) P makes a qualified stock purchase of T and makes a section 338
election for T. T's deemed purchase of the FT1 stock results in a
qualified stock purchase of FT1 and a section 338 election is made for
FT1. Similarly, FT1's deemed purchase of the FT2 stock results in a
qualified stock purchase of FT2 and a section 338 election is made for
FT2.
(iii) T recognizes $125 of gain on the deemed sale of the FT1 stock
under paragraph (h)(3) of this section. FT1 does not recognize $75 of
gain on the deemed sale of the FT2 stock under paragraph (h)(2) of this
section. FT2 recognizes $25 of gain on the deemed sale of its assets.
The $125 gain T recognizes on the deemed sale of the FT1 stock is
included in T's income as a dividend under section 1248, because FT1 and
FT2 have sufficient earnings and profits for full recharacterization
($50 of accumulated earnings and profits in FT1, $50 of accumulated
earnings and profits in FT2, and $25 of deemed sale earnings and profits
in FT2). Section 1.338-9(b). For purposes of sections 901 through 908,
the source and foreign tax credit limitation basket of $25 of the
recharacterized gain on the deemed sale of the FT1 stock is determined
under section 338(h)(16).
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17466, Mar. 30, 2001]
Sec. 1.338-5 Adjusted grossed-up basis.
(a) Scope. This section provides rules under section 338(b) to
determine the adjusted grossed-up basis (AGUB) for target. AGUB is the
amount for which new target is deemed to have purchased all of its
assets in the deemed purchase under section 338(a)(2). AGUB is allocated
among target's assets in accordance with Sec. 1.338-6 to determine the
price at which the assets are deemed to have been purchased. When a
subsequent increase or decrease with respect to an element of AGUB is
required under general principles of tax law, redetermined AGUB is
allocated among target's assets in accordance with Sec. 1.338-7.
(b) Determination of AGUB--(1) General rule. AGUB is the sum of--
(i) The grossed-up basis in the purchasing corporation's recently
purchased target stock;
(ii) The purchasing corporation's basis in nonrecently purchased
target stock; and
(iii) The liabilities of new target.
(2) Time and amount of AGUB--(i) Original determination. AGUB is
initially determined at the beginning of the day after the acquisition
date of target. General principles of tax law apply in determining the
timing and amount of the elements of AGUB.
(ii) Redetermination of AGUB. AGUB is redetermined at such time and
in such amount as an increase or decrease would be required, under
general principles of tax law, with respect to an
[[Page 117]]
element of AGUB. For example, AGUB is redetermined because of an
increase or decrease in the amount paid or incurred for recently
purchased stock or nonrecently purchased stock or because liabilities
not originally taken into account in determining AGUB are subsequently
taken into account. An increase or decrease to one element of AGUB also
may cause an increase or decrease to another element of AGUB. For
example, if there is an increase in the amount paid or incurred for
recently purchased stock after the acquisition date, any increase in the
basis of nonrecently purchased stock because a gain recognition election
was made is also taken into account when AGUB is redetermined. Increases
or decreases with respect to the elements of AGUB result in the
reallocation of AGUB among target's assets under Sec. 1.338-7.
(iii) Examples. The following examples illustrate this paragraph
(b)(2):
Example 1. In Year 1, T, a manufacturer, purchases a customized
delivery truck from X with purchase money indebtedness having a stated
principal amount of $100,000. P acquires all of the stock of T in Year 3
for $700,000 and makes a section 338 election for T. Assume T has no
liabilities other than its purchase money indebtedness to X. In Year 4,
when T is neither insolvent nor in a title 11 case, T and X agree to
reduce the amount of the purchase money indebtedness to $80,000. Assume
that the reduction would be a purchase price reduction under section
108(e)(5). T and X's agreement to reduce the amount of the purchase
money indebtedness would, under general principles of tax law that would
apply if the deemed asset sale had actually occurred, change the amount
of liabilities of old target taken into account in determining its
basis. Accordingly, AGUB is redetermined at the time of the reduction.
See paragraph (e)(2) of this section. Thus the purchase price reduction
affects the basis of the truck only indirectly, through the mechanism of
Sec. Sec. 1.338-6 and 1.338-7. See Sec. 1.338-4(b)(2)(iii) Example for
the effect on ADSP.
Example 2. T, an accrual basis taxpayer, is a chemical manufacturer.
In Year 1, T is obligated to remediate environmental contamination at
the site of one of its plants. Assume that all the events have occurred
that establish the fact of the liability and the amount of the liability
can be determined with reasonable accuracy but economic performance has
not occurred with respect to the liability within the meaning of section
461(h). P acquires all of the stock of T in Year 1 and makes a section
338 election for T. Assume that, if a corporation unrelated to T had
actually purchased T's assets and assumed T's obligation to remediate
the contamination, the corporation would not satisfy the economic
performance requirements until Year 5. Under section 461(h), the assumed
liability would not be treated as incurred and taken into account in
basis until that time. The incurrence of the liability in Year 5 under
the economic performance rules is an increase in the amount of
liabilities properly taken into account in basis and results in the
redetermination of AGUB. (Respecting ADSP, compare Sec. 1.461-4(d)(5),
which provides that economic performance occurs for old T as the amount
of the liability is properly taken into account in amount realized on
the deemed asset sale. Thus ADSP is not redetermined when new T
satisfies the economic performance requirements.)
(c) Grossed-up basis of recently purchased stock. The purchasing
corporation's grossed-up basis of recently purchased target stock (as
defined in section 338(b)(6)(A)) is an amount equal to--
(1) The purchasing corporation's basis in recently purchased target
stock at the beginning of the day after the acquisition date determined
without regard to the acquisition costs taken into account in paragraph
(c)(3) of this section;
(2) Multiplied by a fraction, the numerator of which is 100 minus
the number that is the percentage of target stock (by value, determined
on the acquisition date) attributable to the purchasing corporation's
nonrecently purchased target stock, and the denominator of which is the
number equal to the percentage of target stock (by value, determined on
the acquisition date) attributable to the purchasing corporation's
recently purchased target stock;
(3) Plus the acquisition costs the purchasing corporation incurred
in connection with its purchase of the recently purchased stock that are
capitalized in the basis of such stock (e.g., brokerage commissions and
any similar costs incurred by the purchasing corporation to acquire the
stock).
(d) Basis of nonrecently purchased stock; gain recognition
election--(1) No gain recognition election. In the absence of a gain
recognition election under section 338(b)(3) and this section, the
purchasing corporation retains its basis in the nonrecently purchased
stock.
[[Page 118]]
(2) Procedure for making gain recognition election. A gain
recognition election may be made for nonrecently purchased stock of
target (or a target affiliate) only if a section 338 election is made
for target (or the target affiliate). The gain recognition election is
made by attaching a gain recognition statement to a timely filed Form
8023 for target. The gain recognition statement must contain the
information specified in the form and its instructions. The gain
recognition election is irrevocable. If a section 338(h)(10) election is
made for target, see Sec. 1.338(h)(10)-1(d)(1) (providing that the
purchasing corporation is automatically deemed to have made a gain
recognition election for its nonrecently purchased T stock).
(3) Effect of gain recognition election--(i) In general. If the
purchasing corporation makes a gain recognition election, then for all
purposes of the Internal Revenue Code--
(A) The purchasing corporation is treated as if it sold on the
acquisition date the nonrecently purchased target stock for the basis
amount determined under paragraph (d)(3)(ii) of this section; and
(B) The purchasing corporation's basis on the acquisition date in
nonrecently purchased target stock immediately following the deemed sale
in paragraph (d)(3)(i)(A) of this section is the basis amount.
(ii) Basis amount. The basis amount is equal to the amount in
paragraph (c)(1) of this section (the purchasing corporation's basis in
recently purchased target stock at the beginning of the day after the
acquisition date determined without regard to the acquisition costs
taken into account in paragraph (c)(3) of this section) multiplied by a
fraction the numerator of which is the percentage of target stock (by
value, determined on the acquisition date) attributable to the
purchasing corporation's nonrecently purchased target stock and the
denominator of which is 100 percent minus the numerator amount. Thus, if
target has a single class of outstanding stock, the purchasing
corporation's basis in each share of nonrecently purchased target stock
after the gain recognition election is equal to the average price per
share of the purchasing corporation's recently purchased target stock.
(iii) Losses not recognized. Only gains (unreduced by losses) on the
nonrecently purchased target stock are recognized.
(iv) Stock subject to election. The gain recognition election
applies to--
(A) All nonrecently purchased target stock; and
(B) Any nonrecently purchased stock in a target affiliate having the
same acquisition date as target if such target affiliate stock is held
by the purchasing corporation on such date.
(e) Liabilities of new target--(1) In general. The liabilities of
new target are the liabilities of target as of the beginning of the day
after the acquisition date (but see Sec. 1.338-1(d) (regarding certain
transactions on the acquisition date)). In order to be taken into
account in AGUB, a liability must be a liability of target that is
properly taken into account in basis under general principles of tax law
that would apply if new target had acquired its assets from an unrelated
person for consideration that included discharge of the liabilities of
that unrelated person. Such liabilities may include liabilities for the
tax consequences resulting from the deemed sale.
(2) Time and amount of liabilities. The time for taking into account
liabilities of old target in determining AGUB and the amount of the
liabilities taken into account is determined as if new target had
acquired its assets from an unrelated person for consideration that
included the discharge of its liabilities.
(3) Interaction with deemed sale tax consequences. In general, see
Sec. 1.338-4(e). Although ADSP and AGUB are not necessarily linked, if
an increase in the amount realized for recently purchased stock of
target is taken into account after the acquisition date, and if the tax
on the deemed sale tax consequences is a liability of target, any
increase in that liability is also taken into account in redetermining
AGUB.
(f) Adjustments by the Internal Revenue Service. In connection with
the examination of a return, the Commissioner may increase (or decrease)
AGUB under the authority of section 338(b)(2) and allocate such amounts
to target's assets under the authority of section
[[Page 119]]
338(b)(5) so that AGUB and the basis of target's assets properly reflect
the cost to the purchasing corporation of its interest in target's
assets. Such items may include distributions from target to the
purchasing corporation, capital contributions from the purchasing
corporation to target during the 12-month acquisition period, or
acquisitions of target stock by the purchasing corporation after the
acquisition date from minority shareholders. See also Sec. 1.338-1(d)
(regarding certain transactions on the acquisition date).
(g) Examples. The following examples illustrate this section. For
purposes of the examples in this paragraph (g), T has no liabilities
other than the tax liability for the deemed sale tax consequences, T
shareholders incur no costs in selling the T stock, and P incurs no
costs in acquiring the T stock. The examples are as follows:
Example 1. (i) Before July 1 of Year 1, P purchases 10 of the 100
shares of T stock for $5,000. On July 1 of Year 2, P purchases 80 shares
of T stock for $60,000 and makes a section 338 election for T. As of
July 1 of Year 2, T's only asset is raw land with an adjusted basis to T
of $50,400 and a fair market value of $100,000. T has no loss or tax
credit carryovers to Year 2. T's marginal tax rate for any ordinary
income or net capital gain resulting from the deemed asset sale is 34
percent. The 10 shares purchased before July 1 of Year 1 constitute
nonrecently purchased T stock with respect to P's qualified stock
purchase of T stock on July 1 of Year 2.
(ii) The ADSP formula as applied to these facts is the same as in
Sec. 1.338-4(g) Example 1. Accordingly, the ADSP for T is $87,672.72.
The existence of nonrecently purchased T stock is irrelevant for
purposes of the ADSP formula, because that formula treats P's
nonrecently purchased T stock in the same manner as T stock not held by
P.
(iii) The total tax liability resulting from T's deemed asset sale,
as calculated under the ADSP formula, is $12,672.72.
(iv) If P does not make a gain recognition election, the AGUB of new
T's assets is $85,172.72, determined as follows (In the following
formula below, GRP is the grossed-up basis in P's recently purchased T
stock, BNP is P's basis in nonrecently purchased T stock, L is T's
liabilities, and X is P's acquisition costs for the recently purchased T
stock):
AGUB = GRP + BNP + L + X
AGUB = $60,000 x [(1 - .1)/.8] + $5,000 + $12,672.72 + 0
AGUB = $85,172.72
(v) If P makes a gain recognition election, the AGUB of new T's
assets is $87,672.72, determined as follows:
AGUB = $60,000 x [(1 - .1)/.8] + $60,000 x [(1 - .1)/.8] x [.1/(1 - .1)]
+ $12,672.72
AGUB = $87,672.72
(vi) The calculation of AGUB if P makes a gain recognition election
may be simplified as follows:
AGUB = $60,000/.8 + $12,672.72
AGUB = $87,672.72
(vii) As a result of the gain recognition election, P's basis in its
nonrecently purchased T stock is increased from $5,000 to $7,500 (i.e.,
$60,000 x [(1 - .1)/.8] x [.1/(1 - .1)]). Thus, P recognizes a gain in
Year 2 with respect to its nonrecently purchased T stock of $2,500
(i.e., $7,500 - $5,000).
Example 2. On January 1 of Year 1, P purchases one-third of the T
stock. On March 1 of Year 1, T distributes a dividend to all of its
shareholders. On April 15 of Year 1, P purchases the remaining T stock
and makes a section 338 election for T. In appropriate circumstances,
the Commissioner may decrease the AGUB of T to take into account the
payment of the dividend and properly reflect the fair market value of
T's assets deemed purchased.
Example 3. (i) T's sole asset is a building worth $100,000. At this
time, T has 100 shares of stock outstanding. On August 1 of Year 1, P
purchases 10 of the 100 shares of T stock for $8,000. On June 1 of Year
2, P purchases 50 shares of T stock for $50,000. On June 15 of Year 2, P
contributes a tract of land to the capital of T and receives 10
additional shares of T stock as a result of the contribution. Both the
basis and fair market value of the land at that time are $10,800. On
June 30 of Year 2, P purchases the remaining 40 shares of T stock for
$40,000 and makes a section 338 election for T. The AGUB of T is
$108,800.
(ii) To prevent the shifting of basis from the contributed property
to other assets of T, the Commissioner may allocate $10,800 of the AGUB
to the land, leaving $98,000 to be allocated to the building. See
paragraph (f) of this section. Otherwise, applying the allocation rules
of Sec. 1.338-6 would, on these facts, result in an allocation to the
recently contributed land of an amount less than its value of $10,800,
with the difference being allocated to the building already held by T.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-6 Allocation of ADSP and AGUB among target assets.
(a) Scope--(1) In general. This section prescribes rules for
allocating ADSP and AGUB among the acquisition date assets of a target
for which a section 338 election is made.
[[Page 120]]
(2) Fair market value--(i) In general. Generally, the fair market
value of an asset is its gross fair market value (i.e., fair market
value determined without regard to mortgages, liens, pledges, or other
liabilities). However, for purposes of determining the amount of old
target's deemed sale tax consequences, the fair market value of any
property subject to a nonrecourse indebtedness will be treated as being
not less than the amount of such indebtedness. (For purposes of the
preceding sentence, a liability that was incurred because of the
acquisition of the property is disregarded to the extent that such
liability was not taken into account in determining old target's basis
in such property.)
(ii) Transaction costs. Transaction costs are not taken into account
in allocating ADSP or AGUB to assets in the deemed sale (except
indirectly through their effect on the total ADSP or AGUB to be
allocated).
(iii) Internal Revenue Service authority. In connection with the
examination of a return, the Internal Revenue Service may challenge the
taxpayer's determination of the fair market value of any asset by any
appropriate method and take into account all factors, including any lack
of adverse tax interests between the parties.
(b) General rule for allocating ADSP and AGUB--(1) Reduction in the
amount of consideration for Class I assets. Both ADSP and AGUB, in the
respective allocation of each, are first reduced by the amount of Class
I assets. Class I assets are cash and general deposit accounts
(including savings and checking accounts) other than certificates of
deposit held in banks, savings and loan associations, and other
depository institutions. If the amount of Class I assets exceeds AGUB,
new target will immediately realize ordinary income in an amount equal
to such excess. The amount of ADSP or AGUB remaining after the reduction
is to be allocated to the remaining acquisition date assets.
(2) Other assets--(i) In general. Subject to the limitations and
other rules of paragraph (c) of this section, ADSP and AGUB (as reduced
by the amount of Class I assets) are allocated among Class II
acquisition date assets of target in proportion to the fair market
values of such Class II assets at such time, then among Class III assets
so held in such proportion, then among Class IV assets so held in such
proportion, then among Class V assets so held in such proportion, then
among Class VI assets so held in such proportion, and finally to Class
VII assets. If an asset is described below as includible in more than
one class, then it is included in such class with the lower or lowest
class number (for instance, Class III has a lower class number than
Class IV).
(ii) Class II assets. Class II assets are actively traded personal
property within the meaning of section 1092(d)(1) and Sec. 1.1092(d)-1
(determined without regard to section 1092(d)(3)). In addition, Class II
assets include certificates of deposit and foreign currency even if they
are not actively traded personal property. Class II assets do not
include stock of target affiliates, whether or not of a class that is
actively traded, other than actively traded stock described in section
1504(a)(4). Examples of Class II assets include U.S. government
securities and publicly traded stock.
(iii) Class III assets. Class III assets are assets that the
taxpayer marks to market at least annually for Federal income tax
purposes and debt instruments (including accounts receivable). However,
Class III assets do not include--
(A) Debt instruments issued by persons related at the beginning of
the day following the acquisition date to the target under section
267(b) or 707;
(B) Contingent debt instruments subject to Sec. 1.1275-4, Sec.
1.483-4, or section 988, unless the instrument is subject to the non-
contingent bond method of Sec. 1.1275-4(b) or is described in Sec.
1.988-2(b)(2)(i)(B)(2); and
(C) Debt instruments convertible into the stock of the issuer or
other property.
(iv) Class IV assets. Class IV assets are stock in trade of the
taxpayer or other property of a kind that would properly be included in
the inventory of taxpayer if on hand at the close of the taxable year,
or property held by the taxpayer primarily for sale to customers in the
ordinary course of its trade or business.
[[Page 121]]
(v) Class V assets. Class V assets are all assets other than Class
I, II, III, IV, VI, and VII assets.
(vi) Class VI assets. Class VI assets are all section 197
intangibles, as defined in section 197, except goodwill and going
concern value.
(vii) Class VII assets. Class VII assets are goodwill and going
concern value (whether or not the goodwill or going concern value
qualifies as a section 197 intangible).
(3) Other items designated by the Internal Revenue Service. Similar
items may be added to any class described in this paragraph (b) by
designation in the Internal Revenue Bulletin by the Internal Revenue
Service (see Sec. 601.601(d)(2) of this chapter).
(c) Certain limitations and other rules for allocation to an asset--
(1) Allocation not to exceed fair market value. The amount of ADSP or
AGUB allocated to an asset (other than Class VII assets) cannot exceed
the fair market value of that asset at the beginning of the day after
the acquisition date.
(2) Allocation subject to other rules. The amount of ADSP or AGUB
allocated to an asset is subject to other provisions of the Internal
Revenue Code or general principles of tax law in the same manner as if
such asset were transferred to or acquired from an unrelated person in a
sale or exchange. For example, if the deemed asset sale is a transaction
described in section 1056(a) (relating to basis limitation for player
contracts transferred in connection with the sale of a franchise), the
amount of AGUB allocated to a contract for the services of an athlete
cannot exceed the limitation imposed by that section. As another
example, section 197(f)(5) applies in determining the amount of AGUB
allocated to an amortizable section 197 intangible resulting from an
assumption-reinsurance transaction.
(3) Special rule for allocating AGUB when purchasing corporation has
nonrecently purchased stock--(i) Scope. This paragraph (c)(3) applies if
at the beginning of the day after the acquisition date--
(A) The purchasing corporation holds nonrecently purchased stock for
which a gain recognition election under section 338(b)(3) and Sec.
1.338-5(d) is not made; and
(B) The hypothetical purchase price determined under paragraph
(c)(3)(ii) of this section exceeds the AGUB determined under Sec.
1.338-5(b).
(ii) Determination of hypothetical purchase price. Hypothetical
purchase price is the AGUB that would result if a gain recognition
election were made.
(iii) Allocation of AGUB. Subject to the limitations in paragraphs
(c)(1) and (2) of this section, the portion of AGUB (after reduction by
the amount of Class I assets) to be allocated to each Class II, III, IV,
V, VI, and VII asset of target held at the beginning of the day after
the acquisition date is determined by multiplying--
(A) The amount that would be allocated to such asset under the
general rules of this section were AGUB equal to the hypothetical
purchase price; by
(B) A fraction, the numerator of which is actual AGUB (after
reduction by the amount of Class I assets) and the denominator of which
is the hypothetical purchase price (after reduction by the amount of
Class I assets).
(4) Liabilities taken into account in determining amount realized on
subsequent disposition. In determining the amount realized on a
subsequent sale or other disposition of property deemed purchased by new
target, Sec. 1.1001-2(a)(3) shall not apply to any liability that was
taken into account in AGUB.
(d) Examples. The following examples illustrate Sec. Sec. 1.338-4,
1.338-5, and this section:
Example 1. (i) T owns 90 percent of the outstanding T1 stock. P
purchases 100 percent of the outstanding T stock for $2,000. There are
no acquisition costs. P makes a section 338 election for T and, as a
result, T1 is considered acquired in a qualified stock purchase. A
section 338 election is made for T1. The grossed-up basis of the T stock
is $2,000 (i.e., $2,000 + 1/1).
(ii) The liabilities of T as of the beginning of the day after the
acquisition date (including the tax liability for the deemed sale tax
consequences) that would, under general principles of tax law, properly
be taken into account at that time, are as follows:
Liabilities (nonrecourse mortgage plus unsecured liabilities).. $700
Taxes Payable.................................................. 300
--------
Total...................................................... 1,000
[[Page 122]]
(iii) The AGUB of T is determined as follows:
Grossed-up basis............................................... $2,000
Total liabilities.............................................. 1,000
--------
AGUB....................................................... 3,000
(iv) Assume that ADSP is also $3,000.
(v) Assume that, at the beginning of the day after the acquisition
date, T's cash and the fair market values of T's Class II, III, IV, and
V assets are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
I........................... Cash............................. * $200
II.......................... Portfolio of actively traded 300
securities.
III......................... Accounts receivable.............. 600
IV.......................... Inventory........................ 300
V........................... Building......................... 800
V........................... Land............................. 200
V........................... Investment in T1................. 450
--------
Total........................... 2,850
------------------------------------------------------------------------
*Amount.
(vi) Under paragraph (b)(1) of this section, the amount of ADSP and
AGUB allocable to T's Class II, III, IV, and V assets is reduced by the
amount of cash to $2,800, i.e., $3,000--$200. $300 of ADSP and of AGUB
is then allocated to actively traded securities. $600 of ADSP and of
AGUB is then allocated to accounts receivable. $300 of ADSP and of AGUB
is then allocated to the inventory. Since the remaining amount of ADSP
and of AGUB is $1,600 (i.e., $3,000--($200 + $300 + $600 + $300)), an
amount which exceeds the sum of the fair market values of T's Class V
assets, the amount of ADSP and of AGUB allocated to each Class V asset
is its fair market value:
Building....................................................... $800
Land........................................................... 200
Investment in T1............................................... 450
--------
Total...................................................... 1,450
(vii) T has no Class VI assets. The amount of ADSP and of AGUB
allocated to T's Class VII assets (goodwill and going concern value) is
$150, i.e., $1,600-$1,450.
(viii) The grossed-up basis of the T1 stock is $500, i.e., $450 x
1/.9.
(ix) The liabilities of T1 as of the beginning of the day after the
acquisition date (including the tax liability for the deemed sale tax
consequences) that would, under general principles of tax law, properly
be taken into account at that time, are as follows:
General Liabilities............................................. $100
Taxes Payable................................................... 20
-------
Total....................................................... 120
(x) The AGUB of T1 is determined as follows:
Grossed-up basis of T1 Stock.................................... $ 500
Liabilities..................................................... 120
-------
AGUB........................................................ 620
(xi) Assume that ADSP is also $620.
(xii) Assume that at the beginning of the day after the acquisition
date, T1's cash and the fair market values of its Class IV and VI assets
are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
I........................... Cash............................. *$50
IV.......................... Inventory........................ 200
VI.......................... Patent........................... 350
--------
Total........................... 600
------------------------------------------------------------------------
* Amount.
(xiii) The amount of ADSP and of AGUB allocable to T1's Class IV and
VI assets is first reduced by the $50 of cash.
(xiv) Because the remaining amount of ADSP and of AGUB ($570) is an
amount which exceeds the fair market value of T1's only Class IV asset,
the inventory, the amount allocated to the inventory is its fair market
value ($200). After that, the remaining amount of ADSP and of AGUB
($370) exceeds the fair market value of T1's only Class VI asset, the
patent. Thus, the amount of ADSP and of AGUB allocated to the patent is
its fair market value ($350).
(xv) The amount of ADSP and of AGUB allocated to T1's Class VII
assets (goodwill and going concern value) is $20, i.e., $570-$550.
Example 2. (i) Assume that the facts are the same as in Example 1
except that P has, for five years, owned 20 percent of T's stock, which
has a basis in P's hands at the beginning of the day after the
acquisition date of $100, and P purchases the remaining 80 percent of
T's stock for $1,600. P does not make a gain recognition election under
section 338(b)(3).
(ii) Under Sec. 1.338-5(c), the grossed-up basis of recently
purchased T stock is $1,600, i.e., $1,600 x (1-.2)/.8.
(iii) The AGUB of T is determined as follows:
Grossed-up basis of recently purchased stock as determined $1,600
under Sec. 1.338-5(c) ($1,600 x (1-.2)/.8)..................
Basis of nonrecently purchased stock........................... 100
Liabilities.................................................... 1,000
--------
AGUB....................................................... 2,700
(iv) Since P holds nonrecently purchased stock, the hypothetical
purchase price of the T stock must be computed and is determined as
follows:
Grossed-up basis of recently purchased stock as determined $1,600
under Sec. 1.338-5(c) ($1,600 x (1-.2)/.8)..................
Basis of nonrecently purchased stock as if the gain recognition 400
election under Sec. 1.338-5(d)(2) had been made ($1,600 x .2/
(1-.2)).......................................................
Liabilities.................................................... 1,000
--------
Total...................................................... 3,000
[[Page 123]]
(v) Since the hypothetical purchase price ($3,000) exceeds the AGUB
($2,700) and no gain recognition election is made under section
338(b)(3), AGUB is allocated under paragraph (c)(3) of this section.
(vi) First, an AGUB amount equal to the hypothetical purchase price
($3,000) is allocated among the assets under the general rules of this
section. The allocation is set forth in the column below entitled
Original Allocation. Next, the allocation to each asset in Class II
through Class VII is multiplied by a fraction having a numerator equal
to the actual AGUB reduced by the amount of Class I assets ($2,700-$200
= $2,500) and a denominator equal to the hypothetical purchase price
reduced by the amount of Class I assets ($3,000-$200 = $2,800), or
2,500/2,800. This produces the Final Allocation:
------------------------------------------------------------------------
Original Final
Class Asset allocation allocation
------------------------------------------------------------------------
I.................... Cash..................... $200 $200
II................... Portfolio of actively 300 *268
traded securities.
III.................. Accounts receivable...... 600 536
IV................... Inventory................ 300 268
V.................... Building................. 800 714
V.................... Land..................... 200 178
V.................... Investment in T1......... 450 402
VII.................. Goodwill and going 150 134
concern value.
-------------
Total................... 3,000 2,700
------------------------------------------------------------------------
* All numbers rounded for convenience.
[T.D. 8940, 66 FR 9929, Feb. 13, 2001; 66 FR 17363, Mar. 30, 2001]
Sec. 1.338-7 Allocation of redetermined ADSP and AGUB among target assets.
(a) Scope. ADSP and AGUB are redetermined at such time and in such
amount as an increase or decrease would be required under general
principles of tax law for the elements of ADSP or AGUB. This section
provides rules for allocating redetermined ADSP or AGUB.
(b) Allocation of redetermined ADSP and AGUB. When ADSP or AGUB is
redetermined, a new allocation of ADSP or AGUB is made by allocating the
redetermined ADSP or AGUB amount under the rules of Sec. 1.338-6. If
the allocation of the redetermined ADSP or AGUB amount under Sec.
1.338-6 to a given asset is different from the original allocation to
it, the difference is added to or subtracted from the original
allocation to the asset, as appropriate. (See paragraph (d) of this
section for new target's treatment of the amount so allocated.) Amounts
allocable to an acquisition date asset (or with respect to a disposed-of
acquisition date asset) are subject to all the asset allocation rules
(for example, the fair market value limitation in Sec. 1.338-6(c)(1))
as if the redetermined ADSP or AGUB were the ADSP or AGUB on the
acquisition date.
(c) Special rules for ADSP--(1) Increases or decreases in deemed
sale tax consequences taxable notwithstanding old target ceases to
exist. To the extent general principles of tax law would require a
seller in an actual asset sale to account for events relating to the
sale that occur after the sale date, target must make such an
accounting. Target is not precluded from realizing additional deemed
sale tax consequences because the target is treated as a new corporation
after the acquisition date.
(2) Procedure for transactions in which section 338(h)(10) is not
elected--(i) Deemed sale tax consequences included in new target's
return. If an election under section 338(h)(10) is not made, any
additional deemed sale tax consequences of old target resulting from an
increase or decrease in the ADSP are included in new target's income tax
return for new target's taxable year in which the increase or decrease
is taken into account. For example, if after the acquisition date there
is an increase in the allocable ADSP of section 1245 property for which
the recomputed basis (but not the adjusted basis) exceeds the portion of
the ADSP allocable to that particular asset on the acquisition date, the
additional gain is treated as ordinary income to the extent it does not
exceed such excess amount. See paragraph (c)(2)(ii) of this section for
the special treatment of old target's carryovers and carrybacks.
Although included in new target's income tax return, the deemed sale tax
consequences are separately accounted for as an item of old target and
may not be offset by income, gain, deduction, loss, credit, or other
amount of new target. The amount of tax on income of old target
resulting from an increase or decrease in the ADSP is determined as if
such deemed sale tax consequences had been recognized in old target's
taxable year ending at the close of the acquisition
[[Page 124]]
date. However, because the income resulting from the increase or
decrease in ADSP is reportable in new target's taxable year of the
increase or decrease, not in old target's taxable year ending at the
close of the acquisition date, there is not a resulting underpayment of
tax in that past taxable year of old target for purposes of calculation
of interest due.
(ii) Carryovers and carrybacks--(A) Loss carryovers to new target
taxable years. A net operating loss or net capital loss of old target
may be carried forward to a taxable year of new target, under the
principles of section 172 or 1212, as applicable, but is allowed as a
deduction only to the extent of any recognized income of old target for
such taxable year, as described in paragraph (c)(2)(i) of this section.
For this purpose, however, taxable years of new target are not taken
into account in applying the limitations in section 172(b)(1) or
1212(a)(1)(B) (or other similar limitations). In applying sections
172(b) and 1212(a)(1), only income, gain, loss, deduction, credit, and
other amounts of old target are taken into account. Thus, if old target
has an unexpired net operating loss at the close of its taxable year in
which the deemed asset sale occurred that could be carried forward to a
subsequent taxable year, such loss may be carried forward until it is
absorbed by old target's income.
(B) Loss carrybacks to taxable years of old target. An ordinary loss
or capital loss accounted for as a separate item of old target under
paragraph (c)(2)(i) of this section may be carried back to a taxable
year of old target under the principles of section 172 or 1212, as
applicable. For this purpose, taxable years of new target are not taken
into account in applying the limitations in section 172(b) or 1212(a)
(or other similar limitations).
(C) Credit carryovers and carrybacks. The principles described in
paragraphs (c)(2)(ii)(A) and (B) of this section apply to carryovers and
carrybacks of amounts for purposes of determining the amount of a credit
allowable under part IV, subchapter A, chapter 1 of the Internal Revenue
Code. Thus, for example, credit carryovers of old target may offset only
income tax attributable to items described in paragraph (c)(2)(i) of
this section.
(3) Procedure for transactions in which section 338(h)(10) is
elected. If an election under section 338(h)(10) is made, any changes in
the deemed sale tax consequences caused by an increase or decrease in
the ADSP are accounted for in determining the taxable income (or other
amount) of the member of the selling consolidated group, the selling
affiliate, or the S corporation shareholders to which such income, loss,
or other amount is attributable for the taxable year in which such
increase or decrease is taken into account.
(d) Special rules for AGUB--(1) Effect of disposition or
depreciation of acquisition date assets. If an acquisition date asset
has been disposed of, depreciated, amortized, or depleted by new target
before an amount is added to the original allocation to the asset, the
increased amount otherwise allocable to such asset is taken into account
under general principles of tax law that apply when part of the cost of
an asset not previously taken into account in basis is paid or incurred
after the asset has been disposed of, depreciated, amortized, or
depleted. A similar rule applies when an amount is subtracted from the
original allocation to the asset. For purposes of the preceding
sentence, an asset is considered to have been disposed of to the extent
that its allocable portion of the decrease in AGUB would reduce its
basis below zero.
(2) Section 38 property. Section 1.47-2(c) applies to a reduction in
basis of section 38 property under this section.
(e) Examples. The following examples illustrate this section. Any
amount described in the following examples is exclusive of interest. For
rules characterizing deferred contingent payments as principal or
interest, see Sec. Sec. 1.483-4, 1.1274-2(g), and 1.1275-4(c). The
examples are as follows:
Example 1. (i)(A) T's assets other than goodwill and going concern
value, and their fair market values at the beginning of the day after
the acquisition date, are as follows:
------------------------------------------------------------------------
Fair
Asset class Asset market
value
------------------------------------------------------------------------
V........................... Building........................ $ 100
[[Page 125]]
V........................... Stock of X (not a target)....... 200
---------
Total.......................... 300
------------------------------------------------------------------------
(B) T has no liabilities other than a contingent liability that
would not be taken into account under general principles of tax law in
an asset sale between unrelated parties when the buyer assumed the
liability or took property subject to it.
(ii)(A) On September 1, 2000, P purchases all of the outstanding
stock of T for $270 and makes a section 338 election for T. The grossed-
up basis of the T stock and T's AGUB are both $270. The AGUB is ratably
allocated among T's Class V assets in proportion to their fair market
values as follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Building ($270 x 100/300)....................................... $90
Stock ($270 x 200/300).......................................... 180
-------
Total....................................................... 270
------------------------------------------------------------------------
(B) No amount is allocated to the Class VII assets. New T is a
calendar year taxpayer. Assume that the X stock is a capital asset in
the hands of new T.
(iii) On January 1, 2001, new T sells the X stock and uses the
proceeds to purchase inventory.
(iv) Pursuant to events on June 30, 2002, the contingent liability
of old T is at that time properly taken into account under general
principles of tax law. The amount of the liability is $60.
(v) T's AGUB increases by $60 from $270 to $330. This $60 increase
in AGUB is first allocated among T's acquisition date assets in
accordance with the provisions of Sec. 1.338-6. Because the
redetermined AGUB for T ($330) exceeds the sum of the fair market values
at the beginning of the day after the acquisition date of the Class V
acquisition date assets ($300), AGUB allocated to those assets is
limited to those fair market values under Sec. 1.338-6(c)(1). As there
are no Class VI assets, the remaining AGUB of $30 is allocated to
goodwill and going concern value (Class VII assets). The amount of
increase in AGUB allocated to each acquisition date asset is determined
as follows:
------------------------------------------------------------------------
Original Redetermined
Asset AGUB AGUB Increase
------------------------------------------------------------------------
Building.............................. $90 $100 $10
X Stock............................... 180 200 20
Goodwill and going concern value...... 0 30 30
-----------
Total............................. 270 330 60
------------------------------------------------------------------------
(vi) Since the X stock was disposed of before the contingent
liability was properly taken into account for tax purposes, no amount of
the increase in AGUB attributable to such stock may be allocated to any
T asset. Rather, such amount ($20) is allowed as a capital loss to T for
the taxable year 2002 under the principles of Arrowsmith v.
Commissioner, 344 U.S. 6 (1952). In addition, the $10 increase in AGUB
allocated to the building and the $30 increase in AGUB allocated to the
goodwill and going concern value are treated as basis redeterminations
in 2002. See paragraph (d)(1) of this section.
Example 2. (i) On January 1, 2002, P purchases all of the
outstanding stock of T and makes a section 338 election for T. Assume
that ADSP and AGUB of T are both $500 and are allocated among T's
acquisition date assets as follows:
------------------------------------------------------------------------
Asset Class Asset Basis
------------------------------------------------------------------------
V........................... Machinery........................ $150
V........................... Land............................. 250
VII......................... Goodwill and going concern value. 100
--------
Total........................... 500
------------------------------------------------------------------------
(ii) On September 30, 2004, P filed a claim against the selling
shareholders of T in a court of appropriate jurisdiction alleging fraud
in the sale of the T stock.
(iii) On January 1, 2007, the former shareholders refund $140 of the
purchase price to P in a settlement of the lawsuit. Assume that, under
general principles of tax law, both the seller and the buyer properly
take into account such refund when paid. Assume also that the refund has
no effect on the tax liability for the deemed sale tax consequences.
This refund results in a decrease of T's ADSP and AGUB of $140, from
$500 to $360.
(iv) The redetermined ADSP and AGUB of $360 is allocated among T's
acquisition date assets. Because ADSP and AGUB do not exceed the fair
market value of the Class V assets, the ADSP and AGUB amounts are
allocated to the Class V assets in proportion to their fair market
values at the beginning of the day after the acquisition date. Thus,
$135 ($150 x ($360/($150 + $250))) is allocated to the machinery and
$225 ($250 x ($360/($150 + $250))) is allocated to the land.
Accordingly, the basis of the machinery is reduced by $15 ($150 original
allocation--$135 redetermined allocation) and the basis of the land is
reduced by $25 ($250 original allocation--$225 redetermined allocation).
No amount is allocated to the Class VII assets. Accordingly, the basis
of the goodwill and going concern value is reduced by $100 ($100
original allocation--$0 redetermined allocation).
(v) Assume that, as a result of deductions under section 168, the
adjusted basis of the machinery immediately before the decrease in AGUB
is zero. The machinery is treated as if it were disposed of before the
decrease is
[[Page 126]]
taken into account. In 2007, T recognizes income of $15, the character
of which is determined under the principles of Arrowsmith v.
Commissioner and the tax benefit rule. No adjustment to the basis of T's
assets is made for any tax paid on this amount. Assume also that, as a
result of amortization deductions, the adjusted basis of the goodwill
and going concern value immediately before the decrease in AGUB is $40.
A similar adjustment to income is made in 2007 with respect to the $60
of previously amortized goodwill and going concern value.
(vi) In summary, the basis of T's acquisition date assets, as of
January 1, 2007, is as follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Machinery...................................................... $0
Land........................................................... 225
Goodwill and going concern value............................... 0
------------------------------------------------------------------------
Example 3. (i) Assume that the facts are the same as Sec. 1.338-
6(d) Example 2 except that the recently purchased stock is acquired for
$1,600 plus additional payments that are contingent upon T's future
earnings. Assume that, under general principles of tax law, such later
payments are properly taken into account when paid. Thus, T's AGUB,
determined as of the beginning of the day after the acquisition date
(after reduction by T's cash of $200), is $2,500 and is allocated among
T's acquisition date assets under Sec. 1.338-6(c)(3)(iii) as follows:
------------------------------------------------------------------------
Final
Class Asset allocation
------------------------------------------------------------------------
I.......................... Cash........................... $200
II......................... Portfolio of actively traded *268
securities.
III........................ Accounts receivable............ 536
IV......................... Inventory...................... 268
V.......................... Building....................... 714
V.......................... Land........................... 178
V.......................... Investment in T1............... 402
VII........................ Goodwill and going concern 134
value.
------------------------------------------------------------------------
* All numbers rounded for convenience.
(ii) At a later point in time, P pays an additional $200 for its
recently purchased T stock. Assume that the additional consideration
paid would not increase T's tax liability for the deemed sale tax
consequences.
(iii) T's AGUB increases by $200, from $2,700 to $2,900. This $200
increase in AGUB is accounted for in accordance with the provisions of
Sec. 1.338-6(c)(3)(iii).
(iv) The hypothetical purchase price of the T stock is redetermined
as follows:
Grossed-up basis of recently purchased stock as determined $ 1,800
under Sec. 1.338-5(c) ($1,800 x (1- .2)/.8).................
Basis of nonrecently purchased stock as if the gain recognition 450
election under Sec. 1.338-5(d)(2) had been made ($1,800 x .2/
(1- .2))......................................................
Liabilities.................................................... 1,000
--------
Total...................................................... 3,250
(v) Since the redetermined hypothetical purchase price ($3,250)
exceeds the redetermined AGUB ($2,900) and no gain recognition election
was made under section 338(b)(3), the rules of Sec. 1.338-6(c)(3)(iii)
are reapplied using the redetermined hypothetical purchase price and the
redetermined AGUB.
(vi) First, an AGUB amount equal to the redetermined hypothetical
purchase price ($3,250) is allocated among the assets under the general
rules of Sec. 1.338-6. The allocation is set forth in the column below
entitled Hypothetical Allocation. Next, the allocation to each asset in
Class II through Class VII is multiplied by a fraction with a numerator
equal to the actual redetermined AGUB reduced by the amount of Class I
assets ($2,900 - $200 = $2,700) and a denominator equal to the
redetermined hypothetical purchase price reduced by the amount of Class
I assets ($3,250 - $200 = $3,050), or 2,700/3,050. This produces the
Final Allocation:
------------------------------------------------------------------------
Hypothetical Final
Class Asset allocation allocation
------------------------------------------------------------------------
I................... Cash.................... $200 $200
II.................. Portfolio of actively 300 *266
traded securities.
III................. Accounts receivable..... 600 531
IV.................. Inventory............... 300 266
V................... Building................ 800 708
V................... Land.................... 200 177
V................... Investment in T1........ 450 398
VII................. Goodwill and going 400 354
concern value.
---------------
Total.................. 3,250 2900
------------------------------------------------------------------------
* All numbers rounded for convenience.
(vii) As illustrated by this example, reapplying Sec. 1.338-6(c)(3)
results in a basis increase for some assets and a basis decrease for
other assets. The amount of redetermined AGUB allocated to each
acquisition date asset is determined as follows:
------------------------------------------------------------------------
Original Redetermined
Asset (c)(3) (c)(3) Increase
allocation allocation (decrease)
------------------------------------------------------------------------
Portfolio of actively traded $268 $266 $(2)
securities.......................
Accounts receivable............... 536 531 (5)
Inventory......................... 268 266 (2)
Building.......................... 714 708 (6)
Land.............................. 178 177 (1)
[[Page 127]]
Investment in T1.................. 402 398 (4)
Goodwill and going concern value.. 134 354 220
-------------
Total......................... 2,500 2,700 200
------------------------------------------------------------------------
Example 4. (i) On January 1, 2001, P purchases all of the
outstanding T stock and makes a section 338 election for T. P pays $700
of cash and promises also to pay a maximum $300 of contingent
consideration at various times in the future. Assume that, under general
principles of tax law, such later payments are properly taken into
account by P when paid. Assume also, however, that the current fair
market value of the contingent payments is reasonably ascertainable. The
fair market value of T's assets (other than goodwill and going concern
value) as of the beginning of the following day is as follows:
------------------------------------------------------------------------
Fair
Asset class Assets market
value
------------------------------------------------------------------------
V.......................... Equipment....................... $200
V.......................... Non-actively traded securities.. 100
V.......................... Building........................ 500
----------
Total.......................... 800
------------------------------------------------------------------------
(ii) T has no liabilities. The AGUB is $700. In calculating ADSP,
assume that, under Sec. 1.1001-1, the current amount realized
attributable to the contingent consideration is $200. ADSP is therefore
$900 ($700 cash plus $200).
(iii) (A) The AGUB of $700 is ratably allocated among T's Class V
acquisition date assets in proportion to their fair market values as
follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Equipment ($700 x 200/800)................................... $175.00
Non-actively traded securities ($700 x 100/800).............. 87.50
Building ($700 x 500/800).................................... 437.50
----------
Total.................................................... 700.00
------------------------------------------------------------------------
(B) No amount is allocated to goodwill or going concern value.
(iv) (A) The ADSP of $900 is ratably allocated among T's Class V
acquisition date assets in proportion to their fair market values as
follows:
------------------------------------------------------------------------
Asset Basis
------------------------------------------------------------------------
Equipment.................................................... $200
Non-actively traded securities............................... 100
Building..................................................... 500
----------
Total.................................................... 800
------------------------------------------------------------------------
(B) The remaining ADSP, $100, is allocated to goodwill and going
concern value (Class VII).
(v) P and T file a consolidated return for 2001 and each following
year with P as the common parent of the affiliated group.
(vi) In 2004, a contingent amount of $120 is paid by P. For old T,
this payment has no effect on ADSP, because the payment is accounted for
as a separate transaction. We have assumed that, under general
principles of tax law, the payment is properly taken into account by P
at the time made. Therefore, in 2004, there is an increase in new T's
AGUB of $120. The amount of the increase allocated to each acquisition
date asset is determined as follows:
------------------------------------------------------------------------
Original Redetermined
Asset AGUB AGUB Increase
------------------------------------------------------------------------
Equipment........................... $175.00 $200.00 $25.00
Land................................ 87.50 100.00 12.50
Building............................ 437.50 500.00 62.50
Goodwill and going concern value.... 0.00 20.00 20.00
------------
Total........................... 700.00 820.00 120.00
------------------------------------------------------------------------
[T.D. 8940, 66 FR 9929, Feb. 13, 2001]
Sec. 1.338-8 Asset and stock consistency.
(a) Introduction--(1) Overview. This section implements the
consistency rules of sections 338(e) and (f). Under this section, no
election under section 338 is deemed made or required with respect to
target or any target affiliate. Instead, the person acquiring an asset
may have a carryover basis in the asset.
(2) General application. The consistency rules generally apply if
the purchasing corporation acquires an asset directly from target during
the target consistency period and target is a subsidiary in a
consolidated group. In such a case, gain from the sale of the asset is
reflected under the investment adjustment provisions of the consolidated
return regulations in the basis of target stock and may reduce gain from
[[Page 128]]
the sale of the stock. See Sec. 1.1502-32 (investment adjustment
provisions). Under the consistency rules, the purchasing corporation
generally takes a carryover basis in the asset, unless a section 338
election is made for target. Similar rules apply if the purchasing
corporation acquires an asset directly from a lower-tier target
affiliate if gain from the sale is reflected under the investment
adjustment provisions in the basis of target stock.
(3) Extensions of the general rules. If an arrangement exists,
paragraph (f) of this section generally extends the carryover basis rule
to certain cases in which the purchasing corporation acquires assets
indirectly from target (or a lower-tier target affiliate). To prevent
avoidance of the consistency rules, paragraph (j) of this section also
may extend the consistency period or the 12-month acquisition period and
may disregard the presence of conduits.
(4) Application where certain dividends are paid. Paragraph (g) of
this section extends the carryover basis rule to certain cases in which
dividends are paid to a corporation that is not a member of the same
consolidated group as the distributing corporation. Generally, this rule
applies where a 100 percent dividends received deduction is used in
conjunction with asset dispositions to achieve an effect similar to that
available under the investment adjustment provisions of the consolidated
return regulations.
(5) Application to foreign target affiliates. Paragraph (h) of this
section extends the carryover basis rule to certain cases involving
target affiliates that are controlled foreign corporations.
(6) Stock consistency. This section limits the application of the
stock consistency rules to cases in which the rules are necessary to
prevent avoidance of the asset consistency rules. Following the general
treatment of a section 338(h)(10) election, a sale of a corporation's
stock is treated as a sale of the corporation's assets if a section
338(h)(10) election is made. Because gain from this asset sale may be
reflected in the basis of the stock of a higher-tier target, the
carryover basis rule may apply to the assets.
(b) Consistency for direct acquisitions--(1) General rule. The basis
rules of paragraph (d) of this section apply to an asset if--
(i) The asset is disposed of during the target consistency period;
(ii) The basis of target stock, as of the target acquisition date,
reflects gain from the disposition of the asset (see paragraph (c) of
this section); and
(iii) The asset is owned, immediately after its acquisition and on
the target acquisition date, by a corporation that acquires stock of
target in the qualified stock purchase (or by an affiliate of an
acquiring corporation).
(2) Section 338(h)(10) elections. For purposes of this section, if a
section 338(h)(10) election is made for a corporation acquired in a
qualified stock purchase--
(i) The acquisition is treated as an acquisition of the
corporation's assets (see Sec. 1.338(h)(10)-1); and
(ii) The corporation is not treated as target.
(c) Gain from disposition reflected in basis of target stock. For
purposes of this section:
(1) General rule. Gain from the disposition of an asset is reflected
in the basis of a corporation's stock if the gain is taken into account
under Sec. 1.1502-32, directly or indirectly, in determining the basis
of the stock, after applying section 1503(e) and other provisions of the
Internal Revenue Code.
(2) Gain not reflected if section 338 election made for target. Gain
from the disposition of an asset that is otherwise reflected in the
basis of target stock as of the target acquisition date is not
considered reflected in the basis of target stock if a section 338
election is made for target.
(3) Gain reflected by reason of distributions. Gain from the
disposition of an asset is not considered reflected in the basis of
target stock merely by reason of the receipt of a distribution from a
target affiliate that is not a member of the same consolidated group as
the distributee. See paragraph (g) of this section for the treatment of
dividends eligible for a 100 percent dividends received deduction.
(4) Controlled foreign corporations. For a limitation applicable to
gain of a target affiliate that is a controlled foreign
[[Page 129]]
corporation, see paragraph (h)(2) of this section.
(5) Gain recognized outside the consolidated group. Gain from the
disposition of an asset by a person other than target or a target
affiliate is not reflected in the basis of a corporation's stock unless
the person is a conduit, as defined in paragraph (j)(4) of this section.
(d) Basis of acquired assets--(1) Carryover basis rule. If this
paragraph (d) applies to an asset, the asset's basis immediately after
its acquisition is, for all purposes of the Internal Revenue Code, its
adjusted basis immediately before its disposition.
(2) Exceptions to carryover basis rule for certain assets. The
carryover basis rule of paragraph (d)(1) of this section does not apply
to the following assets--
(i) Any asset disposed of in the ordinary course of a trade or
business (see section 338(e)(2)(A));
(ii) Any asset the basis of which is determined wholly by reference
to the adjusted basis of the asset in the hands of the person that
disposed of the asset (see section 338(e)(2)(B));
(iii) Any debt or equity instrument issued by target or a target
affiliate (see paragraph (h)(3) of this section for an exception
relating to the stock of a target affiliate that is a controlled foreign
corporation);
(iv) Any asset the basis of which immediately after its acquisition
would otherwise be less than its adjusted basis immediately before its
disposition; and
(v) Any asset identified by the Internal Revenue Service in a
revenue ruling or revenue procedure.
(3) Exception to carryover basis rule for de minimis assets. The
carryover basis rules of this section do not apply to an asset if the
asset is not disposed of as part of the same arrangement as the
acquisition of target and the aggregate amount realized for all assets
otherwise subject to the carryover basis rules of this section does not
exceed $250,000.
(4) Mitigation rule--(i) General rule. If the carryover basis rules
of this section apply to an asset and the asset is transferred to a
domestic corporation in a transaction to which section 351 applies or as
a contribution to capital and no gain is recognized, the transferor's
basis in the stock of the transferee (but not the transferee's basis in
the asset) is determined without taking into account the carryover basis
rules of this section.
(ii) Time for transfer. This paragraph (d)(4) applies only if the
asset is transferred before the due date (including extensions) for the
transferor's income tax return for the year that includes the last date
for which a section 338 election may be made for target.
(e) Examples--(1) In general. For purposes of the examples in this
section, unless otherwise stated, the basis of each asset is the same
for determining earnings and profits and taxable income, the exceptions
to paragraph (d)(1) of this section do not apply, the taxable year of
all persons is the calendar year, and the following facts apply: S is
the common parent of a consolidated group that includes T, T1, T2, and
T3; S owns all of the stock of T and T3; and T owns all of the stock of
T1, which owns all of the stock of T2. B is unrelated to the S group and
owns all of the stock of P, which owns all of the stock of P1. Y and Y1
are partnerships that are unrelated to the S group but may be related to
the P group. Z is a corporation that is not related to any of the other
parties.
[[Page 130]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.000
(2) Direct acquisitions. Paragraphs (b), (c), and (d) of this
section may be illustrated by the following examples:
Example 1. Asset acquired from target by purchasing corporation. (a)
On February 1 of Year 1, T sells an asset to P1 and recognizes gain. T's
gain from the disposition of the asset is taken into account under Sec.
1.1502-32 in determining S's basis in the T stock. On January 1 of Year
2, P1 makes a qualified stock purchase of T from S. No section 338
election is made for T.
(b) T disposed of the asset during its consistency period, gain from
the asset disposition is reflected in the basis of the T stock as of T's
acquisition date (January 1 of Year 2), and the asset is owned both
immediately after the asset disposition (February 1 of Year 1) and on
T's acquisition date by P1, the corporation that acquired T stock in the
qualified stock purchase. Consequently, under paragraph (b) of this
section, paragraph (d)(1) of this section applies to the asset and P1's
basis in the asset is T's adjusted basis in the asset immediately before
the sale to P1.
Example 2. Gain from section 338(h)(10) election reflected in stock
basis. (a) On February 1 of Year 1, P1 makes a qualified stock purchase
of T2 from T1. A section 338(h)(10) election is made for T2 and T2
recognizes gain on each of its assets. T2's gain is taken into account
under Sec. 1.1502-32 in determining S's basis in the T stock. On
January 1 of Year 2, P1 makes a qualified stock purchase of T from S. No
section 338 election is made for T.
(b) Under paragraph (b)(2) of this section, the acquisition of the
T2 stock is treated as an acquisition of T2's assets on February 1 of
Year 1, because a section 338(h)(10) election is made for T2. The gain
recognized by T2 under section 338(h)(10) is reflected in S's basis in
the T stock as of T's acquisition date. Because the other requirements
of paragraph (b) of this section are satisfied, paragraph (d)(1) of this
section applies to the assets and new T2's basis in its assets is old
T2's adjusted basis in the assets immediately before the disposition.
Example 3. Corporation owning asset ceases affiliation with
corporation purchasing target before target acquisition date. (a) On
February 1 of Year 1, T sells an asset to P1 and recognizes gain. On
December 1 of Year 1, P disposes of all of the P1 stock while P1 still
owns the asset. On January 1 of Year 2, P makes a qualified stock
purchase of T from S. No section 338 election is made for T.
(b) Immediately after T's disposition of the asset, the asset is
owned by P1 which is affiliated on that date with P, the corporation
that acquired T stock in the qualified stock purchase. However, the
asset is owned by a corporation (P1) that is no longer affiliated with P
on T's acquisition date. Although the other requirements of paragraph
(b) of this section are satisfied, the requirements of paragraph
(b)(1)(iii) of this section are not satisfied. Consequently, the basis
rules of paragraph (d) of this section do not apply to the asset by
reason of P1's acquisition.
(c) If P acquires all of the Z stock and P1 transfers the asset to Z
on or before T's acquisition date (January 1 of Year 2), the
[[Page 131]]
asset is owned by an affiliate of P both on February 1 of Year 1 (P1)
and on January 1 of Year 2 (Z). Consequently, all of the requirements of
paragraph (b) of this section are satisfied and paragraph (d)(1) of this
section applies to the asset and P1's basis in the asset is T's adjusted
basis in the asset immediately before the sale to P1.
Example 4. Gain reflected in stock basis notwithstanding offsetting
loss or distribution. (a) On April 1 of Year 1, T sells an asset to P1
and recognizes gain. In Year 1, T distributes an amount equal to the
gain. On March 1 of Year 2, P makes a qualified stock purchase of T from
S. No section 338 election is made for T.
(b) Although, as a result of the distribution, there is no
adjustment with respect to the T stock under Sec. 1.1502-32 for Year 1,
T's gain from the disposition of the asset is considered reflected in
S's basis in the T stock. The gain is considered to have been taken into
account under Sec. 1.1502-32 in determining the adjustments to S's
basis in the T stock because S's basis in the T stock is different from
what it would have been had there been no gain.
(c) If T distributes an amount equal to the gain on February 1 of
Year 2, rather than in Year 1, the results would be the same because S's
basis in the T stock is different from what it would have been had there
been no gain. If the distribution in Year 2 is by reason of an election
under Sec. 1.1502-32(f)(2), the results would be the same.
(d) If, in Year 1, T does not make a distribution and the S group
does not file a consolidated return, but, in Year 2, the S group does
file a consolidated return and makes an election under Sec. 1.1502-
32(f)(2) for T, the results would be the same. S's basis in the T stock
is different from what it would have been had there been no gain.
Paragraph (c)(3) of this section (gain not considered reflected by
reason of distributions) does not apply to the deemed distribution under
the election because S and T are members of the same consolidated group.
If T distributes an amount equal to the gain in Year 2 and no election
is made under Sec. 1.1502-32(f)(2), the results would be the same.
(e) If, in Year 1, T incurs an unrelated loss in an amount equal to
the gain, rather than distributing an amount equal to the gain, the
results would be the same because the gain is taken into account under
Sec. 1.1502-32 in determining S's basis in the T stock.
Example 5. Gain of a target affiliate reflected in stock basis after
corporate reorganization. (a) On February 1 of Year 1, T3 sells an asset
to P1 and recognizes gain. On March 1 of Year 1, S contributes the T3
stock to T in a transaction qualifying under section 351. On January 15
of Year 2, P1 makes a qualified stock purchase of T from S. No section
338 election is made for T.
(b) T3's gain from the asset sale is taken into account under Sec.
1.1502-32 in determining S's basis in the T3 stock. Under section 358,
the gain that is taken into account under Sec. 1.1502-32 in determining
S's basis in the T3 stock is also taken into account in determining S's
basis in the T stock following S's contribution of the T3 stock to T.
Consequently, under paragraph (b) of this section, paragraph (d)(1) of
this section applies to the asset and P1's basis in the asset is T3's
adjusted basis in the asset immediately before the sale to P1.
(c) If on March 1 of Year 1, rather than S contributing the T3 stock
to T, S causes T3 to merge into T in a transaction qualifying under
section 368(a)(1)(D), the results would be the same.
Example 6. Gain not reflected if election under section 338 made.
(a) On February 1 of Year 1, T1 sells an asset to P1 and recognizes
gain. On January 1 of Year 2, P1 makes a qualified stock purchase of T1
from T. A section 338 election (but not a section 338(h)(10) election)
is made for T1.
(b) Under paragraph (c)(2) of this section, because a section 338
election is made for T1, T's basis in the T1 stock is considered not to
reflect gain from the disposition. Consequently, the requirement of
paragraph (b)(1)(ii) of this section is not satisfied. Thus, P1's basis
in the asset is not determined under paragraph (d) of this section.
Although the section 338 election for T1 results in a qualified stock
purchase of T2, the requirement of paragraph (b)(1)(ii) of this section
is not satisfied with respect to T2, whether or not a section 338
election is made for T2.
(c) If, on January 1 of Year 2, P1 makes a qualified stock purchase
of T from S and a section 338 election for T, rather than T1, S's basis
in the T stock is considered not to reflect gain from T1's disposition
of the asset. However, the section 338 election for T results in a
qualified stock purchase of T1. Because the gain is reflected in T's
basis in the T1 stock, the requirements of paragraph (b) of this section
are satisfied. Consequently, P1's basis in the asset is determined under
paragraph (d)(1) of this section unless a section 338 election is also
made for T1.
(f) Extension of consistency to indirect acquisitions--(1)
Introduction. If an arrangement exists (see paragraph (j)(5) of this
section), this paragraph (f) generally extends the consistency rules to
indirect acquisitions that have the same effect as direct acquisitions.
For example, this paragraph (f) applies if, pursuant to an arrangement,
target sells an asset to an unrelated person who then sells the asset to
the purchasing corporation.
[[Page 132]]
(2) General rule. This paragraph (f) applies to an asset if,
pursuant to an arrangement--
(i) The asset is disposed of during the target consistency period;
(ii) The basis of target stock as of, or at any time before, the
target acquisition date reflects gain from the disposition of the asset;
and
(iii) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied, but the asset is owned, at any time
during the portion of the target consistency period following the target
acquisition date, by--
(A) A corporation--
(1) The basis of whose stock, as of, or at any time before, the
target acquisition date, reflects gain from the disposition of the
asset; and
(2) That is affiliated, at any time during the target consistency
period, with a corporation that acquires stock of target in the
qualified stock purchase; or
(B) A corporation that at the time it owns the asset is affiliated
with a corporation described in paragraph (f)(2)(iii)(A) of this
section.
(3) Basis of acquired assets. If this paragraph (f) applies to an
asset, the principles of the basis rules of paragraph (d) of this
section apply to the asset as of the date, following the disposition
with respect to which gain is reflected in the basis of target's stock,
that the asset is first owned by a corporation described in paragraph
(f)(2)(iii) of this section. If the principles of the carryover basis
rule of paragraph (d)(1) of this section apply to an asset, the asset's
basis also is reduced (but not below zero) by the amount of any
reduction in its basis occurring after the disposition with respect to
which gain is reflected in the basis of target's stock.
(4) Examples. This paragraph (f) may be illustrated by the following
examples:
Example 1. Acquisition of asset from unrelated party by purchasing
corporation. (a) On February 1 of Year 1, T sells an asset to Z and
recognizes gain. On February 15 of Year 1, P1 makes a qualified stock
purchase of T from S. No section 338 election is made for T. P1 buys the
asset from Z on March 1 of Year 1, before Z has reduced the basis of the
asset through depreciation or otherwise.
(b) Paragraph (b) of this section does not apply to the asset
because the asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied. However, the asset ownership
requirements of paragraph (f)(2)(iii) of this section are satisfied
because, during the portion of T's consistency period following T's
acquisition date, the asset is owned by P1 while it is affiliated with
T. Consequently, paragraph (f) of this section applies to the asset if
there is an arrangement for T to dispose of the asset during T's
consistency period, for the gain to be reflected in S's basis in the T
stock as of T's acquisition date, and for P1 to own the asset during the
portion of T's consistency period following T's acquisition date. If the
arrangement exists, under paragraph (f)(3) of this section, P1's basis
in the asset is determined as of March 1 of Year 1, under the principles
of paragraph (d) of this section. Consequently, P1's basis in the asset
is T's adjusted basis in the asset immediately before the sale to Z.
(c) If P1 acquires the asset from Z on January 15 of Year 2 (rather
than on March 1 of Year 1), and Z's basis in the asset has been reduced
through depreciation at the time of the acquisition, P1's basis in the
asset as of January 15 of Year 2 would be T's adjusted basis in the
asset immediately before the sale to Z, reduced (but not below zero) by
the amount of the depreciation. Z's basis and depreciation are
determined without taking into account the basis rules of paragraph (d)
of this section.
(d) If P, rather than P1, acquires the asset from Z, the results
would be the same.
(e) If, on March 1 of Year 1, P1 acquires the Z stock, rather than
acquiring the asset from Z, paragraph (f) of this section would apply to
the asset if an arrangement exists. However, under paragraph (f)(3) of
this section, Z's basis in the asset would be determined as of February
1 of Year 1, the date the asset is first owned by a corporation (Z)
described in paragraph (f)(2)(iii) of this section. Consequently, Z's
basis in the asset as of February 1 of Year 1, determined under the
principles of paragraph (d) of this section, would be T's adjusted basis
in the asset immediately before the sale to Z.
Example 2. Acquisition of asset from target by target affiliate. (a)
On February 1 of Year 1, T contributes an asset to T1 in a transaction
qualifying under section 351 and in which T recognizes gain under
section 351(b) that is deferred under Sec. 1.1502-13. On March 1 of
Year 1, P1 makes a qualified stock purchase of T from S and, pursuant to
Sec. 1.1502-13, the deferred gain is taken into account by T
immediately before T ceases to be a member of the S group. No section
338 election is made for T.
[[Page 133]]
(b) Paragraph (b) of this section does not apply to the asset
because the asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied.
(c) T1 is not described in paragraph (f)(2)(iii)(A) of this section
because the basis of the T1 stock does not reflect gain from the
disposition of the asset. Although, under section 358(a)(1)(B)(ii), T's
basis in the T1 stock is increased by the amount of the gain, the gain
is not taken into account directly or indirectly under Sec. 1.1502-32
in determining T's basis in the T1 stock.
(d) T1 is described in paragraph (f)(2)(iii)(B) of this section
because, during the portion of T's consistency period following T's
acquisition date, T1 owns the asset while it is affiliated with T, a
corporation described in paragraph (f)(2)(iii)(A) of this section.
Consequently, paragraph (f) of this section applies to the asset if
there is an arrangement. Under paragraph (j)(5) of this section, the
fact that, at the time T1 acquires the asset from T, T1 is related
(within the meaning of section 267(b)) to T indicates that an
arrangement exists.
Example 3. Acquisition of asset from target and indirect acquisition
of target stock. (a) On February 1 of Year 1, T sells an asset to P1 and
recognizes gain. On March 1 of Year 1, Z makes a qualified stock
purchase of T from S. No section 338 election is made for T. On January
1 of Year 2, P1 acquires the T stock from Z other than in a qualified
stock purchase.
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied because the asset was never owned by Z,
the corporation that acquired T stock in the qualified stock purchase
(or by a corporation that was affiliated with Z at the time it owned the
asset). However, because the asset is owned by P1 while it is affiliated
with T during the portion of T's consistency period following T's
acquisition date, paragraph (f) of this section applies to the asset if
there is an arrangement. If there is an arrangement, the principles of
the carryover basis rule of paragraph (d)(1) of this section apply to
determine P1's basis in the asset unless Z makes a section 338 election
for T. See paragraph (c)(2) of this section.
(c) If P1 also makes a qualified stock purchase of T from Z, the
results would be the same. If there is an arrangement, the principles of
the carryover basis rule of paragraph (d)(1) of this section apply to
determine P1's basis in the asset unless Z makes a section 338 election
for T. However, these principles apply to determine P1's basis in the
asset if P1, but not Z, makes a section 338 election for T. The basis of
the T stock no longer reflects, as of T's acquisition date by P1, the
gain from the disposition of the asset.
(d) Assume Z purchases the T stock other than in a qualified stock
purchase and P1 makes a qualified stock purchase of T from Z. Paragraph
(b) of this section does not apply to the asset because gain from the
disposition of the asset is not reflected in the basis of T's stock as
of T's acquisition date (January 1 of Year 2). However, because the gain
is reflected in S's basis in the T stock before T's acquisition date and
the asset is owned by P1 while it is affiliated with T during the
portion of T's consistency period following T's acquisition date,
paragraph (f) of this section applies to the asset if there is an
arrangement. If there is an arrangement, the principles of the carryover
basis rule of paragraph (d)(1) of this section apply to determine P1's
basis in the asset even if P1 makes a section 338 election for T. The
basis of the T stock no longer reflects, as of T's acquisition date, the
gain from the disposition of the asset.
Example 4. Asset acquired from target affiliate by corporation that
becomes its affiliate. (a) On February 1 of Year 1, T1 sells an asset to
P1 and recognizes gain. On February 15 of Year 1, Z makes a qualified
stock purchase of T from S. No section 338 election is made for T. On
June 1 of Year 1, P1 acquires the T1 stock from T, other than in a
qualified stock purchase.
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are not satisfied because the asset was never owned by Z,
the corporation that acquired T stock in the qualified stock purchase
(or by a corporation that was affiliated with Z at the time it owned the
asset).
(c) P1 is not described in paragraph (f)(2)(iii)(A) of this section
because gain from the disposition of the asset is not reflected in the
basis of the P1 stock.
(d) P1 is described in paragraph (f)(2)(iii)(B) of this section
because the asset is owned by P1 while P1 is affiliated with T1 during
the portion of T's consistency period following T's acquisition date. T1
becomes affiliated with Z, the corporation that acquired T stock in the
qualified stock purchase, during T's consistency period, and, as of T's
acquisition date, the basis of T1's stock reflects gain from the
disposition of the asset. Consequently, paragraph (f) of this section
applies to the asset if there is an arrangement.
Example 5. De minimis rules. (a) On February 1 of Year 1, T sells an
asset to P and recognizes gain. On February 15 of Year 1, T1 sells an
asset to Z and recognizes gain. The aggregate amount realized by T and
T1 on their respective sales of assets is not more than $250,000. On
March 1 of Year 1, T3 sells an asset to P and recognizes gain. On April
1 of Year 1, P makes a qualified stock purchase of T from S. No section
338 election is made for T. On June 1 of Year 1, P1 buys from Z the
asset sold by T1.
(b) Under paragraph (b) of this section, the basis rules of
paragraph (d) of this section
[[Page 134]]
apply to the asset sold by T. Under paragraph (f) of this section, the
principles of the basis rules of paragraph (d) of this section apply to
the asset sold by T1 if there is an arrangement. Because T3's gain is
not reflected in the basis of the T stock, the basis rules of this
section do not apply to the asset sold by T3.
(c) The de minimis rule of paragraph (d)(3) of this section applies
to an asset if the asset is not disposed of as part of the same
arrangement as the acquisition of T and the aggregate amount realized
for all assets otherwise subject to the carryover basis rules does not
exceed $250,000. The aggregate amount realized by T and T1 does not
exceed $250,000. (The asset sold by T3 is not taken into account for
purposes of the de minimis rule.) Thus, the de minimis rule applies to
the asset sold by T if the asset is not disposed of as part of the same
arrangement as the acquisition of T.
(d) If, under paragraph (f) of this section, the principles of the
carryover basis rules of paragraph (d)(1) of this section otherwise
apply to the asset sold by T1 because of an arrangement, the de minimis
rules of this section do not apply to the asset because of the
arrangement.
(e) Assume on June 1 of Year 1, Z acquires the T1 stock from T,
other than in a qualified stock purchase, rather than P1 buying the T1
asset, and paragraph (f) of this section applies because there is an
arrangement. Because the asset was disposed of and the T1 stock was
acquired as part of the arrangement, the de minimis rules of this
section do not apply to the asset.
(g) Extension of consistency if dividends qualifying for 100 percent
dividends received deduction are paid--(1) General rule for direct
acquisitions from target. Unless a section 338 election is made for
target, the basis rules of paragraph (d) of this section apply to an
asset if--
(i) Target recognizes gain (whether or not deferred) on disposition
of the asset during the portion of the target consistency period that
ends on the target acquisition date;
(ii) The asset is owned, immediately after the asset disposition and
on the target acquisition date, by a corporation that acquires stock of
target in the qualified stock purchase (or by an affiliate of an
acquiring corporation); and
(iii) During the portion of the target consistency period that ends
on the target acquisition date, the aggregate amount of dividends paid
by target, to which section 243(a)(3) applies, exceeds the greater of--
(A) $250,000; or
(B) 125 percent of the yearly average amount of dividends paid by
target, to which section 243(a)(3) applies, during the three calendar
years immediately preceding the year in which the target consistency
period begins (or, if shorter, the period target was in existence).
(2) Other direct acquisitions having same effect. The basis rules of
paragraph (d) of this section also apply to an asset if the effect of a
transaction described in paragraph (g)(1) of this section is achieved
through any combination of disposition of assets and payment of
dividends to which section 243(a)(3) applies (or any other dividends
eligible for a 100 percent dividends received deduction). See paragraph
(h)(4) of this section for additional rules relating to target
affiliates that are controlled foreign corporations.
(3) Indirect acquisitions. The principles of paragraph (f) of this
section also apply for purposes of this paragraph (g).
(4) Examples. This paragraph (g) may be illustrated by the following
examples:
Example 1. Asset acquired from target paying dividends to which
section 243(a)(3) applies. (a) The S group does not file a consolidated
return. In Year 1, Year 2, and Year 3, T pays dividends to S to which
section 243(a)(3) applies of $200,000, $250,000, and $300,000,
respectively. On February 1 of Year 4, T sells an asset to P and
recognizes gain. On January 1 of Year 5, P makes a qualified stock
purchase of T from S. No section 338 election is made for T. During the
portion of T's consistency period that ends on T's acquisition date, T
pays S dividends to which section 243(a)(3) applies of $1,000,000.
(b) Under paragraph (g)(1) of this section, paragraph (d) of this
section applies to the asset. T recognizes gain on disposition of the
asset during the portion of T's consistency period that ends on T's
acquisition date, the asset is owned by P immediately after the
disposition and on T's acquisition date, and T pays dividends described
in paragraph (g)(1)(iii) of this section. Consequently, under paragraph
(d)(1) of this section, P's basis in the asset is T's adjusted basis in
the asset immediately before the sale to P.
(c) If T is a controlled foreign corporation, the results would be
the same if T pays dividends in the amount described in paragraph
(g)(1)(iii) of this section that qualify for a 100 percent dividends
received deduction. See sections 243(e) and 245.
(d) If S and T3 file a consolidated return in which T, T1, and T2 do
not join, the results
[[Page 135]]
would be the same because the dividends paid by T are still described in
paragraph (g)(1)(iii) of this section.
(e) If T, T1, and T2 file a consolidated return in which S and T3 do
not join, the results would be the same because the dividends paid by T
are still described in paragraph (g)(1)(iii) of this section.
Example 2. Asset disposition by target affiliate achieving same
effect. (a) The S group does not file a consolidated return. On February
1 of Year 1, T2 sells an asset to P and recognizes gain. T pays
dividends to S described in paragraph (g)(1)(iii) of this section. On
January 1 of Year 2, P makes a qualified stock purchase of T from S. No
section 338 election is made for T.
(b) Paragraph (g)(1) of this section does not apply to the asset
because T did not recognize gain on the disposition of the asset.
However, under paragraph (g)(2) of this section, because the asset
disposition by T2 and the dividends paid by T achieve the effect of a
transaction described in paragraph (g)(1) of this section, the carryover
basis rule of paragraph (d)(1) of this section applies to the asset. The
effect was achieved because T2 is a lower-tier affiliate of T and the
dividends paid by T to S reduce the value to S of T and its lower-tier
affiliates.
(c) If T2 is a controlled foreign corporation, the results would be
the same because T2 is a lower-tier affiliate of T and the dividends
paid by T to S reduce the value to S of T and its lower-tier affiliates.
(d) If P buys an asset from T3, rather than T2, the asset
disposition and the dividends do not achieve the effect of a transaction
described in paragraph (g)(1) of this section because T3 is not a lower-
tier affiliate of T. Thus, the basis rules of paragraph (d) of this
section do not apply to the asset. The results would be the same whether
or not P also acquires the T3 stock (whether or not in a qualified stock
purchase).
Example 3. Dividends by target affiliate achieving same effect. (a)
The S group does not file a consolidated return. On February 1 of Year
1, T1 sells an asset to P and recognizes gain. On January 1 of Year 2, P
makes a qualified stock purchase of T from S. No section 338 election is
made for T. T does not pay dividends to S described in paragraph
(g)(1)(iii) of this section. However, T1 pays dividends to T that would
be described in paragraph (g)(1)(iii) of this section if T1 were a
target.
(b) Paragraph (g)(1) of this section does not apply to the asset
because T did not recognize gain on the disposition of the asset and did
not pay dividends described in paragraph (g)(1)(iii) of this section.
Further, paragraph (g)(2) of this section does not apply because the
dividends paid by T1 to T do not reduce the value to S of T and its
lower-tier affiliates.
(c) If both S and T own T1 stock and T1 pays dividends to S that
would be described in paragraph (g)(1)(iii) of this section if T1 were a
target, paragraph (g)(2) of this section would apply because the
dividends paid by T1 to S reduce the value to S of T and its lower-tier
affiliates. If T, rather than T1, sold the asset to P, the results would
be the same. Further, if T and T1 pay dividends to S that, only when
aggregated, would be described in paragraph (g)(1)(iii) of this section
(if they were all paid by T), the results would be the same.
Example 4. Gain reflected by reason of dividends. (a) S and T file a
consolidated return in which T1 and T2 do not join. On February 1 of
Year 1, T1 sells an asset to P and recognizes gain. On January 1 of Year
2, P makes a qualified stock purchase of T from S. No section 338
election is made for T. T1 pays dividends to T that would be described
in paragraph (g)(1)(iii) of this section if T1 were a target.
(b) The requirements of paragraph (b) of this section are not
satisfied because, under paragraph (c)(3) of this section, gain from
T1's sale is not reflected in S's basis in the T stock by reason of the
dividends paid by T1 to T.
(c) Although the dividends paid by T1 to T do not reduce the value
to S of T and its lower-tier affiliates, paragraph (g)(2) of this
section applies because the dividends paid by T1 to T are taken into
account under Sec. 1.1502-32 in determining S's basis in the T stock.
Consequently, the carryover basis rule of paragraph (d)(1) of this
section applies to the asset.
(h) Consistency for target affiliates that are controlled foreign
corporations--(1) In general. This paragraph (h) applies only if target
is a domestic corporation. For additional rules that may apply with
respect to controlled foreign corporations, see paragraph (g) of this
section. The definitions and nomenclature of Sec. 1.338-2(b) and (c)
and paragraph (e) of this section apply for purposes of this section.
(2) Income or gain resulting from asset dispositions--(i) General
rule. Income or gain of a target affiliate that is a controlled foreign
corporation from the disposition of an asset is not reflected in the
basis of target stock under paragraph (c) of this section unless the
income or gain results in an inclusion under section 951(a)(1)(A),
951(a)(1)(C), 1291 or 1293.
(ii) Basis of controlled foreign corporation stock. If, by reason of
paragraph (h)(2)(i) of this section, the carryover basis rules of this
section apply to an
[[Page 136]]
asset, no increase in basis in the stock of a controlled foreign
corporation under section 961(a) or 1293(d)(1), or under regulations
issued pursuant to section 1297(b)(5), is allowed to target or a target
affiliate to the extent the increase is attributable to income or gain
described in paragraph (h)(2)(i) of this section. A similar rule applies
to the basis of any property by reason of which the stock of the
controlled foreign corporation is considered owned under section
958(a)(2) or 1297(a).
(iii) Operating rule. For purposes of this paragraph (h)(2)--
(A) If there is an income inclusion under section 951 (a)(1)(A) or
(C), the shareholder's income inclusion is first attributed to the
income or gain of the controlled foreign corporation from the
disposition of the asset to the extent of the shareholder's pro rata
share of such income or gain; and
(B) Any income or gain under section 1293 is first attributed to the
income or gain from the disposition of the asset to the extent of the
shareholder's pro rata share of the income or gain.
(iv) Increase in asset or stock basis--(A) If the carryover basis
rules under paragraph (h)(2)(i) of this section apply to an asset, and
the purchasing corporation disposes of the asset to an unrelated party
in a taxable transaction and recognizes and includes in its U.S. gross
income or the U.S. gross income of its shareholders the greater of the
income or gain from the disposition of the asset by the selling
controlled foreign corporation that was reflected in the basis of the
target stock under paragraph (c) of this section, or the gain recognized
on the asset by the purchasing corporation on the disposition of the
asset, then the purchasing corporation or the target or a target
affiliate, as appropriate, shall increase the basis of the selling
controlled foreign corporation stock subject to paragraph (h)(2)(ii) of
this section, as of the date of the disposition of the asset by the
purchasing corporation, by the amount of the basis increase that was
denied under paragraph (h)(2)(ii) of this section. The preceding
sentence shall apply only to the extent that the controlled foreign
corporation stock is owned (within the meaning of section 958(a)) by a
member of the purchasing corporation's affiliated group.
(B) If the carryover basis rules under paragraph (h)(2)(i) of this
section apply to an asset, and the purchasing corporation or the target
or a target affiliate, as appropriate, disposes of the stock of the
selling controlled foreign corporation to an unrelated party in a
taxable transaction and recognizes and includes in its U.S. gross income
or the U.S. gross income of its shareholders the greater of the gain
equal to the basis increase that was denied under paragraph (h)(2)(ii)
of this section, or the gain recognized in the stock by the purchasing
corporation or by the target or a target affiliate, as appropriate, on
the disposition of the stock, then the purchasing corporation shall
increase the basis of the asset, as of the date of the disposition of
the stock of the selling controlled foreign corporation by the
purchasing corporation or by the target or a target affiliate, as
appropriate, by the amount of the basis increase that was denied
pursuant to paragraph (h)(2)(i) of this section. The preceding sentence
shall apply only to the extent that the asset is owned (within the
meaning of section 958(a)) by a member of the purchasing corporation's
affiliated group.
(3) Stock issued by target affiliate that is a controlled foreign
corporation. The exception to the carryover basis rules of this section
provided in paragraph (d)(2)(iii) of this section does not apply to
stock issued by a target affiliate that is a controlled foreign
corporation. After applying the carryover basis rules of this section to
the stock, the basis in the stock is increased by the amount treated as
a dividend under section 1248 on the disposition of the stock (or that
would have been so treated but for section 1291), except to the extent
the basis increase is attributable to the disposition of an asset in
which a carryover basis is taken under this section.
(4) Certain distributions--(i) General rule. In the case of a target
affiliate that is a controlled foreign corporation, paragraph (g) of
this section applies with respect to the target affiliate by treating
any reference to a dividend to which section 243(a)(3) applies as a
reference to any amount taken
[[Page 137]]
into account under Sec. 1.1502-32 in determining the basis of target
stock that is--
(A) A dividend;
(B) An amount treated as a dividend under section 1248 (or that
would have been so treated but for section 1291); or
(C) An amount included in income under section 951(a)(1)(B).
(ii) Basis of controlled foreign corporation stock. If the carryover
basis rules of this section apply to an asset, the basis in the stock of
the controlled foreign corporation (or any property by reason of which
the stock is considered owned under section 958(a)(2)) is reduced (but
not below zero) by the sum of any amounts that are treated, solely by
reason of the disposition of the asset, as a dividend, amount treated as
a dividend under section 1248 (or that would have been so treated but
for section 1291), or amount included in income under section
951(a)(1)(B). For this purpose, any dividend, amount treated as a
dividend under section 1248 (or that would have been so treated but for
section 1291), or amount included in income under section 951(a)(1)(B)
is considered attributable first to earnings and profits resulting from
the disposition of the asset.
(iii) Increase in asset or stock basis--(A) If the carryover basis
rules under paragraphs (g) and (h)(4)(i) of this section apply to an
asset, and the purchasing corporation disposes of the asset to an
unrelated party in a taxable transaction and recognizes and includes in
its U.S. gross income or the U.S. gross income of its shareholders the
greater of the gain equal to the basis increase denied in the asset
pursuant to paragraphs (g) and (h)(4)(i) of this section, or the gain
recognized on the asset by the purchasing corporation on the disposition
of the asset, then the purchasing corporation or the target or a target
affiliate, as appropriate, shall increase the basis of the selling
controlled foreign corporation stock subject to paragraph (h)(4)(ii) of
this section, as of the date of the disposition of the asset by the
purchasing corporation, by the amount of the basis reduction under
paragraph (h)(4)(ii) of this section. The preceding sentence shall apply
only to the extent that the controlled foreign corporation stock is
owned (within the meaning of section 958(a)) by a member of the
purchasing corporation's affiliated group.
(B) If the carryover basis rules under paragraphs (g) and (h)(4)(i)
of this section apply to an asset, and the purchasing corporation or the
target or a target affiliate, as appropriate, disposes of the stock of
the selling controlled foreign corporation to an unrelated party in a
taxable transaction and recognizes and includes in its U.S. gross income
or the U.S. gross income of its shareholders the greater of the amount
of the basis reduction under paragraph (h)(4)(ii) of this section, or
the gain recognized in the stock by the purchasing corporation or by the
target or a target affiliate, as appropriate, on the disposition of the
stock, then the purchasing corporation shall increase the basis of the
asset, as of the date of the disposition of the stock of the selling
controlled foreign corporation by the purchasing corporation or by the
target or a target affiliate, as appropriate, by the amount of the basis
increase that was denied pursuant to paragraphs (g) and (h)(4)(i) of
this section. The preceding sentence shall apply only to the extent that
the asset is owned (within the meaning of section 958(a)) by a member of
the purchasing corporation's affiliated group.
(5) Examples. This paragraph (h) may be illustrated by the following
examples:
Example 1. Stock of target affiliate that is a CFC. (a) The S group
files a consolidated return; however, T2 is a controlled foreign
corporation. On December 1 of Year 1, T1 sells the T2 stock to P and
recognizes gain. On January 2 of Year 2, P makes a qualified stock
purchase of T from S. No section 338 election is made for T.
(b) Under paragraph (b)(1) of this section, paragraph (d) of this
section applies to the T2 stock. Under paragraph (h)(3) of this section,
paragraph (d)(2)(iii) of this section does not apply to the T2 stock.
Consequently, paragraph (d)(1) of this section applies to the T2 stock.
However, after applying paragraph (d)(1) of this section, P's basis in
the T2 stock is increased by the amount of T1's gain on the sale of the
T2 stock that is treated as a dividend under section 1248. Because P has
a carryover basis in the T2 stock, the T2 stock is not considered
purchased within the meaning of section 338(h)(3) and no section 338
election may be made for T2.
[[Page 138]]
Example 2. Stock of target affiliate CFC; inclusion under subpart F.
(a) The S group files a consolidated return; however, T2 is a controlled
foreign corporation. On December 1 of Year 1, T2 sells an asset to P and
recognizes subpart F income that results in an inclusion in T1's gross
income under section 951(a)(1)(A). On January 2 of Year 2, P makes a
qualified stock purchase of T from S. No section 338 election is made
for T.
(b) Because gain from the disposition of the asset results in an
inclusion under section 951(a)(1)(A), the gain is reflected in the basis
of the T stock as of T's acquisition date. See paragraph (h)(2)(i) of
this section. Consequently, under paragraph (b)(1) of this section,
paragraph (d)(1) of this section applies to the asset. In addition,
under paragraph (h)(2)(ii) of this section, T1's basis in the T2 stock
is not increased under section 961(a) by the amount of the inclusion
that is attributable to the sale of the asset.
(c) If, in addition to making a qualified stock purchase of T, P
acquires the T2 stock from T1 on January 1 of Year 2, the results are
the same for the asset sold by T2. In addition, under paragraph
(h)(2)(ii) of this section, T1's basis in the T2 stock is not increased
by the amount of the inclusion that is attributable to the gain on the
sale of the asset. Further, under paragraph (h)(3) of this section,
paragraph (d)(1) of this section applies to the T2 stock. However, after
applying paragraph (d)(1) of this section, P's basis in the T2 stock is
increased by the amount of T1's gain on the sale of the T2 stock that is
treated as a dividend under section 1248. Finally, because P has a
carryover basis in the T2 stock, the T2 stock is not considered
purchased within the meaning of section 338(h)(3) and no section 338
election may be made for T2.
(d) If P makes a qualified stock purchase of T2 from T1, rather than
of T from S, and T1's gain on the sale of T2 is treated as a dividend
under section 1248, under paragraph (h)(1) of this section, paragraphs
(h)(2) and (3) of this section do not apply because there is no target
that is a domestic corporation. Consequently, the carryover basis rules
of paragraph do not apply to the asset sold by T2 or the T2 stock.
Example 3. Gain reflected by reason of section 1248 dividend; gain
from non-subpart F asset. (a) The S group files a consolidated return;
however, T2 is a controlled foreign corporation. In Years 1 through 4,
T2 does not pay any dividends to T1 and no amount is included in T1's
income under section 951(a)(1)(B). On December 1 of Year 4, T2 sells an
asset with a basis of $400,000 to P for $900,000. T2's gain of $500,000
is not subpart F income. On December 15 of Year 4, T1 sells T2, in which
it has a basis of $600,000, to P for $1,600,000. Under section 1248,
$800,000 of T1's gain of $1,000,000 is treated as a dividend. However,
in the absence of the sale of the asset by T2 to P, only $300,000 would
have been treated as a dividend under section 1248. On December 30 of
Year 4, P makes a qualified stock purchase of T1 from T. No section 338
election is made for T1.
(b) Under paragraph (h)(4) of this section, paragraph (g)(2) of this
section applies by reference to the amount treated as a dividend under
section 1248 on the disposition of the T2 stock. Because the amount
treated as a dividend is taken into account in determining T's basis in
the T1 stock under Sec. 1.1502-32, the sale of the T2 stock and the
deemed dividend have the effect of a transaction described in paragraph
(g)(1) of this section. Consequently, paragraph (d)(1) of this section
applies to the asset sold by T2 to P and P's basis in the asset is
$400,000 as of December 1 of Year 4.
(c) Under paragraph (h)(3) of this section, paragraph (d)(1) of this
section applies to the T2 stock and P's basis in the T2 stock is
$600,000 as of December 15 of Year 4. Under paragraphs (h)(3) and
(4)(ii) of this section, however, P's basis in the T2 stock is increased
by $300,000 (the amount of T1's gain treated as a dividend under section
1248 ($800,000), other than the amount treated as a dividend solely as a
result of the sale of the asset by T2 to P ($500,000)) to $900,000.
(i) [Reserved]
(j) Anti-avoidance rules. For purposes of this section--
(1) Extension of consistency period. The target consistency period
is extended to include any continuous period that ends on, or begins on,
any day of the consistency period during which a purchasing corporation,
or any person related, within the meaning of section 267(b) or
707(b)(1), to a purchasing corporation, has an arrangement--
(i) To purchase stock of target; or
(ii) To own an asset to which the carryover basis rules of this
section apply, taking into account the extension.
(2) Qualified stock purchase and 12-month acquisition period. The
12-month acquisition period is extended if, pursuant to an arrangement,
a corporation acquires by purchase stock of another corporation
satisfying the requirements of section 1504(a)(2) over a period of more
than 12 months.
(3) Acquisitions by conduits--(i) Asset ownership--(A) General rule.
A corporation is treated as owning any portion of an asset attributed to
the corporation from a conduit under section 318(a) (treating any asset
as stock for this purpose), for purposes of--
(1) The asset ownership requirements of this section; and
[[Page 139]]
(2) Determining whether a controlled foreign corporation is a target
affiliate for purposes of paragraph (h) of this section.
(B) Application of carryover basis rule. If the basis rules of this
section apply to the asset, the basis rules of this section apply to the
entire asset (not just the portion for which ownership is attributed).
(ii) Stock acquisitions--(A) Purchase by conduit. A corporation is
treated as purchasing stock of another corporation attributed to the
corporation from a conduit under section 318(a) on the day the stock is
purchased by the conduit. The corporation is not treated as purchasing
the stock, however, if the conduit purchased the stock more than two
years before the date the stock is first attributed to the corporation.
(B) Purchase of conduit by corporation. If a corporation purchases
an interest in a conduit (treating the interest as stock for this
purpose), the corporation is treated as purchasing on that date any
stock owned by a conduit on that date and attributed to the corporation
under section 318(a) with respect to the interest in the conduit that
was purchased.
(C) Purchase of conduit by conduit. If a conduit (the first conduit)
purchases an interest in a second conduit (treating the interest as
stock for this purpose), the first conduit is treated as purchasing on
that date any stock owned by a conduit on that date and attributed to
the first conduit under section 318(a) with respect to the interest in
the second conduit that was purchased.
(4) Conduit. A person (other than a corporation) is a conduit as to
a corporation if--
(i) The corporation would be treated under section 318(a)(2)(A) and
(B) (attribution from partnerships, estates, and trusts) as owning any
stock owned by the person; and
(ii) The corporation, together with its affiliates, would be treated
as owning an aggregate of at least 50 percent of the stock owned by the
person.
(5) Existence of arrangement. The existence of an arrangement is
determined under all the facts and circumstances. For an arrangement to
exist, there need not be an enforceable, written, or unconditional
agreement, and all the parties to the transaction need not have
participated in each step of the transaction. One factor indicating the
existence of an arrangement is the participation of a related party. For
this purpose, persons are related if they are related within the meaning
of section 267(b) or 707(b)(1).
(6) Predecessor and successor--(i) Persons. A reference to a person
(including target, target affiliate, and purchasing corporation)
includes, as the context may require, a reference to a predecessor or
successor. For this purpose, a predecessor is a transferor or
distributor of assets to a person (the successor) in a transaction--
(A) To which section 381(a) applies; or
(B) In which the successor's basis for the assets is determined,
directly or indirectly, in whole or in part, by reference to the basis
of the transferor or distributor.
(ii) Assets. A reference to an asset (the first asset) includes, as
the context may require, a reference to any asset the basis of which is
determined, directly or indirectly, in whole or in part, by reference to
the first asset.
(7) Examples. This paragraph (j) may be illustrated by the following
examples:
Example 1. Asset owned by conduit treated as owned by purchaser of
target stock. (a) P owns a 60-percent interest in Y. On March 1 of Year
1, T sells an asset to Y and recognizes gain. On January 1 of Year 2, P
makes a qualified stock purchase of T from S. No section 338 election is
made for T.
(b) Under paragraph (j)(4) of this section, Y is a conduit with
respect to P. Consequently, under paragraph (j)(3)(i)(A) of this
section, P is treated as owning 60% of the asset on March 1 of Year 1
and January 1 of Year 2. Because P is treated as owning part or all of
the asset both immediately after the asset disposition and on T's
acquisition date, paragraph (b) of this section applies to the asset.
Consequently, paragraph (d)(1) of this section applies to the asset and
Y's basis in the asset is T's adjusted basis in the asset immediately
before the sale to Y.
Example 2. Corporation whose stock is owned by conduit treated as
affiliate. (a) P owns an 80-percent interest in Y. Y owns all of the
stock of Z. On March 1 of Year 1, T sells an asset to Z and recognizes
gain. On January 1 of Year 2, P makes a qualified stock purchase of T
from S. No section 338 election is made for T.
(b) Under paragraph (j)(4) of this section, Y is a conduit with
respect to P. Consequently,
[[Page 140]]
under paragraph (j)(3)(i)(A) of this section, P is treated as owning 80%
of the Z stock and Z is therefore treated as an affiliate of P for
purposes of applying the asset ownership requirements of paragraph
(b)(1)(iii) of this section. Because Z, an affiliate of P, owns the
asset both immediately after the asset disposition and on T's
acquisition date, paragraph (b) of this section applies to the asset,
and the asset's basis is determined under paragraph (d) of this section.
(c) If, instead of owning an 80-percent interest in Y, P owned a 79-
percent interest in Y, Z would not be treated as an affiliate of P and
paragraph (b) of this section would not apply to the asset.
Example 3. Qualified stock purchase by reason of stock purchase by
conduit. (a) P owns a 90-percent interest in Y. Y owns a 60-percent
interest in Y1. On February 1 of Year 2, T sells an asset to P and
recognizes gain. On January 1 of Year 3, P purchases 70% of the T stock
from S and Y1 purchases the remaining 30% of the T stock from S.
(b) Under paragraph (j)(3)(ii)(A) of this section, P is treated as
purchasing on January 1 of Year 3, the 16.2% of the T stock that is
attributed to P from Y and Y1 under section 318(a). Thus, for purposes
of this section, P is treated as making a qualified stock purchase of T
on January 1 of Year 3, paragraph (b) of this section applies to the
asset, and the asset's basis is determined under paragraph (d) of this
section. However, because P is not treated as having made a qualified
stock purchase of T for purposes of making an election under section
338, no election can be made for T.
(c) If Y1 purchases 20% of the T stock from S on December 1 of Year
1, rather than 30% on January 1 of Year 3, P would be treated as
purchasing 10.8% of the T stock on December 1 of Year 1. Thus, if
paragraph (j)(2) of this section (relating to extension of the 12-month
acquisition period) does not apply, P would not be treated as making a
qualified stock purchase of T, because P is not treated as purchasing T
stock satisfying the requirements of section 1504(a)(2) within a 12-
month period.
Example 4. Successor asset. (a) On February 1 of Year 1, T sells
stock of X to P1 and recognizes gain. On December 1 of Year 1, P1
exchanges its X stock for stock in new X in a reorganization qualifying
under section 368(a)(1)(F). On January 1 of Year 2, P1 makes a qualified
stock purchase of T from S. No section 338 election is made for T.
(b) The asset ownership requirements of paragraph (b)(1)(iii) of
this section are satisfied because, under paragraph (j)(6)(ii) of this
section, P1 is treated as owning the X stock on T's acquisition date. P1
is treated as owning the X stock on that date because P1 owns the new X
stock and P1's basis in the new X stock is determined by reference to
P1's basis in the X stock. Consequently, under paragraph (d)(1) of this
section, P1's basis in the X stock on February 1 of Year 1 is T's
adjusted basis in the X stock immediately before the sale to P1.
[T.D. 8515, 59 FR 2972, Jan. 20, 1994, as amended by T.D. 8597, 60 FR
36679, July 18, 1995; T.D. 8710, 62 FR 3459, Jan. 23, 1997. Redesignated
by T.D. 8858, 65 FR 1246, Jan. 7, 2000, as amended by T.D. 8940, 66 FR
9929, Feb. 13, 2001; 66 FR 17466, Mar. 30, 2001]
Sec. 1.338-9 International aspects of section 338.
(a) Scope. This section provides guidance regarding international
aspects of section 338. As provided in Sec. 1.338-2(c)(18), a foreign
corporation, a DISC, or a corporation for which a section 936 election
has been made is considered a target affiliate for all purposes of
section 338. In addition, stock described in section 338(h)(6)(B)(ii)
held by a target affiliate is not excluded from the operation of section
338.
(b) Application of section 338 to foreign targets--(1) In general.
For purposes of subtitle A, the deemed sale tax consequences, as defined
in Sec. 1.338-2(c)(7), of a foreign target for which a section 338
election is made (FT), and the corresponding earnings and profits, are
taken into account in determining the taxation of FT and FT's direct and
indirect shareholders. See, however, section 338(h)(16). For example,
the income and earnings and profits of FT are determined, for purposes
of sections 551, 951, 1248, and 1293, by taking into account the deemed
sale tax sentence consequences.
(2) Ownership of FT stock on the acquisition date. A person who
transfers FT stock to the purchasing corporation on FT's acquisition
date is considered to own the transferred stock at the close of FT's
acquisition date. See, e.g., Sec. 1.951-1(f) (relating to determination
of holding period for purposes of sections 951 through 964). If on the
acquisition date the purchasing corporation owns a block of FT stock
that was acquired before FT's acquisition date, the purchasing
corporation is considered to own such block of stock at the close of the
acquisition date.
(3) Carryover FT stock--(i) Definition. FT stock is carryover FT
stock if--
(A) FT was a controlled foreign corporation within the meaning of
section 957 (taking into account section 953(c))
[[Page 141]]
at any time during the portion of the 12-month acquisition period that
ends on the acquisition date; and
(B) Such stock is owned as of the beginning of the day after FT's
acquisition date by a person other than a purchasing corporation, or by
a purchasing corporation if the stock is nonrecently purchased and is
not subject to a gain recognition election under Sec. 1.338-5(d).
(ii) Carryover of earnings and profits. The earnings and profits of
old FT (and associated foreign taxes) attributable to the carryover FT
stock (adjusted to reflect deemed sale tax sentence consequences) carry
over to new FT solely for purposes of--
(A) Characterizing an actual distribution with respect to a share of
carryover FT stock as a dividend;
(B) Characterizing gain on a post-acquisition date transfer of a
share of carryover FT stock as a dividend under section 1248 (if such
section is otherwise applicable);
(C) Characterizing an investment of earnings in United States
property as income under sections 951(a)(1)(B) and 956 (if such sections
are otherwise applicable); and
(D) Determining foreign taxes deemed paid under sections 902 and 960
with respect to the amount treated as a dividend or income by virtue of
this paragraph (b)(3)(ii) (subject to the operation of section
338(h)(16)).
(iii) Cap on carryover of earnings and profits. The amount of
earnings and profits of old FT taken into account with respect to a
share of carryover FT stock is limited to the amount that would have
been included in gross income of the owner of such stock as a dividend
under section 1248 if--
(A) The shareholder transferred that share to the purchasing
corporation on FT's acquisition date for a consideration equal to the
fair market value of that share on that date; or
(B) In the case of nonrecently purchased FT stock treated as
carryover FT stock, a gain recognition election under section
338(b)(3)(A) applied to that share. For purposes of the preceding
sentence, a shareholder that is a controlled foreign corporation is
considered to be a United States person, and the principle of section
1248(c)(2)(D)(ii) (concerning a United States person's indirect
ownership of stock in a foreign corporation) applies in determining the
correct holding period.
(iv) Post-acquisition date distribution of old FT earnings and
profits. A post-acquisition date distribution with respect to a share of
carryover FT stock is considered to be derived first from earnings and
profits derived after FT's acquisition date and then from earnings and
profits derived on or before FT's acquisition date.
(v) Old FT earnings and profits unaffected by post-acquisition date
deficits. The carryover amount for a share of carryover FT stock is not
reduced by deficits in earnings and profits incurred by new FT. This
rule applies for purposes of determining the amount of foreign taxes
deemed paid regardless of the fact that there are no accumulated
earnings and profits. For example, a distribution by new FT with respect
to a share of carryover FT stock is treated as a dividend by the
distributee to the extent of the carryover amount for that share
notwithstanding that new FT has no earnings and profits.
(vi) Character of FT stock as carryover FT stock eliminated upon
disposition. A share of FT stock is not considered carryover FT stock
after it is disposed of provided that all gain realized on the transfer
is recognized at the time of the transfer, or that, if less than all of
the realized gain is recognized, the recognized amount equals or exceeds
the remaining carryover amount for that share.
(4) Passive foreign investment company stock. Stock that is owned as
of the beginning of the day after FT's acquisition date by a person
other than a purchasing corporation, or by a purchasing corporation if
the FT stock is nonrecently purchased stock not subject to a gain
recognition election under Sec. 1.338-5(d), is treated as passive
foreign investment company stock to the extent provided in section
1297(b)(1).
(c) Dividend treatment under section 1248(e). The principles of this
paragraph (b) apply to shareholders of a domestic corporation subject to
section 1248(e).
(d) Allocation of foreign taxes. If a section 338 election is made
for target
[[Page 142]]
(whether foreign or domestic), and target's taxable year under foreign
law (if any) does not close at the end of the acquisition date, foreign
income taxes attributable to the foreign taxable income earned by target
during such foreign taxable year are allocated to old target and new
target. Such allocation is made under the principles of Sec. 1.1502-
76(b).
(e) Operation of section 338(h)(16). [Reserved]
(f) Examples. (1) Except as otherwise provided, all corporations use
the calendar year as the taxable year, have no earnings and profits (or
deficit) accumulated for any taxable year, and have only one class of
outstanding stock.
(2) This section may be illustrated by the following examples:
Example 1. Gain recognition election for carryover FT stock. (a) A
has owned 90 of the 100 shares of CFCT stock since CFCT was organized on
March 13, 1989. P has owned the remaining 10 shares of CFCT stock since
CFCT was organized. Those 10 shares constitute nonrecently purchased
stock in P's hands within the meaning of section 338(b)(6)(B). On
November 1, 1994, P purchases A's 90 shares of CFCT stock for $90,000
and makes a section 338 election for CFCT. P also makes a gain
recognition election under section 338(b)(3)(A) and Sec. 1.338-5(d).
(b) CFCT's earnings and profits for its short taxable year ending on
November 1, 1994, are $50,000, determined without taking into account
the deemed asset sale. Assume A recognizes gain of $81,000 on the sale
of the CFCT stock. Further, assume that CFCT recognizes gain of $40,000
by reason of its deemed sale of assets under section 338(a)(1).
(c) A's sale of CFCT stock to P is a transfer to which section 1248
and paragraphs (b)(1) and (2) of this section apply. For purposes of
applying section 1248(a) to A, the earnings and profits of CFCT for its
short taxable year ending on November 1, 1994, are $90,000 (the earnings
and profits for that taxable year as determined under Sec. 1.1248-2(e)
($50,000) plus earnings from the deemed sale ($40,000)). Thus, A's
entire gain is characterized as a dividend under section 1248 (but see
section 338(h)(16)).
(d) Assume that P recognizes a gain of $9,000 with respect to the 10
shares of nonrecently purchased CFCT stock by reason of the gain
recognition election. Because P is treated as selling the nonrecently
purchased stock for all purposes of the Internal Revenue Code, section
1248 applies. Thus, under Sec. 1.1248-2(e), $9,000 of the $90,000 of
earnings and profits for 1994 are attributable to the block of 10 shares
of CFCT stock deemed sold by P at the close of November 1, 1994 ($90,000
x 10/100). Accordingly, P's entire gain on the deemed sale of 10 shares
of CFCT stock is included under section 1248(a) in P's gross income as a
dividend (but see section 338(h)(16)).
Example 2. No gain recognition election for carryover FT stock. (a)
Assume the same facts as in Example 1, except that P does not make a
gain recognition election.
(b) The 10 shares of nonrecently purchased CFCT stock held by P is
carryover FT stock under paragraph (b)(3) of this section. Accordingly,
the earnings and profits (and attributable foreign taxes) of old CFCT
carry over to new CFCT solely for purposes of that block of 10 shares.
The amount of old CFCT's earnings and profits taken into account with
respect to that block in the event, for example, of a distribution by
new CFCT with respect to that block is the amount of the section 1248
dividend that P would have recognized with respect to that block had it
made a gain recognition election under section 338(b)(3)(A). Under the
facts of Example 1, P would have recognized a gain of $9,000 with
respect to that block, all of which would have been a section 1248
dividend ($90,000 x 10/100). Accordingly, the carryover amount for the
block of 10 shares of nonrecently purchased CFCT stock is $9,000.
Example 3. Sale of controlled foreign corporation stock prior to and
on the acquisition date. (a) X and Y, both U.S. corporations, have each
owned 50% of the CFCT stock since 1986. Among CFCT's assets are assets
the sale of which would generate subpart F income. On December 31, 1994,
X sells its CFCT stock to P. On June 30, 1995, Y sells its CFCT stock to
P. P makes a section 338 election for CFCT. In both 1994 and 1995, CFCT
has subpart F income resulting from operations.
(b) For taxable year 1994, X and Y are United States shareholders on
the last day of CFCT's taxable year, so pursuant to section 951(a)(1)(A)
each must include in income its pro rata share of CFCT's subpart F
income for 1994. Because P's holding period in the CFCT stock acquired
from X does not begin until January 1, 1995, P is not a United States
shareholder on the last day of 1994 for purposes of section 951(a)(1)(A)
(see Sec. 1.951-1(f)). X must then determine the extent to which
section 1248 recharacterizes its gain on the sale of CFCT stock as a
dividend.
(c) For the short taxable year ending June 30, 1995, Y is considered
to own the CFCT stock sold to P at the close of CFCT's acquisition date.
Because the acquisition date is the last day of CFCT's taxable year, Y
and P are United States shareholders on the last day of CFCT's taxable
year. Pursuant to section 951(a)(1)(A), each must include its pro rata
share of CFCT's subpart F income for the short taxable year ending June
30, 1995. This includes any income generated on the deemed sale of
CFCT's assets. Y must then determine the extent to which section 1248
[[Page 143]]
recharacterizes its gain on the sale of the CFCT stock as a dividend,
taking into account any increase in CFCT's earnings and profits due to
the deemed sale of assets.
Example 4. Acquisition of control for purposes of section 951 prior
to the acquisition date. FS owns 100% of the FT stock. On July 1, 1994,
P buys 60% of the FT stock. On December 31, 1994, P buys the remaining
40% of the FT stock and makes a section 338 election for FT. For tax
year 1994, FT has earnings and profits of $1,000 (including earnings
resulting from the deemed sale). The section 338 election results in
$500 of subpart F income. As a result of the section 338 election, P
must include in gross income the following amount under section
951(a)(1)(A) (see Sec. 1.951-(b)(2)):
FT's subpart F income for 1994................................ $500.00
Less: reduction under section 951(a)(2)(A) for period (1-1-94 249.32
through 7-1-94) during which FT is not a controlled foreign
corporation ($500x182/365)...................................
---------
Subpart F income as limited by section 951 (a)(2)(A).......... 250.68
P's pro rata share of subpart F income as determined under 150.41
section 951(a)(2)(A) (60%x250.68)............................
Example 5. Coordination with section 936. (a) T is a corporation for
which a section 936 election has been made. P makes a qualified stock
purchase of T and makes a section 338 election for T.
(b) T's deemed sale of assets under section 338 constitutes a sale
for purposes of subtitle A of the Internal Revenue Code, including
section 936(a)(1)(A)(ii). To the extent that the assets deemed sold are
used in the conduct of an active trade or business in a possession for
purposes of section 936(a)(1)(A)(i), and assuming all the other
conditions of section 936 are satisfied, the income from the deemed sale
qualifies for the credit granted by section 936(a). The source of income
from the deemed sale is determined as if the assets had actually been
sold and is not affected for purposes of section 936 by section
338(h)(16).
(c) Because new T is treated a new corporation for purposes of
subtitle A of the Internal Revenue Code, the three year testing period
in section 936(a)(2)(A) begins again for new T on the day following T's
acquisition date. Thus, if the character or source of old T's gross
income disqualified it for the credit under section 936, a fresh start
is allowed by a section 338 election.
[T.D. 8515, 59 FR 2978, Jan. 20, 1994. Redesignated by T.D. 8858, 65 FR
1246, Jan. 7, 2000, as amended by T.D. 8940, 66 FR 9929, Feb. 13, 2001;
66 FR 17466, Mar. 30, 2001]
Sec. 1.338-10 Filing of returns.
(a) Returns including tax liability from deemed asset sale--(1) In
general. Except as provided in paragraphs (a)(2) and (3) of this
section, any deemed sale tax consequences are reported on the final
return of old target filed for old target's taxable year that ends at
the close of the acquisition date. Paragraphs (a)(2), (3) and (4) of
this section do not apply to elections under section 338(h)(10). If old
target is the common parent of an affiliated group, the final return may
be a consolidated return (any such consolidated return must also include
any deemed sale tax consequences of any members of the consolidated
group that are acquired by the purchasing corporation on the same
acquisition date as old target).
(2) Old target's final taxable year otherwise included in
consolidated return of selling group--(i) General rule. If the selling
group files a consolidated return for the period that includes the
acquisition date, old target is disaffiliated from that group
immediately before the deemed asset sale and must file a deemed sale
return separate from the group, which includes only the deemed sale tax
consequences and the carryover items specified in paragraph (a)(2)(iii)
of this section. The deemed asset sale occurs at the close of the
acquisition date and is the last transaction of old target and the only
transaction reported on the separate return. Except as provided in Sec.
1.338-1(d) (regarding certain transactions on the acquisition date), any
transactions of old target occurring on the acquisition date other than
the deemed asset sale are included in the selling group's consolidated
return. A deemed sale return includes a combined deemed sale return as
defined in paragraph (a)(4) of this section.
(ii) Separate taxable year. The deemed asset sale included in the
deemed sale return under this paragraph (a)(2) occurs in a separate
taxable year, except that old target's taxable year of the sale and the
consolidated year of the selling group that includes the acquisition
date are treated as the same year for purposes of determining the number
of years in a carryover or carryback period.
(iii) Carryover and carryback of tax attributes. Target's attributes
may be carried over to, and carried back from, the deemed sale return
under the rules applicable to a corporation that ceases
[[Page 144]]
to be a member of a consolidated group.
(iv) Old target is a component member of purchasing corporation's
controlled group. For purposes of its deemed sale return, target is a
component member of the controlled group of corporations including the
purchasing corporation unless target is treated as an excluded member
under section 1563(b)(2).
(3) Old target is an S corporation. If target is an S corporation
for the period that ends on the day before the acquisition date and a
section 338 election (but not a section 338(h)(10) election) is filed
for target, old target files a return as a C corporation reflecting its
activities on the acquisition date, including target's deemed sale. See
section 1362(d)(2). For purposes of this return, target is a component
member of the controlled group of corporations including the purchasing
corporation unless target is treated as an excluded member under section
1563(b)(2).
(4) Combined deemed sale return--(i) General rule. Under section
338(h)(15), a combined deemed sale return (combined return) may be filed
for all targets from a single selling consolidated group (as defined in
Sec. 1.338(h)(10)-1(b)(3)) that are acquired by the purchasing
corporation on the same acquisition date and that otherwise would be
required to file separate deemed sale returns. The combined return must
include all such targets. For example, T and T1 may be included in a
combined return if--
(A) T and T1 are directly owned subsidiaries of S;
(B) S is the common parent of a consolidated group; and
(C) P makes qualified stock purchases of T and T1 on the same
acquisition date.
(ii) Gain and loss offsets. Gains and losses recognized on the
deemed asset sales by targets included in a combined return are treated
as the gains and losses of a single target. In addition, loss carryovers
of a target that were not subject to the separate return limitation year
restrictions (SRLY restrictions) of the consolidated return regulations
while that target was a member of the selling consolidated group may be
applied without limitation to the gains of other targets included in the
combined return. If, however, a target has loss carryovers that were
subject to the SRLY restrictions while that target was a member of the
selling consolidated group, the use of those losses in the combined
return continues to be subject to those restrictions, applied in the
same manner as if the combined return were a consolidated return. A
similar rule applies, when appropriate, to other tax attributes.
(iii) Procedure for filing a combined return. A combined return is
made by filing a single corporation income tax return in lieu of
separate deemed sale returns for all targets required to be included in
the combined return. The combined return reflects the deemed asset sales
of all targets required to be included in the combined return. If the
targets included in the combined return constitute a single affiliated
group within the meaning of section 1504(a), the income tax return is
signed by an officer of the common parent of that group. Otherwise, the
return must be signed by an officer of each target included in the
combined return. Rules similar to the rules in Sec. 1.1502-75(j) apply
for purposes of preparing the combined return. The combined return must
include an attachment prominently identified as an ``ELECTION TO FILE A
COMBINED RETURN UNDER SECTION 338(h)(15).'' The attachment must--
(A) Contain the name, address, and employer identification number of
each target required to be included in the combined return;
(B) Contain the following declaration (or a substantially similar
declaration): EACH TARGET IDENTIFIED IN THIS ELECTION TO FILE A COMBINED
RETURN CONSENTS TO THE FILING OF A COMBINED RETURN;
(C) For each target, be signed by a person who states under
penalties of perjury that he or she is authorized to act on behalf of
such target.
(iv) Consequences of filing a combined return. Each target included
in a combined return is severally liable for any tax associated with the
combined return. See Sec. 1.338-1(b)(3).
(5) Deemed sale excluded from purchasing corporation's consolidated
return. Old target may not be considered a
[[Page 145]]
member of any affiliated group that includes the purchasing corporation
with respect to its deemed asset sale.
(6) Due date for old target's final return--(i) General rule. Old
target's final return is generally due on the 15th day of the third
calendar month following the month in which the acquisition date occurs.
See section 6072 (time for filing income tax returns).
(ii) Application of Sec. 1.1502-76(c)--(A) In general. Section
1.1502-76(c) applies to old target's final return if old target was a
member of a selling group that did not file consolidated returns for the
taxable year of the common parent that precedes the year that includes
old target's acquisition date. If the selling group has not filed a
consolidated return that includes old target's taxable period that ends
on the acquisition date, target may, on or before the final return due
date (including extensions), either--
(1) File a deemed sale return on the assumption that the selling
group will file the consolidated return; or
(2) File a return for so much of old target's taxable period as ends
at the close of the acquisition date on the assumption that the
consolidated return will not be filed.
(B) Deemed extension. For purposes of applying Sec. 1.1502-
76(c)(2), an extension of time to file old target's final return is
considered to be in effect until the last date for making the election
under section 338.
(C) Erroneous filing of deemed sale return. If, under this paragraph
(a)(6)(ii), target files a deemed sale return but the selling group does
not file a consolidated return, target must file a substituted return
for old target not later than the due date (including extensions) for
the return of the common parent with which old target would have been
included in the consolidated return. The substituted return is for so
much of old target's taxable year as ends at the close of the
acquisition date. Under Sec. 1.1502-76(c)(2), the deemed sale return is
not considered a return for purposes of section 6011 (relating to the
general requirement of filing a return) if a substituted return must be
filed.
(D) Erroneous filing of return for regular tax year. If, under this
paragraph (a)(6)(ii), target files a return for so much of old target's
regular taxable year as ends at the close of the acquisition date but
the selling group files a consolidated return, target must file an
amended return for old target not later than the due date (including
extensions) for the selling group's consolidated return. (The amended
return is a deemed sale return.)
(E) Last date for payment of tax. If either a substituted or amended
final return of old target is filed under this paragraph (a)(6)(ii), the
last date prescribed for payment of tax is the final return due date (as
defined in paragraph (a)(6)(i) of this section).
(7) Examples. The following examples illustrate this paragraph (a):
Example 1. (i) S is the common parent of a consolidated group that
includes T. The S group files calendar year consolidated returns. At the
close of June 30 of Year 1, P makes a qualified stock purchase of T from
S. P makes a section 338 election for T, and T's deemed asset sale
occurs as of the close of T's acquisition date (June 30).
(ii) T is considered disaffiliated for purposes of reporting the
deemed sale tax consequences. Accordingly, T is included in the S
group's consolidated return through T's acquisition date except that the
tax liability for the deemed sale tax consequences is reported in a
separate deemed sale return of T. Provided that T is not treated as an
excluded member under section 1563(b)(2), T is a component member of P's
controlled group for the taxable year of the deemed asset sale, and the
taxable income bracket amounts available in calculating tax on the
deemed sale return must be limited accordingly.
(iii) If P purchased the stock of T at 10 a.m. on June 30 of Year 1,
the results would be the same. See paragraph (a)(2)(i) of this section.
Example 2. The facts are the same as in Example 1, except that the S
group does not file consolidated returns. T must file a separate return
for its taxable year ending on June 30 of Year 1, which return includes
the deemed asset sale.
(b) Waiver--(1) Certain additions to tax. An addition to tax or
additional amount (addition) under subchapter A of chapter 68 of the
Internal Revenue Code arising on or before the last day for making the
election under section 338 because of circumstances that would not exist
but for an election under section 338 is waived if--
[[Page 146]]
(i) Under the particular statute the addition is excusable upon a
showing of reasonable cause; and
(ii) Corrective action is taken on or before the last day.
(2) Notification. The Internal Revenue Service should be notified at
the time of correction (e.g., by attaching a statement to a return that
constitutes corrective action) that the waiver rule of this paragraph
(b) is being asserted.
(3) Elections or other actions required to be specified on a timely
filed return--(i) In general. If paragraph (b)(1) of this section
applies or would apply if there were an underpayment, any election or
other action that must be specified on a timely filed return for the
taxable period covered by the late filed return described in paragraph
(b)(1) of this section is considered timely if specified on a late-filed
return filed on or before the last day for making the election under
section 338.
(ii) New target in purchasing corporation's consolidated return. If
new target is includible for its first taxable year in a consolidated
return filed by the affiliated group of which the purchasing corporation
is a member on or before the last day for making the election under
section 338, any election or other action that must be specified in a
timely filed return for new target's first taxable year (but which is
not specified in the consolidated return) is considered timely if
specified in an amended return filed on or before such last day, at the
place where the consolidated return was filed.
(4) Examples. The following examples illustrate this paragraph (b):
Example 1. T is an unaffiliated corporation with a tax year ending
March 31. At the close of September 20 of Year 1, P makes a qualified
stock purchase of T. P does not join in filing a consolidated return. P
makes a section 338 election for T on or before June 15 of Year 2, which
causes T's taxable year to end as of the close of September 20 of Year
1. An income tax return for T's taxable period ending on September 20 of
Year 1 was due on December 15 of Year 1. Additions to tax for failure to
file a return and to pay tax shown on a return will not be imposed if
T's return is filed and the tax paid on or before June 15 of Year 2.
(This waiver applies even if the acquisition date coincides with the
last day of T's former taxable year, i.e., March 31 of Year 2.) Interest
on any underpayment of tax for old T's short taxable year ending
September 20 of Year 1 runs from December 15 of Year 1. A statement
indicating that the waiver rule of this paragraph is being asserted
should be attached to T's return.
Example 2. Assume the same facts as in Example 1. Assume further
that new T adopts the calendar year by filing, on or before June 15 of
Year 2, its first return (for the period beginning on September 21 of
Year 1 and ending on December 31 of Year 1) indicating that a calendar
year is chosen. See Sec. 1.338-1(b)(1). Any additions to tax or amounts
described in this paragraph (b) that arise because of the late filing of
a return for the period ending on December 31 of Year 1 are waived,
because they are based on circumstances that would not exist but for the
section 338 election. Notwithstanding this waiver, however, the return
is still considered due March 15 of Year 2, and interest on any
underpayment runs from that date.
Example 3. Assume the same facts as in Example 2, except that T's
former taxable year ends on October 31. Although prior to the election
old T had a return due on January 15 of Year 2 for its year ending
October 31 of Year 1, that return need not be filed because a timely
election under section 338 was made. Instead, old T must file a final
return for the period ending on September 20 of Year 1, which is due on
December 15 of Year 1.
[T.D. 8940, 66 FR 9948, Feb. 13, 2001]
Sec. 1.338(h)(10)-1 Deemed asset sale and liquidation.
(a) Scope. This section prescribes rules for qualification for a
section 338(h)(10) election and for making a section 338(h)(10)
election. This section also prescribes the consequences of such
election. The rules of this section are in addition to the rules of
Sec. Sec. 1.338-1 through 1.338-10 and, in appropriate cases, apply
instead of the rules of Sec. Sec. 1.338-1 through 1.338-10.
(b) Definitions--(1) Consolidated target. A consolidated target is a
target that is a member of a consolidated group within the meaning of
Sec. 1.1502-1(h) on the acquisition date and is not the common parent
of the group on that date.
(2) Selling consolidated group. A selling consolidated group is the
consolidated group of which the consolidated target is a member on the
acquisition date.
(3) Selling affiliate; affiliated target. A selling affiliate is a
domestic corporation that owns on the acquisition date an amount of
stock in a domestic target, which amount of stock is described in
section 1504(a)(2), and does not join
[[Page 147]]
in filing a consolidated return with the target. In such case, the
target is an affiliated target.
(4) S corporation target. An S corporation target is a target that
is an S corporation immediately before the acquisition date.
(5) S corporation shareholders. S corporation shareholders are the S
corporation target's shareholders. Unless otherwise indicated, a
reference to S corporation shareholders refers both to S corporation
shareholders who do and those who do not sell their target stock.
(6) Liquidation. Any reference in this section to a liquidation is
treated as a reference to the transfer described in paragraph (d)(4) of
this section notwithstanding its ultimate characterization for Federal
income tax purposes.
(c) Section 338(h)(10) election--(1) In general. A section
338(h)(10) election may be made for T if P acquires stock meeting the
requirements of section 1504(a)(2) from a selling consolidated group, a
selling affiliate, or the S corporation shareholders in a qualified
stock purchase.
(2) [Reserved]. For further guidance see Sec. 1.338(h)(10)-
1T(c)(2).
(3) Simultaneous joint election requirement. A section 338(h)(10)
election is made jointly by P and the selling consolidated group (or the
selling affiliate or the S corporation shareholders) on Form 8023 in
accordance with the instructions to the form. S corporation shareholders
who do not sell their stock must also consent to the election. The
section 338(h)(10) election must be made not later than the 15th day of
the 9th month beginning after the month in which the acquisition date
occurs.
(4) Irrevocability. A section 338(h)(10) election is irrevocable. If
a section 338(h)(10) election is made for T, a section 338 election is
deemed made for T.
(5) Effect of invalid election. If a section 338(h)(10) election for
T is not valid, the section 338 election for T is also not valid.
(d) Certain consequences of section 338(h)(10) election. For
purposes of subtitle A of the Internal Revenue Code (except as provided
in Sec. 1.338-1(b)(2)), the consequences to the parties of making a
section 338(h)(10) election for T are as follows:
(1) P. P is automatically deemed to have made a gain recognition
election for its nonrecently purchased T stock, if any. The effect of a
gain recognition election includes a taxable deemed sale by P on the
acquisition date of any nonrecently purchased target stock. See Sec.
1.338-5(d).
(2) New T. The AGUB for new T's assets is determined under Sec.
1.338-5 and is allocated among the acquisition date assets under
Sec. Sec. 1.338-6 and 1.338-7. Notwithstanding paragraph (d)(4) of this
section (deemed liquidation of old T), new T remains liable for the tax
liabilities of old T (including the tax liability for the deemed sale
tax consequences). For example, new T remains liable for the tax
liabilities of the members of any consolidated group that are
attributable to taxable years in which those corporations and old T
joined in the same consolidated return. See Sec. 1.1502-6(a).
(3) Old T--deemed sale--(i) In general. Old T is treated as
transferring all of its assets to an unrelated person in exchange for
consideration that includes the discharge of its liabilities in a single
transaction at the close of the acquisition date (but before the deemed
liquidation). See Sec. 1.338-1(a) regarding the tax characterization of
the deemed asset sale. Except as provided in Sec. 1.338(h)(10)-1(d)(8)
(regarding the installment method), old T recognizes all of the gain
realized on the deemed transfer of its assets in consideration for the
ADSP. ADSP for old T is determined under Sec. 1.338-4 and allocated
among the acquisition date assets under Sec. Sec. 1.338-6 and 1.338-7.
Old T realizes the deemed sale tax consequences from the deemed asset
sale before the close of the acquisition date while old T is a member of
the selling consolidated group (or owned by the selling affiliate or
owned by the S corporation shareholders). If T is an affiliated target,
or an S corporation target, the principles of Sec. Sec. 1.338-2(c)(10)
and 1.338-10(a)(1), (5), and (6)(i) apply to the return on which the
deemed sale tax consequences are reported. When T is an S corporation
target, T's S election continues in effect through the close of the
acquisition date (including the time of
[[Page 148]]
the deemed asset sale and the deemed liquidation) notwithstanding
section 1362(d)(2)(B). Also, when T is an S corporation target (but not
a qualified subchapter S subsidiary), any direct and indirect
subsidiaries of T which T has elected to treat as qualified subchapter S
subsidiaries under section 1361(b)(3) remain qualified subchapter S
subsidiaries through the close of the acquisition date.
(ii) Tiered targets. In the case of parent-subsidiary chains of
corporations making elections under section 338(h)(10), the deemed asset
sale of a parent corporation is considered to precede that of its
subsidiary. See Sec. 1.338-3(b)(4)(i).
(4) Old T and selling consolidated group, selling affiliate, or S
corporation shareholders--deemed liquidation; tax characterization--(i)
In general. Old T is treated as if, before the close of the acquisition
date, after the deemed asset sale in paragraph (d)(3) of this section,
and while old T is a member of the selling consolidated group (or owned
by the selling affiliate or owned by the S corporation shareholders), it
transferred all of its assets to members of the selling consolidated
group, the selling affiliate, or S corporation shareholders and ceased
to exist. The transfer from old T is characterized for Federal income
tax purposes in the same manner as if the parties had actually engaged
in the transactions deemed to occur because of this section and taking
into account other transactions that actually occurred or are deemed to
occur. For example, the transfer may be treated as a distribution in
pursuance of a plan of reorganization, a distribution in complete
cancellation or redemption of all its stock, one of a series of
distributions in complete cancellation or redemption of all its stock in
accordance with a plan of liquidation, or part of a circular flow of
cash. In most cases, the transfer will be treated as a distribution in
complete liquidation to which section 336 or 337 applies.
(ii) Tiered targets. In the case of parent-subsidiary chains of
corporations making elections under section 338(h)(10), the deemed
liquidation of a subsidiary corporation is considered to precede the
deemed liquidation of its parent.
(5) Selling consolidated group, selling affiliate, or S corporation
shareholders--(i) In general. If T is an S corporation target, S
corporation shareholders (whether or not they sell their stock) take
their pro rata share of the deemed sale tax consequences into account
under section 1366 and increase or decrease their basis in T stock under
section 1367. Members of the selling consolidated group, the selling
affiliate, or S corporation shareholders are treated as if, after the
deemed asset sale in paragraph (d)(3) of this section and before the
close of the acquisition date, they received the assets transferred by
old T in the transaction described in paragraph (d)(4)(i) of this
section. In most cases, the transfer will be treated as a distribution
in complete liquidation to which section 331 or 332 applies.
(ii) Basis and holding period of T stock not acquired. A member of
the selling consolidated group (or the selling affiliate or an S
corporation shareholder) retaining T stock is treated as acquiring the
stock so retained on the day after the acquisition date for its fair
market value. The holding period for the retained stock starts on the
day after the acquisition date. For purposes of this paragraph, the fair
market value of all of the T stock equals the grossed-up amount realized
on the sale to P of P's recently purchased target stock. See Sec.
1.338-4(c).
(iii) T stock sale. Members of the selling consolidated group (or
the selling affiliate or S corporation shareholders) recognize no gain
or loss on the sale or exchange of T stock included in the qualified
stock purchase (although they may recognize gain or loss on the T stock
in the deemed liquidation).
(6) Nonselling minority shareholders other than nonselling S
corporation shareholders--(i) In general. This paragraph (d)(6)
describes the treatment of shareholders of old T other than the
following: Members of the selling consolidated group, the selling
affiliate, S corporation shareholders (whether or not they sell their
stock), and P. For a description of the treatment of S corporation
shareholders, see paragraph (d)(5) of this section. A shareholder to
[[Page 149]]
which this paragraph (d)(6) applies is called a minority shareholder.
(ii) T stock sale. A minority shareholder recognizes gain or loss on
the shareholder's sale or exchange of T stock included in the qualified
stock purchase.
(iii) T stock not acquired. A minority shareholder does not
recognize gain or loss under this section with respect to shares of T
stock retained by the shareholder. The shareholder's basis and holding
period for that T stock is not affected by the section 338(h)(10)
election.
(7) Consolidated return of selling consolidated group. If P acquires
T in a qualified stock purchase from a selling consolidated group--
(i) The selling consolidated group must file a consolidated return
for the taxable period that includes the acquisition date;
(ii) A consolidated return for the selling consolidated group for
that period may not be withdrawn on or after the day that a section
338(h)(10) election is made for T; and
(iii) Permission to discontinue filing consolidated returns cannot
be granted for, and cannot apply to, that period or any of the
immediately preceding taxable periods during which consolidated returns
continuously have been filed.
(8) Availability of the section 453 installment method. Solely for
purposes of applying sections 453, 453A, and 453B, and the regulations
thereunder (the installment method) to determine the consequences to old
T in the deemed asset sale and to old T (and its shareholders, if
relevant) in the deemed liquidation, the rules in paragraphs (d)(1)
through (7) of this section are modified as follows:
(i) In deemed asset sale. Old T is treated as receiving in the
deemed asset sale new T installment obligations, the terms of which are
identical (except as to the obligor) to P installment obligations issued
in exchange for recently purchased stock of T. Old T is treated as
receiving in cash all other consideration in the deemed asset sale other
than the assumption of, or taking subject to, old T liabilities. For
example, old T is treated as receiving in cash any amounts attributable
to the grossing-up of amount realized under Sec. 1.338-4(c). The amount
realized for recently purchased stock taken into account in determining
ADSP is adjusted (and, thus, ADSP is redetermined) to reflect the
amounts paid under an installment obligation for the stock when the
total payments under the installment obligation are greater or less than
the amount realized.
(ii) In deemed liquidation. Old T is treated as distributing in the
deemed liquidation the new T installment obligations that it is treated
as receiving in the deemed asset sale. The members of the selling
consolidated group, the selling affiliate, or the S corporation
shareholders are treated as receiving in the deemed liquidation the new
T installment obligations that correspond to the P installment
obligations they actually received individually in exchange for their
recently purchased stock. The new T installment obligations may be
recharacterized under other rules. See for example Sec. 1.453-11(a)(2)
which, in certain circumstances, treats the new T installment
obligations deemed distributed by old T as if they were issued by new T
in exchange for the stock in old T owned by members of the selling
consolidated group, the selling affiliate, or the S corporation
shareholders. The members of the selling consolidated group, the selling
affiliate, or the S corporation shareholders are treated as receiving
all other consideration in the deemed liquidation in cash.
(9) Treatment consistent with an actual asset sale. No provision in
section 338(h)(10) or this section shall produce a Federal income tax
result under subtitle A of the Internal Revenue Code that would not
occur if the parties had actually engaged in the transactions deemed to
occur because of this section and taking into account other transactions
that actually occurred or are deemed to occur. See, however, Sec.
1.338-1(b)(2) for certain exceptions to this rule.
(e) Examples. The following examples illustrate the provisions of
this section:
Example 1. (i) S1 owns all of the T stock and T owns all of the
stock of T1 and T2. S1 is the common parent of a consolidated group that
includes T, T1, and T2. P makes a qualified stock purchase of all of the
T
[[Page 150]]
stock from S1. S1 joins with P in making a section 338(h)(10) election
for T and for the deemed purchase of T1. A section 338 election is not
made for T2.
(ii) S1 does not recognize gain or loss on the sale of the T stock
and T does not recognize gain or loss on the sale of the T1 stock
because section 338(h)(10) elections are made for T and T1. Thus, for
example, gain or loss realized on the sale of the T or T1 stock is not
taken into account in earnings and profits. However, because a section
338 election is not made for T2, T must recognize any gain or loss
realized on the deemed sale of the T2 stock. See Sec. 1.338-4(h).
(iii) The results would be the same if S1, T, T1, and T2 are not
members of any consolidated group, because S1 and T are selling
affiliates.
Example 2. (i) S and T are solvent corporations. S owns all of the
outstanding stock of T. S and P agree to undertake the following
transaction: T will distribute half its assets to S, and S will assume
half of T's liabilities. Then, P will purchase the stock of T from S. S
and P will jointly make a section 338(h)(10) election with respect to
the sale of T. The corporations then complete the transaction as agreed.
(ii) Under section 338(a), the assets present in T at the close of
the acquisition date are deemed sold by old T to new T. Under paragraph
(d)(4) of this section, the transactions described in paragraph (d) of
this section are treated in the same manner as if they had actually
occurred. Because S and P had agreed that, after T's actual distribution
to S of part of its assets, S would sell T to P pursuant to an election
under section 338(h)(10), and because paragraph (d)(4) of this section
deems T subsequently to have transferred all its assets to its
shareholder, T is deemed to have adopted a plan of complete liquidation
under section 332. T's actual transfer of assets to S is treated as a
distribution pursuant to that plan of complete liquidation.
Example 3. (i) S1 owns all of the outstanding stock of both T and
S2. All three are corporations. S1 and P agree to undertake the
following transaction. T will transfer substantially all of its assets
and liabilities to S2, with S2 issuing no stock in exchange therefor,
and retaining its other assets and liabilities. Then, P will purchase
the stock of T from S1. S1 and P will jointly make a section 338(h)(10)
election with respect to the sale of T. The corporations then complete
the transaction as agreed.
(ii) Under section 338(a), the remaining assets present in T at the
close of the acquisition date are deemed sold by old T to new T. Under
paragraph (d)(4) of this section, the transactions described in this
section are treated in the same manner as if they had actually occurred.
Because old T transferred substantially all of its assets to S2, and is
deemed to have distributed all its remaining assets and gone out of
existence, the transfer of assets to S2, taking into account the related
transfers, deemed and actual, qualifies as a reorganization under
section 368(a)(1)(D). Section 361(c)(1) and not section 332 applies to
T's deemed liquidation.
Example 4. (i) T owns two assets: an actively traded security (Class
II) with a fair market value of $100 and an adjusted basis of $100, and
inventory (Class IV) with a fair market value of $100 and an adjusted
basis of $100. T has no liabilities. S is negotiating to sell all the
stock in T to P for $100 cash and contingent consideration. Assume that
under generally applicable tax accounting rules, P's adjusted basis in
the T stock immediately after the purchase would be $100, because the
contingent consideration is not taken into account. Thus, under the
rules of Sec. 1.338-5, AGUB would be $100. Under the allocation rules
of Sec. 1.338-6, the entire $100 would be allocated to the Class II
asset, the actively traded security, and no amount would be allocated to
the inventory. P, however, plans immediately to cause T to sell the
inventory, but not the actively traded security, so it requests that,
prior to the stock sale, S cause T to create a new subsidiary, Newco,
and contribute the actively traded security to the capital of Newco.
Because the stock in Newco, which would not be actively traded, is a
Class V asset, under the rules of Sec. 1.338-6 $100 of AGUB would be
allocated to the inventory and no amount of AGUB would be allocated to
the Newco stock. Newco's own AGUB, $0 under the rules of Sec. 1.338-5,
would be allocated to the actively traded security. When P subsequently
causes T to sell the inventory, T would realize no gain or loss instead
of realizing gain of $100.
(ii) Assume that, if the T stock had not itself been sold but T had
instead sold both its inventory and the Newco stock to P, T would for
tax purposes be deemed instead to have sold both its inventory and
actively traded security directly to P, with P deemed then to have
created Newco and contributed the actively traded security to the
capital of Newco. Section 338, if elected, generally recharacterizes a
stock sale as a deemed sale of assets. However, paragraph (d)(9) of this
section states, in general, that no provision of section 338(h)(10) or
the regulations thereunder shall produce a Federal income tax result
under subtitle A of the Internal Revenue Code that would not occur if
the parties had actually engaged in the transactions deemed to occur by
virtue of the section 338(h)(10) election, taking into account other
transactions that actually occurred or are deemed to occur. Hence, the
deemed sale of assets under section 338(h)(10) should be treated as one
of the inventory and actively traded security themselves, not of the
inventory and Newco stock. The anti-abuse rule of Sec. 1.338-1(c) does
not apply, because the substance of
[[Page 151]]
the deemed sale of assets is a sale of the inventory and the actively
traded security themselves, not of the inventory and the Newco stock.
Otherwise, the anti-abuse rule might apply.
Example 5. (i) T, a member of a selling consolidated group, has only
one class of stock, all of which is owned by S1. On March 1 of Year 2,
S1 sells its T stock to P for $80,000, and joins with P in making a
section 338(h)(10) election for T. There are no selling costs or
acquisition costs. On March 1 of Year 2, T owns land with a $50,000
basis and $75,000 fair market value and equipment with a $30,000
adjusted basis, $70,000 recomputed basis, and $60,000 fair market value.
T also has a $40,000 liability. S1 pays old T's allocable share of the
selling group's consolidated tax liability for Year 2 including the tax
liability for the deemed sale tax consequences (a total of $13,600).
(ii) ADSP of $120,000 ($80,000 + $40,000 + 0) is allocated to each
asset as follows:
----------------------------------------------------------------------------------------------------------------
Assets Basis FMV Fraction Allocable ADSP
----------------------------------------------------------------------------------------------------------------
Land.................................... $50,000 $75,000 \5/9\ $66,667
Equipment............................... 30,000 60,000 \4/9\ 53,333
-------------------
Total............................. 80,000 135,000 1 120,000
----------------------------------------------------------------------------------------------------------------
(iii) Under paragraph (d)(3) of this section, old T has gain on the
deemed sale of $40,000 (consisting of $16,667 of capital gain and
$23,333 of ordinary income).
(iv) Under paragraph (d)(5)(iii) of this section, S1 recognizes no
gain or loss upon its sale of the old T stock to P. S1 also recognizes
no gain or loss upon the deemed liquidation of T. See paragraph (d)(4)
of this section and section 332.
(v) P's basis in new T stock is P's cost for the stock, $80,000. See
section 1012.
(vi) Under Sec. 1.338-5, the AGUB for new T is $120,000, i.e., P's
cost for the old T stock ($80,000) plus T's liability ($40,000). This
AGUB is allocated as basis among the new T assets under Sec. Sec.
1.338-6 and 1.338-7.
Example 6. (i) The facts are the same as in Example 5, except that
S1 sells 80 percent of the old T stock to P for $64,000, rather than 100
percent of the old T stock for $80,000.
(ii) The consequences to P, T, and S1 are the same as in Example 5,
except that:
(A) P's basis for its 80-percent interest in the new T stock is P's
$64,000 cost for the stock. See section 1012.
(B) Under Sec. 1.338-5, the AGUB for new T is $120,000 (i.e.,
$64,000/.8 + $40,000 + $0).
(C) Under paragraph (d)(4) of this section, S1 recognizes no gain or
loss with respect to the retained stock in T. See section 332.
(D) Under paragraph (d)(5)(ii) of this section, the basis of the T
stock retained by S1 is $16,000 (i.e., $120,000 - $40,000 (the ADSP
amount for the old T assets over the sum of new T's liabilities
immediately after the acquisition date) `` .20 (the proportion of T
stock retained by S1)).
Example 7. (i) The facts are the same as in Example 6, except that
K, a shareholder unrelated to T or P, owns the 20 percent of the T stock
that is not acquired by P in the qualified stock purchase. K's basis in
its T stock is $5,000.
(ii) The consequences to P, T, and S1 are the same as in Example 6.
(iii) Under paragraph (d)(6)(iii) of this section, K recognizes no
gain or loss, and K's basis in its T stock remains at $5,000.
Example 8. (i) The facts are the same as in Example 5, except that
the equipment is held by T1, a wholly-owned subsidiary of T, and a
section 338(h)(10) election is also made for T1. The T1 stock has a fair
market value of $60,000. T1 has no assets other than the equipment and
no liabilities. S1 pays old T's and old T1's allocable shares of the
selling group's consolidated tax liability for Year 2 including the tax
liability for T and T1's deemed sale tax consequences.
(ii) ADSP for T is $120,000, allocated $66,667 to the land and
$53,333 to the stock. Old T's deemed sale results in $16,667 of capital
gain on its deemed sale of the land. Under paragraph (d)(5)(iii) of this
section, old T does not recognize gain or loss on its deemed sale of the
T1 stock. See section 332.
(iii) ADSP for T1 is $53,333 (i.e., $53,333 + $0 + $0). On the
deemed sale of the equipment, T1 recognizes ordinary income of $23,333.
(iv) Under paragraph (d)(5)(iii) of this section, S1 does not
recognize gain or loss upon its sale of the old T stock to P.
Example 9. (i) The facts are the same as in Example 8, except that P
already owns 20 percent of the T stock, which is nonrecently purchased
stock with a basis of $6,000, and that P purchases the remaining 80
percent of the T stock from S1 for $64,000.
(ii) The results are the same as in Example 8, except that under
paragraph (d)(1) of this section and Sec. 1.338-5(d), P is deemed to
have made a gain recognition election for its nonrecently purchased T
stock. As a result, P recognizes gain of $10,000 and its basis in the
nonrecently purchased T stock is increased from $6,000 to $16,000. P's
basis in all the T stock is $80,000 (i.e., $64,000 + $16,000). The
computations are as follows:
(A) P's grossed-up basis for the recently purchased T stock is
$64,000 (i.e., $64,000 (the
[[Page 152]]
basis of the recently purchased T stock) x (1-.2)/(.8) (the fraction in
section 338(b)(4))).
(B) P's basis amount for the nonrecently purchased T stock is
$16,000 (i.e., $64,000 (the grossed-up basis in the recently purchased T
stock) x (.2)/(1.0-.2) (the fraction in section 338(b)(3)(B))).
(C) The gain recognized on the nonrecently purchased stock is
$10,000 (i.e., $16,000-$6,000).
Example 10. (i) T is an S corporation whose sole class of stock is
owned 40 percent each by A and B and 20 percent by C. T, A, B, and C all
use the cash method of accounting. A and B each has an adjusted basis of
$10,000 in the stock. C has an adjusted basis of $5,000 in the stock. A,
B, and C hold no installment obligations to which section 453A applies.
On March 1 of Year 1, A sells its stock to P for $40,000 in cash and B
sells its stock to P for a $25,000 note issued by P and real estate
having a fair market value of $15,000. The $25,000 note, due in full in
Year 7, is not publicly traded and bears adequate stated interest. A and
B have no selling expenses. T's sole asset is real estate, which has a
value of $110,000 and an adjusted basis of $35,000. Also, T's real
estate is encumbered by long-outstanding purchase-money indebtedness of
$10,000. The real estate does not have built-in gain subject to section
1374. A, B, and C join with P in making a section 338(h)(10) election
for T.
(ii) Solely for purposes of application of sections 453, 453A, and
453B, old T is considered in its deemed asset sale to receive back from
new T the $25,000 note (considered issued by new T) and $75,000 of cash
(total consideration of $80,000 paid for all the stock sold, which is
then divided by .80 in the grossing-up, with the resulting figure of
$100,000 then reduced by the amount of the installment note). Absent an
election under section 453(d), gain is reported by old T under the
installment method.
(iii) In applying the installment method to old T's deemed asset
sale, the contract price for old T's assets deemed sold is $100,000, the
$110,000 selling price reduced by the indebtedness of $10,000 to which
the assets are subject. (The $110,000 selling price is itself the sum of
the $80,000 grossed-up in paragraph (ii) above to $100,000 and the
$10,000 liability.) Gross profit is $75,000 ($110,000 selling price -
old T's basis of $35,000). Old T's gross profit ratio is 0.75 (gross
profit of $75,000 / $100,000 contract price). Thus, $56,250 (0.75 x the
$75,000 cash old T is deemed to receive in Year 1) is Year 1 gain
attributable to the sale, and $18,750 ($75,000 - $56,250) is recovery of
basis.
(iv) In its liquidation, old T is deemed to distribute the $25,000
note to B, since B actually sold the stock partly for that
consideration. To the extent of the remaining liquidating distribution
to B, it is deemed to receive, along with A and C, the balance of old
T's liquidating assets in the form of cash. Under section 453(h), B,
unless it makes an election under section 453(d), is not required to
treat the receipt of the note as a payment for the T stock; P's payment
of the $25,000 note in Year 7 to B is a payment for the T stock. Because
section 453(h) applies to B, old T's deemed liquidating distribution of
the note is, under section 453B(h), not treated as a taxable disposition
by old T.
(v) Under section 1366, A reports 40 percent, or $22,500, of old T's
$56,250 gain recognized in Year 1. Under section 1367, this increases
A's $10,000 adjusted basis in the T stock to $32,500. Next, in old T's
deemed liquidation, A is considered to receive $40,000 for its old T
shares, causing it to recognize an additional $7,500 gain in Year 1.
(vi) Under section 1366, B reports 40 percent, or $22,500, of old
T's $56,250 gain recognized in Year 1. Under section 1367, this
increases B's $10,000 adjusted basis in its T stock to $32,500. Next, in
old T's deemed liquidation, B is considered to receive the $25,000 note
and $15,000 of other consideration. Applying section 453, including
section 453(h), to the deemed liquidation, B's selling price and
contract price are both $40,000. Gross profit is $7,500 ($40,000 selling
price - B's basis of $32,500). B's gross profit ratio is 0.1875 (gross
profit of $7,500 / $40,000 contract price). Thus, $2,812.50 (0.1875 x
$15,000) is Year 1 gain attributable to the deemed liquidation. In Year
7, when the $25,000 note is paid, B has $4,687.50 (0.1875 x $25,000) of
additional gain.
(vii) Under section 1366, C reports 20 percent, or $11,250, of old
T's $56,250 gain recognized in Year 1. Under section 1367, this
increases C's $5,000 adjusted basis in its T stock to $16,250. Next, in
old T's deemed liquidation, C is considered to receive $20,000 for its
old T shares, causing it to recognize an additional $3,750 gain in Year
1. Finally, under paragraph (d)(5)(ii) of this section, C is considered
to acquire its stock in T on the day after the acquisition date for
$20,000 (fair market value = grossed-up amount realized of $100,000 x
20%). C's holding period in the stock deemed received in new T begins at
that time.
(f) Inapplicability of provisions. The provisions of section 6043,
Sec. 1.331-1(d), and Sec. 1.332-6 (relating to information returns and
recordkeeping requirements for corporate liquidations) do not apply to
the deemed liquidation of old T under paragraph (d)(4) of this section.
(g) Required information. The Commissioner may exercise the
authority granted in section 338(h)(10)(C)(iii) to require provision of
any information
[[Page 153]]
deemed necessary to carry out the provisions of section 338(h)(10) by
requiring submission of information on any tax reporting form.
[T.D. 8940, 66 FR 8950, Feb. 13, 2001, as amended by T.D. 9071, 68 FR
40768, July 9, 2003]
Sec. 1.338(h)(10)-1T Deemed asset sale and liquidation (temporary).
(a)-(c)(1) [Reserved]. For further guidance, see Sec. 1.338(h)(10)-
1(a) through (c)(1).
(c)(2) Availability of section 338(h)(10) election in certain multi-
step transactions. Notwithstanding anything to the contrary in Sec.
1.338-3(c)(1)(i), a section 338(h)(10) election may be made for T where
P's acquisition of T stock, viewed independently, constitutes a
qualified stock purchase and, after the stock acquisition, T merges or
liquidates into P (or another member of the affiliated group that
includes P), whether or not, under relevant provisions of law, including
the step transaction doctrine, the acquisition of the T stock and the
merger or liquidation of T qualify as a reorganization described in
section 368(a). If a section 338(h)(10) election is made in a case where
the acquisition of T stock followed by a merger or liquidation of T into
P qualifies as a reorganization described in section 368(a), for all
Federal tax purposes, P's acquisition of T stock is treated as a
qualified stock purchase and is not treated as part of a reorganization
described in section 368(a).
(c)(3)-(e) (Example 10) [Reserved]. For further guidance, see Sec.
1.338(h)(10)-1(c)(3) through (e) (Example 10).
(e) Example 11. Stock acquisition followed by upstream merger--
without section 338(h)(10) election. (i) P owns all the stock of Y, a
newly formed subsidiary. S owns all the stock of T. Each of P, S, T and
Y is a domestic corporation. P acquires all of the T stock in a
statutory merger of Y into T, with T surviving. In the merger, S
receives consideration consisting of 50% P voting stock and 50% cash.
Viewed independently of any other step, P's acquisition of T stock
constitutes a qualified stock purchase. As part of the plan that
includes P's acquisition of the T stock, T subsequently merges into P.
Viewed independently of any other step, T's merger into P qualifies as a
liquidation described in section 332. Absent the application of
paragraph (c)(2) of this section, the step transaction doctrine would
apply to treat P's acquisition of the T stock and T's merger into P as
an acquisition by P of T's assets in a reorganization described in
section 368(a). P and S do not make a section 338(h)(10) election with
respect to P's purchase of the T stock.
(ii) Because P and S do not make an election under section
338(h)(10) for T, P's acquisition of the T stock and T's merger into P
is treated as part of a reorganization described in section 368(a).
Example 12. Stock acquisition followed by upstream merger--with
section 338(h)(10) election. (i) The facts are the same as in Example 11
except that P and S make a joint election under section 338(h)(10) for
T.
(ii) Pursuant to paragraph (c)(2) of this section, as a result of
the election under section 338(h)(10), for all Federal tax purposes, P's
acquisition of the T stock is treated as a qualified stock purchase and
P's acquisition of the T stock is not treated as part of a
reorganization described in section 368(a).
Example 13. Stock acquisition followed by brother-sister merger--
with section 338(h)(10) election. (i) The facts are the same as in
Example 12, except that, following P's acquisition of the T stock, T
merges into X, a domestic corporation that is a wholly owned subsidiary
of P. Viewed independently of any other step, T's merger into X
qualifies as a reorganization described in section 368(a). Absent the
application of paragraph (c)(2) of this section, the step transaction
doctrine would apply to treat P's acquisition of the T stock and T's
merger into X as an acquisition by X of T's assets in a reorganization
described in section 368(a).
(ii) Pursuant to paragraph (c)(2) of this section, as a result of
the election under section 338(h)(10), for all Federal tax purposes, P's
acquisition of T stock is treated as a qualified stock purchase and P's
acquisition of T stock is not treated as part of a reorganization
described in section 368(a).
Example 14. Stock acquisition that does not qualify as a qualified
stock purchase followed by upstream merger. (i) The facts are the same
as in Example 11, except that, in the statutory merger of Y into T, S
receives only P voting stock.
(ii) Pursuant to section 1.338-3(c)(1)(i) and paragraph (c)(2) of
this section, no election under section 338(h)(10) can be made with
respect to P's acquisition of the T stock because, pursuant to relevant
provisions of law, including the step transaction doctrine, that
acquisition followed by T's merger into P is treated as a reorganization
under section 368(a)(1)(A), and that acquisition, viewed independently
of T's merger into P, does not constitute a qualified stock purchase
under section 338(d)(3). Accordingly, P's acquisition of the T stock and
T's merger into P is treated as a reorganization under section 368(a).
(f)-(g) [Reserved]. For further guidance, see Sec. 1.338(h)(10)-
1(f) through (g).
[[Page 154]]
(h) Effective date. This section is applicable to stock acquisitions
occurring on or after July 9, 2003.
[T.D. 9071, 68 FR 40768, July 9, 2003]
Sec. 1.338(i)-1 Effective dates.
(a) In general. The provisions of Sec. Sec. 1.338-1 through 1.338-
7, 1.338-10 and 1.338(h)(10)-1 apply to any qualified stock purchase
occurring after March 15, 2001. For rules applicable to qualified stock
purchases on or before March 15, 2001, see Sec. Sec. 1.338-1T through
1.338-7T, 1.338-10T, 1.338(h)(10)-1T and 1.338(i)-1T in effect prior to
March 16, 2001 (see 26 CFR part 1 revised April 1, 2000).
(b) Section 338(h)(10) elections for S corporation targets. The
requirements of Sec. Sec. 1.338(h)(10)-1T(c)(2) and 1.338(h)(10)-
1(c)(2) that S corporation shareholders who do not sell their stock must
also consent to an election under section 338(h)(10) will not invalidate
an otherwise valid election made on the September 1997 revision of Form
8023, ``Elections Under Section 338 For Corporations Making Qualified
Stock Purchases,'' not signed by the nonselling shareholders, provided
that the S corporation and all of its shareholders (including nonselling
shareholders) report the tax consequences consistently with the results
under section 338(h)(10).
[T.D. 8940, 66 FR 9954, Feb. 13, 2001]
collapsible corporations; foreign personal holding companies
Sec. 1.341-1 Collapsible corporations; in general.
Subject to the limitations contained in Sec. 1.341-4 and the
exceptions contained in Sec. 1.341-6 and Sec. 1.341-7(a), the entire
gain from the actual sale or exchange of stock of a collapsible
corporation, (b) amounts distributed in complete or partial liquidation
of a collapsible corporation which are treated, under section 331, as
payment in exchange for stock, and (c) a distribution made by a
collapsible corporation which, under section 301(c)(3), is treated, to
the extent it exceeds the basis of the stock, in the same manner as a
gain from the sale or exchange of property, shall be considered as
ordinary income.
[T.D. 7655, 44 FR 68459, Nov. 29, 1979]
Sec. 1.341-2 Definitions.
(a) Determination of collapsible corporation. (1) A collapsible
corporation is defined by section 341(b)(1) to be a corporation formed
or availed of principally (i) for the manufacture, construction, or
production of property, (ii) for the purchase of property which (in the
hands of the corporation) is property described in section 341(b)(3), or
(iii) for the holding of stock in a corporation so formed or availed of,
with a view to (a) the sale or exchange of stock by its shareholders
(whether in liquidation or otherwise), or a distribution to its
shareholders, prior to the realization by the corporation manufacturing,
constructing, producing, or purchasing the property of a substantial
part of the taxable income to be derived from such property, and (b) the
realization by such shareholders of gain attributable to such property.
See Sec. 1.341-5 for a description of the facts which will ordinarily
be considered sufficient to establish whether or not a corporation is a
collapsible corporation under the rules of this section. See paragraph
(d) of Sec. 1.341-5 for examples of the application of section 341.
(2) Under section 341(b)(1) the corporation must be formed or
availed of with a view to the action therein described, that is, the
sale or exchange of its stock by its shareholders, or a distribution to
them prior to the realization by the corporation manufacturing,
constructing, producing, or purchasing the property of a substantial
part of the taxable income to be derived from such property, and the
realization by the shareholders of gain attributable to such property.
This requirement is satisfied in any case in which such action was
contemplated by those persons in a position to determine the policies of
the corporation, whether by reason of their owning a majority of the
voting stock of the corporation or otherwise. The requirement is
satisfied whether such action was contemplated, unconditionally,
conditionally, or as a recognized possibility. If the corporation was so
formed or availed of, it is immaterial that a particular shareholder
[[Page 155]]
was not a shareholder at the time of the manufacture, construction,
production, or purchase of the property, or if a shareholder at such
time, did not share in such view. Any gain of such a shareholder on his
stock in the corporation shall be treated in the same manner as gain of
a shareholder who did share in such view. The existence of a bona fide
business reason for doing business in the corporate form does not, by
itself, negate the fact that the corporation may also have been formed
or availed of with a view to the action described in section 341(b).
(3) A corporation is formed or availed of with a view to the action
described in section 341(b) if the requisite view existed at any time
during the manufacture, production, construction, or purchase referred
to in that section. Thus, if the sale, exchange, or distribution is
attributable solely to circumstances which arose after the manufacture,
construction, production, or purchase (other than circumstances which
reasonably could be anticipated at the time of such manufacture,
construction, production, or purchase), the corporation shall, in the
absence of compelling facts to the contrary, be considered not to have
been so formed or availed of. However, if the sale, exchange or
distribution is attributable to circumstances present at the time of the
manufacture, construction, production, or purchase, the corporation
shall, in the absence of compelling facts to the contrary, be considered
to have been so formed or availed of.
(4) The property referred to in section 341(b) is that property or
the aggregate of those properties with respect to which the requisite
view existed. In order to ascertain the property or properties as to
which the requisite view existed, reference shall be made to each
property as to which, at the time of the sale, exchange, or distribution
referred to in section 341(b) there has not been a realization by the
corporation manufacturing, constructing, producing, or purchasing the
property of a substantial part of the taxable income to be derived from
such property. However, where any such property is a unit of an
integrated project involving several properties similar in kind, the
determination whether the requisite view existed shall be made only if a
substantial part of the taxable income to be derived from the project
has not been realized at the time of the sale, exchange, or
distribution, and in such case the determination shall be made by
reference to the aggregate of the properties constituting the single
project.
(5) A corporation shall be deemed to have manufactured, constructed,
produced, or purchased property if it (i) engaged in the manufacture,
construction, or production of property to any extent, or (ii) holds
property having a basis determined, in whole or in part, by reference to
the cost of such property in the hands of a person who manufactured,
constructed, produced, or purchased the property, or (iii) holds
property having a basis determined, in whole or in part, by reference to
the cost of property manufactured, constructed, produced, or purchased
by the corporation. Thus, under subdivision (i) of this subparagraph,
for example, a corporation need not have originated nor have completed
the manufacture, construction, or production of the property. Under
subdivision (ii) of this subparagraph, for example, if an individual
were to transfer property constructed by him to a corporation in
exchange for all of the capital stock of such corporation, and such
transfer qualifies under section 351, then the corporation would be
deemed to have constructed the property, since the basis of the property
in the hands of the corporation would, under section 362 be determined
by reference to the basis of the property in the hands of the
individual. Under subdivision (iii) of this subparagraph, for example,
if a corporation were to exchange property constructed by it for
property of like kind constructed by another person, and such exchange
qualifies under section 1031(a), then the corporation would be deemed to
have constructed the property received by it in the exchange, since the
basis of the property received by it in the exchange would, under
section 1031(d), be determined by reference to the basis of the property
constructed by the corporation.
(6) In determining whether a corporation is a collapsible
corporation by reason of the purchase of property, it is
[[Page 156]]
immaterial whether the property is purchased from the shareholders of
the corporation or from persons other than such shareholders. The
property, however, must be property which, in the hands of the
corporation, is property of a kind described in section 341(b)(3). The
determination whether property is of a kind described in section
341(b)(3) shall be made without regard to the fact that the corporation
is formed or availed of with a view to the action described in section
341(b)(1).
(7) Section 341 is applicable whether the shareholder is an
individual, a trust, an estate, a partnership, a company, or a
corporation.
(b) Section 341 assets. For the purposes of this section, the term
``section 341 assets'' means the following listed property if held for
less than 3 years:
(1) Stock in trade of the corporation, or other property of a kind
which would properly be included in the inventory of the corporation if
on hand at the close of the taxable year.
(2) Property held primarily for sale to customers in the ordinary
course of a trade or business.
(3) Property used in a trade or business as defined in section
1231(b) and held for less than 3 years, except property that is or has
been used in connection with the manufacture, construction, production
or sale of property described in subparagraphs (1) and (2) of this
paragraph.
(4) Unrealized receivables or fees pertaining to property listed in
this paragraph. The term unrealized receivables or fees means any rights
(contractual or otherwise) to payment for property listed in
subparagraphs (1), (2), and (3) of this paragraph which has been
delivered or is to be delivered and rights to payments for services
rendered or to be rendered, to the extent such rights have not been
included in the income of the corporation under the method of accounting
used by it. In determining whether the assets referred to in this
paragraph have been held for 3 years, the time such assets were held by
a transferor shall be taken into consideration (section 1223). However,
no such period shall begin before the date the manufacture,
construction, production, or purchase of such assets is completed.
Sec. 1.341-3 Presumptions.
(a) Unless shown to the contrary a corporation shall be considered
to be a collapsible corporation if at the time of the transactions
described in Sec. 1.341-1 the fair market value of the section 341
assets held by it constitutes 50 percent or more of the fair market
value of its total assets and the fair market value of the section 341
assets is 120 percent or more of the adjusted basis of such assets. In
determining the fair market value of the total assets, cash, obligations
which are capital assets in the hands of the corporation, governmental
obligations, and stock in any other corporation shall not be taken into
consideration. The failure of a corporation to meet the requirements of
this paragraph, shall not give rise to the presumption that the
corporation was not a collapsible corporation.
(b) The following example will illustrate the application of this
section:
Example A corporation, filing its income tax returns on the accrual
basis, on July 31, 1955, owned assets with the following fair market
values: Cash, $175,000; note receivable held for investment, $130,000;
stocks of other corporations, $545,000; rents receivable, $15,000; and a
building constructed by the corporation in 1953 and held thereafter as
rental property, $750,000. The adjusted basis of the building on that
date was $600,000. The only debt outstanding was a $500,000 mortgage on
the building. On July 31, 1955, the corporation liquidated and
distributed all of its assets to its shareholders. In computing whether
the fair market value of the section 341 assets (only the building) is
50 percent or more of the fair market value of the total assets, the
cash, note receivable, and stocks of other corporations are not taken
into account in determining the value of the total assets, with the
result that the fair market value of the total assets was $765,000
($750,000 (building) plus $15,000 rents receivable). Therefore, the
value of the building is 98 percent of the total assets ($750,000/
$765,000). The value of the building is also 125 percent of the adjusted
basis of the building ($750,000/$600,000). In view of the above facts,
there arises a presumption that the corporation is a collapsible
corporation.
Sec. 1.341-4 Limitations on application of section.
(a) General. This section shall apply only to the extent that the
recognized gain of a shareholder upon his stock in a collapsible
corporation would be considered, but for the provisions of this
[[Page 157]]
section, as gain from the sale or exchange of a capital asset held for
more than 1 year (6 months for taxable years before 1977; 9 months for
taxable years beginning in 1977). Thus, if a taxpayer sells at a gain
stock of a collapsible corporation which he had held for six months or
less, this section would not, in any event, apply to such gain. Also, if
it is determined, under provisions of law other than section 341, that a
sale or exchange at a gain of stock of a collapsible corporation which
has been held for more than 1 year (6 months for taxable years before
1977; 9 months for taxable years beginning in 1977) results in ordinary
income rather than long-term capital gain, then this section (including
the limitations contained herein) has no application whatsoever to such
gain.
(b) Stock ownership rules. (1) This section shall apply in the case
of gain realized by a shareholder upon his stock in a collapsible
corporation only if the shareholder, at any time after the actual
commencement of the manufacture, construction, or production of the
property, or at the time of the purchase of the property described in
section 341(b)(3) or at any time thereafter, (i) owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation, or (ii) owned stock which was considered as
owned at such time by another shareholder who then owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation.
(2) The ownership of stock shall be determined in accordance with
the rules prescribed by section 544(a)(1), (2), (3), (5), and (6),
except that, in addition to the persons prescribed by section 544(a)(2),
the family of an individual shall include the spouses of that
individual's brothers and sisters, whether such brothers and sisters are
by the whole or the half blood, and the spouses of that individual's
lineal descendants.
(3) For the purpose of this limitation, treasury stock shall not be
considered as outstanding stock.
(4) It is possible, under this limitation, that a shareholder in a
collapsible corporation may have gain upon his stock in that corporation
treated differently from the gain of another shareholder in the same
collapsible corporation.
(c) Seventy-percent rule. (1) This section shall apply to the gain
recognized during a taxable year upon the stock in a collapsible
corporation only if more than 70 percent of such gain is attributable to
the property referred to in section 341(b)(1). If more than 70 percent
of such gain is so attributable, then all of such gain is subject to
this section, and, if 70 percent or less of such gain is so
attributable, then none of such gain is subject to this section.
(2) For the purpose of this limitation, the gain attributable to the
property referred to in section 341(b)(1) is the excess of the
recognized gain of the shareholder during the taxable year upon his
stock in the collapsible corporation over the recognized gain which the
shareholder would have if the property had not been manufactured,
constructed, produced, or purchased. In the case of gain on a
distribution in partial liquidation or a distribution described in
section 301(c)(3)(A), the gain attributable to the property shall not be
less than an amount which bears the same ratio to the gain on such
distribution as the gain which would be attributable to the property if
there had been a complete liquidation at the time of such distribution
bears to the total gain which would have resulted from such complete
liquidation.
(3) Gain may be attributable to the property referred to in section
341(b)(1) even though such gain is represented by an appreciation in the
value of property other than that manufactured, constructed, produced,
or purchased. Where, for example, a corporation owns a tract of land and
the development of one-half of the tract increases the value of the
other half, the gain attributable to the developed half of the tract
includes the increase in the value of the other half.
(4) The following example will illustrate the application of the 70
percent rule:
Example: On January 2, 1954, A formed the Z Corporation and
contributed $1,000,000 cash in exchange for all of the stock thereof.
The Z Corporation invested $400,000 in one project
[[Page 158]]
for the purpose of building and selling residential houses. As of
December 31, 1954, the residential houses in this project were all sold,
resulting in a profit of $100,000 (after taxes). Simultaneously with the
development of the first project and in connection with a second and
separate project the Z Corporation invested $600,000 in land for the
purpose of subdividing such land into lots suitable for sale as home
sites and distributing such lots in liquidation before the realization
by the corporation of a substantial part of the taxable income to be
realized from this second project. As of December 31, 1954, Corporation
Z had derived $60,000 in profits (after taxes) from the sale of some of
the lots. On January 2, 1955, the Z Corporation made a distribution in
complete liquidation to shareholder A who received:
(i) $560,000 in cash and notes, and
(ii) Lots having a fair market value of $940,000.
The gain recognized to shareholder A upon the liquidation is $500,000
($1,500,000 minus $1,000,000). The gain which would have been recognized
to A if the second project had not been undertaken is $100,000
($1,100,000 minus $1,000,000). Therefore, the gain attributable to the
second project which is property referred to in section 341(b)(1), is
$400,000 ($500,000 minus $100,000). Since this gain ($400,000) is more
than 70 percent of the entire gain ($500,000) recognized to A on the
liquidation, the entire gain so recognized is gain subject to section
341(a).
(d) Three-year rule. This section shall not apply to that portion of
the gain of a shareholder that is realized more than three years after
the actual completion of the manufacture, construction, production, or
purchase of the property referred to in section 341(b)(1) to which such
portion is attributable. However, if the actual completion of the
manufacture, construction, production, or purchase of all of such
property occurred more than 3 years before the date on which the gain is
realized, this section shall not apply to any part of the gain realized.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6738, 29 FR
7671, June 16, 1964; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.341-5 Application of section.
(a) Whether or not a corporation is a collapsible corporation shall
be determined under the regulations of Sec. Sec. 1.341-2 and 1.341-3 on
the basis of all the facts and circumstances in each particular case.
The following paragraphs of this section set forth those facts which
will ordinarily be considered sufficient to establish that a corporation
is or is not a collapsible corporation. The facts set forth in the
following paragraphs of this section are not exclusive of other facts
which may be controlling in any particular case. For example, if the
facts in paragraph (b) of this section, but not the facts in paragraph
(c) of this section, are present, the corporation may nevertheless not
be a collapsible corporation if there are other facts which clearly
establish that the regulations of Sec. Sec. 1.341-2 and 1.341-3 are not
satisfied. Similarly, if the facts in paragraph (c) of this section are
present, the corporation may nevertheless be a collapsible corporation
if there are other facts which clearly establish that the corporation
was formed or availed of in the manner described in Sec. Sec. 1.341-2
and 1.341-3 or if the facts in paragraph (c) of this section are not
significant by reason of other facts, such as the fact that the
corporation is subject to the control of persons other than those who
were in control immediately prior to the manufacture, construction,
production, or purchase of the property. See Sec. 1.341-4 for
provisions which make section 341 inapplicable to certain shareholders
of collapsible corporations.
(b) The following facts will ordinarily be considered sufficient
(except as otherwise provided in paragraph (a) of this section and
paragraph (c) of this section) to establish that a corporation is a
collapsible corporation:
(1) A shareholder of the corporation sells or exchanges his stock,
or receives a liquidating distribution, or a distribution described in
section 301(c)(3)(A),
(2) Upon such sale, exchange, or distribution, such shareholder
realizes gain attributable to the property described in subparagraphs
(4) and (5) of this paragraph, and
(3) At the time of the manufacture, construction, production, or
purchase of the property described in subparagraphs (4) and (5) of this
paragraph, such activity was substantial in relation to the other
activities of the corporation which manufactured, constructed, produced,
or purchased such property.
[[Page 159]]
The property referred to in subparagraphs (2) and (3) of this paragraph
is that property or the aggregate of those properties which meet the
following two requirements:
(4) The property is manufactured, constructed, or produced by the
corporation or by another corporation stock of which is held by the
corporation, or is property purchased by the corporation or by such
other corporation which (in the hands of the corporation holding such
property) is property described in section 341(b)(3), and
(5) At the time of the sale, exchange, or distribution described in
subparagraph (1) of this paragraph, the corporation which manufactured,
constructed, produced, or purchased such property has not realized a
substantial part of the taxable income to be derived from such property.
In the case of property which is a unit of an integrated project
involving several properties similar in kind, the rules of this
subparagraph shall be applied to the aggregate of the properties
constituting the single project rather than separately to such unit.
Under the rules of this subparagraph, a corporation shall be considered
a collapsible corporation by reason of holding stock in other
corporations which manufactured, constructed, produced, or purchased the
property only if the activity of the corporation in holding stock in
such other corporations is substantial in relation to the other
activities of the corporation.
(c) The absence of any of the facts set forth in paragraph (b) of
this section or the presence of the following facts will ordinarily be
considered sufficient (except as otherwise provided in paragraph (a) of
this section) to establish that a corporation is not a collapsible
corporation:
(1) In the case of a corporation subject to paragraph (b) of this
section only by reason of the manufacture, construction, production, or
purchase (either by the corporation or by another corporation the stock
of which is held by the corporation) of property which is property
described in section 341(b)(3)(A) and (B), the amount (both in quantity
and value) of such property is not in excess of the amount which is
normal--
(i) For the purpose of the business activities of the corporation
which manufactured, constructed, produced, or purchased the property if
such corporation has a substantial prior business history involving the
use of such property and continues in business, or
(ii) For the purpose of an orderly liquidation of the business if
the corporation which manufactured, constructed, produced, or purchased
such property has a substantial prior business history involving the use
of such property and is in the process of liquidation.
(2) In the case of a corporation subject to paragraph (b) of this
section with respect to the manufacture, construction, or production
(either by the corporation or by another corporation the stock of which
is held by the corporation) of property, the amount of the unrealized
taxable income from such property is not substantial in relation to the
amount of the taxable income realized (after the completion of a
material part of such manufacture, construction, or production, and
prior to the sale, exchange, or distribution referred to in paragraph
(b)(1) of this section) from such property and from other property
manufactured, constructed, or produced by the corporation.
(d) The following examples will illustrate the application of this
section:
Example (1). (i) On January 2, 1954, A formed the W Corporation and
contributed $50,000 cash in exchange for all of the stock thereof. The W
Corporation borrowed $900,000 from a bank and used $800,000 of such sum
in the construction of an apartment house on land which it purchased for
$50,000. The apartment house was completed on December 31, 1954. On
December 31, 1954, the corporation, having determined that the fair
market value of the apartment house, separate and apart from the land,
was $900,000, made a distribution (permitted under the applicable State
law) to A of $100,000. At this time, the fair market value of the land
was $50,000. As of December 31, 1954, the corporation has not realized
any earnings and profits. In 1955, the corporation began the operation
of the apartment house and received rentals therefrom. The corporation
has since continued to own and operate the building. The corporation
reported on the basis of the calendar year and cash receipts and
disbursements.
[[Page 160]]
(ii) Since A received a distribution and realized a gain
attributable to the building constructed by the corporation, since, at
the time of such distribution, the corporation has not realized a
substantial part of the taxable income to be derived from such building,
and since the construction of the building was a substantial activity of
the corporation, the W Corporation is considered a collapsible
corporation under paragraph (b) of Sec. 1.341-5. The provisions of
section 341(d) do not prohibit the application of section 341(a).
Therefore, the distribution, if and to the extent that it may be
considered long-term capital gain rather than ordinary income without
regard to section 341, will be considered ordinary income under section
341(a).
(iii) In the event of the existence of additional facts and
circumstances in the above case, the corporation, notwithstanding the
above facts, might not be considered a collapsible corporation. See
Sec. 1.342-2 and paragraph (a) of Sec. 1.341-5.
Example (2). (i) On January 2, 1954, B formed X Corporation and
became its sole shareholder. In August 1954, the corporation completed
construction of an office building. It immediately sold this building at
a gain of $50,000, included this entire gain in its return for 1954, and
distributed this entire gain (less taxes) to B. In June 1955, the
corporation completed construction of a second office building. In
August 1955, B sold the entire stock of X Corporation at a gain of
$12,000, which gain is attributable to the second building.
(ii) X Corporation is a collapsible corporation under section 341(b)
for the following reasons: The gain realized through the sale of the
stock of X Corporation was attributable to the second office building;
the construction of that building was a substantial activity of X
Corporation during the time of construction and, at the time of sale,
the corporation had not realized a substantial part of the taxable
income to be derived from such building. Since the provisions of section
341(d) do not prohibit the application of section 341 (a) to B, the gain
of $12,000 to B is, accordingly, considered ordinary income.
Example (3). The facts are the same as in Example (2), except that
the following facts are shown: B was the president of the X Corporation
and active in the conduct of its business. The second building was
constructed as the first step in a project of the X Corporation for the
development for rental purposes of a large suburban center involving the
construction of several buildings by the corporation. The sale of the
stock by B was caused by his retiring from all business activity as a
result of illness arising after the second building was constructed.
Under these additional facts, the corporation is not considered a
collapsible corporation. See Sec. 1.341-2 and paragraph (a) of Sec.
1.341-5.
Example (4). (i) On January 2, 1948, C formed the Y Corporation and
became the sole shareholder thereof. The Y Corporation has been engaged
solely in the business of producing motion pictures and licensing their
exhibition. On January 2, 1955, C sold all of the stock of the Y
Corporation at a gain. The Y Corporation has produced one motion picture
each year since its organization and before January 2, 1955, it has
realized a substantial part of the taxable income to be derived from
each of its motion pictures except the last one made in 1954. This last
motion picture was completed September 1, 1954. As of January 2, 1955,
no license had been made for its exhibition. The fair market value on
January 2, 1955, of this last motion picture exceeds the cost of its
production by $50,000. A material part of the production of this last
picture was completed on January 1, 1954, and between that date and
January 2, 1955, the corporation had realized taxable income of $500,000
from other motion pictures produced by it. The corporation has
consistently distributed to its shareholder its taxable income when
received (after adjustment for taxes).
(ii) Although the corporation is within paragraph (b) of this
section with respect to the production of property, the amount of the
unrealized income from such property ($50,000) is not substantial in
relation to the amount of the income realized, after the completion of a
material part of the production of such property and prior to sale of
the stock, from such property and other property produced by the
corporation ($500,000). Accordingly, the Y Corporation is within
paragraph (c)(2) of this section, and is not considered a collapsible
corporation.
Example (5). The facts are the same as in Example (4) except that C
sold all of his stock to D on February 1, 1954. On January 2, 1955, D
sold all of the Y Corporation stock at a gain, the gain being
attributable to the picture completed September 1, 1954, and not
released by the corporation for exhibition. In view of the change of
control of the corporation, the provisions of paragraph (c)(2) of this
section are not significant at the time of the sale by D, and the Y
Corporation would be considered a collapsible corporation on January 2,
1955. See Sec. 1.341-2 and paragraph (a) of Sec. 1.341-5.
Sec. 1.341-6 Exceptions to application of section.
(a) In general--(1) Transactions excepted. Section 341(e) excepts 4
types of transactions from the application of the collapsible
corporation provisions. These exceptions, where applicable, eliminate
the necessity of determining whether a corporation is a collapsible
[[Page 161]]
corporation within the meaning of section 341(b) or whether any of the
limitations of section 341(d) are applicable. Under section 341(e)(1)
and (2), there are 2 exceptions which are designed to allow the
shareholders of a corporation either to sell or exchange their stock or
to receive distributions in certain complete liquidations without having
any gain considered under section 341(a)(1) or (2) as gain from the sale
or exchange of property which is not a capital asset. Under section
341(e)(3), a third exception is designed to permit the shareholders of a
corporation to make use of section 333, relating to elections as to
recognition of gain in certain complete liquidations occurring within
one calendar month. Under section 341(e)(4), the fourth exception
permits a corporation to make use of section 337, relating to
nonrecognition of gain or loss on sales or exchanges of property by a
corporation following the adoption of a plan of complete liquidation.
Section 341(e) does not apply to distributions in partial liquidation or
in redemption of stock (other than any such distribution pursuant to a
plan of complete liquidation), or to distributions described in section
301(c)(3)(A).
(2) Effective date. The exceptions in section 341(e)(1), (2), and
(3) apply only with respect to taxable years of shareholders beginning
after December 31, 1957, and only with respect to sales or exchanges of
stock and distributions of property occurring after September 2, 1958.
The exception in section 341(e)(4) applies only with respect to taxable
years of corporations beginning after December 31, 1957, and only if all
sales or exchanges of property, and all liquidating distributions, made
by the corporation under the plan of complete liquidation occur after
September 2, 1958.
(3) Definition of constructive shareholder and attribution rules.
(i) For purposes of this section, the term constructive shareholder
means a person who does not actually own any stock but who is considered
to own stock by reason of the application of subdivision (ii) of this
subparagraph.
(ii) For purposes of this section (other than paragraph (k),
relating to definition of related person) a person shall be considered
to own the stock he actually owns plus any stock which is attributed to
him by reason of applying the rules prescribed in paragraph (b)(2) and
(3) of Sec. 1.341-4. See section 341(e)(10).
(iii) As an example of this subparagraph, if a husband does not
actually own any stock in a corporation but his wife is the actual owner
of 5 shares in the corporation, then the husband is a constructive
shareholder who is considered to own 5 shares in the corporation.
(4) General corporate test. No exception provided in section 341(e)
applies unless a general corporate test and, where applicable, a
specific shareholder test are satisfied. Under the general corporate
test no taxpayer may utilize the provisions of section 341(e) unless the
net increase in value (called ``net unrealized appreciation'') in the
corporation's ``subsection (e) assets'' does not exceed 15 percent of
the corporation's net worth. Subsection (e) assets are, in general,
those assets of the corporation which, if sold at a gain by the
corporation or by any actual or constructive shareholder who is
considered to own more than 20 percent in value of the outstanding
stock, would result in the realization of ordinary income. See paragraph
(b) of this section for the definition of subsection (e) assets, and
paragraph (h) of this section for definition of net unrealized
appreciation. This subparagraph may be illustrated by the following
examples:
Example (1). X Corporation is in the business of selling whiskey.
The net unrealized appreciation in its whiskey is $20,000 and the net
worth of the corporation is $100,000. Since the corporation's whiskey is
a subsection (e) asset and since the net unrealized appreciation in
subsection (e) assets ($20,000) exceeds 15 percent of net worth
($15,000), the general corporate test is not satisfied and section
341(e) is inapplicable to the corporation or its shareholders.
Example (2). Assume the same facts as in Example (1) except that X
Corporation is not in the business of selling whiskey. Assume further
that an actual shareholder who owns more than 20 percent in value of the
outstanding X stock (or a person who is considered to own such actual
shareholder's stock, such as his spouse) is in the business of selling
whiskey. The result is the same as in Example (1).
(5) Specific shareholder test. Even if the general corporate test is
met, a shareholder selling or exchanging his
[[Page 162]]
stock or receiving a distribution with respect to his stock (referred to
as a ``specific shareholder'') who is considered to own more than 5
percent in value of the outstanding stock of the corporation may not
utilize the benefits of the exception in section 341(e)(1) (or the
exception in section 341(e)(2)) unless he satisfies the applicable
specific shareholder test. In general, the specific shareholder test is
satisfied if the net unrealized appreciation in subsection (e) assets of
the corporation, plus the net unrealized appreciation in certain other
assets of the corporation which would be subsection (e) assets in
respect of the specific shareholder under the following circumstances,
does not exceed 15 percent of the corporation's net worth:
(i) If the specific shareholder is considered to own more than 5
percent but not more than 20 percent in value of the outstanding stock,
he must take into account the net unrealized appreciation in assets of
the corporation which would be subsection (e) assets if he was
considered to own more than 20 percent in value of the outstanding stock
(see paragraph (c)(3)(i) of this section);
(ii) In addition, if the specific shareholder is considered to own
more than 20 percent in value of the outstanding stock, he must also
take into account the net unrealized appreciation in assets of the
corporation which would be subsection (e) assets under section
341(e)(5)(A)(i) and (iii) if his ownership within the preceding 3 years
of stock in certain ``related'' corporations were taken into account in
the manner prescribed in paragraphs (c)(3)(ii) and (d) of this section.
(b) Subsection (e) asset defined--(1) General. The benefits of
section 341(e) are unavailable if the net unrealized appreciation (as
defined in paragraph (h) of this section) in certain assets of the
corporation (hereinafter called ``subsection (e) assets'') exceeds 15
percent of the corporation's net worth. In determining whether property
is a subsection (e) asset, it is immaterial whether the property is
described in section 341(b), and there shall not be taken into account
sections 617(d) (relating to gain from dispositions of certain mining
property), 1245 and 1250 (relating to gain from dispositions of certain
depreciable property), 1251 (relating to gain from disposition of farm
property where farm losses offset nonfarm income), 1252 (relating to
gain from disposition of farm land), and 1254 (relating to gain from
disposition of natural resource recapture property).
(2) Categories of subsection (e) assets. The term subsection (e)
assets, as defined in section 341(e)(5)(A)(i), (ii), (iii), and (iv),
means the following categories of property held by a corporation:
(i) The first category is property (except property described in
section 1231(b), without regard to any holding period prescribed
therein) which in the hands of the corporation is, or in the hands of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of the outstanding stock of the corporation
would be, property gain from the sale or exchange of which would under
any provision of chapter 1 of the Code (other than section 617(d), 1245,
1250, 1251, 1252, or 1254) be considered in whole or in part as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). For example, included in this
category is property held by a corporation which in its hands is stock
in trade, inventory, or property held by it primarily for sale to
customers in the ordinary course of its trade or business regardless of
whether such property is appreciated or depreciated in value. Also
included in this category is property held by a corporation which is a
capital asset in its hands but which, in the hands of any actual or
constructive shareholder who is considered to own more than 20 percent
in value of the outstanding stock, would be stock in trade, inventory,
or property held by such actual or constructive shareholder primarily
for sale to customers in the ordinary course of his trade or business.
For additional rules relating to whether property is a subsection (e)
asset under this subdivision, see subparagraphs (3), (4), and (5) of
this paragraph.
(ii) The second category of subsection (e) assets is property which
in the hands of the corporation is property
[[Page 163]]
described in section 1231(b) (without regard to any holding period
prescribed therein), but only if there is net unrealized depreciation
(within the meaning of paragraph (h)(2) of this section) on all such
property. This subdivision may be illustrated by the following example:
Example. X Corporation owns only the following section 1231(b)
property (determined without regard to holding period).
------------------------------------------------------------------------
Fair Unreal- ized
Oil leaseholds Adjusted market appreciation
basis value (depreciation)
------------------------------------------------------------------------
No. 1............................... $16,000 $10,000 ($6,000)
No. 2............................... 8,000 5,000 (3,000)
No. 3............................... 5,000 5,000 0
No. 4............................... 3,000 5,000 2,000
-----------
Totals............................. 32,000 25,000 (7,000)
------------------------------------------------------------------------
Since with respect to such property the unrealized depreciation in
property on which there is unrealized depreciation ($9,000) exceeds the
unrealized appreciation in property on which there is unrealized
appreciation ($2,000), all such property is included in subsection (e)
assets under clause (ii) of section 341(e)(5)(A).
(iii) The third category of subsection (e) assets exists only if
there is net unrealized appreciation on all property which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). In such case, any such
section 1231(b) property (whether appreciated or depreciated) is a
subsection (e) asset of the third category if, in the hands of an actual
or constructive shareholder who is considered to own more than 20
percent in value of the outstanding stock of the corporation, such
property would be property gain from the sale or exchange of which would
under any provision of chapter 1 of the Code (other than section 617(d),
1245, 1250, 1251, 1252, or 1254) be considered in whole or in part as
gain from the sale or exchange of property which is neither a capital
asset nor property described in section 1231(b). Included in this
category, for example, is property which in the hands of the corporation
is property described in section 1231(b) (without regard to any holding
period prescribed therein), but which in the hands of an actual or
constructive more-than-20-percent shareholder would be property used in
his trade or business held for not more than 1 year (6 months for
taxable years beginning before 1977; 9 months for taxable years
beginning in 1977), stock in trade, inventory, or property held by such
shareholder primarily for sale to customers in the ordinary course of
his trade or business. For additional rules relating to whether property
is a subsection (e) asset under this subdivision, see subparagraphs (3)
and (4) of this paragraph. This subdivision may be further illustrated
by the following example:
Example. Assume the same facts as stated in the example under
subdivision (ii) of this subparagraph, except that in addition to the
oil leaseholds the corporation also owns land which has a fair market
value of $30,000 and an adjusted basis of $20,000 and which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). Assume further that A
is a constructive shareholder of the corporation who is considered to
own 25 percent in value of its outstanding stock and that A holds land
primarily for sale to customers in the ordinary course of his trade or
business, and that no actual or constructive shareholder who is
considered to own more than 20 percent in value of the stock of
corporation X so holds oil leases. Since with respect to the
corporation's section 1231(b) property the unrealized appreciation in
such property on which there is unrealized appreciation ($12,000)
exceeds the unrealized depreciation in such property on which there is
unrealized depreciation ($9,000), then clause (iii), and not clause
(ii), of section 341(e)(5)(A) is applicable. Therefore, no oil lease of
the corporation is a subsection (e) asset. However, since in the hands
of A, a more-than-20-percent constructive shareholder, the land would be
property gain from the sale or exchange of which would be considered as
gain from the sale or exchange of property which is neither a capital
asset nor property described in section 1231(b), the land is a
subsection (e) asset. Consequently, the net unrealized appreciation on
subsection (e) assets of the corporation is $10,000 since the net
unrealized depreciation on the oil leases is not taken into account.
(iv) The fourth category of subsection (e) assets is property
(unless included under subdivision (i), (ii), or (iii) of this
subparagraph) which consists of a copyright, a literary, musical, or
artistic composition, a letter or memorandum, or similar property, or
any interest in any such property, if the property was created in whole
or in
[[Page 164]]
part by the personal efforts of, or, in the case of a letter,
memorandum, or property similar to a letter or memorandum, was prepared,
or produced in whole or in part, for, any individual actual or
constructive shareholder who is considered to own more than 5 percent in
value of the outstanding stock of the corporation. For items included in
the phrase ``similar property'' see paragraph (c) of Sec. 1.1221-1. In
general, property is created in whole or in part by the personal efforts
of an individual if such individual performs literary, theatrical,
musical, artistic, or other creative or productive work which
affirmatively contributes to the creation of the property, or if such
individual directs and guides others in the performance of such work. An
individual, such as a corporate executive, who merely has administrative
control of writers, actors, artists, or personnel and who does not
substantially engage in the direction and guidance of such persons in
the performance of their work, does not create property by his personal
efforts. However, a letter or memorandum, or property similar to a
letter or memorandum, which is prepared by personnel who are under the
administrative control of an individual, such as a corporate executive,
shall be deemed to have been prepared or produced for him whether or not
such letter, memorandum, or similar property is reviewed by him. In
addition, a letter, memorandum, or property similar to a letter or
memorandum, addressed to an individual shall be considered as prepared
or produced for him. In the case of a letter, memorandum, or property
similar to a letter or memorandum, this subdivision applies only to
sales and other dispositions occurring after July 25, 1969.
(3) Manner of determination. For purposes of determining whether
property is a subsection (e) asset under subparagraph (2)(i) or (iii) of
this paragraph, the determination as to whether property of a
corporation in the hands of the corporation is, or in the hands of an
actual or constructive shareholder of the corporation would be, property
gain from the sale or exchange of which would under any provision of
chapter 1 of the Code (other than section 617(d), 1245, 1250, 1251,
1252, or 1254) be considered in whole or in part as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made as if all property of the
corporation had been sold or exchanged to one person in one transaction.
For example, if a corporation whose sole asset is an interest in a gas
well has entered into a long-term contract for the future delivery of
gas from the well, the ownership of which will pass to the buyer only
after extraction or severance from the well, the determination as to
whether such contract is a subsection (e) asset shall be made as if the
contract were sold or exchanged to one person in one transaction
together with such corporation's interest in the well. An assumed sale
under this subparagraph does not affect the character of property which
is held for sale to customers in the ordinary course of a person's trade
or business or the character of a transaction which would be an
anticipatory assignment of income. Thus, for example, if a corporation
holds subdivided lots for sale to customers in the ordinary course of
its trade or business, this subparagraph shall not be applied to change
the manner in which the lots are held.
(4) Shareholder reference test. For purposes of subparagraph (2)(i)
and (iii) of this paragraph, in determining whether any property of the
corporation would, in the hands of a particular actual or constructive
shareholder, be property gain from the sale or exchange of which would
be considered in whole or in part as gain from the sale or exchange of
property which is neither a capital asset nor property described in
section 1231(b), all the facts and circumstances of the direct and
indirect activities of the shareholder must be taken into account. If
the particular shareholder holds property primarily for sale to
customers in the ordinary course of his trade or business and if similar
property is held by the corporation, then in the hands of the
shareholder such corporate property will be treated as held primarily
for sale to customers in the ordinary course of his trade or business.
Moreover, even if the shareholder does not presently so hold property
which is similar to property
[[Page 165]]
held by the corporation, it may be determined under the particular facts
and circumstances (taking into account an assumed sale of such corporate
property by the shareholder, all his other direct and indirect
activities, and, if applicable, the fact that he previously so held
similar property) that he would hold the corporate property primarily
for sale to customers in the ordinary course of his trade or business.
See also paragraph (d) of this section, pertaining to effect of stock in
related corporations.
(5) Special rule for stock in shareholder's investment account. If--
(i) A dealer in stock or securities is an actual shareholder
(considered to own more than 20 percent of the outstanding stock of a
corporation) and holds such stock which he actually owns in his
investment account pursuant to section 1236(a), or
(ii) A dealer in stock or securities is a constructive shareholder
who is considered to own more than 20 percent of the outstanding stock
of a corporation,
then stock or securities held by such corporation shall not be
considered subsection (e) assets under subparagraph (2)(i) of this
paragraph solely because such actual or constructive shareholder is a
dealer in stock or securities. However, stock held by such corporation
shall be considered as a subsection (e) asset if, in the hands of any
more-than-20-percent actual or constructive shareholder of the
corporation, the gain (or any portion thereof) upon a sale of such stock
would (if it were held for more than 1 year (6 months for taxable years
beginning before 1977; 9 months for taxable years beginning in 1977),
constitute, by reason of the application of section 341, gain from the
sale of property which is not a capital asset. This subparagraph may be
illustrated by the following example:
Example. Jones, a more-than-20-percent actual shareholder in
corporation X holds his X stock in an investment account in the manner
prescribed in section 1236(a). Jones is a dealer in stock and securities
and holds land for sale to customers in the ordinary course of his trade
or business. No other actual or constructive shareholder is a dealer in
stock and securities or so holds land. X holds all of the stock in
corporation Y, a collapsible corporation within the meaning of section
341(b). Y's sole asset is land on which unrealized appreciation exceeds
15 percent of Y's net worth. Since Jones holds his X stock in an
investment account pursuant to section 1236(a), the Y stock cannot be
considered a subsection (e) asset of the X Corporation merely because
Jones is a dealer in stock and securities. Nevertheless, the Y stock is
a subsection (e) asset of the X Corporation because if Jones were
treated as having sold the Y stock, his gain would be treated as gain
from the sale of property which is not a capital asset by reason of the
application of section 341. If, however, the net unrealized appreciation
on Y's land did not exceed 15 percent of Y's net worth the Y stock would
not be a subsection (e) asset since section 341(e)(1) would except such
sale from the application of section 341.
(c) Sales or exchanges of stock--(1) General. Section 341(e)(1)
provides that, if certain requirements are satisfied, the provisions of
section 341(a)(1) shall in no event apply to certain sales or exchanges
of stock by a shareholder. See subparagraph (5) of this paragraph for
sales or exchanges of stock which do not qualify under section
341(e)(1). Section 341(e)(1) applies to a sale or exchange of stock by a
shareholder only if, at the time of such sale or exchange, the general
corporate test and, if applicable, the specific shareholder test are
satisfied.
(2) General corporate test. The general corporate test is satisfied
if the net unrealized appreciation in subsection (e) assets of the
corporation does not exceed an amount equal to 15 percent of the net
worth of the corporation. See paragraphs (h), (b), and (j) of this
section for the definition of ``net unrealized appreciation,''
``subsection (e) assets,'' and ``net worth.''
(3) Specific shareholder test. The specific shareholder test (if
applicable) is satisfied if the following conditions are met:
(i) If the shareholder selling or exchanging the stock is considered
to own more than 5 percent but not more than 20 percent in value of the
outstanding stock, the sum of the net unrealized appreciation in the
following assets of the corporation must not exceed an amount equal to
15 percent of the net worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
[[Page 166]]
(b) The other assets of the corporation which would be subsection
(e) assets under section 341(e)(5)(A)(i) and (iii) if such shareholder
were considered to own more than 20 percent in value of the outstanding
stock.
(ii) If the shareholder selling or exchanging the stock is
considered to own more than 20 percent in value of the outstanding
stock, the sum of the net unrealized appreciation in the following
assets of the corporation must not exceed an amount equal to 15 percent
of the net worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
(b) The other assets of the corporation which would be subsection
(e) assets under section 341(e)(5)(A)(i) and (iii) if the shareholder's
ownership of stock in certain related corporations were taken into
account in the manner prescribed in paragraph (d) of this section.
(4) Example. Subparagraph (3) of this paragraph may be illustrated
by the following example:
Example. Assume an individual, A, and his grandfather, G, each
actually owns 3 percent in value of the stock of corporation X, a
corporation holding apartment houses used in its trade or business on
which net unrealized appreciation exceeds 15 percent of X's net worth.
A, but not G, holds apartment houses primarily for sale to customers in
the ordinary course of trade or business. Assume that X satisfies the
general corporate test. A and G desire to sell their stock and to take
advantage of section 341(e)(1). Since a grandfather and grandson are
each considered to own the other's stock under paragraph (a)(3)(ii) of
this section, A and G are each considered to own 6 percent in value of
corporation X's outstanding stock. Therefore, A cannot avail himself of
section 341(e)(1) since he does not satisfy the specific shareholder
test prescribed in subparagraph (3)(i) of this paragraph. G, however,
who is considered to own 6 percent in value of the stock, does not hold
apartment houses for sale to customers in the ordinary course of trade
or business. Therefore, G satisfies the specific shareholder test and
may benefit from section 341(e)(1).
(5) Nonqualifying sales or exchanges. Section 341(e)(1) does not
apply to any sale or exchange of stock to the issuing corporation. Thus,
stock redemptions (including distributions in complete or partial
liquidation) cannot qualify under section 341(e)(1). In addition,
section 341(e)(1) does not apply in any case where a shareholder who is
considered to own more than 20 percent in value of the outstanding stock
sells or exchanges stock to any person related (within the meaning of
paragraph (k) of this section) to such shareholder. A sale or exchange
of stock of the corporation by a shareholder to which section 341(e)(1)
does not apply because of this subparagraph shall have no effect on the
application of this section to other sales or exchanges of stock of the
corporation.
(6) Example. For an illustration of the application of this
paragraph, see Example (2) in paragraph (o) of this section.
(d) Stock in related corporations--(1) General. This paragraph
provides rules for applying the specific shareholder test prescribed in
paragraph (c)(3)(ii) of this section for purposes of determining whether
section 341(e)(1) (relating to sales or exchanges of stock of a
corporation) or section 341(e)(2) (relating to distributions in complete
liquidation of a corporation) applies to an actual shareholder who is
considered as owning more than 20 percent in value of the corporation's
outstanding stock. In general, if such a more-than-20-percent
shareholder of such corporation (referred to as a ``first'' corporation)
owns, or at any time during the preceding 3 years has owned, more than
20 percent in value of the outstanding stock of a ``related''
corporation (see subparagraph (2) of this paragraph), then certain
transactions in respect of the stock of the related corporation are
taken into account in the manner prescribed in subparagraph (3) of this
paragraph. By taking such transactions into account, such shareholder of
the first corporation may be deemed to hold primarily for sale to
customers in the ordinary course of trade or business property similar
or related in service or use to property owned by the first corporation
where his other activities, direct and indirect, are insufficient to
treat him as so holding such property. See section 341(e)(1)(C) and
(2)(C). The transactions in respect of stock in a related corporation
are taken into account solely for the purpose of determining the extent
to
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which assets (other than subsection (e) assets) of the first corporation
are treated as subsection (e) assets under the shareholder reference
tests of section 341(e)(5)(A)(i) and (iii). For purposes of this
paragraph, the term ``similar or related in service or use'' shall have
the same meaning as such term has in section 1033 (relating to
involuntary conversions), without regard to subsection (g) thereof.
(2) Related corporation defined. (i) A corporation (referred to as a
``second'' corporation) is ``related'' to another corporation (referred
to as a ``first'' corporation) if the stock ownership test specified in
subdivision (ii) of this subparagraph and the more-than-70-percent-asset
comparison test specified in subdivision (iii) of this subparagraph are
met.
(ii) The stock ownership test specified in this subdivision is met--
(a) In the case of a sale or exchange referred to in paragraph
(c)(1) of this section, if the shareholder in the first corporation is
considered to own on the date of such sale or exchange more than 20
percent in value of the outstanding stock of the first corporation, and
if on such date (or at any time during the 3-year period preceding such
date) such shareholder in the first corporation is an actual or
constructive shareholder in the second corporation who was considered to
own more than 20 percent in value of the outstanding stock of the second
corporation, or
(b) In the case of a distribution pursuant to the adoption by the
first corporation of a plan of complete liquidation referred to in
paragraph (e) of this section, if the shareholder in the first
corporation is considered to own on any date after the adoption of such
plan more than 20 percent in value of the outstanding stock of the first
corporation, and if on such date (or at any time during the 3-year
period preceding such date) such shareholder in the first corporation
was an actual or constructive shareholder in the second corporation who
was considered to own more than 20 percent in value of the outstanding
stock of the second corporation.
(iii) The more-than-70-percent-asset comparison test specified in
this subdivision is met if more than 70 percent in value of the assets
of the second corporation (at any of the applicable times determined
under subdivision (ii) of this subparagraph during which the shareholder
of the first corporation is or was considered to own more than 20
percent in value of the outstanding stock of the second corporation)
are, or were, assets similar or related in service or use to assets
comprising more than 70 percent in value of the assets of the first
corporation (at any of the times determined under subdivision (ii) of
this subparagraph during which the shareholder of the first corporation
is or was considered to own more than 20 percent in value of the
outstanding stock of the first corporation).
(iv) This subparagraph may be illustrated by the following example:
Example. X is a first corporation and Y is a second corporation. On
January 15, 1960, Jones purchased 21 percent in value of the outstanding
stock of X, which he sold on January 1, 1961. On January 15, 1955, Jones
had purchased 21 percent in value of the outstanding stock of Y which he
sold on December 15, 1959. Since Jones owned 21 percent of the
outstanding X stock on January 1, 1961 (the date he sold his X stock)
and also owned 21 percent of the outstanding Y stock at some time during
the 3-year period preceding January 1, 1961, the stock ownership test
specified in subdivision (ii)(a) of this subparagraph is met. Assume
that more than 70 percent in value of the assets of Y were apartment
houses held for rental purposes at some time between January 1, 1958,
and December 15, 1959 (the portion of the 3-year period preceding the
date Jones sold his X stock during which he was a more-than-20-percent
shareholder in Y) and that more than 70 percent in value of the assets
of X were apartment houses held for rental purposes at some time during
the period January 15, 1960, to January 1, 1961, inclusive (the portion
of the 3-year period preceding the date he sold his X stock during which
he was a more-than-20-percent shareholder in X). Thus, the more-than-70-
percent-asset comparison test specified in subdivision (iii) of this
subparagraph is met. Accordingly, corporation Y is related to
corporation X within the meaning of this subparagraph.
(3) Manner of taking into account. If an actual shareholder in a
first corporation who is considered to own more than 20 percent of the
first corporation's stock, owns or has owned stock in a related
corporation, then--
[[Page 168]]
(i) Any sale or exchange by such shareholder, during the applicable
period specified in subparagraph (2)(ii) of this paragraph, of stock in
the related corporation shall be treated as a sale or exchange by him of
his proportionate share of the assets of the related corporation, if
immediately before such sale or exchange he was an actual shareholder of
the related corporation who was considered to own more than 20 percent
in value of the outstanding stock of the related corporation. A
shareholder's proportionate share of the assets of a related corporation
shall be that percent of each asset of the related corporation as the
fair market value of the stock of the related corporation which he
actually sold or exchanged bears, immediately before such sale or
exchange, to the total fair market value of the outstanding stock of
such related corporation; and
(ii) Any sale or exchange of property by the related corporation
during the applicable period specified in subparagraph (2)(ii) of this
paragraph, gain or loss on which was not recognized to the related
corporation by reason of the application of section 337(a), shall be
treated as a sale or exchange by him of his proportionate share of the
related corporation's property sold or exchanged, if at the time of such
sale or exchange he was an actual or constructive shareholder of the
related corporation who was considered to own more than 20 percent in
value of the outstanding stock of such related corporation. A
shareholder's proportionate share of such related corporation's property
sold or exchanged shall be that percent of each such property sold or
exchanged as the fair market value of the stock which he was considered
to own in the related corporation immediately before such sale or
exchange bears to the total fair market value of the outstanding stock
of such related corporation at such time.
(4) Example. This paragraph may be illustrated by the following
example:
Example. (i) A owns 25 percent in value of the outstanding stock of
Z Corporation. On December 31, 1959, he sells all his stock in the
corporation and desires to take advantage of section 341(e)(1). The only
asset of Z Corporation is an appreciated apartment house held for rental
purposes but which is not a subsection (e) asset. However, during the
preceding 3-year period A sold 25 percent in value of the outstanding
stock of each of 3 related corporations. More than 70 percent in value
of the assets of each related corporation consisted of an apartment
house.
(ii) In determining whether the apartment house owned by Z
Corporation would be a subsection (e) asset under the shareholder
reference test of section 341(e)(5)(A)(iii), A is treated as having sold
a one-fourth interest in each of 3 apartment houses during the preceding
3-year period and these sales must be taken into account, together with
all other facts and circumstances, in determining whether the apartment
house owned by Z Corporation would be, in the hands of A, property gain
from the sale or exchange of which would under any provision of chapter
1 of the Code (other than section 1245 or 1250) be considered as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). However, A's sales of related
corporation stock are not taken into account in determining whether
section 341(e)(1) or (2) would be applicable to sales or exchanges of
stock by (or liquidating distributions to) other shareholders of Z
Corporation.
(e) Distributions in certain liquidations pursuant to section 337--
(1) In general. Section 341(e)(2) provides that, if certain requirements
are met, the provisions of section 341(a)(2) shall in no event apply to
certain distributions in complete liquidation of a corporation. Section
341(e)(2) applies with respect to any distribution to a shareholder
pursuant to a plan of complete liquidation if the following 3
requirements are satisfied:
(i) By reason of the application of section 341(e)(4) and paragraph
(g) of this section, section 337(a) applies to sales or exchanges of
property by the corporation within the 12-month period beginning on the
date of the adoption of such plan. Thus, for example, section 341(e)(2)
is not applicable in any case where depreciable, amortizable, or
depletable property is distributed after the date of adoption of the
plan or if the corporation does not sell substantially all of the
properties held by it on such date within such 12-month period, since
such a distribution, or the failure to make such a sale, makes section
337(a) inapplicable under section 341(e)(4).
(ii) At all times within such 12-month period the general corporate
test of
[[Page 169]]
paragraph (c)(2) of this section is satisfied.
(iii) In respect of the shareholder who receives the distribution--
(a) At all times within such 12-month period while such shareholder
is considered to own more than 5 percent but not more than 20 percent in
value of the outstanding stock of the corporation, the shareholder must
satisfy the specific shareholder test of paragraph (c)(3)(i) of this
section, and
(b) At all times within such 12-month period while such shareholder
is considered to own more than 20 percent in value of the outstanding
stock of the corporation, the shareholder must satisfy the specific
shareholder test of paragraph (c)(3)(ii) of this section.
(2) Illustration. For an illustration of this paragraph, see Example
(4) in paragraph (o) of this section.
(f) Recognition of gain in certain liquidations under section 333.
Section 341(e)(3) provides that, for purposes of section 333 (relating
to elections as to recognition of gain in certain complete liquidations
occurring within one calendar month), a corporation is considered not to
be a collapsible corporation if, at all times after the adoption of the
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation. For purposes of the
preceding sentence, the determination of subsection (e) assets shall be
made in accordance with paragraph (b) of this section except that
subparagraph (2)(i) and (iii) of such paragraph (b) shall apply in
respect of any actual or constructive shareholder who is considered to
own more than 5 percent in value of the outstanding stock (in lieu of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of such stock). Thus, no shareholder of the
corporation can qualify under paragraph (3) of section 341(e) for use of
section 333 if, because of any actual or constructive shareholder who is
considered to own more than 5 percent in value of the stock, this
modified general corporate test is not satisfied. On the other hand,
once this modified general corporate test is satisfied, all the
shareholders can use section 333 (assuming that the requirements of that
section are satisfied) since there is no specific shareholder test. For
an illustration of this paragraph, see Example (3) in paragraph (o) of
this section.
(g) Gain or loss on sales or exchanges in connection with certain
liquidations, pursuant to section 337--(1) General. Section 341(e)(4)
provides that solely for purposes of section 337, a corporation is
considered not to be a collapsible corporation if (i) at all times
within the 12-month period beginning on the date of the adoption of a
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation; (ii) within the 12-
month period beginning on the date of the adoption of such plan, the
corporation sells substantially all of the properties held by it on such
date; and (iii) following the adoption of such plan, no distribution is
made of any property which in the hands of the corporation or in the
hands of the distributee is property in respect of which a deduction for
exhaustion, wear and tear, obsolescence, amortization, or depletion is
allowable. Thus, if at the time of the adoption of the plan of
liquidation the corporation is a collapsible corporation within the
meaning of section 341(b) and if the preceding requirements are
satisfied, then except as provided in subparagraph (2) of this paragraph
section 337(a) will apply to such corporation but the corporation will
continue to be a collapsible corporation within the meaning of section
341(b) (including for purposes of section 341(e)(2)) with the result
that each shareholder must still satisfy all the tests in paragraph (e)
of this section before he can utilize the benefits of section 341(e)(2).
(2) Exception to section 337 treatment. Section 341(e)(4) shall not
apply with respect to any sale or exchange of property by the
corporation to any actual or constructive shareholder who is considered
to own more than 20 percent in value of the outstanding stock of the
corporation or to any person related (within the meaning of paragraph
(k) of this section) to such actual or constructive shareholder if such
property in the hands of the corporation, or in the hands of such
shareholder or such
[[Page 170]]
related person, is property in respect of which a deduction for
exhaustion, wear and tear, obsolescence, amortization, or depletion is
allowable. Thus, gain or loss will be recognized on such sales or
exchanges.
(3) Cross references. For effective date of section 341(e)(4) and
this paragraph, see paragraph (a)(2) of this section. For an
illustration of this paragraph, see Example (4) in paragraph (o) of this
section.
(h) Net unrealized appreciation and depreciation defined--(1) Net
unrealized appreciation. For purposes of this section, the term net
unrealized appreciation means, with respect to the assets of a
corporation, the amount by which--
(i) The unrealized appreciation in such assets on which there is
unrealized appreciation, exceeds
(ii) The unrealized depreciation in such assets on which there is
unrealized depreciation.
(2) Net unrealized depreciation. For purposes of paragraph
(b)(2)(ii) of this section, there is net unrealized depreciation on all
property of a corporation which in its hands is property described in
section 1231(b) (without regard to any holding period prescribed
therein) if--
(i) The unrealized depreciation in such property on which there is
unrealized depreciation, exceeds
(ii) The unrealized appreciation in such property on which there is
unrealized appreciation.
(3) Unrealized appreciation or depreciation. For purposes of this
paragraph--
(i) The term unrealized appreciation means (except as provided in
subparagraph (4) of this paragraph), with respect to any asset, the
amount by which (a) the fair market value of such asset, exceeds (b) the
adjusted basis for determining gain from the sale or other disposition
of such asset; and
(ii) The term unrealized depreciation means, with respect to any
asset, the amount by which (a) the adjusted basis for determining gain
from the sale or other disposition of such asset, exceeds (b) the fair
market value of such asset.
(4) Special rule. For purposes of determining whether the net
unrealized appreciation in subsection (e) assets of a corporation
exceeds an amount equal to 15 percent of the corporation's net worth
under the tests of section 341(e)(1), (2), (3), and (4), in the case of
any asset on the sale or exchange of which only a portion of the gain
would under any provision of chapter 1 of the Code (other than section
617(d), 1245, 1250, 1251, 1252, or 1254) be considered as gain from the
sale or exchange of property which is neither a capital asset nor
property described in section 1231(b), there shall be taken into account
only an amount equal to the unrealized appreciation in such asset which
is equal to such portion of the gain. This subparagraph shall have no
effect on whether paragraph (b)(2)(ii) or (iii) of this section applies
for purposes of identifying the subsection (e) assets of the
corporation.
(i) [Reserved]
(j) Net worth defined. For purposes of this section, the net worth
of a corporation, as of any day, is the amount by which--
(1) The fair market value of all its assets at the close of such
day, plus the amount of any distribution (taken into account at fair
market value on the date of such distribution) in complete liquidation
made by it on or before such day, exceeds
(2) All its liabilities at the close of such day.
In computing the fair market value of all the assets of a corporation at
the close of such day, there shall be excluded any amount attributable
to money or property received by it during the one-year period ending on
such day for stock, or as a contribution to capital or as paid-in
surplus, if it appears that there was not a bona fide business purpose
for the transaction in respect of which such money or property was
received.
(k) Related person defined--(1) General. For purposes of paragraphs
(c)(5) and (g)(2) of this section, the following persons are considered
to be related to a shareholder:
(i) If the shareholder is an individual--
(a) His spouse, ancestors, and lineal descendants, and
(b) Any corporation which is controlled by him.
(ii) If the shareholder is a corporation--
[[Page 171]]
(a) A corporation which controls, or is controlled by, such
shareholder, and
(b) If more than 50 percent in value of the outstanding stock of
such shareholder is owned by any person, any corporation more than 50
percent in value of the outstanding stock of which is owned by the same
person.
(2) Control. For purposes of this paragraph, control means the
ownership of stock possessing at least 50 percent of the total combined
voting power of all classes of stock entitled to vote or at least 50
percent of the total value of shares of all classes of stock of the
corporation.
(3) Constructive ownership rules. In determining the ownership of
stock for purposes of this paragraph, the constructive ownership rules
of section 267(c) shall apply, except that the family of an individual
shall include only his spouse, ancestors, and lineal descendants.
(l) [Reserved]
(m) Corporations and shareholders not meeting requirements. In
determining whether the provisions of section 341 (a) through (d) apply
with respect to any corporation, the fact that such corporation, or such
corporation with respect to any of its shareholders, does not meet the
requirements of section 341(e)(1), (2), (3), or (4) shall not be taken
into account, and such determination shall be made as if section 341(e)
had not been enacted.
(n) Determinations without regard to sections 617(d), 1245, 1250,
1251, 1252, and 1254. For purposes of this section, the determination of
whether gain from the sale or exchange of property would under any
provision of chapter 1 of the Code be considered as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made without regard to the
application of sections 617(d)(1) (relating to gain from dispositions of
certain mining property), 1245(a) and 1250(a) (relating to gain from
dispositions of certain depreciable property), 1251(c) (relating to gain
from the disposition of farm property where farm losses offset nonfarm
income), 1252(a) (relating to gain from disposition of farm land), and
1254(a) (relating to gain from disposition of interest in natural
resource recapture property).
(o) Illustrations. The operation of section 341(e) may be
illustrated by the following examples:
Example (1). (i) The outstanding stock of X Corporation is actually
owned, on the basis of value, 75 percent by A, 15 percent by B, and 10
percent by C. None of the stock actually owned by one is attributed to
another under the constructive ownership rules of paragraph (a)(3) of
this section. The corporation owns no property which, in its hands, is
property gain from the sale or exchange of which would be considered
(without regard to section 617(d), 1245 or 1250, 1251, or 1252) as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). The corporation owns no
property described in section 1231(b) except an apartment house on which
the unrealized appreciation is $20,000 and which in the hands of A would
be property held primarily for sale to customers in the ordinary course
of trade or business. The corporation owns no property of the type
described in clause (iv) of section 341(e)(5)(A). The net worth of the
corporation is $100,000.
(ii) Although the apartment house in the hands of the corporation is
section 1231(b) property, in the hands of A, a more-than-20-percent
shareholder, the apartment house would be ordinary-income type property.
Therefore, the apartment house is a subsection (e) asset under clause
(iii) of section 341(e)(5)(A). Accordingly, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), the general corporate test is not satisfied and
section 341(e) is unavailable to the corporation or its shareholders.
Example (2). (i) Assume the same facts as in Example (1), except
that in the hands of B, but not in the hands of A or C, the apartment
house would be property held primarily for sale to customers in the
ordinary course of trade or business.
(ii) Since B does not own more than 20 percent in value of the
outstanding stock, the fact that the apartment house owned by the
corporation would, in his hands, be property held primarily for sale to
customers in the ordinary course of trade or business does not make the
apartment house owned by the corporation a subsection (e) asset.
Therefore, since the net unrealized appreciation in subsection (e)
assets (zero) does not exceed 15 percent of net worth, the general
corporate test is satisfied. C may sell his stock to anyone (other than
X Corporation) and will qualify under section 341(e)(1). However, a sale
by A of his stock to persons related to A within the meaning of
paragraph (k) of this section will not so qualify.
(iii) B, however, since he owns more than 5 percent but not more
than 20 percent in
[[Page 172]]
value of the outstanding stock, must take into account not only the net
unrealized appreciation in subsection (e) assets but also the net
unrealized appreciation in any other assets of the corporation which
would be subsection (e) assets under section 341(e)(5)(A) if he owned
more than 20 percent in value of the outstanding stock. Therefore, since
the apartment house owned by the corporation would be, in B's hands,
property held primarily for sale to customers in the ordinary course of
trade or business, and since the net unrealized appreciation in such
property ($20,000) exceeds 15 percent of net worth ($15,000), B does not
satisfy the specific shareholder test and therefore cannot avail himself
of section 341(e)(1).
Example (3). (i) Assume the same facts as in Example (1), except
that in the hands of B, but not in the hands of A or C, the apartment
house of the corporation would be property held primarily for sale to
customers in the ordinary course of trade or business. Assume further
that the shareholders of X Corporation wish to avail themselves of
section 333.
(ii) For purposes of section 341(e)(3), section 341(e)(5)(A)(iii)
applies in respect of any shareholder who owns more than 5 percent
(instead of more than 20 percent) in value of the outstanding stock.
Since in the hands of B, a more-than-5-percent shareholder, the
apartment house would be held primarily for sale to customers in the
ordinary course of trade or business, the corporation's apartment house
is a subsection (e) asset. Therefore, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), no shareholder of the corporation may qualify under
section 341(e)(3) for use of section 333. However, if B were not a more-
than-5-percent shareholder of the corporation, or if, in his hands, the
apartment house would not be held primarily for sale to customers in the
ordinary course of trade or business, then all shareholders of the
corporation could qualify under section 341(e)(3) for use of section 333
since the apartment house would not be a subsection (e) asset.
Example (4). (i) Assume the same facts as in Example (1), except
that in the hands of no shareholder of the corporation would the
apartment house be deemed property held primarily for sale to customers
in the ordinary course of trade or business (such determination,
however, having been made without regard to A's ownership of stock of
related corporations). Assume further that (a) X Corporation adopts a
plan of complete liquidation, (b) within the 12-month period beginning
on the date of such adoption X Corporation sells substantially all the
property held by it on such date and distributes all its assets in
complete liquidation, (c) following the adoption of such plan, no
distribution is made of any property which in the hands of the
corporation or in the hands of the distributee is property in respect of
which a deduction for exhaustion, wear and tear, obsolescence,
amortization, or depletion is allowable, and (d) following the adoption
of such plan no property is sold or exchanged to A, to a constructive
owner of A's stock, or to a person ``related'' (within the meaning of
paragraph (k) of this section) to A or such constructive owner.
(ii) Since, under the above-stated facts, the requirements of
section 341(e)(4) are satisfied, section 337(a) will apply to sales or
exchanges of property by the corporation within the 12-month period
beginning on the date of the adoption of the plan of liquidation.
(iii) Any distribution in complete liquidation to B and C, who own
15 and 10 percent, respectively, in value of the outstanding stock, will
qualify under section 341(e)(2) because (a) by reason of the application
of section 341(e)(4), section 337(a) applies to sales or exchanges of
property by the corporation, and (b) at all times within the 12-month
period beginning on the date of the adoption of the plan of complete
liquidation the general corporate test is satisfied and B and C each
satisfy the specific shareholder test of paragraph (e)(1)(iii)(a) of
this section.
(iv) Any distribution in complete liquidation to A, who owns 75
percent in value of the outstanding stock, will qualify under section
341(e)(2) if, at all times within the 12-month period beginning on the
date of the adoption of the plan of complete liquidation, and after
taking into account A's ownership of stock in related corporations in
the manner prescribed in paragraph (d) of this section, A satisfies the
specific shareholder test of paragraph (e)(1)(iii)(b) of this section.
[T.D. 6806, 30 FR 2845, Mar. 5, 1965, as amended by T.D. 7369, 40 FR
29840, July 16, 1975; T.D. 7418, 41 FR 18811, May 7, 1976; T.D. 7728, 45
FR 72650, Nov. 3, 1980; T.D. 8586, 60 FR 2500, Jan. 10, 1995]
Sec. 1.341-7 Certain sales of stock of consenting corporations.
(a) In general. (1) Under section 341(f)(1), if a corporation
consents (in the manner provided in paragraph (b) of this section) to
the application of section 341(f)(2) with respect to dispositions by it
of its subsection (f) assets (as defined in paragraph (g) of this
section), then section 341(a)(1) does not apply to any sales of stock of
such consenting corporation (other than sale to such corporation) made
by any of its shareholders within the 6-month period beginning on the
date on which such consent is filed.
(2) For purposes of section 341(f)(1) and (5)--(i) The term sale
means a sale
[[Page 173]]
of exchange of stock at a gain, but only if such gain would be
recognized as long-term capital gain were section 341 not a part of the
Code. Thus, a sale or exchange of stock is not a ``sale'' within the
meaning of section 341(f)(1) and (5) if there is no gain on the
transaction, or if the sale or exchange gives rise to ordinary income
under a provision of the Code other than section 341, or if gain on the
transaction is not recognized under any provisions of subtitle A of the
Code.
(ii) A sale of stock in a corporation does not include any
disposition of such stock by a shareholder, if, by reason of section
341(d)(1), section 341(a) could not have applied to that disposition.
(Under section 341(d)(1), section 341(a) does not apply except to more-
than-5-percent shareholders.) Except as otherwise provided in paragraph
(a)(2)(i) of this section, the term ``sale'' included a disposition of
stock in a corporation by a more-than-5-percent shareholders described
in section 341(d)(1), even though section 341(a) did not apply to the
disposition because the corporation was not collapsible or by reason of
the application of section 341(d)(2), (3), or (e).
(3) A corporation which consents to the application of section
341(f)(2) does not thereby become noncollapsible, and the fact that a
corporation consents to the application of section 341(f)(2) does not
affect the determination as to whether it is a collapsible corporation.
(4) For limitation on the application of section 341(f)(1) see
section 341(f)(5) and (6) and paragraphs (h) and (j) of this section.
(b) Statement of consent. (1) The consent of a corporation referred
to in paragraph (a)(1) or (j)(1) of this section shall be given by means
of a statement, signed by any officer who is duly authorized to act on
behalf of the consenting corporation stating that the corporation
consents to have the provisions of section 341(f)(2) apply to any
disposition by it of its subsection (f) assets. The statement shall be
filed with the district director having jurisdiction over the income tax
return of the consenting corporation for the taxable year during which
the statement is filed.
(2)(i) The statement shall contain the name, address, and employer
identification number of any corporation 5 percent or more in value of
the outstanding stock of which is owned directly by the consenting
corporation, and of any other corporation connected to the consenting
corporation through a chain of stock ownership described in paragraph
(j)(4) of this section. The statement shall also indicate where such 5-
percent-or-more corporation (or such ``connected'' corporation) has
consented within the 6-month period ending on the date on which the
statement filed to the application of section 341 (f)(2) with respect to
any dispositions of its subsection (f) assets (see paragraph (j) of this
section), and, if so, the district director with whom such consent was
filed and the date on which such consent was filed.
(ii) If, during the 6-month period beginning on the date on which
the statement is filed, the consenting corporation becomes the owner of
5 percent or more in value of the outstanding stock of another
corporation or becomes connected to another corporation through a chain
of stock ownership described in paragraph (j)(4) of this section, then
the consenting corporation shall, within 5 days after such occurrence,
notify the district director with whom it filed the statement of the
name, address and employer identification number of such corporation.
(3) A consent under section 341(f)(1) may be filed at any time and
there is no limit as to the number of such consents that may be filed.
If a consent is filed by a corporation under section 341(f)(1) and if a
shareholder sells stock (i) in such corporation, or (ii) in another
corporation a sale of whose stock is treated under section 341(f)(6) as
a sale of stock in such corporation, at any time during the applicable
6-month period, then the consent cannot thereafter be revoked or
withdrawn by the corporation. However, a consent may be revoked or
withdrawn at any time prior to a sale during the applicable 6-month
period. If no sale is made during such period, the consent will have no
effect on the corporation. See paragraph (g) of this section.
(c) Consenting corporation. (1) A consenting corporation at the time
that is
[[Page 174]]
filed a consent under section 341(f)(10) shall notify its shareholders
that such consent is being filed. In addition, the consenting
corporation shall, at the request of any shareholder, promptly supply
the shareholder with a copy of the consent.
(2) A consenting corporation shall maintain records adequate to
permit identification of its subsection (F) assets.
(d) Shareholders of consenting corporation. (1) A shareholder who
sells stock in a consenting corporation within the 6-month period
beginning on the date on which the consent is filed shall--
(i) Notify the corporation, within 5 days after such sale, of the
date on which such sale is made, and
(ii) Attach a copy of the corporation's consent to the shareholder's
income tax return for the taxable year in which the sale is made.
(2) If the sale of stock in a consenting corporation is treated
under section 341(f)(6) as the sale of stock in any other corporation,
the consenting corporation shall notify such other corporation, within 5
days after receiving notification of a sale of its stock, of the date on
which such sale was made.
(e) Recognition of gain under section 341(f)(2). (1) Under section
341(f)(2), if a subsection (f) asset (as defined in paragraph (g) of
this section) is disposed of any time by a consenting corporation, then,
except as provided in section 341(f)(3) and paragraph (f) of this
section, the amount by which--
(i) The amount realized (in the case of a sale, exchange, or
involuntary conversion), or
(ii) The fair market value of such asset (in the case of any other
disposition), exceeds the adjusted base of such asset is treated as gain
from the sale of exchange of such asset. Such gain is recognized
notwithstanding any contrary non-recognition provisions of subtitle A of
the Code, but only to the extent such gain is not recognized under any
other provisions of subtitle A of the Code (for example, section 1245
(a)(1) or 1250(a)). Gain recognized under section 341(f)(2) with respect
to a disposition of a subsection (f) asset has the same character (i.e.,
ordinary income or capital gain) that such gain would have if it arose
from a sale of such asset.
(2) The nonrecognition provisions of subtitle A of the Code which
section 341(f)(2) override include, but are not limited to, sections
311(a), 332(c), 336, 337, 351, 361, 371(a), 374(a), 721, 1031, 1033,
1071, and 1081.
(3) In the case of a foreign corporation which files a statement of
consent pursuant to paragraph (b) of this section, such statement, in
addition to the information required in paragraph (b) of this section,
shall also contain a declaration that the corporation consents that any
gain upon the disposition of a subsection (f) asset which would
otherwise be recognized under section 341(f)(2) will, for purposes of
section 882(a)(2), be considered as gross income which is effectively
connected with the conduct of a trade or business which is conducted
through a permanent establishment within the United States.
(4) The provisions of subparagraphs (1) and (2) of this paragraph
may be illustrated by the following examples:
Example (1). Corporation X, a consenting corporation, distributes a
subsection (f) asset to its shareholders in complete or partial
liquidation of the corporation. The asset, at the line of the
distribution, is held by the corporation primarily for sale to customers
in the ordinary course of business and has an adjusted basis of $1,000
and a fair market value of $2,000. Under section 341(f)(2), the excess
of the fair market value of the asset over its adjusted basis, or $1,000
is treated as ordinary income. Assuming the gain is not recognized by
corporation X under another provision of the Code, corporation X
recognizes the $1,000 gain as ordinary income under section 341(f)(2)
even though, in the absence of section 341(f)(2), section 336 would
preclude the recognition of such gain.
Example (2). Corporation Y, a consenting corporation, distributes a
subsection (f) asset to its shareholders as a dividend. The asset at the
time of the distribution is properly described in section 1231 and has
an adjusted basis of $6,000 and a fair market value of $8,000. Assuming
that no other section of the Code would require recognition of gain,
under section 341(f)(2) the excess of the fair market value of the asset
over its adjusted basis, or $2,000, is recognized by corporation Y as
gain from the sale or exchange of property described in section 1231
even though, in the absence of section 341(f)(2), section 311(a) would
preclude the recognition of such gain.
Example (3). Assume the same facts as in Example (2) except that the
subsection (f)
[[Page 175]]
asset is section 1245 property having a ``recomputed basis'' (as defined
in section 1245(a)(2)) or $7,200. Since the recomputed basis of the
asset is lower than its fair market value, the excess of the recomputed
basis over the adjusted basis, or $1,200, is recognized as ordinary
income under section 1245(a)(1). The remaining amount, or $800, is
recognized under section 341(f)(2) as gain from the sale or exchange or
property described in section 1231.
(5) The provisions of section 341(f)(2) apply whether or not (i) on
the date on which a consent is filed or at any time thereafter, the
consenting corporation was in fact a collapsible corporation within the
meaning of section 341(b), or (ii) on the date of any sale of stock of
the consenting corporation, the purchaser of such stock was aware that a
consent had been filed under section 341(f)(1) within the 6-month period
ending on the date of such sale.
(6) Section 341(f)(2) does not apply to losses. Thus, section
341(f)(2) does not apply if a loss is realized upon a sale, exahnger or
involuntary conversion of a subsection (f) asset nor does the section
appy to a disposition other than by way of sale, exchange, or
involuntary conversion if at the time of the disposition the fair market
value of such property is not greater than its adjusted basis.
(7) For purposes of this paragraph, the term ``disposition''
includes an abandonment or retirement, a gift, a sale in a sale-and-
leasback transaction, and a transfer upon the foreclosure of a security
interest. Such term, however, does not include a mere transfer of title
to a creditor upon creation of a security interest or to a debtor upon
termination of a security interest. Thus, for example, a disposition
occurs upon a sale of property prusuant to a conditional sales contract
even though the seller retains legal title to the propoerty for purposes
of security, but a disposition does not occur when the seller ultimately
gives up his security interest following payment by the purchaser.
(8) The amount of gain required to be recognized by section
341(f)(2) shall be determined separately for each subsection (f) asset
disposed of by the corporation. For purposes of applying section
341(f)(2), the facts and circumstances of each disposition shall be
considered in determining whether the transactions involves more than
one subsection (f) asset or involves both subsection (f) and
nonsubsection (f) assets. In appropriate cases, several subsection (f)
assets may be treated as a single asset as long as it is reasonably
clear, from the best estimates obtainable on the basis of all the facts
and circumstances, that the amount of gain required to be recognized by
section 341(f)(2) is not less than the total gain under section
341(f)(2) whish would be computed separately for each subsection (f)
asset.
(9) In the case of a sale, exchange, or involuntary conversion of a
subsection (f) asset and a nonsubsection (f) asset in one transaction,
the total amount realized upon the disposition shall be allocated
between the subsection (f) asset any arm's length agreement between the
buyer and the seller will establish the allocation. In the absence of
such an agreement, the allocation shall be made by taking into account
the appropriate facts and circumstances. Some of the facts and
circumstances which shall be taken into account to the extent
appropriate included, but are not limited to, a comparision between the
subsection (f) asset and all property disposed of in such transaction of
(i) the original costs and reproduction costs of construction, erection,
or production, (ii) the remaining economic useful life, (ii) state of
obsolencence, and (iv) anticipated expenditures to maintain, renovate,
or modernize.
(10) See Sec. 1.1502-13 for the treatment of gain recognized upon a
distribution other than in complete liquidation made by one member of a
group which files a consolidated return to another such members.
(f) Exception for certain tax-free transactions. (1) Under section
341(f)(3), no gain is taken into account under section 341(f)(2) by a
transferor corporation on the transfer of a subsection (f) asset to
another corporation (other than a corporation exempt from tax imposed by
chapter 1 of the Code) if--
(i) The basis of such asset in the hands of the transferee
corporation is determined by reference to its basis in the hands of the
transferor by reason of the application of section 332 (relating
[[Page 176]]
to distributions in liquidation of an 80-percent-or-more controlled
subsidairy corporation), section 351 (relating to transfers to a
corporation controlled by the transferor), section 361 (relating to
exchanges pursuant to certain reorganizations), section 371(a) (relating
to exchanges pursuant to certain receivership and bankruptcy
proceedings), or section 374 (a) (relating to exchanges pursuant to
certain railroad reorganizations), and
(ii) The transferee corporation agrees (as provided in subparagraph
(3) of this paragraph) to have the provisiions of section 341(f)(2)
apply to any disposition by it of such asset.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example (1). Corporation M. in exchange for its voting stock worth
$20,000 and $1,000 in cash, acquires the entire property of corporation
N (an unencumbered apartment building) in a transaction which is
described in section 368(a)(2)(B) and which, therefore, qualifies as a
reorganization under section 368(a)(1)(C). The apartment building, which
in the hands of corporation N. a consenting corporation, is a subsection
(f) asset, has an adjusted basis of $15,000 and a fair market value of
$21,000. The basis of the apartment house in the hands of corporation M
is determined by reference to its basis in the hands of corporation N by
reason of the application of section 361. Thus, under section 341(f)(3),
if corporation M agrees to have the provisions of section 341(f)(2)
apply to any disposition by it of the apartment house, then corporation
N will recognize no gain under section 341(f)(2) but will recognize
$1,000 gain under section 361(b) (assuming the cash it receives is not
distributed in pursuance of the plan of reorganization). However, if
corporation M does not so agree, the gain recognized by corporation N
will be $6,000, that is, the gain of $1,000 recognized under section
361(b) plus $5,000 gain recognized under section 341(f)(2). In either
case, if section 1245, 1250, or 1251 applies, some or all of the gain
may be recognized under sections in lieu of sections 341(f)(2) and
361(b).
Example (2). Corporation Y, a consenting corporation, is a wholly
owned subsidiary of corporation X. In the complete liquidation of Y it
distributes to X a subsection (f) asset which is section 1245 property.
The asset at the time of the distribution has an adjusted basis of
$10,000, a recomputed basis of $14,000, and a fair market value of
$10,000. The basis of the asset in the hands of X is determined by
reference to its basis in the hands of corporation Y by reason of the
application of section 332. Thus, under section 341(f)(3), if
corporation X agrees to have the provisions of section 341(f)(2) apply
to any disposition by it of the subsection (f) asset, then Y will
recognize no gain under section 341(f)(2) and will recognize no gain
under section 1245(a)(1) by reason of the application of section
1245(b)(3). Under section 334(b)(1), the basis of the subsection (f)
asset to corporation X will be the same as it would be in the hands of
Y, or $10,000. However, if corporation X does not so agree, then under
section 341(f)(2) $6,000 (the excess of the fair market value of the
asset over its adjusted basis) will be treated as gain from the sale or
exchange of the asset. Moreover, under section 1245(a)(1) $4,000 (the
excess of the recomputed basis over the adjusted basis) of the $6,000
will be recognized as ordinary income. The basis of the asset to
corporation X is $16,000, i.e., the same as it would be in the hands of
Y ($10,000) increased in the amount of gain recognized by Y on the
distribution ($6,000).
(3) The agreement of a transferee corporation referred to in
subparagraph (1) of this paragraph shall be filed, on or before the date
on which the subsection (f) assets are transferred, with the district
director having jurisdiction over its income tax return for the taxable
year during which the transfer is to be made. The agreement shall be
signed by any officer who is duly authorized to act on behalf of the
transferee corporation (if the transaxtion is one to which section
371(a) or 374(a) applies, the fiduciary for the transferee corporation,
in appropriate cases, may sign the agreement) and shall apply to all the
subsection (f) assets to be transferred pursuant to the applicable
transaction described in section 341(f)(3). The agreement shall identify
the transaction by which the subsection (f) assets will be acquired,
including the names, addresses, and employer identification numbers of
the transferor and transferee corporations, and shall contain a schedule
of the subsection (f) assets to be acquired. The agreement shall also
state that the transferee corporation (i) agrees to have the provisions
of section 341(f)(2) apply to any disposition by it of the subsection
(f) assets acquired, and (ii) agrees to maintain records adequate to
permit identification of such subsection (f) assets.
(4) The transferor corporation shall attach a copy of the agreement
to its income tax return for the taxable year
[[Page 177]]
in which the subsection (f) assets are transferred.
(g) Subsection (f) asset defined. (1) Under section 341(f)(4), a
subsection (f) asset is any property which, as of the date of any sale
of stock to which paragraph (a) or (j)(3) of this section applies, is
not a capital asset and is property owned by, or subject to a binding
contract or an option to acquire held by, the consenting corporation.
Land or any interest in real property (other than a security interest)
is treated as property which is not a capital asset. Also, unrealized
receivables or fees (as defined in section 341(b)(4)) are treated as
property which are not capital assets.
(2) If, with respect to any property described in subparagraph (1)
of this paragraph, manufacture, construction, or production has been
commenced by either the consenting corporation or another person before
any date of sale of stock described in subparagraph (1) of this
paragraph, a consenting corporation's subsection (f) assets include any
property resulting from such manufacture, construction, or production.
Thus, for example, if, on the date of any sale of stock within the 6-
month period, manufacture, construction, or production has been
commended on a tract of land to be used for residential housing or on a
television series, the term ``subsection (f) asset'' includes the
residential homes of the television tapes resulting from such
manufacture, construction, or production by the consenting corporation
(or by a transferee corporation which has agreed to the application of
section 341(f)(2)). If land or any interest in real property (other than
a security interest) is owned or held under an option by the consenting
corporation on the date of any sale of stock described in subparagraph
(1) of this paragraph, the term ``subsection (f) asset'' includes any
improvements resulting from construction with respect to such property
(by the consenting corporation or by a transferee corporation which has
agreed to the application of section 341(f)(2)) if such construction is
commenced within 2 years after the date of any such sale. The property
or improvements resulting from any manufacture, construction, or
production is a question to be determined on the basis of the particular
facts and circumstances of each individual case. Thus, for example, a
building which is a part of an integrated project is a subsection (f)
asset if construction of the project commenced before the date of sale
or within 2 years thereafter even if construction of the building
commenced more than 2 years thereafter. Similarly a television tape
which is part of a series is a subsection (i) asset if production of the
series was commenced on the date of sale even if production of the tape
commenced after the sale.
(3) The provisions of subparagraphs (1) and (2) of this paragraph
may be illustrated by the following examples:
Example (1). Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1985. Shareholder A owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 5 percent of the stock on January 2, 1965, 10 percent on
February 10, 1963, and 1 percent on May 1, 1965. No other sales of X
stock were made during the 6-month period beginning on January 1, 1965.
On such date X owns an apartment building and on March 1 X purchases an
office building. X's subsection (f) assets include the apartment
building owned on January 1 and the office building purchased on March
1.
Example (2). Assume the same facts as in Example (1) except that on
January 1, 1965, X also owns a tract of raw land. On April 1, 1965,
construction of a residential housing project is commenced on the tract
of land. Corporation X's subsection (i) assets will include the tract of
land plus the resulting improvements to the land. This result would not
be changed if construction of the residential housing project were not
commenced until July 1, 1966, since the construction would have been
commenced within 2 years after May 1, 1965.
Example (3). Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1965. Shareholder B owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 10 percent of the stock on June 1, 1965. On April 1, 1965, Y
acquires an option to purchase a motion picture when completed. On May
1, 1965, production is started on the motion picture. On February 1,
1967, production is completed, and Y exercises its option. Y holds the
option and the motion picture for use in its trade or business. Y's
subsection (f) assets initially include the option and ultimately
include the motion picture. However the exercise of the option is not a
disposition of the option within the meaning of section 341(f)(2).
[[Page 178]]
(h) Five-year limitation as to shareholder. Under section 341(f)(5),
section 341(f)(1) does not apply to the sale of stock of a consenting
corporation if, during the 5-year period ending on the date of such
sale, such shareholder (or any person related to such shareholder within
the meaning of section 341(e)(8)(A)) made a sale (as defined in
paragraph (a)(2) of this section) of any stock of another consenting
corporation within any 6-month period beginning on a date on which a
consent was filed under section 341(f)(1) by such other corporation.
Section 341(f)(5) does not prevent a shareholder of a consenting
corporation from receiving the benefit of section 341(f)(1) on the sale
of additional shares of the stock of the same consenting corporation.
(i) [Reserved]
(j) Special rule for stock ownership in other corporations--(1)
Section 341(f)(6) provides a special rule applicable to a consenting
corporation which owns 5 percent or more in value of the outstanding
stock of another corporation. In such a case, a consent filed by the
consenting corporation shall not be valid with respect to a sale of its
stock during the applicable 6-month period unless each corporation, 5
percent or more in value of the outstanding stock of which is owned by
the consenting corporation on the date of such sale, file (within the 6-
month period ending on the date of such sale) a valid consent under
section 341(f)(1) with respect to sales of its own stock.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example: Corporation X files a consent under section 341(f)(1) on
November 1, 1965. On January 1, 1966, the date on which a shareholder of
corporation X sells stock of X. X owns 80 percent in value of the
outstanding stock of corporation Y. In order for the consent filed by
corporation X to be valid with respect to the sale of its stock on
January 1, 1966, corporation Y must have filed, during the 6-month
period ending on January 1, 1966, a valid consent under section
341(f)(1) with respect to sales of its stock.
(3) For purposes of applying section 341(f)(4) (relating to the
definition of a subsection (f) asset) to a corporation 5 percent or more
in value of the outstanding stock of which is owned by the consenting
corporation, a sale of stock of the consenting corporation to which
section 341(f)(1) applies shall be treated as a sale of stock of such
other corporation. Thus, in the example in subparagraph (2) of this
paragraph, the subsection (f) assets of corporation Y would include
property described in section 341(f)(4) owned by or held under an option
by corporation Y on January 1, 1966.
(4) In the case of a chain of corporations connected by the 5-
percent ownership requirement described in subparagraph (1) of this
paragraph, rules similar to the rules described in subparagraphs (2) and
(3) of this paragraph shall apply. Thus, in the example in subparagraph
(2) of this paragraph, if corporation Y owned 5 percent or more of the
stock of corporation Z on January 1, 1966, then Z must have filed a
valid consent during the 6-month period ending January 1, 1966, in order
for the consent filed by X to be valid with respect to the sale of its
stock on January 1, 1966. In such case any of stock of either X or Y is
treated as a sale of stock of Z for purposes of applying section
341(f)(4) to Z.
(5) If a corporation is a member of an affiliated group (as defined
in section 1504(a)) that files a consolidated return, a corporation will
be considered to have filed a consent if a consent is filed on its
behalf by the common parent under Sec. 1.1502-77(a).
(k) Effective date. Paragraphs (b), (c), (e)(3), and (f)(3) of this
section apply only with respect to statements and notifications filed
more than 30 days after July 6, 1977. Paragraph (d) applies only with
respect to sales of stock made more than 30 days after July 6, 1977. All
other provisions of this section appy with respect to transactions after
August 22, 1964.
[T.D. 7655, 44 FR 68460, Nov. 29, 1979; 45 FR 17982, Mar. 20, 1980; 45
FR 20464, Mar. 28, 1980; T.D. 8597, 60 FR 36679, July 18, 1995]
Sec. 1.342-1 General.
The determination of whether a foreign corporation was a foreign
personal holding company with respect to a taxable year beginning on or
before, and ending after August 26, 1937, shall be made under section
331 of the Revenue Act of 1936 (50 Stat. 818) and the regulations
thereunder. For the purpose of
[[Page 179]]
section 342(a), a liquidation may be completed before the actual
dissolution of the liquidating corporation. However, no liquidation
shall be considered as completed until the liquidating corporation and
the receiver (or trustees in liquidation) are finally divested of all
the property, whether tangible or intangible.
definition
Sec. 1.346-1 Partial liquidation.
(a) General. This section defines a partial liquidation. If amounts
are distributed in partial liquidation such amounts are treated under
section 331(a)(2) as received in part or full payment in exchange for
the stock. A distribution is treated as in partial liquidation of a
corporation if:
(1) The distribution is one of a series of distributions in
redemption of all of the stock of the corporation pursuant to a plan of
complete liquidation, or
(2) The distribution:
(i) Is not essentially equivalent to a dividend,
(ii) Is in redemption of a part of the stock of the corporation
pursuant to a plan, and
(iii) Occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year.
An example of a distribution which will qualify as a partial liquidation
under subparagraph (2) of this paragraph and section 346(a) is a
distribution resulting from a genuine contraction of the corporate
business such as the distribution of unused insurance proceeds recovered
as a result of a fire which destroyed part of the business causing a
cessation of a part of its activities. On the other hand, the
distribution of funds attributable to a reserve for an expansion program
which has been abandoned does not qualify as a partial liquidation
within the meaning of section 346(a). A distribution to which section
355 applies (or so much of section 356 as relates to section 355) is not
a distribution in partial liquidation within the meaning of section
346(a).
(b) Special requirements on termination of business. A distribution
which occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year and which meets the requirements of
subsection (b) of section 346 falls within paragraph (a)(2) of this
section and within section 346(a)(2). The requirements which a
distribution must meet to fall within subsection (b) of section 346 are:
(1) Such distribution is attributable to the corporation's ceasing
to conduct, or consists of assets of, a trade or business which has been
actively conducted throughout the five-year period immediately before
the distribution, which trade or business was not acquired by the
corporation within such period in a transaction in which gain or loss
was recognized in whole or in part, and
(2) Immediately after such distribution by the corporation it is
actively engaged in the conduct of a trade or business, which trade or
business was actively conducted throughout the five-year period ending
on the date of such distribution and was not acquired by the corporation
within such period in a transaction in which gain or loss was recognized
in whole or in part.
A distribution shall be treated as having been made in partial
liquidation pursuant to section 346(b) if it consists of the proceeds of
the sale of the assets of a trade or business which has been actively
conducted for the five-year period and has been terminated, or if it is
a distribution in kind of the assets of such a business, or if it is a
distribution in kind of some of the assets of such a business and of the
proceeds of the sale of the remainder of the assets of such a business.
In general, a distribution which will qualify under section 346(b) may
consist of, but is not limited to:
(i) Assets (other than inventory or property described in
subdivision (ii) of this subparagraph) used in the trade or business
throughout the five-year period immediately before the distribution (for
this purpose an asset shall be considered used in the trade or business
during the period of time the asset which it replaced was so used), or
(ii) Proceeds from the sale of assets described in subdivision (i)
of this subparagraph, and, in addition,
(iii) The inventory of such trade or business or property held
primarily for sale to customers in the ordinary course of business, if:
[[Page 180]]
(a) The items constituting such inventory or such property were
substantially similar to the items constituting such inventory or
property during the five-year period immediately before the
distribution, and
(b) The quantity of such items on the date of distribution was not
substantially in excess of the quantity of similar items regularly on
hand in the conduct of such business during such five-year period, or
(iv) Proceeds from the sale of inventory or property described in
subdivision (iii) of this subparagraph, if such inventory or property is
sold in bulk in the course of termination of such trade or business and
if with respect to such inventory the conditions of subdivision (iii)(a)
and (b) of this subparagraph would have been met had such inventory or
property been distributed on the date of such sale.
(c) Active conduct of a trade or business. For the purpose of
section 346(b)(1), a corporation shall be deemed to have actively
conducted a trade or business immediately before the distribution, if:
(1) In the case of a business the assets of which have been
distributed in kind, the business was operated by such corporation until
the date of distribution, or
(2) In the case of a business the proceeds of the sale of the assets
of which are distributed, such business was actively conducted until the
date of sale and the proceeds of such sale were distributed as soon
thereafter as reasonably possible.
The term active conduct of a trade or business shall have the same
meaning in this section as in paragraph (c) of Sec. 1.355-1.
Sec. 1.346-2 Treatment of certain redemptions.
If a distribution in a redemption of stock qualifies as a
distribution in part or full payment in exchange for the stock under
both section 302(a) and this section, then only this section shall be
applicable. None of the limitations of section 302 shall be applicable
to such redemption.
Sec. 1.346-3 Effect of certain sales.
The determination of whether assets sold in connection with a
partial liquidation are sold by the distributing corporation or by the
shareholder is a question of fact to be determined under the facts and
circumstances of each case.
Corporate Organizations and Reorganizations
corporate organizations
Sec. 1.351-1 Transfer to corporation controlled by transferor.
(a)(1) Section 351(a) provides, in general, for the nonrecognition
of gain or loss upon the transfer by one or more persons of property to
a corporation solely in exchange for stock or securities in such
corporation, if immediately after the exchange, such person or persons
are in control of the corporation to which the property was transferred.
As used in section 351, the phrase ``one or more persons'' includes
individuals, trusts, estates, partnerships, associations, companies, or
corporations (see section 7701(a)(1)). To be in control of the
transferee corporation, such person or persons must own immediately
after the transfer stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of
stock of such corporation (see section 368(c)). In determining control
under this section, the fact that any corporate transferor distributes
part or all of the stock which it receives in the exchange to its
shareholders shall not be taken into account. The phrase ``immediately
after the exchange'' does not necessarily require simultaneous exchanges
by two or more persons, but comprehends a situation where the rights of
the parties have been previously defined and the execution of the
agreement proceeds with an expedition consistent with orderly procedure.
For purposes of this section--
(i) Stock or securities issued for services rendered or to be
rendered to or for the benefit of the issuing corporation will not be
treated as having been issued in return for property, and
[[Page 181]]
(ii) Stock or securities issued for property which is of relatively
small value in comparison to the value of the stock and securities
already owned (or to be received for services) by the person who
transferred such property, shall not be treated as having been issued in
return for property if the primary purpose of the transfer is to qualify
under this section the exchanges of property by other persons
transferring property.
For the purpose of section 351, stock rights or stock warrants are not
included in the term ``stock or securities.''
(2) The application of section 351(a) is illustrated by the
following examples:
Example (1). C owns a patent right worth $25,000 and D owns a
manufacturing plant worth $75,000. C and D organize the R Corporation
with an authorized capital stock of $100,000. C transfers his patent
right to the R Corporation for $25,000 of its stock and D transfers his
plant to the new corporation for $75,000 of its stock. No gain or loss
to C or D is recognized.
Example (2). B owns certain real estate which cost him $50,000 in
1930, but which has a fair market value of $200,000 in 1955. He
transfers the property to the N Corporation in 1955 for 78 percent of
each class of stock of the corporation having a fair market value of
$200,000, the remaining 22 percent of the stock of the corporation
having been issued by the corporation in 1940 to other persons for cash.
B realized a taxable gain of $150,000 on this transaction.
Example (3). E, an individual, owns property with a basis of $10,000
but which has a fair market value of $18,000. E also had rendered
services valued at $2,000 to Corporation F. Corporation F has
outstanding 100 shares of common stock all of which are held by G.
Corporation F issues 400 shares of its common stock (having a fair
market value of $20,000) to E in exchange for his property worth $18,000
and in compensation for the services he has rendered worth $2,000. Since
immediately after the transaction, E owns 80 percent of the outstanding
stock of Corporation F, no gain is recognized upon the exchange of the
property for the stock. However, E realized $2,000 of ordinary income as
compensation for services rendered to Corporation F.
(3) Underwritings of stock--(i) In general. For the purpose of
section 351, if a person acquires stock of a corporation from an
underwriter in exchange for cash in a qualified underwriting
transaction, the person who acquires stock from the underwriter is
treated as transferring cash directly to the corporation in exchange for
stock of the corporation and the underwriter is disregarded. A qualified
underwriting transaction is a transaction in which a corporation issues
stock for cash in an underwriting in which either the underwriter is an
agent of the corporation or the underwriter's ownership of the stock is
transitory.
(ii) Effective date. This paragraph (a)(3) is effective for
qualified underwriting transactions occurring on or after May 1, 1996.
(b)(1) Where property is transferred to a corporation by two or more
persons in exchange for stock or securities, as described in paragraph
(a) of this section, it is not required that the stock and securities
received by each be substantially in proportion to his interest in the
property immediately prior to the transfer. However, where the stock and
securities received are received in disproportion to such interest, the
entire transaction will be given tax effect in accordance with its true
nature, and in appropriate cases the transaction may be treated as if
the stock and securities had first been received in proportion and then
some of such stock and securities had been used to make gifts (section
2501 and following), to pay compensation (section 61(a)(1)), or to
satisfy obligations of the transferor of any kind.
(2) The application of paragraph (b)(1) of this section may be
illustrated as follows:
Example (1). Individuals A and B, father and son, organize a
corporation with 100 shares of common stock to which A transfers
property worth $8,000 in exchange for 20 shares of stock, and B
transfers property worth $2,000 in exchange for 80 shares of stock. No
gain or loss will be recognized under section 351. However, if it is
determined that A in fact made a gift to B, such gift will be subject to
tax under section 2501 and following. Similarly, if B had rendered
services to A (such services having no relation to the assets
transferred or to the business of the corporation) and the disproportion
in the amount of stock received constituted the payment of compensation
by A to B, B will be taxable upon the fair market value of the 60 shares
of stock received as compensation for services rendered, and A will
realize gain or loss upon the difference between the basis to him of the
60 shares and
[[Page 182]]
their fair market value at the time of the exchange.
Example (2). Individuals C and D each transferred, to a newly
organized corporation, property having a fair market value of $4,500 in
exchange for the issuance by the corporation of 45 shares of its capital
stock to each transferor. At the same time, the corporation issued to E,
an individual, 10 shares of its capital stock in payment for
organizational and promotional services rendered by E for the benefit of
the corporation. E transferred no property to the corporation. C and D
were under no obligation to pay for E's services. No gain or loss is
recognized to C or D. E received compensation taxable as ordinary income
to the extent of the fair market value of the 10 shares of stock
received by him.
(c)(1) The general rule of section 351 does not apply, and
consequently gain or loss will be recognized, where property is
transferred to an investment company after June 30, 1967. A transfer of
property after June 30, 1967, will be considered to be a transfer to an
investment company if--
(i) The transfer results, directly or indirectly, in diversification
of the transferors' interests, and
(ii) The transferee is (a) a regulated investment company, (b) a
real estate investment trust, or (c) a corporation more than 80 percent
of the value of whose assets (excluding cash and nonconvertible debt
obligations from consideration) are held for investment and are readily
marketable stocks or securities, or interests in regulated investment
companies or real estate investment trusts.
(2) The determination of whether a corporation is an investment
company shall ordinarily be made by reference to the circumstances in
existence immediately after the transfer in question. However, where
circumstances change thereafter pursuant to a plan in existence at the
time of the transfer, this determination shall be made by reference to
the later circumstances.
(3) Stocks and securities will be considered readily marketable if
(and only if) they are part of a class of stock or securities which is
traded on a securities exchange or traded or quoted regularly in the
over-the-counter market. For purposes of subparagraph (1)(ii)(c) of this
paragraph, the term ``readily marketable stocks or securities'' includes
convertible debentures, convertible preferred stock, warrants, and other
stock rights if the stock for which they may be converted or exchanged
is readily marketable. Stocks and securities will be considered to be
held for investment unless they are (i) held primarily for sale to
customers in the ordinary course of business, or (ii) used in the trade
or business of banking, insurance, brokerage, or a similar trade or
business.
(4) In making the determination required under subparagraph
(1)(ii)(c) of this paragraph, stock and securities in subsidiary
corporations shall be disregarded and the parent corporation shall be
deemed to own its ratable share of its subsidiaries' assets. A
corporation shall be considered a subsidiary if the parent owns 50
percent or more of (i) the combined voting power of all classes of stock
entitled to vote, or (ii) the total value of shares of all classes of
stock outstanding.
(5) A transfer ordinarily results in the diversification of the
transferors' interests if two or more persons transfer nonidentical
assets to a corporation in the exchange. For this purpose, if any
transaction involves one or more transfers of nonidentical assets which,
taken in the aggregate, constitute an insignificant portion of the total
value of assets transfered, such transfers shall be disregarded in
determining whether diversification has occurred. If there is only one
transferor (or two or more transferors of identical assets) to a newly
organized corporation, the transfer will generally be treated as not
resulting in diversification. If a transfer is part of a plan to achieve
diversification without recognition of gain, such as a plan which
contemplates a subsequent transfer, however delayed, of the corporate
assets (or of the stock or securities received in the earlier exchange)
to an investment company in a transaction purporting to qualify for
nonrecognition treatment, the original transfer will be treated as
resulting in diversification.
(6)(i) For purposes of paragraph (c)(5) of this section, a transfer
of stocks and securities will not be treated as resulting in a
diversification of the transferors' interests if each transferor
transfers a diversified portfolio of stocks and securities. For purposes
of
[[Page 183]]
this paragraph(c)(6), a portfolio of stocks and securities is
diversified if it satisfies the 25 and 50-percent tests of section
368(a)(2)(F)(ii), applying the relevant provisions of section
368(a)(2)(F). However, Government securities are included in total
assets for purposes of the denominator of the 25 and 50-percent tests
(unless the Government securities are acquired to meet the 25 and 50-
percent tests), but are not treated as securities of an issuer for
purposes of the numerator of the 25 and 50-percent tests.
(ii) Paragraph (c)(6)(i) of this section is effective for transfers
completed on or after May 2, 1996. Transfers of diversified (within the
meaning of paragraph (c)(6)(i) of this section), but nonidentical,
portfolios of stocks and securities completed before May 2, 1996, may be
treated either--
(A) Consistent with paragraph (c)(6)(i) of this section; or
(B) As resulting in diversification of the transferors' interests.
(7) The application of subparagraph (5) of this paragraph may be
illustrated as follows:
Example (1). Individuals A, B, and C organize a corporation with 101
shares of common stock. A and B each transfers to it $10,000 worth of
the only class of stock of corporation X, listed on the New York Stock
Exchange, in exchange for 50 shares of stock. C transfers $200 worth of
readily marketable securities in corporation Y for one share of stock.
In determining whether or not diversification has occurred, C's
participation in the transaction will be disregarded. There is,
therefore, no diversification, and gain or loss will not be recognized.
Example (2). A, together with 50 other transferors, organizes a
corporation with 100 shares of stock. A transfers $10,000 worth of stock
in corporation X, listed on the New York Stock Exchange, in exchange for
50 shares of stock. Each of the other 50 transferors transfers $200
worth of readily marketable securities in corporations other than X in
exchange for one share of stock. In determining whether or not
diversification has occurred, all transfers will be taken into account.
Therefore, diversification is present, and gain or loss will be
recognized.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6942, 32 FR
20977, Dec. 29, 1967; T.D. 8665, 61 FR 19189, May 1, 1996; T.D. 8663, 61
FR 19545, May 2, 1996]
Sec. 1.351-2 Receipt of property.
(a) If an exchange would be within the provisions of section 351(a)
if it were not for the fact that the property received in exchange
consists not only of property permitted by such subsection to be
received without the recognition of gain, but also of other property or
money, then the gain, if any, to the recipient shall be recognized, but
in an amount not in excess of the sum of such money and the fair market
value of such other property. No loss to the recipient shall be
recognized.
(b) See section 357 and the regulations pertaining to that section
for applicable rules as to the treatment of liabilities as ``other
property'' in cases subject to section 351, where another party to the
exchange assumes a liability, or acquires property subject to a
liability.
(c) See sections 358 and 362 and the regulations pertaining to those
sections for applicable rules with respect to the determination of the
basis of stock, securities, or other property received in exchanges
subject to section 351.
(d) See part I (section 301 and following), subchapter C, chapter 1
of the Code, and the regulations thereunder for applicable rules with
respect to the taxation of dividends where a distribution by a
corporation of its stock or securities in connection with an exchange
subject to section 351(a) has the effect of the distribution of a
taxable dividend.
(e) See Sec. 1.356-7(a) for the applicability of the definition of
nonqualified preferred stock in section 351(g)(2) for stock issued prior
to June 9, 1997, and for stock issued in transactions occurring after
June 8, 1997, that are described in section 1014(f)(2) of the Taxpayer
Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 921). See Sec.
1.356-7(c) for the treatment of preferred stock received in certain
exchanges for common or preferred stock described in section
351(g)(2)(C)(i)(II).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as
amended by T.D. 8904, 65 FR 58650, Oct. 2, 2000]
[[Page 184]]
Sec. 1.351-3 Records to be kept and information to be filed.
(a) Every person who received the stock or securities of a
controlled corporation, or other property as part of the consideration,
in exchange for property under section 351, shall file with his income
tax return for the taxable year in which the exchange is consummated a
complete statement of all facts pertinent to such exchange, including--
(1) A description of the property transferred, or of his interest in
such property, together with a statement of the cost or other basis
thereof, adjusted to the date of transfer.
(2) With respect to stock of the controlled corporation received in
the exchange, a statement of--
(i) The kind of stock and preferences, if any;
(ii) The number of shares of each class received; and
(iii) The fair market value per share of each class at the date of
the exchange.
(3) With respect to securities of the controlled corporation
received in the exchange, a statement of--
(i) The principal amount and terms; and
(ii) The fair market value at the date of exchange.
(4) The amount of money received, if any.
(5) With respect to other property received--
(i) A complete description of each separate item;
(ii) The fair market value of each separate item at the date of
exchanges; and
(iii) In the case of a corporate shareholder, the adjusted basis of
the other property in the hands of the controlled corporation
immediately before the distribution of such other property to the
corporate shareholder in connection with the exchange.
(6) With respect to liabilities of the transferors assumed by the
controlled corporation, a statement of--
(i) The nature of the liabilities;
(ii) When and under what circumstances created;
(iii) The corporate business reason for assumption by the controlled
corporation; and
(iv) Whether such assumption eliminates the transferor's primary
liability.
(b) Every such controlled corporation shall file with its income tax
return for the taxable year in which the exchange is consummated--
(1) A complete description of all the property received from the
transferors.
(2) A statement of the cost or other basis thereof in the hands of
the transferors adjusted to the date of transfer.
(3) The following information with respect to the capital stock of
the controlled corporation--
(i) The total issued and outstanding capital stock immediately prior
to and immediately after the exchange, with a complete description of
each class of stock;
(ii) The classes of stock and number of shares issued to each
transferor in the exchange, and the number of shares of each class of
stock owned by each transferor immediately prior to and immediately
after the exchange, and
(iii) The fair market value of the capital stock as of the date of
exchange which was issued to each transferor.
(4) The following information with respect to securities of the
controlled corporation--
(i) The principal amount and terms of all securities outstanding
immediately prior to and immediately after the exchange,
(ii) The principal amount and terms of securities issued to each
transferor in the exchange, with a statement showing each transferor's
holdings of securities of the controlled corporation immediately prior
to and immediately after the exchange,
(iii) The fair market value of the securities issued to the
transferors on the date of the exchange, and
(iv) A statement as to whether the securities issued in the exchange
are subordinated in any way to other claims against the controlled
corporation.
(5) The amount of money, if any, which passed to each of the
transferors in connection with the transaction.
(6) With respect to other property which passed to each transferor--
(i) A complete description of each separate item;
[[Page 185]]
(ii) The fair market value of each separate item at the date of
exchange, and
(iii) In the case of a corporate transferor, the adjusted basis of
each separate item in the hands of the controlled corporation
immediately before the distribution of such other property to the
corporate transferor in connection with the exchange.
(7) The following information as to the transferor's liabilities
assumed by the controlled corporation in the exchange--
(i) The amount and a description thereof,
(ii) When and under what circumstances created, and
(iii) The corporate business reason or reasons for assumption by the
controlled corporation.
(c) Permanent records in substantial form shall be kept by every
taxpayer who participates in the type of exchange described in section
351, showing the information listed above, in order to facilitate the
determination of gain or loss from a subsequent disposition of stock or
securities and other property, if any, received in the exchange.
effects on shareholders and security holders
Sec. 1.354-1 Exchanges of stock and securities in certain reorganizations.
(a) Section 354 provides that under certain circumstances no gain or
loss is recognized to a shareholder who surrenders his stock in exchange
for other stock or to a security holder who surrenders his securities in
exchange for stock. Section 354 also provides that under certain
circumstances a security holder may surrender securities and receive
securities in the same principal amount or in a lesser principal amount
without the recognition of gain or loss to him. The exchanges to which
section 354 applies must be pursuant to a plan of reorganization as
provided in section 368(a) and the stock and securities surrendered as
well as the stock and securities received must be those of a corporation
which is a party to the reorganization. Section 354 does not apply to
exchanges pursuant to a reorganization described in section 368(a)(1)(D)
unless the transferor corporation--
(1) Transfers all or substantially all of its assets to a single
corporation, and
(2) Distributes all of its remaining properties (if any) and the
stock, securities and other properties received in the exchange to its
shareholders or security holders in pursuance of the plan of
reorganization. The fact that properties retained by the transferor
corporation, or received in exchange for the properties transferred in
the reorganization, are used to satisfy existing liabilities not
represented by securities and which were incurred in the ordinary course
of business before the reorganization does not prevent the application
of section 354 to an exchange pursuant to a plan of reorganization
defined in section 368(a)(1)(D).
(b) Except as provided in section 354 (c) and (d), section 354 is
not applicable to an exchange of stock or securities if a greater
principal amount of securities is received than the principal amount of
securities the recipient surrenders, or if securities are received and
the recipient surrenders no securities. See, however, section 356 and
regulations pertaining to such section. See also section 306 with
respect to the receipt of preferred stock in a transaction to which
section 354 is applicable.
(c) An exchange of stock or securities shall be subject to section
354(a)(1) even though--
(1) Such exchange is not pursuant to a plan of reorganization
described in section 368(a), and
(2) The principal amount of the securities received exceeds the
principal amount of the securities surrendered or if securities are
received and no securities are surrendered--
if such exchange is pursuant to a plan of reorganization for a railroad
corporation as defined in section 77(m) of the Bankruptcy Act (11 U.S.C.
205(m)) and is approved by the Interstate Commerce Commission under
section 77 of such act or under section 20b of the Interstate Commerce
Act (49 U.S.C. 20b) as being in the public interest. Section 354 is not
applicable to such exchanges if there is received property other than
stock or securities. See,
[[Page 186]]
however, section 356 and regulations pertaining to such section.
(d) The rules of section 354 may be illustrated by the following
examples:
Example 1. Pursuant to a reorganization under section 368(a) to
which Corporations T and W are parties, A, a shareholder in Corporation
T, surrenders all his common stock in Corporation T in exchange for
common stock of Corporation W. No gain or loss is recognized to A.
Example 2. Pursuant to a reorganization under section 368(a) to
which Corporations X and Y (which are not railroad corporations) are
parties, B, a shareholder in Corporation X, surrenders all his stock in
X for stock and securities in Y. Section 354 does not apply to this
exchange. See, however, section 356.
Example 3. C, a shareholder in Corporation Z (which is not a
railroad corporation), surrenders all his stock in Corporation Z in
exchange for securities in Corporation Z. Whether or not this exchange
is in connection with a recapitalization under section 368(a)(1)(E),
section 354 does not apply. See, however, section 302.
Example 4. The facts are the same as in Example 3 of this paragraph
(d), except that C receivies solely rights to acquire stock in
Corporation Z. Section 354 does not apply.
(e) Except as provided in Sec. 1.356-6, for purposes of section
354, the term securities includes rights issued by a party to the
reorganization to acquire its stock. For purposes of this section and
section 356(d)(2)(B), a right to acquire stock has no principal amount.
For this purpose, rights to acquire stock has the same meaning as it
does under sections 305 and 317(a). Other Internal Revenue Code
provisions governing the treatment of rights to acquire stock may also
apply to certain exchanges occurring in connection with a
reorganization. See, for example, sections 83 and 421 through 424 and
the regulations thereunder. This paragraph (e) applies to exchanges
occurring on or after March 9, 1998.
(f) See Sec. 1.356-7(a) and (b) for the treatment of nonqualified
preferred stock (as defined in section 351(g)(2)) received in certain
exchanges for nonqualified preferred stock or preferred stock. See Sec.
1.356-7(c) for the treatment of preferred stock received in certain
exchanges for common or preferred stock described in section
351(g)(2)(C)(i)(II).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8752, 63 FR 410, Jan. 6, 1998; T.D. 8882, 65 FR
31078, May 16, 2000; T.D. 8904, 65 FR 58651, Oct. 2, 2000]
Sec. 1.355-0 Outline of sections.
In order to facilitate the use of Sec. Sec. 1.355-1 through 1.355-
7T, this section lists the major paragraphs in those sections as
follows:
Sec. 1.355-1 Distribution of stock and securities of a controlled
corporation.
(a) Effective date of certain sections.
(b) Application of section.
Sec. 1.355-2 Limitations.
(a) Property distributed.
(b) Independent business purpose.
(1) Independent business purpose requirement.
(2) Corporate business purpose.
(3) Business purpose for distribution.
(4) Business purpose as evidence of nondevice.
(5) Examples.
(c) Continuity of interest requirement.
(1) Requirement.
(2) Examples.
(d) Device for distribution of earnings and profits.
(1) In general.
(2) Device factors.
(i) In general.
(ii) Pro rata distribution.
(iii) Subsequent sale or exchange of stock.
(A) In general.
(B) Sale or exchange negotiated or agreed upon before the
distribution.
(C) Sale or exchange not negotiated or agreed upon before the
distribution.
(D) Negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization.
(iv) Nature and use of assets.
(A) In general.
(B) Assets not used in a trade or business meeting the requirement
of section 355(b).
(C) Related function.
(3) Nondevice factors.
(i) In general.
(ii) Corporate business purpose.
(iii) Distributing corporation publicly traded and widely held.
(iv) Distribution to domestic corporate shareholders.
(4) Examples.
(5) Transactions ordinarily not considered as a device.
(i) In general.
(ii) Absence of earnings and profits.
[[Page 187]]
(iii) Section 303(a) transactions.
(iv) Section 302(a) transactions.
(v) Examples.
(e) Stock and securities distributed.
(1) In general.
(2) Additional rules.
(f) Principal amount of securities.
(1) Securities received.
(2) Only stock received.
(g) Period of ownership.
(1) Other property.
(2) Example.
(h) Active conduct of a trade or business.
Sec. 1.355-3 Active conduct of a trade or business.
(a) General requirements.
(1) Application of section 355.
(2) Examples.
(b) Active conduct of a trade or business defined.
(1) In general.
(2) Active conduct or a trade or business immediately after
distribution.
(i) In general.
(ii) Trade or business.
(iii) Active conduct.
(iv) Limitations.
(3) Active conduct for five-year period preceding distribution.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(i) In general.
(ii) Example.
(iii) Gain or loss recognized in certain transactions.
(iv) Affiliated group.
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(c) Examples.
Sec. 1.355-4 Non pro rata distributions, etc.
Sec. 1.355-5 Records to be kept and information to be filed.
Sec. 1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
(a) Conventions.
(1) Examples.
(2) Five-year period.
(3) Distributing securities.
(4) Marketable securities.
(b) General rules and purposes of section 355(d).
(1) Disqualified distributions in general.
(2) Disqualified stock.
(i) In general.
(ii) Purchase.
(iii) Exceptions.
(A) Purchase eliminated.
(B) Deemed purchase eliminated.
(C) Elimination of basis.
(1) General rule.
(2) Special rule for transferred and exchanged basis property.
(3) Special rule for Split-offs and Split-ups.
(D) Special rule if basis allocated between two corporations.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated.
(i) In general.
(ii) Disqualified person.
(iii) Purchased basis.
(iv) Increase in interest because payment of cash in lieu of
fractional shares.
(v) Other exceptions.
(vi) Examples.
(4) Anti-avoidance rule.
(i) In general.
(ii) Example.
(c) Whether a person holds a 50 percent or greater interest.
(1) In general.
(2) Valuation.
(3) Effect of options, warrants, convertible obligations, and other
similar interests.
(i) Application.
(ii) General rule.
(iii) Options deemed newly issued and substituted options.
(A) Exchange, adjustment, or alteration of existing option.
(B) Certain compensatory options.
(C) Substituted options.
(iv) Effect of treating an option as exercised.
(A) In general.
(B) Stock purchase agreement or similar arrangement.
(v) Instruments treated as options.
(vi) Instruments generally not treated as options.
(A) Escrow, pledge, or other security agreements.
(B) Compensatory options.
(1) General rule.
(2) Exception.
(C) Certain stock conversion features.
(D) Options exercisable only upon death, disability, mental
imcompetency, or separation from service.
(E) Rights of first refusal.
(F) Other enumerated instruments.
(vii) Reasonably certain that the option will be exercised.
(A) In general.
(B) Stock purchase agreement or similar arrangement.
(viii) Examples.
(4) Plan or arrangement.
(i) In general.
(ii) Understanding.
(iii) Examples.
(iv) Exception.
(A) Subsequent disposition.
(B) Example.
(d) Purchase.
[[Page 188]]
(1) In general.
(i) Definition of purchase under section 355(d)(5)(A).
(ii) Section 355 distributions.
(iii) Example.
(2) Exceptions to definition of purchase under section 355(d)(5)(A).
(i) Acquisition of stock in a transaction which includes other
property or money.
(A) Transferors and shareholders of transferor or distributing
corporations.
(1) In general.
(2) Exception.
(B) Transferee corporations.
(1) In general.
(2) Exception.
(C) Examples.
(ii) Acquisition of stock in a distribution to which section 305(a)
applies.
(iii) Section 1036(a) exchange.
(iv) Section 338 elections.
(A) In general.
(B) Example.
(v) Partnership distributions.
(A) Section 732(b).
(B) Section 734(b).
(3) Certain section 351 exchanges treated as purchases.
(i) In general.
(A) Treatment of stock received by transferor.
(B) Multiple classes of stock.
(ii) Cash item, marketable stock.
(iii) Exception for certain acquisitions.
(A) In general.
(B) Example.
(iv) Exception for assets transferred as part of an active trade or
business.
(A) In general.
(B) Active conduct of a trade or business.
(C) Reasonable needs of the trade or business.
(D) Consideration of all facts and circumstances.
(E) Successive transfers.
(v) Exception for transfer between members of the same affiliated
group.
(A) In general.
(B) Examples.
(4) Triangular asset reorganizations.
(i) Definition.
(ii) Treatment.
(iii) Example.
(5) Reverse triangular reorganizations other than triangular asset
reorganizations.
(i) In general.
(ii) Letter ruling and closing agreement.
(iii) Example.
(6) Treatment of group structure changes.
(i) In general.
(ii) Adjustments to basis of higher-tier members.
(iii) Example.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes.
(e) Deemed purchase and timing rules.
(1) Attribution and aggregation.
(i) In general.
(ii) Purchase of additional interest.
(iii) Purchase between persons treated as one person.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A).
(v) Examples.
(2) Transferred basis rule.
(3) Exchanged basis rule.
(i) In general.
(ii) Example.
(4) Certain section 355 or section 305 distributions.
(i) Section 355.
(ii) Section 305.
(5) Substantial diminution of risk.
(i) In general.
(ii) Property to which suspension applies.
(iii) Risk of loss substantially diminished.
(iv) Special class of stock.
(f) Duty to determine stockholders.
(1) In general.
(2) Deemed knowledge of contents of securities filings.
(3) Presumptions as to securities filings.
(4) Presumption as to less-than-five-percent shareholders.
(5) Examples.
(g) Effective date.
Sec. 1.355-7T Recognition of gain on certain distributions of stock or
securities in connection with an acquisition.
(a) In general.
(b) Plan.
(1) In general.
(2) Certain post-distribution acquisitions.
(3) Plan factors.
(4) Non-plan factors.
(c) Operating rules.
(1) Internal discussions and discussions with outside advisors
evidence of business purpose.
(2) Takeover defense.
(3) Effect of distribution on trading in stock.
(4) Consequences of section 355(e) disregarded for certain purposes.
(5) Multiple acquisitions.
(d) Safe harbors.
(1) Safe Harbor I.
(2) Safe Harbor II.
(3) Safe Harbor III.
(4) Safe Harbor IV.
(5) Safe Harbor V.
(i) In general.
(ii) Special rules.
(6) Safe Harbor VI.
(i) In general.
(ii) Special rule.
(7) Safe Harbor VII.
(i) In general.
(ii) Special rule.
(e) Stock acquired by exercise of options, warrants, convertible
obligations, and other similar interests.
(1) Treatment of options.
[[Page 189]]
(i) General rule.
(ii) Agreement, understanding, or arrangement to write an option.
(iii) Substantial negotiations related to options.
(2) Instruments treated as options.
(3) Instruments generally not treated as options.
(i) Escrow, pledge, or other security agreements.
(ii) Compensatory options.
(iii) Options exercisable only upon death, disability, mental
incompetency, or separation from service.
(iv) Rights of first refusal.
(v) Other enumerated instruments.
(f) Multiple controlled corporations.
(g) Valuation.
(h) Definitions.
(1) Agreement, understanding, arrangement, or substantial
negotiations.
(2) Controlled corporation.
(3) Controlling shareholder.
(4) Coordinating group.
(5) Discussions.
(6) Established market.
(7) Five-percent shareholder.
(8) Similar acquisition.
(9) Ten-percent shareholder.
(i) [Reserved]
(j) Examples.
(k) Effective dates.
[T.D. 8238, 54 FR 289, Jan. 5, 1989, as amended by T.D. 8913, 65 FR
79722, Dec. 20, 2000; T.D. 8960, 66 FR 40591, Aug. 3, 2001; T.D. 8988,
67 FR 20636, Apr. 26, 2002; 67 FR 38200, June 3, 2002]
Sec. 1.355-1 Distribution of stock and securities of a controlled
corporation.
(a) Effective date of certain sections. Sections 1.355-1 through
1.355-4 apply to transactions occurring after February 6, 1989. For
transactions occurring on or before that date, see 26 CFR 1.355-1
through 1.355-4 (revised as of April 1, 1987). Sections 1.355-1 through
1.355-4 do not reflect the amendments to section 355 made by the Revenue
Act of 1987 and the Technical and Miscellaneous Revenue Act of 1988.
(b) Application of section. Section 355 provides for the separation,
without recognition of gain or loss to (or the inclusion in income of)
the shareholders and security holders, of one or more existing
businesses formerly operated, directly or indirectly, by a single
corporation (the ``distributing corporation''). It applies only to the
separation of existing businesses that have been in active operation for
at least five years (or a business that has been in active operation for
at least five years into separate businesses), and which, in general,
have been owned, directly or indirectly, for at least five years by the
distributing corporation. A separation is achieved through the
distribution by the distributing corporation of stock, or stock and
securities, of one or more subsidiaries (the ``controlled
corporations'') to its shareholders with respect to its stock or to its
security holders in exchange for its securities. The controlled
corporations may be preexisting or newly created subsidiaries.
Throughout the regulations under section 355, the term distribution
refers to a distribution by the distributing corporation of stock, or
stock and securities, of one or more controlled corporations, unless the
context indicates otherwise. Section 355 contemplates the continued
operation of the business or businesses existing prior to the
separation. See Sec. 1.355-4 for types of distributions that may
qualify under section 355, including pro rata distributions and non pro
rata distributions.
(c) Stock rights. Except as provided in Sec. 1.356-6, for purposes
of section 355, the term securities includes rights issued by the
distributing corporation or the controlled corporation to acquire the
stock of that corporation. For purposes of this section and section
356(d)(2)(B), a right to acquire stock has no principal amount. For this
purpose, rights to acquire stock has the same meaning as it does under
sections 305 and 317(a). Other Internal Revenue Code provisions
governing the treatment of rights to acquire stock may also apply to
certain distributions occurring in connection with a transaction
described in section 355. See, for example, sections 83 and 421 through
424 and the regulations thereunder. This paragraph (c) applies to
distributions occurring on or after March 9, 1998.
(d) Nonqualified preferred stock. See Sec. 1.356-7(a) and (b) for
the treatment of nonqualified preferred stock (as defined in section
351(g)(2)) received in certain exchanges for (or in certain
distributions with respect to) nonqualified preferred stock or preferred
stock. See Sec. 1.356-7(c) for the treatment of the receipt of
preferred stock in certain exchanges for (or in certain distributions
with respect to) common or preferred
[[Page 190]]
stock described in section 351(g)(2)(C)(i)(II).
[T.D. 8238, 54 FR 289, Jan. 5, 1989, as amended by T.D. 8752, 63 FR 410,
Jan. 6, 1998; T.D. 8882, 65 FR 31078, May 16, 2000; T.D. 8904, 65 FR
58651, Oct. 2, 2000]
Sec. 1.355-2 Limitations.
(a) Property distributed. Section 355 applies to a distribution only
if the property distributed consists solely of stock, or stock and
securities, of a controlled corporation. If additional property
(including an excess principal amount of securities received over
securities surrendered) is received, see section 356.
(b) Independent business purpose--(1) Independent business purpose
requirement. Section 355 applies to a transaction only if it is carried
out for one or more corporate business purposes. A transaction is
carried out for a corporate business purpose if it is motivated, in
whole or substantial part, by one or more corporate business purposes.
The potential for the avoidance of Federal taxes by the distributing or
controlled corporations (or a corporation controlled by either) is
relevant in determining the extent to which an existing corporate
business purpose motivated the distribution. The principal reason for
this business purpose requirement is to provide nonrecognition treatment
only to distributions that are incident to readjustments of corporate
structures required by business exigencies and that effect only
readjustments of continuing interests in property under modified
corporate forms. This business purpose requirement is independent of the
other requirements under section 355.
(2) Corporate business purpose. A corporate business purpose is a
real and substantial non Federal tax purpose germane to the business of
the distributing corporation, the controlled corporation, or the
affiliated group (as defined in Sec. 1.355-3(b)(4)(iv)) to which the
distributing corporation belongs. A purpose of reducing non Federal
taxes is not a corporate business purpose if (i) the transaction will
effect a reduction in both Federal and non Federal taxes because of
similarities between Federal tax law and the tax law of the other
jurisdiction and (ii) the reduction of Federal taxes is greater than or
substantially coextensive with the reduction of non Federal taxes. See
Examples (7) and (8) of paragraph (b)(5) of this section. A shareholder
purpose (for example, the personal planning purposes of a shareholder)
is not a corporate business purpose. Depending upon the facts of a
particular case, however, a shareholder purpose for a transaction may be
so nearly coextensive with a corporate business purpose as to preclude
any distinction between them. In such a case, the transaction is carried
out for one or more corporate business purposes. See Example (2) of
paragraph (b)(5) of this section.
(3) Business purpose for distribution. The distribution must be
carried out for one or more corporate business purposes. See Example (3)
of paragraph (b)(5) of this section. If a corporate business purpose can
be achieved through a nontaxable transaction that does not involve the
distribution of stock of a controlled corporation and which is neither
impractical nor unduly expensive, then, for purposes of paragraph (b)(1)
of this section, the separation is not carried out for that corporate
business purpose. See Examples (3) and (4) of paragraph (b)(5) of this
section. For rules with respect to the requirement of a business purpose
for a transfer of assets to a controlled corporation in connection with
a reorganization described in section 368(a)(1)(D), See Sec. 1.368-
1(b).
(4) Business purpose as evidence of nondevice. The corporate
business purpose or purposes for a transaction are evidence that the
transaction was not used principally as a device for the distribution of
earnings and profits within the meaning of section 355(a)(1)(B). See
paragraph (d)(3)(ii) of this section.
(5) Examples. The provisions of this paragraph (b) may be
illustrated by the following examples:
Example (1). Corporation X is engaged in the production,
transportation, and refining of petroleum products. In 1985, X acquires
all of the properties of corporation Z, which is also engaged in the
production, transportation, and refining of petroleum products. In 1991,
as a result of antitrust litigation, X is ordered to divest itself of
all of the properties acquired from Z. X transfers those
[[Page 191]]
properties to new corporation Y and distributes the stock of Y pro rata
to X's shareholders. In view of the divestiture order, the distribution
is carried out for a corporate business purpose. See paragraph (b)(1) of
this section.
Example (2). Corporation X is engaged in two businesses: The
manufacture and sale of furniture and the sale of jewelry. The
businesses are of equal value. The outstanding stock of X is owned
equally by unrelated individuals A and B. A is more interested in the
furniture business, while B is more interested in the jewelry business.
A and B decide to split up the businesses and go their separate ways. A
and B anticipate that the operations of each business will be enhanced
by the separation because each shareholder will be able to devote his
undivided attention to the business in which he is more interested and
more proficient. Accordingly, X transfers the jewelry business to new
corporation Y and distributes the stock of Y to B in exchange for all of
B's stock in X. The distribution is carried out for a corporate business
purpose, notwithstanding that it is also carried out in part for
shareholder purposes. See paragraph (b)(2) of this section.
Example (3). Corporation X is engaged in the manufacture and sale of
toys and the manufacture and sale of candy. The shareholders of X wish
to protect the candy business from the risks and vicissitudes of the toy
business. Accordingly, X transfers the toy business to new corporation Y
and distributes the stock of Y to X's shareholders. Under applicable
law, the purpose of protecting the candy business from the risks and
vicissitudes of the toy business is achieved as soon as X transfers the
toy business to Y. Therefore, the distribution is not carried out for a
corporate business purpose. See paragraph (b)(3) of this section.
Example (4). Corporation X is engaged in a regulated business in
State T. X owns all of the stock of corporation Y, a profitable
corporation that is not engaged in a regulated business. Commission C
sets the rates that X may charge its customers, based on its total
income. C has recently adopted rules according to which the total income
of a corporation includes the income of a business if, and only if, the
business is operated, directly or indirectly, by the corporation. Total
income, for this purpose, includes the income of a wholly owned
subsidiary corporation but does not include the income of a parent or
``brother/sister'' corporation. Under C's new rule, X's total income
includes the income of Y, with the result that X has suffered a
reduction of the rates that it may charge its customers. It would not be
impractical or unduly expensive to create in a nontaxable transaction
(such as a transaction qualifying under section 351) a holding company
to hold the stock of X and Y. X distributes the stock of Y to X's
shareholders. The distribution is not carried out for the purpose of
increasing the rates that X may charge its customers because that
purpose could be achieved through a nontaxable transaction, the creation
of a holding company, that does not involve the distribution of stock of
a controlled corporation and which is neither impractical nor unduly
expensive. See paragraph (b)(3) of this section.
Example (5). The facts are the same as in Example (4), except that C
has recently adopted rules according to which the total income of a
corporation includes not only the income included in Example (3), but
also the income of any member of the affiliated group to which the
corporation belongs. In order to avoid a reduction in the rates that it
may charge its customers, X distributes the stock of Y to X's
shareholders. The distribution is carried out for a corporate business
purpose. See paragraph (b)(3) of this section.
Example (6). (i) Corporation X owns all of the one class of stock of
corporation Y. X distributes the stock of Y pro rata to its five
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b)(1) and (2) of this section.
(ii) The facts are the same as in Example 6(i), except that the
business of Y is operated as a division of X. X transfers this division
to new corporation Y and distributes the stock of Y pro rata to its
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b)(1) and (2) of this section.
Example (7). The facts are the same as in Example (6)(i), except
that the distribution is made to enable X to elect to become an S
corporation both for Federal tax purposes and for purposes of the income
tax imposed by State M. State M has tax law provisions similar to
subchapter S of the Internal Revenue Code of 1986. An election to be an
S corporation for Federal tax purposes will effect a substantial
reduction in Federal taxes that is greater than the reduction of State M
taxes pursuant to an election to be an S corporation for State M
purposes. The purpose of reducing State M taxes is not a corporate
business purpose. The distribution does not meet the corporate business
purpose requirements. See paragraph (b)(1) and (2) of this section.
Example (8). The facts are the same as Example (7), except that the
distribution also is made to enable A, a key employee of Y, to acquire
stock of Y without investing in X. A is considered to be critical to the
success of Y and he has indicated that he will seriously consider
leaving the company if he is not
[[Page 192]]
given the opportunity to purchase a significant amount of stock of Y. As
a matter of state law, Y could not issue stock to the employee while it
was a subsidiary of X. As in Example (7), the purpose of reducing State
M taxes is not a corporate business purpose. In order to determine
whether the issuance of stock to the key employee, in fact, motivated
the distribution of the Y stock, the potential avoidance of Federal
taxes is a relevant factor to take into account. If the facts and
circumstances establish that the distribution was substantially
motivated by the need to issue stock to the employee, the distribution
will meet the corporate business purpose requirement.
(c) Continuity of interest requirement--(1) Requirement. Section 355
applies to a separation that effects only a readjustment of continuing
interests in the property of the distributing and controlled
corporations. In this regard section 355 requires that one or more
persons who, directly or indirectly, were the owners of the enterprise
prior to the distribution or exchange own, in the aggregate, an amount
of stock establishing a continuity of interest in each of the modified
corporate forms in which the enterprise is conducted after the
separation. This continuity of interest requirement is independent of
the other requirements under section 355.
(2) Examples.
Example (1). For more than five years, corporation X has been
engaged directly in one business, and indirectly in a different business
through its wholly owned subsidiary, S. The businesses are equal in
value. At all times, the outstanding stock of X has been owned equally
by unrelated individuals A and B. For valid business reasons, A and B
cause X to distribute all of the stock of S to B in exchange for all of
B's stock in X. After the transaction, A owns all the stock of X and B
owns all the stock of S. The continuity of interest requirement is met
because one or more persons who were the owners of X prior to the
distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example (2). Assume the same facts as in Example (1), except that
pursuant to a plan to acquire a stock interest in X without acquiring,
directly or indirectly, an interest in S, C purchased one-half of the X
stock owned by A and immediately thereafter X distributed all of the S
stock to B in exchange for all of B's stock in X. After the
transactions, A owns 50 percent of X and B owns 100 percent of S. The
distribution by X of all of the stock of S to B in exchange for all of
B's stock in X will satisfy the continuity of interest requirement for
section 355 because one or more persons who were the owners of X prior
to the distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example (3). Assume the same facts as in Examples (1) and (2),
except that C purchased all of the X stock owned by A. After the
transactions, neither A nor B own any of the stock of X, and B owns all
the stock of S. The continuity of interest requirement is not met
because the owners of X prior to the distribution (A and B) do not, in
the aggregate, own an amount of stock establishing a continuity of
interest in each of X and S after the distribution, i.e., although A and
B collectively have retained 50 percent of their equity interest in the
former combined enterprise, they have failed to continue to own the
minimum stock interest in the distributing corporation, X, that would be
required in order to meet the continuity of interest requirement.
Example (4). Assume the same facts as in Examples (1) and (2),
except that C purchased 80 percent of the X stock owned by A. After the
transactions, A owns 20 percent of the stock of X, B owns no X stock,
and B owns 100 percent of the S stock. The continuity of interest
requirement is not met because the owners of X prior to the distribution
(A and B) do not, in the aggregate, have a continuity of interest in
each of X and S after the distribution, i.e., although A and B
collectively have retained 60 percent of their equity interest in the
former combined enterprise, the 20 percent interest of A in X is less
than the minimum equity interest in the distributing corporation, X,
that would be required in order to meet the continuity of interest
requirement.
(d) Device for distribution of earnings and profits--(1) In general.
Section 355 does not apply to a transaction used principally as a device
for the distribution of the earnings and profits of the distributing
corporation, the controlled corporation, or both (a ``device''). Section
355 recognizes that a tax-free distribution of the stock of a controlled
corporation presents a potential for tax avoidance by facilitating the
avoidance of the dividend provisions of the Code through the subsequent
sale or exchange of stock of one corporation and the retention of the
stock of another corporation. A device can include a transaction that
effects a recovery of basis. In this paragraph (d), ``exchange''
includes transactions, such as redemptions, treated
[[Page 193]]
as exchanges under the Code. Generally, the determination of whether a
transaction was used principally as a device will be made from all of
the facts and circumstances, including, but not limited to, the presence
of the device factors specified in paragraph (d)(2) of this section
(``evidence of device''), and the presence of the nondevice factors
specified in paragraph (d)(3) of this section (``evidence of
nondevice''). However, if a transaction is specified in paragraph (d)(5)
of this section, then it is ordinarily considered not to have been used
principally as a device.
(2) Device factors--(i) In general. The presence of any of the
device factors specified in this subparagraph (2) is evidence of device.
The strength of this evidence depends on the facts and circumstances.
(ii) Pro rata distribution. A distribution that is pro rata or
substantially pro rata among the shareholders of the distributing
corporation presents the greatest potential for the avoidance of the
dividend provisions of the Code and, in contrast to other types of
distributions, is more likely to be used principally as a device.
Accordingly, the fact that a distribution is pro rata or substantially
pro rata is evidence of device.
(iii) Subsequent sale or exchange of stock--(A) In general. A sale
or exchange of stock of the distributing or the controlled corporation
after the distribution (a ``subsequent sale or exchange'') is evidence
of device. Generally, the greater the percentage of the stock sold or
exchanged after the distribution, the stronger the evidence of device.
In addition, the shorter the period of time between the distribution and
the sale or exchange, the stronger the evidence of device.
(B) Sale or exchange negotiated or agreed upon before the
distribution. A subsequent sale or exchange pursuant to an arrangement
negotiated or agreed upon before the distribution is substantial
evidence of device.
(C) Sale or exchange not negotiated or agreed upon before the
distribution. A subsequent sale or exchange not pursuant to an
arrangement negotiated or agreed upon before the distribution is
evidence of device.
(D) Negotiated or agreed upon before the distribution. For purposes
of this subparagraph (2), a sale or exchange is always pursuant to an
arrangement negotiated or agreed upon before the distribution if
enforceable rights to buy or sell existed before the distribution. If a
sale or exchange was discussed by the buyer and the seller before the
distribution and was reasonably to be anticipated by both parties, then
the sale or exchange will ordinarily be considered to be pursuant to an
arrangement negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization. For purposes
of this subparagraph (2), if stock is exchanged for stock in pursuance
of a plan of reorganization, and either no gain or loss or only an
insubstantial amount of gain is recognized on the exchange, then the
exchange is not treated as a subsequent sale or exchange, but the stock
received in the exchange is treated as the stock surrendered in the
exchange. For this purpose, gain treated as a dividend pursuant to
sections 356(a)(2) and 316 shall be disregarded.
(iv) Nature and use of assets--(A) In general. The determination of
whether a transaction was used principally as a device will take into
account the nature, kind, amount, and use of the assets of the
distributing and the controlled corporations (and corporations
controlled by them) immediately after the transaction.
(B) Assets not used in a trade or business meeting the requirement
of section 355(b). The existence of assets that are not used in a trade
or business that satisfies the requirements of section 355(b) is
evidence of device. For this purpose, assets that are not used in a
trade or business that satisfies the requirements of section 355(b)
include, but are not limited to, cash and other liquid assets that are
not related to the reasonable needs of a business satisfying such
section. The strength of the evidence of device depends on all the facts
and circumstances, including, but not limited to, the ratio for each
corporation of the value of assets not used in a trade or business that
satisfies the requirements of section 355(b) to the value of its
business that satisfies such requirements. A difference in the ratio
[[Page 194]]
described in the preceding sentence for the distributing and controlled
corporation is ordinarily not evidence of device if the distribution is
not pro rata among the shareholders of the distributing corporation and
such difference is attributable to a need to equalize the value of the
stock distributed and the value of the stock or securities exchanged by
the distributees.
(C) Related function. There is evidence of device if a business of
either the distributing or controlled corporation (or a corporation
controlled by it) is (1) a ``secondary business'' that continues as a
secondary business for a significant period after the separation, and
(2) can be sold without adversely affecting the business of the other
corporation (or a corporation controlled by it). A secondary business is
a business of either the distributing or controlled corporation, if its
principal function is to serve the business of the other corporation (or
a corporation controlled by it). A secondary business can include a
business transferred to a newly-created subsidiary or a business which
serves a business transferred to a newly-created subsidiary. The
activities of the secondary business may consist of providing property
or performing services. Thus, in Example (11) of Sec. 1.355-3(c),
evidence of device would be presented if the principal function of the
coal mine (satisfying the requirements of the steel business) continued
after the separation and the coal mine could be sold without adversely
affecting the steel business. Similarly, in Example (10) of Sec. 1.355-
3(c), evidence of device would be presented if the principal function of
the sales operation after the separation is to sell the output from the
manufacturing operation and the sales operation could be sold without
adversely affecting the manufacturing operation.
(3) Nondevice factors--(i) In general. The presence of any of the
nondevice factors specified in this subparagraph (3) is evidence of
nondevice. The strength of this evidence depends on all of the facts and
circumstances.
(ii) Corporate business purpose. The corporate business purpose for
the transaction is evidence of nondevice. The stronger the evidence of
device (such as the presence of the device factors specified in
paragraph (d)(2) of this section), the stronger the corporate business
purpose required to prevent the determination that the transaction was
used principally as a device. Evidence of device presented by the
transfer or retention of assets not used in a trade or business that
satisfies the requirements of section 355(b) can be outweighed by the
existence of a corporate business purpose for those transfers or
retentions. The assessment of the strength of a corporate business
purpose will be based on all of the facts and circumstances, including,
but not limited to, the following factors:
(A) The importance of achieving the purpose to the success of the
business;
(B) The extent to which the transaction is prompted by a person not
having a proprietary interest in either corporation, or by other outside
factors beyond the control of the distributing corporation; and
(C) The immediacy of the conditions prompting the transaction.
(iii) Distributing corporation publicly traded and widely held. The
fact that the distributing corporation is publicly traded and has no
shareholder who is directly or indirectly the beneficial owner of more
than five percent of any class of stock is evidence of nondevice.
(iv) Distribution to domestic corporate shareholders. The fact that
the stock of the controlled corporation is distributed to one or more
domestic corporations that, if section 355 did not apply, would be
entitled to a deduction under section 243(a)(1) available to
corporations meeting the stock ownership requirements of section 243(c),
or a deduction under section 243(a)(2) or (3) or 245(b) is evidence of
nondevice.
(4) Examples. The provisions of paragraph (d)(1) through (3) of this
section may be illustrated by the following examples:
Example (1). Individual A owns all of the stock of corporation X,
which is engaged in the warehousing business. X owns all of the stock of
corporation Y, which is engaged in the transportation business. X
employs individual B, who is extremely knowledgeable of the warehousing
business in general and the operations of X in particular. B has
informed A that he will seriously consider leaving the company if he is
not given the opportunity to purchase a significant amount of stock of
X. Because of his knowledge and experience, the loss of B would
seriously damage the
[[Page 195]]
business of X. B cannot afford to purchase any significant amount of
stock of X as long as X owns Y. Accordingly, X distributes the stock of
Y to A and A subsequently sells a portion of his X stock to B. However,
X could have issued additional shares to B sufficient to give B an
equivalent ownership interest in X. There is no other evidence of device
or evidence of nondevice. In light of the fact that X could have issued
additional shares to B, the sale of X stock by A is substantial evidence
of device. The transaction is considered to have been used principally
as a device. See paragraph (d)(1), (2)(ii), (iii)(A), (B) and (D), and
(3)(i) and (ii) of this section.
Example (2). Corporation X owns and operates a fast food restaurant
in State M and owns all of the stock of corporation Y, which owns and
operates a fast food restaurant in State N. X and Y operate their
businesses under franchises granted by D and E, respectively. X owns
cash and marketable securities that exceed the reasonable needs of its
business but whose value is small relative to the value of its business.
E has recently changed its franchise policy and will no longer grant or
renew franchises to subsidiaries (or other members of the same
affiliated group) of corporations operating businesses under franchises
granted by its competitors. Thus, Y will lose its franchise if it
remains a subsidiary of X. The franchise is about to expire.
Accordingly, X distributes the stock of Y pro rata among X's
shareholders. X retains its business and transfers cash and marketable
securities to Y in an amount proportional to the value of Y's business.
There is no other evidence of device or evidence of nondevice. The
transfer by X to Y and the retention by X of cash and marketable
securities is relatively weak evidence of device because after the
transfer X and Y hold cash and marketable securities in amounts
proportional to the values of their businesses. The fact that the
distribution is pro rata is evidence of device. A strong corporate
business purpose is relatively strong evidence of nondevice.
Accordingly, the transaction is considered not to have been used
principally as a device. See paragraph (d)(1), (2)(ii), (iv)(A), and (B)
and (3)(i) and (ii)(A), (B) and (C) of this section.
Example (3). Corporation X is engaged in a regulated business in
State M and owns all of the stock of corporation Y, which is not engaged
in a regulated business in State M. State M has recently amended its
laws to provide that affiliated corporations operating in M may not
conduct both regulated and unregulated businesses. X transfers cash not
related to the reasonable needs of the business of X or Y to Y and then
distributes the stock of Y pro rata among X's shareholders. As a result
of the transfer of cash, the ratio of the value of its assets not used
in a trade or business that satisfies the requirements of section 355(b)
to the value of its business is substantially greater for Y than for X.
There is no other evidence of device or evidence of nondevice. The
transfer of cash by X to Y is relatively strong evidence of device
because after the transfer Y holds disproportionately many assets that
are not used in a trade or business that satisfies the requirements of
section 355(b). The fact that the distribution is pro rata is evidence
of device. The strong business purpose is relatively strong evidence of
nondevice, but it does not pertain to the transfer. Accordingly, the
transaction is considered to have been used principally as a device. See
paragraph (d)(1), (2)(ii), (iv)(A) and (B), and (3) and (i) and (ii) of
this section.
Example (4). The facts are the same as in Example (3), except that,
instead of transferring cash to Y, X purchases operating assets
unrelated to the business of Y and transfers them to Y prior to the
distribution. There is no other evidence of device or evidence of
nondevice. The transaction is considered to have been used principally
as a device. See paragraph (d)(1), (2)(ii), (iv)(A) and (B), and (3)(i)
and (ii) of this section.
(5) Transactions ordinarily not considered as a device--(i) In
general. This subparagraph (5) specifies three distributions that
ordinarily do not present the potential for tax avoidance described in
paragraph (d)(1) of this section. Accordingly, such distributions are
ordinarily considered not to have been used principally as a device,
notwithstanding the presence of any of the device factors described in
paragraph (d)(2) of this section. A transaction described in paragraph
(d)(5)(iii) or (iv) of this section is not protected by this
subparagraph (5) from a determination that it was used principally as a
device if it involves the distribution of the stock of more than one
controlled corporation and facilitates the avoidance of the dividend
provisions of the Code through the subsequent sale or exchange of stock
of one corporation and the retention of the stock of another
corporation.
(ii) Absence of earnings and profits. A distribution is ordinarily
considered not to have been used principally as a device if--
(A) The distributing and controlled corporations have no accumulated
earnings and profits at the beginning of their respective taxable years,
(B) The distributing and controlled corporations have no current
earnings and profits as of the date of the distribution, and
[[Page 196]]
(C) No distribution of property by the distributing corporation
immediately before the separation would require recognition of gain
resulting in current earnings and profits for the taxable year of the
distribution.
(iii) Section 303(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 303(a) applied.
(iv) Section 302(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 302(a) applied.
For purposes of the preceding sentence, section 302(c)(2)(A)(ii) and
(iii) shall not apply.
(v) Examples. The provisions of this subparagraph (5) may be
illustrated by the following examples:
Example (1). The facts are the same as in Example (3) of paragraph
(d)(4) of this section, except that X and Y had no accumulated earnings
and profits at the beginning of its taxable year, X and Y have no
current earnings and profits as of the date of the distribution, and no
distribution of property by X immediately before the separation would
require recognition of gain that would result in earnings and profits
for the taxable year of the distribution. The transaction is considered
not to have been used principally as a device. See paragraph (d)(5)(i)
and (ii) of this section.
Example (2). Corporation X is engaged in three businesses: a hotel
business, a restaurant business, and a rental real estate business.
Individuals A, B, and C own all of the stock of X. X transfers the
restaurant business to new corporation Y and transfers the rental real
estate business to new corporation Z. X then distributes the stock of Y
and Z pro rata between B and C in exchange for all of their stock in X.
In the absence of section 355, the distribution would be a redemption to
which section 302(a) applied. Since this distribution involves the stock
of more than one controlled corporation and facilitates the avoidance of
the dividend provisions of the Code through the subsequent sale or
exchange of stock in one corporation and the retention of the stock of
another corporation, it is not protected by paragraph (d)(5)(i) and (iv)
of this section from a determination that it was used principally as a
device. Thus, the determination of whether the transaction was used
principally as a device must be made from all the facts and
circumstances, including the presence of the device factors and
nondevice factors specified in paragraph (d)(2) and (3) of this section.
(e) Stock and securities distributed--(1) In general. Section 355
applies to a distribution only if the distributing corporation
distributes--
(i) All of the stock and securities of the controlled corporation
that it owns, or
(ii) At least an amount of the stock of the controlled corporation
that constitutes control as defined in section 368(c). In such a case,
all, or any part, of the securities of the controlled corporation may be
distributed, and paragraph (e)(2) of this section shall apply.
(2) Additional rules. Where a part of either the stock or the
securities of the controlled corporation is retained under paragraph
(e)(1)(ii) of this section, it must be established to the satisfaction
of the Commissioner that the retention by the distributing corporation
was not in pursuance of a plan having as one of its principal purposes
the avoidance of Federal income tax. Ordinarily, the corporate business
purpose or purposes for the distribution will require the distribution
of all of the stock and securities of the controlled corporation. If the
distribution of all of the stock and securities of a controlled
corporation would be treated to any extent as a distribution of ``other
property'' under section 356, this fact tends to establish that the
retention of stock or securities is in pursuance of a plan having as one
of its principal purposes the avoidance of Federal income tax.
(f) Principal amount of securities--(1) Securities received. Section
355 does not apply to a distribution if, with respect to any shareholder
or security holder, the principal amount of securities received exceeds
the principal amount of securities surrendered, or securities are
received but no securities are surrendered. In such cases, see section
356.
(2) Only stock received. If only stock is received in a distribution
to which section 355(a)(1)(A) applies, the principal amount of the
securities surrendered, if any, and the par value or stated value of the
stock surrendered, if any, are
[[Page 197]]
not relevant to the application of that section.
(g) Period of ownership--(1) Other property. For purposes of section
355(a)(1)(A), stock of a controlled corporation acquired in a
transaction in which gain or loss was recognized in whole or in part
(other than a transaction described in Sec. 1.355-3(b)(4)(iii)) within
the five-year period ending on the date of the distribution shall not be
treated as stock of the controlled corporation but shall be treated as
``other property.'' See section 356. However, for purposes of section
355(a)(1)(D), the stock so acquired is stock of the controlled
corporation.
(2) Example. Paragraph (g)(1) of this section may be illustrated by
the following example:
Example. Corporation X has held 85 of the 100 outstanding shares of
the stock of corporation Y for more than five years on the date of the
distribution. Six months before that date, X purchased ten more shares.
If X distributes all of its 95 shares of the stock of Y, so much of
section 356 as relates to section 355 may apply to the transaction and
the ten newly acquired shares are treated as other property. On the
other hand, if X retains ten of the shares of the stock of Y then the
application of paragraph (e) of this section must take into account all
of the stock of Y, including the ten shares newly acquired by X and the
five shares owned by others. Similarly, if, by the use of any agency, X
acquired any of the stock of Y within the five-year period ending on the
date of the distribution in a transaction in which gain or loss was
recognized in whole or in part (for example, where another subsidiary of
X purchased stock of Y), then that stock is treated as other property.
If X had held only 75 of the 100 outstanding shares of the stock of Y
for more than five years on the date of the distribution and had
purchased the remaining 25 shares six months before that date, then
neither section 355 nor section 356 would apply to the distribution.
(h) Active conduct of a trade or business. Section 355 applies to a
distribution only if the requirements of Sec. 1.355-3 (relating to the
active conduct of a trade or business) are satisfied.
[T.D. 8238, 54 FR 290, Jan. 5, 1989; 54 FR 5577, Feb. 3, 1989; 57 FR
28463, June 25, 1992]
Sec. 1.355-3 Active conduct of a trade or business.
(a) General requirements--(1) Application of section 355. Under
section 355(b)(1), a distribution of stock, or stock and securities, of
a controlled corporation qualifies under section 355 only if--
(i) The distributing and the controlled corporations are each
engaged in the active conduct of a trade or business immediately after
the distribution (section 355(b)(1)(A)), or
(ii) Immediately before the distribution, the distributing
corporation had no assets other than stock or securities of the
controlled corporations, and each of the controlled corporations is
engaged in the active conduct of a trade or business immediately after
the distribution (section 355(b)(1)(B)). A de minimis amount of assets
held by the distributing corporation shall be disregarded for purposes
of this paragraph (a)(1)(ii).
(2) Examples. Paragraph (a)(1) of this section may be illustrated by
the following examples:
Example (1). Prior to the distribution, corporation X is engaged in
the active conduct of a trade or business and owns all of the stock of
corporation Y, which also is engaged in the active conduct of a trade or
business. X distributes all of the stock of Y to X's shareholders, and
each corporation continues the active conduct of its trade or business.
The active business requirement of section 355(b)(1)(A) is satisfied.
Example (2). The facts are the same as in Example (1), except that X
transfers all of its assets other than the stock of Y to a new
corporation in exchange for all of the stock of the new corporation and
then distributes the stock of both controlled corporations to X's
shareholders. The active business requirement of section 355(b)(1)(B) is
satisfied.
(b) Active conduct of a trade or business defined--(1) In general.
Section 355(b)(2) provides rules for determining whether a corporation
is treated as engaged in the active conduct of a trade or business for
purposes of section 355(b)(1). Under section 355(b)(2)(A), a corporation
is treated as engaged in the active conduct of a trade or business if it
is itself engaged in the active conduct of a trade or business or if
substantially all of its assets consist of the stock, or stock and
securities, of a corporation or corporations controlled by it
(immediately after the distribution) each of which is engaged in the
active conduct of a trade or business.
[[Page 198]]
(2) Active conduct of a trade or business immediately after
distribution--(i) In general. For purposes of section 355(b), a
corporation shall be treated as engaged in the ``active conduct of a
trade or business'' immediately after the distribution if the assets and
activities of the corporation satisfy the requirements and limitations
described in paragraph (b)(2)(ii), (iii), and (iv) of this section.
(ii) Trade or business. A corporation shall be treated as engaged in
a trade or business immediately after the distribution if a specific
group of activities are being carried on by the corporation for the
purpose of earning income or profit, and the activities included in such
group include every operation that forms a part of, or a step in, the
process of earning income or profit. Such group of activities ordinarily
must include the collection of income and the payment of expenses.
(iii) Active conduct. For purposes of section 355(b), the
determination whether a trade or business is actively conducted will be
made from all of the facts and circumstances. Generally, the corporation
is required itself to perform active and substantial management and
operational functions. Generally, activities performed by the
corporation itself do not include activities performed by persons
outside the corporation, including independent contractors. A
corporation may satisfy the requirements of this subdivision (iii)
through the activities that it performs itself, even though some of its
activities are performed by others. Separations of real property all or
substantially all of which is occupied prior to the distribution by the
distributing or the controlled corporation (or by any corporation
controlled directly or indirectly by either of those corporations) will
be carefully scrutinized with respect to the requirements of section
355(b) and this Sec. 1.355-3.
(iv) Limitations. The active conduct of a trade or business does not
include--
(A) The holding for investment purposes of stock, securities, land,
or other property, or
(B) The ownership and operation (including leasing) of real or
personal property used in a trade or business, unless the owner performs
significant services with respect to the operation and management of the
property.
(3) Active conduct for five-year period preceding distribution.
Under section 355(b)(2)(B), a trade or business that is relied upon to
meet the requirements of section 355(b) must have been actively
conducted throughout the five-year period ending on the date of the
distribution. For purposes of this subparagraph (3)--
(i) Activities which constitute a trade or business under the tests
described in paragraph (b)(2) of this section shall be treated as
meeting the requirement of the preceding sentence if such activities
were actively conducted throughout the 5-year period ending on the date
of distribution, and
(ii) The fact that a trade or business underwent change during the
five-year period preceding the distribution (for example, by the
addition of new or the dropping of old products, changes in production
capacity, and the like) shall be disregarded, provided that the changes
are not of such a character as to constitute the acquisition of a new or
different business. In particular, if a corporation engaged in the
active conduct of one trade or business during that five-year period
purchased, created, or otherwise acquired another trade or business in
the same line of business, then the acquisition of that other business
is ordinarily treated as an expansion of the original business, all of
which is treated as having been actively conducted during that five-year
period, unless that purchase, creation, or other acquisition effects a
change of such a character as to constitute the acquisition of a new or
different business.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988)--(i) In general. Under section 355(b)(2)(C), a trade or business
relied upon to meet the requirements of section 355(b) must not have
been acquired by the distributing corporation, the controlled
corporation, or another member of the affiliated group during the five-
year period ending on the date of the distribution unless it was
acquired in a transaction in which no gain or loss was recognized.
Similarly, under section
[[Page 199]]
355(b)(2)(D), the trade or business must not have been indirectly
acquired by any of those corporations (or a predecessor in interest of
any of those corporations) during that five-year period in a transaction
in which gain or loss was recognized in whole or in part and which
consisted of the acquisition of control of the corporation directly
engaged in the trade or business, or the indirect acquisition of control
of that corporation through the direct or indirect acquisition of
control of one or more other corporations. A trade or business acquired,
directly or indirectly, within the five-year period ending on the date
of the distribution in a transaction in which the basis of the assets
acquired was not determined in whole or in part by reference to the
transferor's basis does not qualify under section 355(b)(2), even though
no gain or loss was recognized by the transferror.
(ii) Example. Paragraph (b)(4)(i) of this section may be illustrated
by the following example:
Example. In 1985, corporation X, which operates a business and has
cash and other liquid assets, purchases all of the stock of corporation
Y, which is engaged in the active conduct of a trade or business. Later
in the same year, X merges into Y in a ``downstream'' statutory merger.
In 1986, Y transfers the business assets formerly owned by X to a new
subsidiary, corporation Z, and then distributes the stock of Z to Y's
shareholders. Section 355 does not apply to the distribution of the
stock of Z because the trade or business of Y was indirectly acquired by
X, a predecessor in interest of Y, during the five-year period preceding
the distribution.
(iii) Gain or loss recognized in certain transactions. The
requirements of section 355(b)(2)(C) and (D) are intended to prevent the
direct or indirect acquisition of a trade or business by a corporation
in anticipation of a distribution by the corporation of that trade of
business in a distribution to which section 355 would otherwise apply. A
direct or indirect acquisition of a trade or business by one member of
an affiliated group from another member of the group is not the type of
transaction to which section 355(b)(2)(C) and (D) is intended to apply.
Therefore, in applying section 355(b)(2)(C) or (D), such an acquisition,
even though taxable, shall be disregarded.
(iv) Affiliated group. For purposes of this subparagraph (4), the
term affiliated group means an affiliated group as defined in section
1504(a) (without regard to section 1504(b)), except that the term stock
includes nonvoting stock described in section 1504(a)(4).
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988). [Reserved]
(c) Examples. The following examples illustrate section 355(b)(2)(A)
and (B) and paragraph (b)(1), (2), and (3) of this section. However, a
transaction that satisfies these active business requirements will
qualify under section 355 only if it satisfies the other requirements of
section 355 (a) and (b).
Example (1). Corporation X is engaged in the manufacture and sale of
soap and detergents and also owns investment securities. X transfers the
investment securities to new subsidiary Y and distributes the stocks of
Y to X's shareholders. Y does not satisfy the requirements of section
355(b) because the holding of investment securities does not constitute
the active conduct of a trade or business. See paragraph (b)(2)(iv)(A)
of this section.
Example (2). Corporation X owns, manages, and derives rental income
from an office building and also owns vacant land. X transfers the land
to new subsidiary Y and distributes the stock of Y to X's shareholders.
Y will subdivide the land, install streets and utilities, and sell the
developed lots to various homebuilders. Y does not satisfy the
requirements of section 355(b) because no significant development
activities were conducted with respect to the land during the five-year
period ending on the date of the distribution. See paragraph (b)(3) of
this section.
Example (3). Corporation X owns land on which it conducts a ranching
business. Oil has been discovered in the area, and it is apparent that
oil may be found under the land on which the ranching business is
conducted. X has engaged in no significant activities in connection with
its mineral rights. X transfers its mineral rights to new subsidiary Y
and distributes the stock of Y to X's shareholders. Y will actively
pursue the development of the oil producing potential of the property. Y
does not satisfy the requirements of section 355(b) because X engaged in
no significant exploitation activities with respect to the mineral
rights during the five-
[[Page 200]]
year period ending on the date of the distribution. See paragraph (b)(3)
of this section.
Example (4). For more than five years, corporation X has conducted a
single business of constructing sewage disposal plants and other
facilities. X transfers one-half of its assets to new subsidiary Y.
These assets include a contract for the construction of a sewage
disposal plant in State M, construction equipment, cash, and other
tangible assets. X retains a contract for the construction of a sewage
disposal plant in State N, construction equipment, cash, and other
intangible assets. X then distributes the stock of Y to one of X's
shareholders in exchange for all of his stock of X. X and Y both satisfy
the requirements of section 355(b). See paragraph (b)(3)(i) of this
section.
Example (5). For the past six years, corporation X has owned and
operated two factories devoted to the production of edible pork skins.
The entire output of one factory is sold to one customer, C, while the
output of the second factory is sold to C and a number of other
customers. To eliminate errors in packaging, X opens a new factory.
Thereafter, orders from C are processed and packaged at the two original
factories, while the new factory handles only orders from other
customers. Eight months after opening the new factory, X transfers it
and related business assets to new subsidiary Y and distributes the
stock of Y to X's shareholders. X and Y both satisfy the requirements of
section 355(b). See paragraph (b)(3)(i) and (ii) of this section.
Example (6). Corporation X has owned and operated a men's retail
clothing store in the downtown area of the City of G for nine years and
has owned and operated another men's retail clothing store in a suburban
area of G for seven years. X transfers the store building, fixtures,
inventory, and other assets related to the operations of the suburban
store to new subsidiary Y. X also transfers to Y the delivery trucks and
delivery personnel that formerly served both stores. Henceforth, X will
contract with a local public delivery service to make its deliveries. X
retains the warehouses that formerly served both stores. Henceforth, Y
will lease warehouse space from an unrelated public warehouse company. X
then distributes the stock of Y to X's shareholders. X and Y both
satisfy the requirements of section 355(b). See paragraph (b)(3)(i) of
this section.
Example (7). For the past nine years, corporation X has owned and
operated a department store in the downtown area of the City of G. Three
years ago, X acquired a parcel of land in a suburban area of G and
constructed a new department store on it. X transfers the suburban store
and related business assets to new subsidiary Y and distributes the
stock of Y to X's shareholders. After the distribution, each store has
its own manager and is operated independently of the other store. X and
Y both satisfy the requirements of section 355(b). See paragraph
(b)(3)(i) and (ii) of this section.
Example (8). For the past six years, corporation X has owned and
operated hardware stores in several states. Two years ago, X purchased
all of the assets of a hardware store in State M, where X had not
previously conducted business. X transfers the State M store and related
business assets to new subsidiary Y and distributes the stock of Y to
X's shareholders. After the distribution, the State M store has its own
manager and is operated independently of the other stores. X and Y both
satisfy the requirements of section 355(b). See paragraph (b)(3)(i) and
(ii) of this section.
Example (9). For the past eight years, corporation X has engaged in
the manufacture and sale of household products. Throughout this period,
X has maintained a research department for use in connection with its
manufacturing activities. The research department has 30 employees
actively engaged in the development of new products. X transfers the
research department to new subsidiary Y and distributes the stock of Y
to X's shareholders. After the distribution, Y continues its research
operations on a contractual basis with several corporations, including
X. X and Y both satisfy the requirements of section 355(b). See
paragraph (b)(3)(i) of this section. The result in this example is the
same if, after the distribution, Y continues its research operations but
furnishes its services only to X. See paragraph (b)(3)(i) of this
section. However, see Sec. 1.355-2 (d)(2)(iv)(C) (related function
device factor) for possible evidence of device.
Example (10). For the past six years, corporation X has processed
and sold meat products. X derives income from no other source. X
separates the sales function from the processing function by
transferring the business assets related to the sales function and cash
for working capital to new subsidiary Y. X then distributes the stock of
Y to X's shareholders. After the distribution, Y purchases for resale
the meat products processed by X. X and Y both satisfy the requirements
of section 355(b). See paragraph (b)(3)(i) of this section. However, see
Sec. 1.355-2(d)(2)(iv)(C) (related function device factor) for possible
evidence of device.
Example (11). For the past eight years, corporation X has been
engaged in the manufacture and sale of steel and steel products. X owns
all of the stock of corporation Y, which, for the past six years, has
owned and operated a coal mine for the sole purpose of supplying X's
coal requirements in the manufacture of steel. X distributes the stock
of Y to X's shareholders. X and Y both satisfy the requirements of
section 355 (b). See paragraph (b)(3)(i) of this section. However, see
[[Page 201]]
Sec. 1.355-2 (d)(2)(iv)(C) (related function device factor) for
possible evidence of device.
Example (12). For the past seven years, corporation X, a bank, has
owned an eleven-story office building, the ground floor of which X has
occupied in the conduct of its banking business. The remaining ten
floors are rented to various tenants. Throughout this seven-year period,
the building has been managed and maintained by employees of the bank. X
transfers the building to new subsidiary Y and distributes the stock of
Y to X's shareholders. Henceforth, Y will manage the building, negotiate
leases, seek new tenants, and repair and maintain the building. X and Y
both satisfy the requirements of section 355 (b). See paragraph (b)(3)
of this section.
Example (13). For the past nine years, corporation X, a bank, has
owned a two-story building, the ground floor and one half of the second
floor of which X has occupied in the conduct of its banking business.
The other half of the second floor has been rented as storage space to a
neighboring retail merchant. X transfers the building to new subsidiary
Y and distributes the stock of Y to X's shareholders. After the
distribution, X leases from Y the space in the building that it formerly
occupied. Under the lease, X will repair and maintain its portion of the
building and pay property taxes and insurance. Y does not satisfy the
requirements of section 355 (b) because it is not engaged in the active
conduct of a trade or business immediately after the distribution. See
paragraph (b)(2)(iv)(A) of this section. This example does not address
the question of whether the activities of X with respect to the building
prior to the separation would constitute the active conduct of a trade
or business.
[T.D. 8238, 54 FR 294, Jan. 5, 1989]
Sec. 1.355-4 Non pro rata distributions, etc.
Section 355 provides for nonrecognition of gain or loss with respect
to a distribution whether or not (a) the distribution is pro rata with
respect to all of the shareholders of the distributing corporation, (b)
the distribution is pursuant to a plan of reorganization within the
meaning of section 368 (a) (1)(D), or (c) the shareholder surrenders
stock in the distributing corporation. Under section 355, the stock of a
controlled corporation may consist of common stock or preferred stock.
(See, however, section 306 and the regulations thereunder.) Section 355
does not apply, however, if the substance of a transaction is merely an
exchange between shareholders or security holders of stock or securities
in one corporation for stock or securities in another corporation. For
example, if two individuals, A and B, each own directly 50 percent of
the stock of corporation X and 50 percent of the stock of corporation Y,
section 355 would not apply to a transaction in which A and B transfer
all of their stock of X and Y to a new corporation Z, for all of the
stock of Z, and Z then distributes the stock of X to A and the stock of
Y to B.
[T.D. 8238, 54 FR 296, Jan. 5, 1989]
Sec. 1.355-5 Records to be kept and information to be filed.
(a) Every corporation that makes a distribution of stock or
securities of a controlled corporation, as described in section 355,
shall attach to its return for the year of the distribution a detailed
statement setting forth such data as may be appropriate in order to show
compliance with the provisions of such section.
(b) Every taxpayer who receives a distribution of stock or
securities of a corporation that was controlled by a corporation in
which he holds stock or securities shall attach to his return for the
year in which such distribution is received a detailed statement setting
forth such data as may be appropriate in order to show the applicability
of section 355. Such statement shall include, but shall not be limited
to, a description of the stock and securities surrendered (if any) and
received, and the names and addresses of all of the corporations
involved in the transaction.
Sec. 1.355-6 Recognition of gain on certain distributions of stock or
securities in controlled corporation.
(a) Conventions--(1) Examples. For purposes of the examples in this
section, unless otherwise stated, assume that P, S, T, X, Y, N, HC, D,
D1, D2, D3, and C are corporations, A and B are individuals,
shareholders are not treated as one person under section 355(d)(7),
stock has been owned for more than five years and section 355(d)(6) and
paragraph (e)(4) of this section do not apply, no election under section
338 (if available) is made, and all transactions described are respected
under general
[[Page 202]]
tax principles, including the step transaction doctrine. No inference
should be drawn from any example as to whether any requirements of
section 355 other than those of section 355(d), as specified, are
satisfied.
(2) Five-year period. For purposes of this section, the term five-
year period means the five-year period (determined after applying
section 355(d)(6) and paragraph (e)(4) of this section) ending on the
date of the distribution, but in no event beginning earlier than October
10, 1990.
(3) Distributing securities. For purposes of determining if stock of
any controlled corporation received in the distribution is disqualified
stock described in section 355(d)(3)(B)(ii)(II) (relating to a
distribution of controlled corporation stock on any securities in the
distributing corporation acquired by purchase during the five-year
period), references in this section to stock of a corporation that is or
becomes a distributing corporation includes securities of the
corporation. Similarly, a reference to stock in paragraph (c)(4) of this
section (relating to a plan or arrangement) includes securities.
(4) Marketable securities. Unless otherwise stated, any reference in
this section to marketable stock includes marketable securities.
(b) General rules and purposes of section 355(d)--(1) Disqualified
distributions in general. In the case of a disqualified distribution,
any stock or securities in the controlled corporation shall not be
treated as qualified property for purposes of section 355(c)(2) or
361(c)(2). In general, a disqualified distribution is any distribution
to which section 355 (or so much of section 356 as relates thereto)
applies if, immediately after the distribution--
(i) Any person holds disqualified stock in the distributing
corporation that constitutes a 50 percent or greater interest in such
corporation; or
(ii) Any person holds disqualified stock in the controlled
corporation (or, if stock of more than one controlled corporation is
distributed, in any controlled corporation) that constitutes a 50
percent or greater interest in such corporation.
(2) Disqualified stock--(i) In general. Disqualified stock is--
(A) Any stock in the distributing corporation acquired by purchase
during the five-year period; and
(B) Any stock in any controlled corporation--
(1) Acquired by purchase during the five-year period; or
(2) Received in the distribution to the extent attributable to
distributions on any stock in the distributing corporation acquired by
purchase during the five-year period.
(ii) Purchase. For the definition of a purchase for purposes of
section 355(d) and this section, see section 355(d)(5) and paragraph (d)
of this section.
(iii) Exceptions--(A) Purchase eliminated. Stock (or an interest in
another entity) that is acquired by purchase (including stock (or
another interest) that is treated as acquired by purchase under
paragraph (e)(2), (3), or (4) of this section) ceases to be acquired by
that purchase if (and when) the basis resulting from the purchase is
eliminated. For purposes of this paragraph (b)(2)(iii), basis resulting
from the purchase is basis in the stock (or in an interest in another
entity) that is directly purchased during the five-year period or that
is treated as acquired by purchase during such period under paragraph
(e)(2), (3), or (4) of this section.
(B) Deemed purchase eliminated. Stock (or an interest in another
entity) that is deemed purchased under section 355(d)(8) or paragraph
(e)(1) of this section shall cease to be treated as purchased if (and
when) the basis resulting from the purchase that effects the deemed
purchase is eliminated.
(C) Elimination of basis--(1) General rule. Basis in the stock of a
corporation (or in an interest in another entity) is eliminated if (and
when) it would no longer be taken into account by any person in
determining gain or loss on a sale or exchange of any stock of such
corporation (or an interest in the other entity). Basis is not
eliminated, however, if it is allocated between stock of two
corporations under Sec. 1.358-2(a).
(2) Special rule for transferred and exchanged basis property. Basis
of stock
[[Page 203]]
(or an interest in another entity) resulting from a purchase (the first
purchase) is eliminated if (and when) such stock (or other interest) is
subsequently transferred to another person in an exchange or other
transfer to which paragraph (e)(2) or (3) of this section applies (the
second purchase). The elimination of basis in stock (or in another
interest) resulting from the first purchase, however, does not eliminate
the basis resulting from the second purchase in the stock (or other
interest) that is treated as acquired by purchase by the acquirer in a
transaction to which paragraph (e)(2) of this section applies or by the
person making the exchange in a transaction to which paragraph (e)(3) of
this section applies.
(3) Special rule for Split-offs and Split-ups. Under section
355(d)(3)(B)(ii) and paragraph (b)(2)(i)(B)(2) of this section,
disqualified stock includes controlled corporation stock received in
exchange for distributing corporation stock acquired by purchase. Solely
for purposes of determining whether controlled corporation stock
received in a distribution in exchange for distributing corporation
stock is disqualified stock described in that section and paragraph
immediately after the distribution, paragraph (b)(2)(iii)(C)(2) of this
section does not apply to the exchange to eliminate basis resulting from
a purchase of that distributing corporation stock (notwithstanding that
paragraph (e)(3) of this section applies to the exchange).
(D) Special rule if basis allocated between two corporations. If the
shareholder of a distributing corporation, pursuant to Sec. 1.358-2,
allocates basis resulting from a purchase between the stock of two or
more corporations then, following such allocation, the determination of
whether such basis has been eliminated shall be made separately with
respect to the stock of each such corporation.
(3) Certain distributions not disqualified distributions because
purposes of section 355(d) not violated--(i) In general. Notwithstanding
the provisions of section 355(d)(2) and this paragraph (b), a
distribution is not a disqualified distribution if the distribution does
not violate the purposes of section 355(d) as provided in this paragraph
(b)(3). A distribution does not violate the purposes of section 355(d)
if the effect of the distribution is neither--
(A) To increase ownership (combined direct and indirect) in the
distributing corporation or any controlled corporation by a disqualified
person; nor
(B) To provide a disqualified person with a purchased basis in the
stock of any controlled corporation.
(ii) Disqualified person. A disqualified person is any person
(taking into account section 355(d)(7) and paragraph (c)(4) of this
section) that, immediately after a distribution, holds (directly or
indirectly under section 355(d)(8) and paragraph (e)(1) of this section)
disqualified stock in the distributing corporation or controlled
corporation that--
(A) The person--
(1) Acquired by purchase under section 355(d)(5) or (8) and
paragraphs (d) and (e) of this section during the five-year period, or
(2) Received in the distribution to the extent attributable to
distributions on any stock in the distributing corporation acquired by
purchase under section 355(d)(5) or (8) and paragraphs (d) and (e) of
this section by that person during the five-year period; and
(B) Constitutes a 50 percent or greater interest in such corporation
(under section 355(d)(4) and paragraph (c) of this section).
(iii) Purchased basis. In general, a purchased basis is basis in
controlled corporation stock that is disqualified stock. However, basis
in controlled corporation stock that is disqualified stock will not be
treated as purchased basis if the controlled corporation stock and any
distributing corporation stock with respect to which the controlled
corporation stock is distributed are treated as acquired by purchase
solely under the attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section. The prior sentence will not apply, however, if
the distributing corporation stock is treated as acquired by purchase
under the attribution rules as a result of the acquisition of an
interest in a partnership (the purchased partnership), and following the
[[Page 204]]
distribution, the controlled corporation stock is directly held by the
purchased partnership (or a chain of partnerships that includes the
purchased partnership).
(iv) Increase in interest because of payment of cash in lieu of
fractional shares. Any increase in direct or indirect ownership in the
distributing corporation or any controlled corporation by a disqualified
person because of a payment of cash in lieu of issuing fractional shares
will be disregarded for purposes of paragraph (b)(3)(i)(A) of this
section if the payment of the cash is solely to avoid the expense and
inconvenience of issuing fractional share interests, and does not
represent separately bargained for consideration.
(v) Other exceptions. The Commissioner may provide by guidance
published in the Internal Revenue Bulletin that other distributions are
not disqualified distributions because they do not violate the purposes
of section 355(d).
(vi) Examples. The following examples illustrate this paragraph
(b)(3):
Example 1. Stock distributed in spin-off; no purchased basis. D owns
all of the stock of D1, and D1 owns all the stock of C. A purchases 60
percent of the D stock for cash. Within five years of A's purchase, D1
distributes the C stock to D. A is treated as having purchased 60
percent of the stock of both D1 and C on the date A purchases 60 percent
of the D stock under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. The C stock received by D is
attributable to a distribution on purchased D1 stock under section
355(d)(3)(B)(ii). Accordingly, the D1 and C stock each is disqualified
stock under section 355(d)(3) and paragraph (b)(2) of this section, and
A is a disqualified person under paragraph (b)(3)(ii) of this section.
However, the purposes of section 355(d) under paragraph (b)(3)(i) of
this section are not violated. A did not increase direct or indirect
ownership in D1 or C. In addition, D's basis in the C stock is not a
purchased basis under paragraph (b)(3)(iii) of this section because both
the D1 and the C stock are treated as acquired by purchase solely under
the attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, D1's distribution of the C stock to D is not a
disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
Example 2. Stock distributed in spin-off; purchased basis. The facts
are the same as Example 1, except that D immediately further distributes
the C stock to its shareholders (including A) pro rata. The D and C
stock each is disqualified stock under section 355(d)(3) and paragraph
(b)(2) of this section, and A is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated. A did not increase
direct or indirect ownership in D or C. However, A's basis in the C
stock is a purchased basis under paragraph (b)(3)(iii) of this section
because the D stock is not treated as acquired by purchase solely under
the attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. Accordingly, the further distribution is a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 3. Stock distributed in split-off with ownership increase;
purchased basis. The facts are the same as Example 1, except that D
immediately further distributes the C stock to A in exchange for A's
purchased stock in D. The C stock received by A is attributable to a
distribution on purchased D stock under section 355(d)(3)(B)(ii), and
A's basis in the C stock is determined by reference to the adjusted
basis of A's purchased D stock under paragraph (e)(3) of this section.
(Under paragraph (b)(2)(iii)(B)(3) of this section, the basis resulting
from A's purchase of D stock is not eliminated solely for purposes of
determining if the C stock acquired by A is disqualified stock
immediately after the distribution, notwithstanding that paragraph
(e)(3) of this section applies to the exchange.) Accordingly, the D
stock and the C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated because A
increased its ownership in C from a 60 percent indirect interest to a
100 percent direct interest, and because A's basis in the C stock is a
purchased basis under paragraph (b)(3)(iii) of this section.
Accordingly, the further distribution is a disqualified distribution
under section 355(d)(2) and paragraph (b)(1) of this section.
Example 4. Stock distributed in spin-off; purchased basis. D1 owns
all the stock of C. D purchases all of the stock of D1 for cash. Within
five years of D's purchase of D1, P acquires all of the stock of D1 from
D in a section 368(a)(1)(B) reorganization that is not a reorganization
under section 368(a)(1)(A) by reason of section 368(a)(2)(E), and D1
distributes all of its C stock to P. P is treated as having acquired the
D1 stock by purchase on the date D acquired it under the transferred
basis rule of section 355(d)(5)(C) and paragraph (e)(2) of this section.
P is treated as having purchased all of the C stock on the date D
purchased the D1 stock under the attribution rules of section 355(d)(8)
and paragraph (e)(1) of this section, and the C stock
[[Page 205]]
received by P is attributable to a distribution on purchased D1 stock
under section 355(d)(3)(B)(ii). Accordingly, the D1 and C stock each is
disqualified stock under section 355(d)(3) and paragraph (b)(2) of this
section, and P is a disqualified person under paragraph (b)(3)(ii) of
this section. The purposes of section 355(d) under paragraph (b)(3)(i)
of this section are violated. P did not increase direct or indirect
ownership in D1 or C. However, P's basis in the C stock is a purchased
basis under paragraph (b)(3)(iii) of this section because the D1 stock
is not treated as acquired by purchase solely under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of this section.
Accordingly, D1's distribution of the C stock to P is a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 5. Stock distributed in split-off with ownership increase;
no purchased basis. P owns 50 percent of the stock of D, the remaining D
stock is owned by unrelated persons, D owns all the stock of C, and A
purchases all of the P stock from the P shareholders. Within five years
of A's purchase, D distributes all of the C stock to P in exchange for
P's D stock. A is treated as having purchased 50 percent of the stock of
both D and C on the date A purchases the P stock under the attribution
rules of section 355(d)(8) and paragraph (e)(1) of this section. The C
stock received by P is attributable to a distribution on purchased D
stock under section 355(d)(3)(B)(ii). Accordingly, the D stock and the C
stock each is disqualified stock under section 355(d)(3) and paragraph
(b)(2) of this section, and A is a disqualified person under paragraph
(b)(3)(ii) of this section. The purposes of section 355(d) under
paragraph (b)(3)(i) of this section are violated because, even though
P's basis in the C stock is not a purchased basis under paragraph
(b)(3)(iii) of this section, A increased its direct or indirect
ownership in C from a 50 percent indirect interest to a 100 percent
indirect interest. Accordingly, D's distribution of the C stock to P is
a disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
Example 6. Stock distributed in split-off with no ownership
increase; no purchased basis. A purchases all of the stock of T. T later
merges into D in a section 368(a)(1)(A) reorganization and A exchanges
its purchased T stock for 60 percent of the stock of D. D owns all of
the stock of D1 and D2, D1 and D2 each owns 50 percent of the stock of
D3, and D3 owns all of the stock of C. Within five years of A's purchase
of the T stock, D3 distributes the C stock to D1 in exchange for all of
D1's D3 stock. A is treated as having acquired 60 percent of the D stock
by purchase on the date A purchases the T stock under paragraph (e)(3)
of this section. A is treated as having purchased 60 percent of the
stock of D1, D2, D3, and C on the date A purchases the T stock under the
attribution rules of section 355(d)(8) and paragraph (e)(1) of this
section. The C stock received by D1 is attributable to a distribution on
purchased D3 stock under section 355(d)(3)(B)(ii). Accordingly, the D3
stock and the C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and A is a disqualified person
under paragraph (b)(3)(ii) of this section. However, the purposes of
section 355(d) under paragraph (b)(3)(i) of this section are not
violated. A did not increase direct or indirect ownership in D3 or C,
and D1's basis in the C stock is not a purchased basis under paragraph
(b)(3)(iii) of this section because the D3 stock is treated as acquired
by purchase solely under the attribution rules of section 355(d)(8) and
paragraph (e)(1) of this section. Accordingly, D3's distribution of the
C stock to D1 is not a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section.
Example 7. Purchased basis eliminated by liquidation; stock
distributed in spin-off. P owns 30 percent of the stock of D, D owns all
of the stock of D1, and D1 owns all of the stock of C. P purchases the
remaining 70 percent of the D stock for cash. Within five years of P's
purchase, P liquidates D in a transaction qualifying under sections 332
and 337(a), and D1 then distributes the stock of C to P. Prior to the
liquidation, P is treated as having purchased 70 percent of the stock of
D1 and C on the date P purchases the D stock under the attribution rules
of section 355(d)(8)(B) and paragraph (e)(1) of this section. After the
liquidation, however, under paragraph (b)(2)(iii) of this section, P is
not treated as having acquired by purchase the D1 or the C stock under
section 355(d)(8)(B) and paragraph (e)(1) of this section because P's
basis in the D stock is eliminated in the liquidation of D. Under
section 334(b)(1), P's basis in the D1 stock is determined by reference
to D's basis in the D1 stock and not by reference to P's basis in D.
Paragraph (d)(2)(i)(B) of this section does not treat the D1 stock as
newly purchased in P's hands because no gain or loss was recognized by D
in the liquidation. Accordingly, neither the D1 stock nor the C stock is
disqualified stock under section 355(d)(3) and paragraph (b)(2) of this
section in P's hands, and the distribution is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 8. Purchased basis eliminated by upstream merger; stock
distributed in spin-off. D owns all of the stock of D1, and D1 owns all
of the stock of C. P purchases 60 percent of the D stock for cash.
Within five years of P's purchase, D merges into P in a section
368(a)(1)(A) reorganization, with the D shareholders other than P
receiving solely P stock in exchange for their D stock, and D1 then
distributes the stock of C to P. Prior to the merger, P is treated as
having purchased 60 percent of the stock of D1 and C on the date
[[Page 206]]
P purchases the D stock under the attribution rules of section 355(d)(8)
and paragraph (e)(1) of this section. After the merger, however, under
paragraph (b)(2)(iii) of this section, P is not treated as having
acquired by purchase the D1 or the C stock under section 355(d)(8)(B)
and paragraph (e)(1) of this section because P's basis in the D stock is
eliminated in the merger. Under section 362(b), P's basis in the D1
stock is determined by reference to D's basis in the D1 stock and not by
reference to P's basis in D. Paragraph (d)(2)(i)(B) of this section does
not treat the D1 stock as newly purchased in P's hands because no gain
or loss was recognized by D in the merger. Accordingly, neither the D1
stock nor the C stock is disqualified stock under section 355(d)(3) and
paragraph (b)(2) of this section in P's hands, and the distribution is
not a disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 9. Purchased basis eliminated by distribution; stock
distributed in spin-off. A purchases all the stock of C for cash on Date
1. D acquires all of the stock of C from A in a section 368(a)(1)(B)
reorganization that is not a reorganization under section 368(a)(1)(A)
by reason of section 368(A)(1)(E). A receives ten percent of the D stock
in the transaction. The remaining D stock is owned by B. Within five
years of A's purchase of the C stock, D distributes all the stock of C
pro rata to A and B. Under the transferred basis rule of paragraph
(e)(2) of this section, D is treated as having purchased all of the C
stock on the date A acquired it. Under the exchanged basis rule of
paragraph (e)(3) of this section, A is treated as having purchased its D
stock on Date 1 and A is treated as having purchased ten percent of the
C stock on Date 1 under the attribution rules of section 355(d)(8) and
paragraph (e)(3) of this section. Moreover, under paragraph
(b)(2)(iii)(C) of this section, A's basis in the C stock resulting from
A's Date 1 purchase of C stock is eliminated. After the distribution,
A's and B's bases in their C stock are determined by reference to the
bases of their D stock under Sec. 1.358-2(a)(2) (and not by reference
to D's basis in the C stock). D's basis in the stock of C resulting from
its deemed purchase of that stock under paragraph (e)(2) of this section
is eliminated by the distribution of the C stock because it would no
longer be taken into account by any person in determining gain or loss
on the sale of C stock. Therefore, the C stock distributed to A and B is
not disqualified stock as a result of D's purchase of C. However, A's
basis in its D stock resulting from its deemed purchase of that stock
under paragraph (e)(3) of this section is not eliminated. Therefore, A's
ten percent interest in the stock of D is disqualified stock.
Furthermore, A's ten percent interest in the stock of C is disqualified
stock because the distribution of the C stock is attributable to A's D
stock that was acquired by purchase. However, there has not been a
disqualified distribution because no person, immediately after the
distribution, holds disqualified stock in either D or C that constitutes
a 50 percent or greater interest in such corporation.
Example 10. Allocation of purchased basis analyzed separately. --(i)
P owns all the stock of D. D purchases all the stock of D1 for cash on
Date 1. D1 owns all the stock of C (which owns all the stock of C1) and
S. Within five years of Date 1, D1 distributes all the stock of C to D.
The D1 and C stock each is disqualified stock under section 355(d)(3)
and paragraph (b)(2) of this section, and D is a disqualified person
under paragraph (b)(3)(ii) of this section. The purposes of section
355(d) under paragraph (b)(3)(i) of this section are violated. D did not
increase direct or indirect ownership in D1 or C. However, D's basis in
the C stock is a purchased basis under paragraph (b)(3)(iii) of this
section because the D1 stock is not treated as acquired by purchase
solely under the attribution rules of section 355(d)(8) and paragraph
(e)(1) of this section. Accordingly, the distribution is a disqualified
distribution under section 355(d) and paragraph (b)(1) of this section.
D's basis in the D1 stock is allocated pursuant to Sec. 1.358-2 between
the D1 stock and the C stock. Therefore, under paragraph (e)(4) of this
section, the C stock is deemed to be acquired by purchase on Date 1, the
date D purchased all the stock of D1. If thereafter, and within five
years of Date 1, C were to distribute all the stock of C1 to D, that
distribution would also be a disqualified distribution because of D's
deemed purchase of the stock of C.
(ii) Following the distribution of the stock of C by D1, and within
five years of Date 1, D distributes all the stock of D1 to P. Under
paragraph (b)(2)(iii)(D) of this section, the determination of whether
D's basis in D1 has been eliminated shall be made without regard to D's
allocated basis in C. After the distribution, P's basis in the D1 stock
is determined by reference to its basis in its D stock under Sec.
1.358-2(a)(2) (and not by reference to D's basis in the D1 stock). D's
basis in the D1 stock resulting from the purchase of that stock is
eliminated by the distribution of the D1 stock because it would no
longer be taken into account by any person in determining gain or loss
on the sale of D1 stock. Therefore, the D1 stock distributed to P is not
disqualified stock as a result of D's purchase of D1. Moreover, a
subsequent distribution of the S stock by D1 to P would not be a
disqualified distribution because both the D1 and S stock would cease to
be treated as purchased when D's basis in D1 has been eliminated.
[[Page 207]]
(4) Anti-avoidance rule--(i) In general. Notwithstanding any
provision of section 355(d) or this section, the Commissioner may treat
any distribution as a disqualified distribution under section 355(d)(2)
and paragraph (b)(1) of this section if the distribution or another
transaction or transactions are engaged in or structured with a
principal purpose to avoid the purposes of section 355(d) or this
section with respect to the distribution. Without limiting the preceding
sentence, the Commissioner may determine that the existence of a related
person, intermediary, pass-through entity, or similar person (an
intermediary) should be disregarded, in whole or in part, if the
intermediary is formed or availed of with a principal purpose to avoid
the purposes of section 355(d) or this section.
(ii) Example. The following example illustrates this paragraph
(b)(4):
Example. Post-distribution redemption. B wholly owns D, which wholly
owns C. With a principal purpose to avoid the purposes of section
355(d), A, B, D, and C engage in the following transactions. A purchases
45 of 100 shares of the only class of D stock. Within five years after
A's purchase, D distributes all of its 100 shares in C to A and B pro
rata. D then redeems 20 shares of B's D stock, and C redeems 20 shares
of B's C stock. After the redemption, A owns 45 shares and B owns 35
shares in each of D and C. Under paragraph (b)(4)(i) of this section,
the Commissioner may treat A as owning disqualified stock in D and C
that constitutes a 50 percent or greater interest in D and C immediately
after the distribution. Under that treatment, the distribution is a
disqualified distribution under section 355(d)(2) and paragraph (b)(1)
of this section.
(c) Whether a person holds a 50 percent or greater interest--(1) In
general. Under section 355(d)(4), 50 percent or greater interest means
stock possessing at least 50 percent of the total combined voting power
of all classes of stock entitled to vote or at least 50 percent of the
total value of shares of all classes of stock.
(2) Valuation. For purposes of section 355(d)(4) and this section,
all shares of stock within a single class are considered to have the
same value. But see paragraph (c)(3)(vii)(A) of this section
(determination of whether it is reasonably certain that an option will
be exercised).
(3) Effect of options, warrants, convertible obligations, and other
similar interests--(i) Application. This paragraph (c)(3) provides rules
to determine when an option is treated as exercised for purposes of
section 355(d) (other than section 355(d)(6)). Except as provided in
this paragraph (c)(3), an option is not treated as exercised for
purposes of section 355(d). This paragraph (c)(3) does not affect the
determination of whether an instrument is an option or stock under
general principles of tax law (such as substance over form).
(ii) General rule. In determining whether a person has acquired by
purchase a 50 percent or greater interest under section 355(d)(4), an
option to acquire stock (as described in paragraphs (c)(3)(v) and (vi)
of this section) that has not been exercised when a distribution occurs
is treated as exercised on the date it was issued or most recently
transferred if--
(A) Its exercise (whether by itself or in conjunction with the
deemed exercise of one or more other options) would cause a person to
become a disqualified person; and
(B) Immediately after the distribution, it is reasonably certain (as
described in paragraph (c)(3)(vii) of this section) that the option will
be exercised.
(iii) Options deemed newly issued and substituted options--(A)
Exchange, adjustment, or alteration of existing option. For purposes of
this paragraph (c)(3), each of the following is treated as a new
issuance or transfer of an existing option only if it materially
increases the likelihood that an option will be exercised--
(1) An exchange of an option for another option or options;
(2) An adjustment to the terms of an option (including an adjustment
pursuant to the terms of the option);
(3) An adjustment to the terms of the underlying stock (including an
adjustment pursuant to the terms of the stock);
(4) A change to the capital structure of the issuing corporation;
and
(5) An alteration to the fair market value of issuing corporation
stock through an asset transfer (other than
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regular, ordinary dividends) or through any other means.
(B) Certain compensatory options. An option described in paragraph
(c)(3)(vi)(B)(2) of this section is treated as issued on the date it
becomes transferable.
(C) Substituted options. If an option (existing option) is exchanged
for another option or options (substituted option or options) and
paragraph (c)(3)(iii)(A) of this section does not apply to treat such
exchange as a new issuance or transfer of the existing option, the
substituted option or options will be treated as issued or most recently
transferred on the date that the existing option was issued or most
recently transferred.
(iv) Effect of treating an option as exercised--(A) In general. For
purposes of section 355(d), an option that is treated as exercised under
this paragraph (c)(3) is treated as exercised both for purposes of
determining the percentage of the voting power of stock owned by the
holder and for purposes of determining the percentage of the value of
stock owned by the holder.
(B) Stock purchase agreement or similar arrangement. If a stock
purchase agreement or similar arrangement is deemed exercised, the
purchaser is treated as having purchased the stock under the terms of
the agreement or arrangement as though all covenants had been satisfied
and all contingencies met. The agreement or arrangement is deemed to
have been exercised as of the date it is entered into or most recently
assigned.
(v) Instruments treated as options. For purposes of this paragraph
(c)(3), except to the extent provided in paragraph (c)(3)(vi) of this
section, the following are treated as options: A call option, warrant,
convertible obligation, the conversion feature of convertible stock, put
option, redemption agreement (including a right to cause the redemption
of stock), notional principal contract (as defined in Sec. 1.446-3(c))
that provides for the payment of amounts in stock, stock purchase
agreement or similar arrangement, or any other instrument that provides
for the right to purchase, issue, redeem, or transfer stock (including
an option on an option).
(vi) Instruments generally not treated as options. For purposes of
this paragraph (c)(3), the following are not treated as options, unless
issued, transferred, or listed with a principal purpose to avoid the
application of section 355(d) or this section:
(A) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(B) Compensatory options--(1) General rule. An option to acquire
stock in a corporation with customary terms and conditions, provided to
an employee, director, or independent contractor in connection with the
performance of services for the corporation or a person related to it
under section 355(d)(7)(A) (and that is not excessive by reference to
the services performed) and that--
(i) Is nontransferable within the meaning of Sec. 1.83-3(d); and
(ii) Does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b).
(2) Exception. Paragraph (c)(3)(vi)(B)(1) of this section ceases to
apply to an option that becomes transferable.
(C) Certain stock conversion features. The conversion feature of
convertible stock, provided that--
(1) The stock is not convertible for at least five years after
issuance or transfer; and
(2) The terms of the conversion feature do not require the tender of
any consideration other than the stock being converted.
(D) Options exercisable only upon death, disability, mental
incompetency, or separation from service. Any option entered into
between stockholders of a corporation (or a stockholder and the
corporation) with respect to the stock of either stockholder that is
exercisable only upon the death, disability, mental incompetency of the
stockholder, or, in the case of stock acquired
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in connection with the performance of services for the corporation or a
person related to it under section 355(d)(7)(A) (and that is not
excessive by reference to the services performed), the stockholder's
separation from service.
(E) Rights of first refusal. A bona fide right of first refusal
regarding the corporation's stock with customary terms, entered into
between stockholders of a corporation (or between the corporation and a
stockholder).
(F) Other enumerated instruments. Any other instruments specified in
regulations, a revenue ruling, or a revenue procedure. See Sec.
601.601(d)(2) of this chapter.
(vii) Reasonably certain that the option will be exercised--(A) In
general. The determination of whether, immediately after the
distribution, an option is reasonably certain to be exercised is based
on all the facts and circumstances. In applying the previous sentence,
the fair market value of stock underlying an option is determined by
taking into account control premiums and minority and blockage
discounts.
(B) Stock purchase agreement or similar arrangement. A stock
purchase agreement or similar arrangement is treated as reasonably
certain to be exercised if the parties' obligations to complete the
transaction are subject only to reasonable closing conditions.
(viii) Examples. The following examples illustrate this paragraph
(c)(3):
Example 1. D owns all of the stock of C. A purchases 40 percent of
D's only class of stock and an option to purchase D stock from D, that
if deemed exercised, would result in A owning a total of 60 percent of
the stock of D. Assume that no control premium or minority or blockage
discount applies to the D stock underlying the option. The option
permits A to acquire the D stock at $30 per share, and D's stock has a
fair market value of $27 per share on the date the option is issued. The
option is subject to no contingencies or restrictive covenants, may be
exercised within five years after its issuance, and is not described in
paragraph (c)(3)(vi) of this section (regarding instruments generally
not treated as options). Within five years of A's purchase of the D
stock and option, D distributes the stock of its subsidiary C pro rata
and A receives 40 percent of the C stock in the distribution.
Immediately after the distribution, D's stock has a fair market value of
$30 per share and C's stock has a fair market value of $15 per share. At
the time of the distribution, A exchanges A's option for an option to
purchase 20 percent of the D stock at $20 per share and an option to
purchase 20 percent of the C stock at $10 per share. The exchange of the
options in D for options in D and C did not materially increase the
likelihood that the options would be exercised. Nonetheless, based on
all the facts and circumstances, it is reasonably certain, immediately
after the distribution, that A will exercise its options. Under
paragraph (c)(3)(iii)(C) of this section, the substituted options are
treated as issued on the date the original option was issued.
Accordingly, the options are treated as exercised by A on the date that
A purchased the original option. A is treated as owning 60 percent of
the D stock and 60 percent of the C stock that is disqualified stock,
and the distribution is a disqualified distribution under section
355(d)(2) and paragraph (b)(1) of this section.
Example 2. D owns all of the stock of C. A purchases 37 percent of
D's only class of stock. B owns 38 percent of the D stock, and the
remaining 25 percent is owned by 20 individuals, each of whom owns less
than five percent of D's stock. A purchases an option to purchase an
additional 14 percent of the D stock from shareholders other than B for
$50 per share. The option is subject to no contingencies or restrictive
covenants, may be exercised within five years after its issuance, and is
not described in paragraph (c)(3)(vi) of this section. Within five years
of A's purchase of the option and 37 percent interest in D, D
distributes the stock of its subsidiary C pro rata and A receives 37
percent of the C stock in the distribution. At the time of the
distribution, A exchanges its option for an option to purchase 14
percent of the D stock at $25 per share and an option to purchase 14
percent of the C stock at $25 per share. Assume that, although a
shareholder that owned no D or C stock would pay only $20 per share for
D or C stock immediately after the distribution, a shareholder in A's
position would pay $30 per share for 14 percent of the stock of D or C
because of the control premium which attaches to the shares. The control
premium is taken into account under paragraph (c)(3)(vii)(A) of this
section to determine whether A is reasonably certain to exercise the
options. The exchange of the options in D for options in D and C did not
materially increase the likelihood that the options would be exercised.
Nonetheless, based on all the facts and circumstances, it is reasonably
certain, immediately after the distribution, that A will exercise its
options. Under paragraph (c)(3)(iii)(C) of this section, the substituted
options are treated as issued on the date the original option was
issued. Accordingly, the options are treated as exercised by A on the
date that A purchased the original option. Under paragraph (c)(2) of
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this section, all shares of D and C are considered to have the same
value to determine the amount of stock A is treated as purchasing under
the options. A is treated as owning 51 percent of the D stock and 51
percent of the C stock that is disqualified stock, and the distribution
is a disqualified distribution under section 355(d)(2).
(4) Plan or arrangement--(i) In general. Under section 355(d)(7)(B),
if two or more persons act pursuant to a plan or arrangement with
respect to acquisitions of stock in the distributing corporation or
controlled corporation, those persons are treated as one person for
purposes of section 355(d).
(ii) Understanding. For purposes of section 355(d)(7)(B), two or
more persons who are (or will after an acquisition become) shareholders
(or are treated as shareholders under paragraph (c)(3)(ii) of this
section) act pursuant to a plan or arrangement with respect to an
acquisition of stock only if they have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock. A principal element in determining if such an understanding
exists is whether the investment decision of each person is based on the
investment decision of one or more other existing or prospective
shareholders. However, the participation by creditors in formulating a
plan for an insolvency workout or a reorganization in a title 11 or
similar case (whether as members of a creditors' committee or otherwise)
and the receipt of stock by creditors in satisfaction of indebtedness
pursuant to the workout or reorganization do not cause the creditors to
be considered as acting pursuant to a plan or arrangement.
(iii) Examples. The following examples illustrate paragraph
(c)(4)(ii) of this section:
Example 1. D has 1,000 shares of common stock outstanding. A group
of 20 unrelated individuals who previously owned no D stock (the Group)
agree among themselves to acquire 50 percent or more of D's stock. The
Group is not a person under section 7701(a)(1). Subsequently, pursuant
to their understanding, the members of the Group purchase 600 shares of
D common stock from the existing D shareholders (a total of 60 percent
of the D stock), with each member purchasing 30 shares. Under paragraph
(c)(4)(ii) of this section, the members of the Group have a formal or
informal understanding among themselves to make a coordinated
acquisition of stock. Their interests are therefore aggregated under
section 355(d)(7)(B), and they are treated as one person that purchased
600 shares of D's stock for purposes of section 355(d).
Example 2. D has 1,000 shares of outstanding stock owned by
unrelated individuals. D's management is concerned that D may become
subject to a takeover bid. In separate meetings, D's management meets
with potential investors who own no stock and are friendly to management
to convince them to acquire D's stock based on an understanding that D
will assemble a group that in the aggregate will acquire more than 50
percent of D's stock. Subsequently, 15 of these investors each purchases
four percent of D's outstanding stock. Under paragraph (c)(4)(ii) of
this section, the 15 investors have a formal or informal understanding
among themselves to make a coordinated acquisition of stock. Their
interests are therefore aggregated under section 355(d)(7)(B), and they
are treated as one person that purchased 600 shares of D stock for
purposes of section 355(d).
Example 3. (i) D has 1,000 shares of outstanding stock owned by
unrelated individuals. An investment advisor advises its clients that it
believes D's stock is undervalued and recommends that they acquire D
stock. Acting on the investment advisor's recommendation, 20 unrelated
individuals each purchases 30 shares of the outstanding D stock. Each
client's decision was not based on the investment decisions made by one
or more other clients. Because there is no formal or informal
understanding among the clients to make a coordinated acquisition of D
stock, their interests are not aggregated under section 355(d)(7)(B) and
they are treated as making separate purchases.
(ii) The facts are the same as in paragraph (i) of this Example 3,
except that the investment advisor is also the underwriter (without
regard to whether it is a firm commitment or best efforts underwriting)
for a primary or secondary offering of D stock. The result is the same.
(iii) The facts are the same as in paragraph (i) of this Example 3,
except that, instead of an investment advisor recommending that clients
purchase D stock, the trustee of several trusts qualified under section
401(a) sponsored by unrelated corporations causes each trust to purchase
the D stock. The result is the same, provided that the trustee's
investment decision made on behalf of each trust was not based on the
investment decision made on behalf of one or more of the other trusts.
(iv) Exception--(A) Subsequent disposition. If two or more persons
do not act pursuant to a plan or arrangement within the meaning of this
paragraph
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(c)(4) with respect to an acquisition of stock in a corporation (the
first corporation), a subsequent acquisition in which such persons
exchange their stock in the first corporation for stock in another
corporation (the second corporation) in a transaction in which the basis
of the second corporation's stock in the hands of such persons is
determined in whole or in part by reference to the basis of their stock
in the first corporation, will not result in such persons being treated
as one person, even if the acquisition of the second corporation's stock
is pursuant to a plan or arrangement.
(B) Example. The following example illustrates this paragraph
(c)(4)(iv):
Example. In an initial public offering of D stock on Date 1, 100
investors independently purchase one percent each of the D stock. Two
years later, D merges into P (in a reorganization described in section
368(a)(1)(A)) and, pursuant to the plan of reorganization, the D
shareholders exchange their D stock for 50 percent of the stock of P.
The D shareholders approve the plan by a two-thirds vote, as required by
state law. Under section 358(a), each shareholder's basis in its P stock
is determined by reference to the basis of the D stock it purchased.
Under paragraph (e)(3) of this section, the former D shareholders are
treated as purchasing their P stock on Date 1. The investors do not
become a single person under paragraph (c)(4) of this section with
respect to the deemed purchase of the P stock on Date 1 by virtue of
their acquisition of the P stock pursuant to the merger on Date 2.
(d) Purchase--(1) In general--(i) Definition of purchase under
section 355(d)(5)(A). Under section 355(d)(5)(A), except as otherwise
provided in section 355(d)(5)(B) and (C), a purchase means any
acquisition, but only if--
(A) The basis of the property acquired in the hands of the acquirer
is not determined--
(1) In whole or in part by reference to the adjusted basis of such
property in the hands of the person from whom acquired; or
(2) Under section 1014(a); and
(B) The property is not acquired in an exchange to which section
351, 354, 355, or 356 applies.
(ii) Section 355 distributions. Paragraph (d)(1)(i)(B) of this
section includes all section 355 distributions, whether in exchange (in
whole or in part) for stock or pro rata.
(iii) Example. The following example illustrates this paragraph
(d)(1):
Example. Section 304(a)(1) acquisition. A, who owns all of the stock
of P and T, sells the T stock to P for cash. The T stock is not
marketable stock under section 355(d)(5)(B)(ii) and paragraph (d)(3)(ii)
of this section. A is treated under section 304(a)(1) as receiving a
distribution in redemption of the P stock. Under section 302(d), the
deemed redemption is treated as a section 301 distribution. Assume that
under sections 304(b)(2) and 301(c)(1), all of the distribution is a
dividend. A and P are treated in the same manner as if A had transferred
the T stock to P in exchange for stock of P in a transaction to which
section 351(a) applies, and P had then redeemed the stock P was treated
as issuing in the transaction. Under section 362(a), P's basis in the T
stock is determined by reference to A's adjusted basis in the T stock,
and there is no basis increase in the T stock because A recognizes no
gain on the deemed transfer. Accordingly, P's acquisition of the T stock
from A is not a purchase by P under section 355(d)(5)(A)(i)(I) and
paragraphs (d)(1)(i)(A)(1) and (d)(2)(i)(B) of this section.
(2) Exceptions to definition of purchase under section 355(d)(5)(A).
The following acquisitions are not treated as purchases under section
355(d)(5)(A):
(i) Acquisition of stock in a transaction which includes other
property or money--(A) Transferors and shareholders of transferor or
distributing corporations--(1) In general. An acquisition of stock
permitted to be received by a transferor of property without the
recognition of gain under section 351(a), or permitted to be received
without the recognition of gain under section 354, 355, or 356 is not a
purchase to the extent section 358(a)(1) applies to determine the
recipient's basis in the stock received, whether or not the recipient
recognizes gain under section 351(b) or 356. But see paragraph (e)(3) of
this section (interest received in exchange for purchased interest in
exchanged basis transaction treated as purchased).
(2) Exception. To the extent there is received in the exchange or
distribution, in addition to stock described in paragraph
(d)(2)(i)(A)(1) of this section, stock that is other property under
section 351(b) or 356(a)(1), the stock is treated as purchased on the
date of the exchange or distribution for purposes of section 355(d).
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(B) Transferee corporations--(1) In general. An acquisition of stock
by a corporation is not a purchase to the extent section 334(b) or
362(a) or (b) applies to determine the corporation's basis in the stock
received. But see section 355(d)(5)(C) and paragraph (e)(2) of this
section (purchased property transferred in transferred basis transaction
is treated as purchased by transferee).
(2) Exception. If a corporation acquires stock, the stock is treated
as purchased on the date of the stock acquisition for purposes of
section 355(d)--
(i) If the liquidating corporation recognizes gain or loss with
respect to the transferred stock as described in section 334(b)(1); or
(ii) To the extent the basis of the transferred stock is increased
through the recognition of gain by the transferor under section 362(a)
or (b).
(C) Examples. The following examples illustrate this paragraph
(d)(2)(i):
Example 1. (i) A owns all the stock of T. T merges into D in a
transaction qualifying under section 368(a)(1)(A), with A exchanging all
of the T stock for D stock and $100 cash. Under section 356(a)(1), A
recognizes $100 of the realized gain on the transaction. Under section
358(a)(1), A's basis in the D stock equals A's basis in the T stock,
decreased by the $100 received and increased by the gain recognized,
also $100. Under paragraph (d)(2)(i)(A) of this section, A is not
treated as having purchased the D stock for purposes of section
355(d)(5).
(ii) The facts are the same as in paragraph (i) of this Example 1,
except that rather than D stock and $100 cash, A receives D stock and
stock in C, a corporation not a party to the reorganization, with a fair
market value of $100. Under section 358(a)(2), A's basis in the C stock
is its fair market value, or $100. Under paragraph (d)(2)(i)(A)(2) of
this section, A is treated as having purchased the C stock, but not the
D stock, for purposes of section 355(d)(5).
Example 2. A purchases all of the stock of D, which is not
marketable stock, on Date 1 for $90. Within five years of A's purchase,
on Date 2, A contributes the D stock to P in exchange for P stock worth
$90 and $10 cash in a transaction qualifying under section 351. A
recognizes a gain of $10 as a result of the transfer. Under section
362(a), P's basis in D is $100. P is treated as having purchased 90
percent ($90 worth) of the D stock on Date 1 under section 355(d)(5)(C)
and paragraph (e)(2) of this section and as having purchased 10 percent
($10 worth) of the D stock on Date 2 under paragraph (d)(2)(i)(B)(2)(ii)
of this section.
(ii) Acquisition of stock in a distribution to which section 305(a)
applies. An acquisition of stock in a distribution qualifying under
section 305(a) is not a purchase to the extent section 307(a) applies to
determine the recipient's basis. However, to the extent the distribution
is of rights to acquire stock, see paragraph (c)(3) of this section for
rules regarding options, warrants, convertible obligations, and other
similar interests.
(iii) Section 1036(a) exchange. An exchange of stock qualifying
under section 1036(a) is not a purchase by either party to the exchange
to the extent the basis of the property acquired equals that of the
property exchanged under section 1031(d).
(iv) Section 338 elections--(A) In general. Stock acquired in a
qualified stock purchase with respect to which a section 338 election
(or a section 338(h)(10) election) is made is not treated as a purchase
for purposes of section 355(d)(5)(A). However, any stock (or an interest
in another entity) held by old target that is treated as purchased by
new target is treated as acquired by purchase for purposes of section
355(d)(5)(A) unless a section 338 election or section 338(h)(10)
election also is made for that stock. See Sec. 1.338-2T(c) for the
definitions of section 338 election, section 338(h)(10) election, old
target, and new target.
(B) Example. The following example illustrates this paragraph
(d)(2)(iv):
Example. T owns all of the stock of S and no other assets. X
acquires all of the T stock from the T shareholders for cash and makes
an election under section 338. Under section 338(a) and (b), T, as Old
T, is treated as having sold all of its assets at fair market value and
purchased the assets as a new corporation, New T, as of the beginning of
the day after the acquisition date. Under paragraph (d)(2)(iv)(A) of
this section, X is not treated as having purchased the T stock. Absent a
section 338 election or a section 338(h)(10) election with respect to S,
New T is treated as having purchased all of the S stock under section
355(d)(5)(A).
(v) Partnership distributions--(A) Section 732(b). An acquisition of
stock (or an interest in another entity) in a liquidation of a partner's
interest in a
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partnership in which basis is determined pursuant to section 732(b) is a
purchase at the time of the liquidation.
(B) Section 734(b). If the adjusted basis of stock (or an interest
in another entity) held by a partnership is increased under section
734(b), a proportionate amount of the stock (or other interest) will be
treated as purchased at the time of the basis adjustment, determined by
reference to the amount of the basis adjustment (but not in excess of
the fair market value of the stock (or other interest) at the time of
the adjustment) over the fair market value of the stock (or other
interest) at the time of the adjustment.
(3) Certain section 351 exchanges treated as purchases--(i) In
general--(A) Treatment of stock received by transferor. Under section
355(d)(5)(B), a purchase includes any acquisition of property in an
exchange to which section 351 applies to the extent the property is
acquired in exchange for any cash or cash item, any marketable stock, or
any debt of the transferor. The property treated as acquired by purchase
is the property received by the transferor in the exchange.
(B) Multiple classes of stock. If the transferor in a transaction
described in section 355(d)(5)(B) receives stock or securities of more
than one class, or receives both stock and securities, then the amount
of stock or securities purchased is determined in a manner that
corresponds to the allocation of basis to the stock or securities under
section 358. See Sec. 1.358-2(b).
(ii) Cash item, marketable stock. For purposes of section
355(d)(5)(B) and this paragraph (d)(3), either or both of the terms cash
item and marketable stock include personal property within the meaning
of section 1092(d)(1) and Sec. 1.1092(d)-1, without giving effect to
section 1092(d)(3).
(iii) Exception for certain acquisitions--(A) In general. Except to
the extent provided in paragraph (e)(3) of this section (interest
received in exchange for purchased interest in exchanged basis
transaction treated as purchased), an acquisition of stock in a
corporation in a section 351 transaction by one or more persons in
exchange for an amount of stock in another corporation (the transferred
corporation) that meets the requirements of section 1504(a)(2) is not a
purchase by the transferor or transferors, regardless of whether the
stock of the transferred corporation is marketable stock under section
355(d)(5)(B)(ii) and paragraph (d)(3)(ii) of this section.
(B) Example. The following example illustrates this paragraph
(d)(3)(iii):
Example. D's two classes of stock, voting common and nonvoting
preferred, are both widely held and publicly traded. The nonvoting
preferred stock is stock described in section 1504(a)(4). Assume that
all of the D stock is marketable stock under section 355(d)(5)(B)(ii)
and paragraph (d)(3)(ii) of this section. D's board of directors
proposes that, for valid business purposes, D's common stock should be
held by a holding company, HC, but its preferred stock should not be
transferred to HC. As proposed, the D common shareholders exchange their
D stock solely for HC common stock in a section 351(a) transaction. The
D preferred shareholders retain their stock. HC acquires an amount of D
stock that meets the requirements of section 1504(a)(2). Although the D
common stock was marketable stock in the hands of the D shareholders
immediately before the transfer, and the D nonvoting preferred stock is
marketable stock after the transfer, the D shareholders are not treated
as having acquired the HC stock by purchase (except to the extent the
exchanged basis rule of paragraph (e)(3) of this section may apply to
treat HC stock as purchased on the date the exchanged D stock was
purchased).
(iv) Exception for assets transferred as part of an active trade or
business--(A) In general. Except to the extent provided in paragraph
(e)(3) of this section, an acquisition not described in paragraph
(d)(3)(iii) of this section of stock in exchange for any cash or cash
item, any marketable stock, or any debt of the transferor in a section
351 transaction is not a purchase if--
(1) The transferor is engaged in the active conduct of a trade or
business under paragraph (d)(3)(iv)(B) of this section and the
transferred items (including debt incurred in the ordinary course of the
trade or business) are used in the trade or business;
(2) The transferred items do not exceed the reasonable needs of the
trade or business under paragraph (d)(3)(iv)(C) of this section;
(3) The transferor transfers the items as part of the trade or
business; and
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(4) The transferee continues the active conduct of the trade or
business.
(B) Active conduct of a trade or business. For purposes of this
paragraph (d)(3)(iv), whether, with respect to the trade or business at
issue, the transferor and transferee are engaged in the active conduct
of a trade or business is determined under Sec. 1.355-3(b)(2) and (3),
except that--
(1) Conduct is tested before the transfer (with respect to the
transferor) and after the transfer (with respect to the transferee)
rather than immediately after a distribution; and
(2) The trade or business need not have been conducted for five
years before its transfer, but it must have been conducted for a
sufficient period of time to establish that it is a viable and ongoing
trade or business.
(C) Reasonable needs of the trade or business. For purposes of this
paragraph (d)(3)(iv), the reasonable needs of the trade or business
include only the amount of cash or cash items, marketable stock, or debt
of the transferor that a prudent business person apprised of all
relevant facts would consider necessary for the present and reasonably
anticipated future needs of the business. Transferred items may be
considered necessary for reasonably anticipated future needs only if the
transferor and transferee have specific, definite, and feasible plans
for their use. Those plans must require that items intended for
anticipated future needs rather than present needs be used as
expeditiously as possible consistent with the business purpose for
retention of the items. Future needs are not reasonably anticipated if
they are uncertain or vague or where the execution of the plan for their
use is substantially postponed. The reasonable needs of a trade or
business are generally its needs at the time of the transfer of the
business including the items. However, for purposes of applying section
355(d) to a distribution, events and conditions after the transfer and
through the date immediately after the distribution (including whether
plans for the use of transferred items have been consummated or
substantially postponed) may be considered to determine whether at the
time of the transfer the items were necessary for the present and
reasonably anticipated future needs of the business.
(D) Consideration of all facts and circumstances. All facts and
circumstances are considered in determining whether this paragraph
(d)(3)(iv) applies.
(E) Successive transfers. A transfer of assets does not fail to meet
the requirements of paragraph (d)(3)(iv)(A)(4) of this section solely
because the transferee transfers the assets directly (or indirectly
through other members) to another member of the transferee's affiliated
group, as defined in Sec. 1.355-3(b)(4)(iv) (the final transferee), if
the requirements of paragraphs (d)(3)(iv)(A)(1), (2), (3) and (4) of
this section would be met if the transferor had transferred the assets
directly to the final transferee.
(v) Exception for transfer between members of the same affiliated
group--(A) In general. Except to the extent provided in paragraph (e)(3)
of this section, an acquisition of stock (whether actual or
constructive) not described in paragraphs (d)(3)(iii) and (iv) of this
section in exchange for any cash or cash item, marketable stock, or debt
of the transferor in a section 351 transaction is not a purchase if--
(1) The transferor corporation or corporations and the transferee
corporation (whether formed in the transaction or already existing) are
members of the same affiliated group as defined in section 1504(a)
before the section 351 transaction (if the transferee corporation is in
existence before the transaction);
(2) The cash or cash item, marketable stock or debt of the
transferor are not included in assets that are acquired (or treated as
acquired) by the transferor (or another member of the transferor's
affiliated group) from a nonmember in a related transaction in which
section 362(a) or (b) applies to determine the basis in the acquired
assets; and
(3) The transferor corporation or corporations, the transferee
corporation, and any distributed controlled corporation of the
transferee corporation do not cease to be members of such affiliated
group in any transaction pursuant to a plan that includes the section
351 transaction (including any distribution of a controlled corporation
by the
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transferee corporation). But see paragraph (b)(4) of this section where
the transfer is made for a principal purpose to avoid the purposes of
section 355(d).
(B) Examples. The following examples illustrate this paragraph
(d)(3)(v):
Example 1. Publicly traded P has wholly owned S since 1990. S is
engaged in the telecommunications business and the business of computer
software development. S is developing new software for use in the
managed health care industry. Over a period of four years beginning on
January 31, 2000, P contributes a substantial amount of cash to S solely
for the purpose of funding the software development. On completion of
the software in January of 2004, 60 percent of the value of the S stock
is attributable to the cash contributions made within the last four
years. The P group's primary lender requires that S separately
incorporate the software and related assets and distribute the new
subsidiary to P as a condition of providing required funding to market
the software. Accordingly, on February 1, 2004, S forms N, contributes
the software and related assets to N, and distributes all of the N stock
to P in a transaction intended to qualify under section 355(a). P, S,
and N will not leave the affiliated group in any transaction related to
the cash contributions. Under paragraph (d)(3)(v)(A) of this section,
P's cash contributions to S are not treated as purchases of additional S
stock, and the distribution of N from S to P is not a disqualified
distribution under section 355(d)(2) and paragraph (b)(1) of this
section.
Example 2. On Date 1, P contributes cash to its subsidiary S with a
principal purpose to increase its stock basis in S. Sixty percent of the
value of P's S stock is attributable to the cash contribution. Under
paragraph (b)(4) of this section (anti-avoidance rule), 60 percent of
the S stock is treated as purchased under section 355(d)(5)(B),
notwithstanding paragraph (d)(3)(v)(A) of this section. Accordingly, any
distribution of a subsidiary of S to P within the five-year period after
Date 1 will be a disqualified distribution, regardless of whether P, S,
and any distributed S subsidiary remain affiliated after the
distribution and any transactions related to the cash contribution.
(4) Triangular asset reorganizations--(i) Definition. A triangular
asset reorganization is a reorganization that qualifies under--
(A) Section 368(a)(1)(A) or (G) by reason of section 368(a)(2)(D);
(B) Section 368(a)(1)(A) by reason of section 368(a)(2)(E)
(regardless of whether section 368(a)(3)(E) applies), unless the
transaction also qualifies as either a section 351 transfer or a
reorganization under section 368(a)(1)(B); or
(C) Section 368(a)(1)(C), and stock of the controlling corporation
rather than the acquiring corporation is exchanged for the acquired
corporation's properties.
(ii) Treatment. Notwithstanding section 355(d)(5)(A), for purposes
of section 355(d), the controlling corporation in a triangular asset
reorganization is treated as having--
(A) Acquired the assets of the acquired corporation (and as having
assumed any liabilities assumed by the controlling corporation's
subsidiary corporation or to which the acquired corporation's assets
were subject (the acquired liabilities)) in a transaction in which the
controlling corporation's basis in the acquired corporation's assets was
determined under section 362(b); and
(B) Transferred the acquired assets and acquired liabilities to its
subsidiary corporation in a section 351 transfer.
(iii) Example. The following example illustrates this paragraph
(d)(4):
Example. Forward triangular reorganization. P forms S with $25 of
cash and T merges into S in a reorganization qualifying under section
368(a)(1)(A) by reason of section 368(a)(2)(D) in which the T
shareholders receive $70 of P stock and $15 of cash in exchange for
their T stock. T is not a common parent of a consolidated group of
corporations. The remaining $10 of cash with which P formed S will not
be used in the acquired business. T's assets consist only of assets part
of and used in its business with a value of $80, and $5 of cash that is
not part of or used in T's business. T has no liabilities. S will use
T's business assets in T's business (which will become S's business),
but will invest the $5 of cash in an unrelated passive investment. Under
paragraph (d)(4)(ii) of this section, P is treated as acquiring the T
assets in a transaction in which P's basis in the T assets was
determined under section 362(b) and contributing them to S in a section
351 transfer. Under paragraph (d)(3)(v) of this section, $10 (of the
total $25) of cash contributed by P to S upon S's formation is not
treated as a purchase of S stock. The $15 (of the total $25) of cash
contributed by P to S upon S's formation that is paid to T's
shareholders is not treated as a purchase of S stock. The exception in
paragraph (d)(3)(v) of this section does not apply to the $5 of cash
from T's business because P is treated as
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having acquired T's assets in a related transaction in which section
362(b) applies to determine P's basis in such assets. Accordingly, P is
treated under section 355(d)(5)(B) and paragraph (d)(3)(iv) of this
section as having purchased $5 of the S stock, but is not deemed to have
purchased the remaining $80 of the S stock.
(5) Reverse triangular reorganizations other than triangular asset
reorganizations--(i) In general. Except as provided in paragraph
(d)(5)(ii) of this section, if a transaction qualifies as a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E) and also as either a reorganization under section
368(a)(1)(B) or a section 351 transfer, then either section 355(d)(5)(B)
(and paragraphs (d)(3)(i) through (iv) of this section) or 355(d)(5)(C)
(and paragraph (e)(2) of this section) applies. Regardless of which
method the controlling corporation employs to determine its basis in the
surviving corporation stock under Sec. 1.358-6(c)(2)(ii) or Sec.
1.1502-30(b), the total amount of surviving corporation stock treated as
purchased by the controlling corporation will equal the higher of--
(A) The amount of surviving corporation stock that would be treated
as purchased (on the date of the deemed section 351 transfer) by the
controlling corporation if the controlling corporation acquired the
surviving corporation's assets and assumed its liabilities in a
transaction in which the controlling corporation's basis in the
surviving corporation assets was determined under section 362(b), and
then transferred the acquired assets and liabilities to the surviving
corporation in a section 351 transfer (see Sec. Sec. 1.358-6(c)(1) and
(2)(ii)(A), and 1.1502-30(b)); or
(B) The amount of surviving corporation stock that would be treated
as purchased (on the date the surviving corporation shareholders
purchased their surviving corporation stock) if the controlling
corporation acquired the stock of the surviving corporation in a
transaction in which the basis in the surviving corporation's stock was
determined under section 362(b) (see Sec. Sec. 1.358-6(c)(2)(ii)(B) and
1.1502-30(b)).
(ii) Letter ruling and closing agreement. If a controlling
corporation obtains a letter ruling and enters into a closing agreement
under section 7121 in which it agrees to determine its basis in
surviving corporation stock under Sec. 1.358-6(c)(2)(ii)(A), or under
Sec. 1.1502-30(b) by applying Sec. 1.358-6(c)(2)(ii)(A) (deemed asset
acquisition and transfer by controlling corporation), then section
355(d)(5)(B) and paragraphs (d)(3)(i) through (iv) of this section
apply, and section 355(d)(5)(C) and paragraph (e)(2) of this section do
not apply. If a controlling corporation obtains a letter ruling and
enters into a closing agreement under section 7121 under which it agrees
to determine its basis in surviving corporation stock under Sec. 1.358-
6(c)(2)(ii)(B), or under Sec. 1.1502-30(b) by applying Sec. 1.358-
6(c)(2)(ii)(B) (deemed stock acquisition), then section 355(d)(5)(C) and
paragraph (e)(2) of this section apply, and section 355(d)(5)(B) and
paragraphs (d)(3)(i) through (iv) of this section do not apply.
(iii) Example. The following example illustrates this paragraph
(d)(5):
Example. Reverse triangular reorganization; purchase. (i) A
purchases 60 percent of the stock of D on Date 1. D owns no cash items,
marketable stock, or transferor debt, but holds cash that is not part of
or used in D's trade or business under paragraph (d)(3)(iv) of this
section and that represents 20 percent of D's value. On Date 2, P forms
S, and S merges into D in a reorganization qualifying under section
368(a)(1)(B) and under section 368(a)(1)(A) by reason of section
368(a)(2)(E). In the reorganization, P acquires all of the D stock in
exchange solely for P stock. After Date 2, and within five years after
Date 1, D distributes its wholly owned subsidiary C to P. P does not
obtain a letter ruling and enter into a closing agreement under
paragraph (d)(5)(ii) of this section. P would acquire 20 percent of the
D stock by purchase on Date 2 under paragraph (d)(5)(i)(A) of this
section by operation of section 355(d)(5)(B) and paragraph (d)(3)(iv) of
this section. The exception in paragraph (d)(3)(v) of this section does
not apply because D was not affiliated with P before the transaction in
which the section 351 transfer is deemed to occur and D's assets are
treated as acquired by P in a related transaction in which section
362(b) applies to determine P's basis in the D assets. P would acquire
60 percent of the D stock by purchase on Date 1 under paragraph
(d)(5)(i)(B) of this section because, under the transferred basis rule
of section 355(d)(5)(C) and paragraph (e)(2) of this section, P is
treated as though P purchased the D stock on the date A purchased it.
Accordingly, under paragraph (d)(5)(i) of this section, P is treated as
acquiring the higher amount (60 percent) by purchase on Date 1. D's
distribution of C to P is a disqualified distribution under section
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355(d)(2) and paragraph (b)(1) of this section. In addition, A is
treated as acquiring the P stock by purchase on Date 1 under paragraph
(e)(3) of this section because A's basis in the P stock is determined by
reference to A's basis in the D stock.
(ii) The facts are the same as in paragraph (i) of this Example,
except that P obtains a letter ruling and enters into a closing
agreement under which it agrees to determine its basis in the D stock
under Sec. 1.358-6(c)(2)(ii)(A). Under paragraph (d)(5)(ii) of this
section, section 355(d)(5)(B) (and paragraphs (d)(3)(i) through (iv) of
this section) applies, and section 355(d)(5)(C) (and paragraph (e)(2) of
this section) does not apply. Accordingly, P is treated as acquiring
only 20 percent of the D stock by purchase on Date 2. D's distribution
of C to P is not a disqualified distribution under section 355(d)(2) and
paragraph (b)(1) of this section.
(6) Treatment of group structure changes--(i) In general.
Notwithstanding section 355(d)(5)(A), for purposes of section 355(d), if
a corporation succeeds another corporation as the common parent of a
consolidated group in a group structure change to which Sec. 1.1502-31
applies, the new common parent is treated as having acquired the assets
and assumed the liabilities of the former common parent in a transaction
in which the new common parent's basis in the former common parent's
assets was determined under section 362(b), and then transferred the
acquired assets and liabilities to the former common parent (or, if the
former common parent does not survive, to the new common parent's
subsidiary) in a section 351 transfer, with the new common parent and
former common parent being treated as not in the same affiliated group
at the time of the transfer for purposes of applying paragraph (d)(3)(v)
of this section (notwithstanding Sec. 1.1502-31(c)(2)).
(ii) Adjustments to basis of higher-tier members. A higher-tier
member that indirectly owns all or part of the former common parent's
stock after a group structure change is treated as having purchased the
stock of an immediate subsidiary to the extent that the higher-tier
member's basis in the subsidiary is increased under Sec. 1.1502-
31(d)(4).
(iii) Example. The following example illustrates this paragraph
(d)(6):
Example. P is the common parent of a consolidated group, and T is
the common parent of another group. P has owned S for more than five
years, and the fair market value of the S stock is $50. T's assets
consist only of non-marketable stock of direct and indirect wholly owned
subsidiaries with a value of $50, assets used in its business with a
value of $50, and $50 of marketable stock that is not part of or used in
T's business. T has no liabilities. T merges into S with the T
shareholders receiving solely P stock with a value of $150 in exchange
for their T stock in a section 368(a)(2)(D) reorganization. S will use
T's business assets in T's business (which will become S's business),
but will hold the $50 of marketable stock for investment purposes.
Assume that the transaction is a reverse acquisition under Sec. 1.1502-
75(d)(3) because the T shareholders, as a result of owning T stock, own
more than 50 percent of the value of P's stock immediately after the
transaction. Thus, the transaction is a group structure change under
Sec. 1.1502-33(f)(1). Under paragraph (d)(6) of this section, P is
treated as having acquired the assets of T in a transaction in which P's
basis in the T assets was determined under section 362(b), and then
transferred the acquired assets to S in a section 351 transfer, with P
and T being treated as not in the same affiliated group at the time of
the transfer solely for purposes of paragraph (d)(3)(v) of this section.
The exception in paragraph (d)(3)(v) of this section (transfers within
an affiliated group) does not apply. Accordingly, P is treated under
section 355(d)(5)(B) and paragraph (d)(3)(iv) of this section as having
purchased $50 of the S stock (attributable to the marketable stock), but
is not deemed to have purchased the remaining $150 of the S stock.
(7) Special rules for triangular asset reorganizations, other
reverse triangular reorganizations, and group structure changes. The
amount of acquiring subsidiary, surviving corporation, or former common
parent stock that is treated as purchased under paragraph (c)(4),
(5)(i)(A), or (6) of this section (by operation of section 355(d)(5)(B)
and paragraphs (d)(3)(i) through (iv) of this section) is adjusted to
reflect any basis adjustment under--
(i) Section 1.358-6(c)(2)(i)(B) and (C) (reduction of basis
adjustment in reverse triangular reorganization where controlling
corporation acquires less than all of the surviving corporation stock),
Sec. 1.1502-30(b) (applying Sec. 1.358-6(c)(2)(i)(B) and (C) to a
consolidated group), and Sec. 1.1502-31(d)(2)(ii) (reduction of basis
adjustment in group structure change where new common parent acquires
less than all of the former common parent stock); or
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(ii) Section 1.358-6(d) (reduction of basis adjustment in any
triangular reorganization to the extent controlling corporation does not
provide consideration), Sec. 1.1502-30(b) (applying Sec. 1.358-6(d)
(except Sec. 1.358-6(d)(2)) to a consolidated group), and Sec. 1.1502-
31(d)(1) (reduction of basis adjustment in group structure change to the
extent new common parent does not provide consideration).
(e) Deemed purchase and timing rules--(1) Attribution and
aggregation--(i) In general. Under section 355(d)(8)(B), if any person
acquires by purchase an interest in any entity, and the person is
treated under section 355(d)(8)(A) as holding any stock by reason of
holding the interest, the stock shall be treated as acquired by purchase
on the later of the date of the purchase of the interest in the entity
or the date the stock is acquired by purchase by such entity.
(ii) Purchase of additional interest. If a person and an entity are
treated as a single person under section 355(d)(7), and the person later
purchases an additional interest in the entity, the person is treated as
purchasing on the date of the later purchase the amount of stock
attributed from the entity to the person under section 355(d)(8)(A) as a
result of the additional interest.
(iii) Purchase between persons treated as one person. If two persons
are treated as one person under section 355(d)(7), and one later
purchases stock from the other, the date of the later purchase is used
for purposes of determining when the five-year period commences.
(iv) Purchase by a person already treated as holding stock under
section 355(d)(8)(A). If a person who is already treated as holding
stock under section 355(d)(8)(A) later directly purchases such stock,
the date of the later direct purchase is used for purposes of
determining when the five-year period commences.
(v) Examples. The following examples illustrate this paragraph
(e)(1):
Example 1. On Date 1, A purchases 10 percent of the stock of P,
which has held 100 percent of the stock of T for more than five years at
the time of A's purchase. A is deemed to have purchased 10 percent of
P's T stock on Date 1. If A later purchases an additional 41 percent of
the stock of P on Date 2, A is deemed to have purchased an additional 41
percent of P's T stock on Date 2. Because A and P are now related
persons under section 267(b), they are treated as one person under
section 355(d)(7)(A), and A is treated as owning all of P's T stock. A
is treated as acquiring 51 percent of the T stock by purchase at the
times of A's respective purchases of P stock on Date 1 and Date 2. The
remaining 49 percent of T stock is treated as acquired when P acquired
the T stock, more than five years before Date 1. If P distributes T
after Date 2 and within five years after Date 1, the distribution will
be a disqualified distribution under section 355(d)(2) and paragraph
(b)(1) of this section.
Example 2. A has owned 60 percent of the stock of P for more than
five years, and P has owned 40 percent of the stock of T for more than
five years. A and P are treated as one person, and A is treated as
owning 40 percent of the stock of T for more than five years. If P later
purchases an additional 20 percent of the stock of T on Date 1, A is
treated as acquiring by purchase the additional 20 percent of T stock on
Date 1. If A then purchases an additional 10 percent of the stock of P
on Date 2, under paragraph (e)(1)(i) of this section, A is deemed to
have purchased on Date 2 an additional four percent of the T stock (10
percent of the 40 percent that P originally owned). In addition, even
though A and P were already treated as one person under section
355(d)(7)(A), A also is deemed to have purchased two percent of the T
stock on Date 2 (10 percent of the 20 percent of the T stock that it was
treated as purchasing on Date 1). A is still treated as owning all 60
percent of the T stock owned by P. However, of the 60 percent, A is
treated as having purchased 18 percent of the T stock on Date 1 and 6
percent of the T stock on Date 2, for a total of 24 percent purchased
stock.
Example 3. A purchases a 20 percent interest in partnership M on
Date 1. M has owned 30 percent of the stock and 25 percent of the
securities of P for more than five years. P has owned 40 percent of the
stock and 100 percent of the securities of T for more than five years.
Under section 318(a)(2)(C) as modified by section 355(d)(8)(A), M is
deemed to own 12 percent of the stock (30 percent of the 40 percent P
owns) and 30 percent of the securities (30 percent of the 100 percent P
owns) of T. Under sections 318(a)(2)(A) and 355(d)(8)(B), A is deemed to
have purchased 2.4 percent of the stock (20 percent of the 12 percent M
is deemed to own) and 6 percent of the securities (20 percent of the 30
percent M is deemed to own) of T on Date 1. Similarly, A is deemed to
have purchased 6 percent of the stock (20 percent of the 30 percent M
owns) and five percent of the securities (20 percent of the 25 percent M
owns) of P on Date 1. If M later purchases an additional 10 percent of P
stock on Date 2, M is deemed to have purchased four percent of the stock
(10
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percent of the 40 percent P owns) and 10 percent of the securities (10
percent of the 100 percent P owns) of T on Date 2. A is deemed to have
purchased two percent of the stock of P on Date 2 (20 percent of the 10
percent M purchased). A is also deemed to have purchased 0.8 percent of
the stock (20 percent of the four percent M is deemed to have purchased)
and two percent of the securities (20 percent of the 10 percent M is
deemed to have purchased) of T on Date 2.
Example 4. A and B are brother and sister. For more than five years,
A has owned 75 percent of the stock of P, and B has owned 25 percent of
the stock of P. A and B are treated as one person under section 267(b),
and the stock of each is treated as purchased on the date it was
purchased by A and B, respectively. If B later purchases 50 percent of
the P stock from A on Date 1, A and B are still treated as one person.
However, under paragraph (e)(3)(iii) of this section, the 50 percent of
P stock that B purchased from A is treated as purchased on Date 1.
(2) Transferred basis rule. If any person acquires property from
another person who acquired the property by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3) and (4)
of this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the adjusted basis of the property in the
hands of the acquirer is determined in whole or in part by reference to
the adjusted basis of the property in the hands of the other person, the
acquirer is treated as having acquired the property by purchase on the
date it was so acquired by the other person. The rule in this paragraph
(e)(2) applies, for example, where stock of a corporation acquired by
purchase is subsequently acquired in a section 351 transfer or a
reorganization qualifying under section 368(a)(1)(B), but does not apply
if the stock of a former common parent is acquired in a group structure
change to which Sec. 1.1502-31 applies. But see paragraph
(d)(2)(i)(B)(2) of this section for situations where the stock is
treated as purchased on the date of a transfer.
(3) Exchanged basis rule--(i) In general. If any person acquires an
interest in an entity (the first interest) by purchase (determined with
regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3) and (4)
of this section, but without regard to section 355(d)(8) and paragraph
(e)(1) of this section), and the first interest is exchanged for an
interest in the same or another entity (the second interest) where the
adjusted basis of the second interest is determined in whole or in part
by reference to the adjusted basis of the first interest, then the
second interest is treated as having been purchased on the date the
first interest was purchased. The rule in this paragraph (e)(3) applies
only to exchanges that are not otherwise treated as purchases under
section 355(d)(5) and paragraph (d) of this section. The rule in this
paragraph (e)(3) applies, for example, where stock of a corporation
acquired by purchase is subsequently exchanged for other stock in a
section 351, 354, or 1036(a) exchange. But see paragraph (d)(2)(i)(A)(2)
of this section for situations where the stock is treated as purchased
on the date of an exchange or distribution.
(ii) Example. The following example illustrates this paragraph
(e)(3):
Example. A purchases 50 percent of the stock of T on Date 1. On Date
2, T merges into D in a section 368(a)(1)(A) reorganization, with A
exchanging all of the T stock solely for stock of D. Under section
358(a), A's basis in the D stock is determined by reference to the basis
of the T stock it purchased. Accordingly, A is treated as having
purchased the D stock on Date 1, and has a purchased basis in the D
stock under paragraph (b)(3)(iii) of this section.
(4) Certain section 355 or section 305 distributions--(i) Section
355. If a distributing corporation distributes any stock of a controlled
corporation with respect to recently purchased distributing stock in a
distribution that qualifies under section 355 (or so much of section 356
as relates to section 355), such controlled corporation stock is deemed
to be acquired by purchase by the distributee on the date the
distributee acquired the recently purchased distributing stock. Recently
purchased distributing stock is stock in the distributing corporation
acquired by purchase (determined with regard to section 355(d)(5) and
paragraphs (d) and (e)(2), (3), and (4) of this section, but without
regard to section 355(d)(8) and paragraph (e)(1) of this section) by the
distributee during the five-year period with respect to that
distribution.
[[Page 220]]
(ii) Section 305. If a corporation distributes its stock in a
distribution that qualifies under section 305(a), the stock received in
the distribution (to the extent section 307(a) applies to determine the
recipient's basis) is deemed to be acquired by purchase by the recipient
on the date (if any) that the recipient acquired by purchase (determined
with regard to section 355(d)(5) and paragraphs (d) and (e)(2), (3), and
(4) of this section), the stock with respect to which the distribution
is made.
(5) Substantial diminution of risk--(i) In general. If section
355(d)(6) applies to any stock for any period, the running of any five-
year period set forth in section 355(d)(3) is suspended during such
period.
(ii) Property to which suspension applies. Section 355(d)(6) applies
to any stock for any period during which the holder's risk of loss with
respect to such stock, or with respect to any portion of the activities
of the corporation, is (directly or indirectly) substantially diminished
by an option, a short sale, any special class of stock, or any other
device or transaction.
(iii) Risk of loss substantially diminished. Whether a holder's risk
of loss is substantially diminished under section 355(d)(6) and
paragraph (e)(5)(ii) of this section will be determined based on all
facts and circumstances relating to the stock, the corporate activities,
and arrangements for holding the stock.
(iv) Special class of stock. For purposes of section 355(d)(6) and
paragraph (e)(5)(ii) of this section, the term special class of stock
includes a class of stock that grants particular rights to, or bears
particular risks for, the holder or the issuer with respect to the
earnings, assets, or attributes of less than all the assets or
activities of a corporation or any of its subsidiaries. The term
includes, for example, tracking stock and stock (or any related
instruments or arrangements) the terms of which provide for the
distribution (whether or not at the option of any party or in the event
of any contingency) of any controlled corporation or other specified
assets to the holder or to one or more persons other than the holder.
(f) Duty to determine stockholders--(1) In general. In determining
whether section 355(d) applies to a distribution of controlled
corporation stock, a distributing corporation must determine whether a
disqualified person holds its stock or the stock of any distributed
controlled corporation. This paragraph (f) provides rules regarding this
determination and the extent to which a distributing corporation must
investigate whether a disqualified person holds stock.
(2) Deemed knowledge of contents of securities filings. A
distributing corporation is deemed to have knowledge of the existence
and contents of all schedules, forms, and other documents filed with or
under the rules of the Securities and Exchange Commission, including
without limitation any Schedule 13D or 13G (or any similar schedules)
and amendments, with respect to any relevant corporation.
(3) Presumption as to securities filings. Absent actual knowledge to
the contrary, in determining whether section 355(d) applies to a
distribution, a distributing corporation may presume, with respect to
stock that is reporting stock (while such stock is reporting stock),
that every shareholder or other person required to file a schedule,
form, or other document with or under the rules of the Securities and
Exchange Commission as of a given date has filed the schedule, form, or
other document as of that date and that the contents of filed schedules,
forms, or other documents are accurate and complete. Reporting stock is
stock that is described in Rule 13d-1(i) of Regulation 13D (17 CFR
240.13d-1(i)) (or any rule or regulation to generally the same effect)
promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(4) Presumption as to less-than-five-percent shareholders. Absent
actual knowledge (or deemed knowledge under paragraph (f)(2) of this
section) immediately after the distribution to the contrary with regard
to a particular shareholder, a distributing corporation may presume that
no less-than-five-percent shareholder of a corporation acquired stock or
securities by purchase under section 355(d)(5) or (8) and paragraphs (d)
and (e) of this section
[[Page 221]]
during the five-year period. For purposes of this paragraph (f), a less-
than-five-percent shareholder is a person that, at no time during the
five-year period, holds directly (or by application of paragraph
(c)(3)(ii) of this section, but not by application of section 355(d)(7)
or (8)) stock possessing five percent or more of the total combined
voting power of all classes of stock entitled to vote or the total value
of shares of all classes of stock of a corporation. However, this
presumption does not apply to any less-than-five-percent shareholder
that, at any time during the five-year period--
(i) Is related under section 355(d)(7)(A) to a shareholder in the
corporation that is, at any time during the five-year period, not a
less-than-five-percent shareholder;
(ii) Acted pursuant to a plan or arrangement, with respect to
acquisitions of the corporation's stock or securities under section
355(d)(7)(B) and paragraph (c)(4) of this section, with a shareholder in
the corporation that is, at any time during the five-year period, not a
less-than-five-percent shareholder; or
(iii) Holds stock or securities that is attributed under section
355(d)(8)(A) to a shareholder in the corporation that is, at any time
during the five-year period, not a less-than-five-percent shareholder.
(5) Examples. The following examples illustrate this paragraph (f):
Example 1. Publicly traded corporation; no schedules filed. D is a
widely held and publicly traded corporation with a single class of
reporting stock and no other class of stock. Assume that applicable
federal law requires any person that directly holds five percent or more
of the D stock to file a schedule with the Securities and Exchange
Commission within 10 days after an acquisition. D distributes its wholly
owned subsidiary C pro rata. D determines that no schedule, form, or
other document has been filed with respect to its stock or the stock of
any other relevant corporation during the five-year period or within 10
days after the distribution. Immediately after the distribution, D has
no knowledge that any of its shareholders are (or were at any time
during the five-year period) not less-than-five-percent shareholders, or
that any particular shareholder acquired D stock by purchase under
section 355(d)(5) or (8) and paragraphs (d) and (e) of this section
during the five-year period. Under paragraph (f)(3) of this section, D
may presume it has no shareholder that is or was not a less-than-five-
percent shareholder during the five-year period due to the absence of
any filed schedules, forms, or other documents. Under paragraph (f)(4)
of this section, D may presume that none of its less-than-five-percent
shareholders acquired D's stock by purchase during the five-year period.
Accordingly, D may presume that section 355(d) does not apply to the
distribution of C.
Example 2. Publicly traded corporation; schedule filed. The facts
are the same as those in Example 1, except that D determines that, as of
10 days after the distribution, only one schedule has been filed with
respect to its stock. That schedule discloses that X acquired 15 percent
of the D stock one year before the distribution. Absent contrary
knowledge, D may rely on the presumptions in paragraph (f)(3) of this
section and so may presume that X is its only shareholder that is or was
not a less-than-five-percent shareholder during the five-year period. D
may not rely on the presumption in paragraph (f)(4) of this section with
respect to X. In addition, D may not rely on the presumption in
paragraph (f)(4) of this section with respect to any less-than-five-
percent shareholder that, at any time during the five-year period, is
related to X under section 355(d)(7)(A), acted pursuant to a plan or
arrangement with X under section 355(d)(7)(B) and paragraph (c)(4) of
this section with respect to acquisitions of D stock, or holds stock
that is attributed to X under section 355(d)(8)(A). Accordingly, under
paragraph (f)(1) of this section, to determine whether section 355(d)
applies, D must determine: whether X acquired its directly held D stock
by purchase under section 355(d)(5) and paragraphs (d) and (e)(2) and
(3) of this section during the five-year period; whether X is treated as
having purchased any additional D stock under section 355(d)(8) and
paragraph (e)(1) of this section during the five-year period; and
whether X is related to, or acquired its D stock pursuant to a plan or
arrangement with, one or more of D's other shareholders during the five-
year period under section 355(d)(7)(A) or (B) and paragraph (c)(4) of
this section, and if so, whether those shareholders acquired their D
stock by purchase under section 355(d)(5) or (8) and paragraphs (d) and
(e) of this section during the five-year period.
Example 3. Acquisition of publicly traded corporation. The facts are
the same as those in Example 1, except that P acquires all of the D
stock in a section 368(a)(1)(B) reorganization that is not also a
reorganization under section 368(a)(1)(A) by reason of section
368(a)(2)(E), and D distributes C to P one year later. Because D was
widely held, P applies statistical sampling procedures that involve less
than 50% of D's outstanding
[[Page 222]]
shares, to estimate the basis of all shares acquired, instead of
surveying each shareholder. Under the deemed purchase rule of section
355(d)(5)(C) and paragraph (e)(2) of this section, P is treated as
having acquired the D stock by purchase on the date the D shareholders
acquired the D stock by purchase. Even though D has no less-than-five-
percent shareholder immediately after the distribution, D may rely on
the presumptions in paragraphs (f)(3) and (4) of this section to
determine whether and to what extent the D stock is treated as purchased
during the five-year period in P's hands under the deemed purchase rule
of section 355(d)(5)(C) and paragraph (e)(2) of this section.
Accordingly, D may presume that section 355(d) does not apply to the
distribution of C to P. This result would not change even if the
statistical sampling that involves less than 50 percent of D's
outstanding shares indicated that more than 50% of D's shares were
acquired by purchase during the five-year period.
Example 4. Non-publicly traded corporation. D is owned by 20
shareholders and has a single class of stock that is not reporting
stock. D knows that A owns 40 percent of the D stock, and D does not
know that any other shareholder has owned as much as five percent of the
D stock at any time during the five-year period. D may not rely on the
presumption in paragraph (f)(3) of this section because its stock is not
reporting stock. D may not rely on the presumption in paragraph (f)(4)
of this section with respect to A. In addition, D may not rely on the
presumption in paragraph (f)(4) of this section for any less-than-five-
percent shareholder that, at any time during the five-year period, is
related to A under section 355(d)(7)(A), acted pursuant to a plan or
arrangement with A under section 355(d)(7)(B) and paragraph (c)(4) of
this section with respect to acquisitions of D stock, or holds stock
that is attributed to A under section 355(d)(8)(A). D may rely on the
presumption in paragraph (f)(4) of this section for less-than-five-
percent shareholders that during the five-year period are not related to
A, did not act pursuant to a plan or arrangement with A, and do not hold
stock attributed to A. Accordingly, under paragraph (f)(1) of this
section, to determine whether section 355(d) applies, D must determine:
that A is its only shareholder that is (or was at any time during the
five-year period) not a less-than-five-percent shareholder; whether A
acquired its directly held D stock by purchase under section 355(d)(5)
and paragraphs (d) and (e)(2) and (3) of this section during the five-
year period; whether A is treated as having purchased any additional D
stock under section 355(d)(8) and paragraph (e)(1) of this section
during the five-year period; and whether A is related to, or acquired
its D stock pursuant to a plan or arrangement with, one or more of D's
other shareholders during the five-year period under section
355(d)(7)(A) or (B) and paragraph (c)(4) of this section, and if so,
whether those shareholders acquired their D stock by purchase under
section 355(d)(5) or (8) and paragraphs (d) and (e) of this section
during the five-year period.
(g) Effective date. This section applies to distributions occurring
after December 20, 2000, except that they do not apply to any
distributions occurring pursuant to a written agreement which is
(subject to customary conditions) binding on December 20, 2000, and at
all times thereafter.
[T.D. 8913, 65 FR 79723, Dec. 20, 2000; 66 FR 9034, Feb. 6, 2001]
Sec. 1.355-7T Recognition of gain on certain distributions of stock
or securities in connection with an acquisition.
(a) In general. Except as provided in section 355(e) and in this
section, section 355(e) applies to any distribution--
(1) To which section 355 (or so much of section 356 as relates to
section 355) applies; and
(2) That is part of a plan (or series of related transactions)
(hereinafter, plan) pursuant to which 1 or more persons acquire directly
or indirectly stock representing a 50-percent or greater interest in the
distributing corporation (Distributing) or any controlled corporation
(Controlled).
(b) Plan--(1) In general. Whether a distribution and an acquisition
are part of a plan is determined based on all the facts and
circumstances. The facts and circumstances to be considered in
demonstrating whether a distribution and an acquisition are part of a
plan include, but are not limited to, the facts and circumstances set
forth in paragraphs (b)(3) and (4) of this section. In general, the
weight to be given each of the facts and circumstances depends on the
particular case. Whether a distribution and an acquisition are part of a
plan does not depend on the relative number of facts and circumstances
set forth in paragraph (b)(3) that evidence that a distribution and an
acquisition are part of a plan as compared to the relative number of
facts and circumstances set forth in paragraph (b)(4) that evidence that
a
[[Page 223]]
distribution and an acquisition are not part of a plan.
(2) Certain post-distribution acquisitions. In the case of an
acquisition (other than involving a public offering) after a
distribution, the distribution and the acquisition can be part of a plan
only if there was an agreement, understanding, arrangement, or
substantial negotiations regarding the acquisition or a similar
acquisition at some time during the 2-year period ending on the date of
the distribution. In the case of an acquisition (other than involving a
public offering) after a distribution, the existence of an agreement,
understanding, arrangement, or substantial negotiations regarding the
acquisition or a similar acquisition at some time during the 2-year
period ending on the date of the distribution tends to show that the
distribution and the acquisition are part of a plan. See paragraph
(b)(3)(i) of this section. However, all facts and circumstances must be
considered to determine whether the distribution and the acquisition are
part of a plan. For example, in the case of an acquisition (other than
involving a public offering) after a distribution, if the distribution
was motivated in whole or substantial part by a corporate business
purpose (within the meaning of Sec. 1.355-2(b)) other than a business
purpose to facilitate the acquisition or a similar acquisition of
Distributing or Controlled (see paragraph (b)(4)(v) of this section) and
would have occurred at approximately the same time and in similar form
regardless of whether the acquisition or a similar acquisition was
effected (see paragraph (b)(4)(vi) of this section), the taxpayer may be
able to establish that the distribution and the acquisition are not part
of a plan.
(3) Plan factors. Among the facts and circumstances tending to show
that a distribution and an acquisition are part of a plan are the
following:
(i) In the case of an acquisition (other than involving a public
offering) after a distribution, at some time during the 2-year period
ending on the date of the distribution, there was an agreement,
understanding, arrangement, or substantial negotiations regarding the
acquisition or a similar acquisition. The weight to be accorded this
fact depends on the nature, extent, and timing of the agreement,
understanding, arrangement, or substantial negotiations. The existence
of an agreement, understanding, or arrangement at the time of the
distribution is given substantial weight.
(ii) In the case of an acquisition involving a public offering after
a distribution, at some time during the 2-year period ending on the date
of the distribution, there were discussions by Distributing or
Controlled with an investment banker regarding the acquisition or a
similar acquisition. The weight to be accorded this fact depends on the
nature, extent, and timing of the discussions.
(iii) In the case of an acquisition (other than involving a public
offering) before a distribution, at some time during the 2-year period
ending on the date of the acquisition, there were discussions by
Distributing or Controlled with the acquirer regarding a distribution.
The weight to be accorded this fact depends on the nature, extent, and
timing of the discussions. In addition, in the case of an acquisition
(other than involving a public offering) before a distribution, a person
other than Distributing or Controlled intended to cause a distribution
and, as a result of the acquisition, can meaningfully participate in the
decision regarding whether to make a distribution.
(iv) In the case of an acquisition involving a public offering
before a distribution, at some time during the 2-year period ending on
the date of the acquisition, there were discussions by Distributing or
Controlled with an investment banker regarding a distribution. The
weight to be accorded this fact depends on the nature, extent, and
timing of the discussions.
(v) In the case of an acquisition either before or after a
distribution, the distribution was motivated by a business purpose to
facilitate the acquisition or a similar acquisition.
(4) Non-plan factors. Among the facts and circumstances tending to
show that a distribution and an acquisition are not part of a plan are
the following:
(i) In the case of an acquisition involving a public offering after
a distribution, during the 2-year period ending on the date of the
distribution,
[[Page 224]]
there were no discussions by Distributing or Controlled with an
investment banker regarding the acquisition or a similar acquisition.
(ii) In the case of an acquisition after a distribution, there was
an identifiable, unexpected change in market or business conditions
occurring after the distribution that resulted in the acquisition that
was otherwise unexpected at the time of the distribution.
(iii) In the case of an acquisition (other than involving a public
offering) before a distribution, during the 2-year period ending on the
date of the acquisition, there were no discussions by Distributing or
Controlled with the acquirer regarding a distribution. This paragraph
(b)(4)(iii) does not apply if the acquisition occurred after the date of
the public announcement of the planned distribution. In addition, this
paragraph (b)(4)(iii) does not apply in the case of an acquisition where
a person other than Distributing or Controlled intends to cause a
distribution and, as a result of the acquisition, can meaningfully
participate in the decision regarding whether to make a distribution.
(iv) In the case of an acquisition before a distribution, there was
an identifiable, unexpected change in market or business conditions
occurring after the acquisition that resulted in a distribution that was
otherwise unexpected.
(v) In the case of an acquisition either before or after a
distribution, the distribution was motivated in whole or substantial
part by a corporate business purpose (within the meaning of Sec. 1.355-
2(b)) other than a business purpose to facilitate the acquisition or a
similar acquisition.
(vi) In the case of an acquisition either before or after a
distribution, the distribution would have occurred at approximately the
same time and in similar form regardless of the acquisition or a similar
acquisition.
(c) Operating rules. The operating rules contained in this paragraph
(c) apply for all purposes of this section.
(1) Internal discussions and discussions with outside advisors
evidence of business purpose. Internal discussions and discussions with
outside advisors by or on behalf of officers or directors of
Distributing or Controlled may be indicative of one or more business
purposes for the distribution and the relative importance of such
purposes.
(2) Takeover defense. If Distributing engages in discussions with a
potential acquirer regarding an acquisition of Distributing or
Controlled and distributes Controlled stock intending, in whole or
substantial part, to decrease the likelihood of the acquisition of
Distributing or Controlled by separating it from another corporation
that is likely to be acquired, Distributing will be treated as having a
business purpose to facilitate the acquisition of the corporation that
was likely to be acquired.
(3) Effect of distribution on trading in stock. The fact that the
distribution made all or a part of the stock of Controlled available for
trading or made Distributing's or Controlled's stock trade more actively
is not taken into account in determining whether the distribution and an
acquisition of Distributing or Controlled stock were part of a plan.
(4) Consequences of section 355(e) disregarded for certain purposes.
For purposes of determining the intentions of the relevant parties under
this section, the consequences of the application of section 355(e), and
the existence of any contractual indemnity by Controlled for tax
resulting from the application of section 355(e) caused by an
acquisition of Controlled, are disregarded.
(5) Multiple acquisitions. All acquisitions of stock of Distributing
or Controlled that are considered to be part of a plan with a
distribution pursuant to paragraph (b) of this section will be
aggregated for purposes of the 50-percent test of paragraph (a)(2) of
this section.
(d) Safe harbors--(1) Safe Harbor I. A distribution and an
acquisition occurring after the distribution will not be considered part
of a plan if--
(i) The distribution was motivated in whole or substantial part by a
corporate business purpose (within the meaning of Sec. 1.355-2(b)),
other than a business purpose to facilitate an acquisition of the
acquired corporation (Distributing or Controlled); and
(ii) The acquisition occurred more than 6 months after the
distribution and there was no agreement, understanding, arrangement, or
substantial
[[Page 225]]
negotiations concerning the acquisition or a similar acquisition during
the period that begins 1 year before the distribution and ends 6 months
thereafter.
(2) Safe Harbor II. (i) A distribution and an acquisition occurring
after the distribution will not be considered part of a plan if--
(A) The distribution was not motivated by a business purpose to
facilitate the acquisition or a similar acquisition;
(B) The acquisition occurred more than 6 months after the
distribution and there was no agreement, understanding, arrangement, or
substantial negotiations concerning the acquisition or a similar
acquisition during the period that begins 1 year before the distribution
and ends 6 months thereafter; and
(C) No more than 25 percent of the stock of the acquired corporation
(Distributing or Controlled) was either acquired or the subject of an
agreement, understanding, arrangement, or substantial negotiations
during the period that begins 1 year before the distribution and ends 6
months thereafter.
(ii) For purposes of paragraph (d)(2)(i)(C) of this section,
acquisitions of stock that are treated as not part of a plan pursuant to
Safe Harbor V, Safe Harbor VI, or Safe Harbor VII are disregarded.
(3) Safe Harbor III. If an acquisition occurs after a distribution,
there was no agreement, understanding, or arrangement concerning the
acquisition or a similar acquisition at the time of the distribution,
and there was no agreement, understanding, arrangement, or substantial
negotiations concerning the acquisition or a similar acquisition within
1 year after the distribution, the acquisition and the distribution will
not be considered part of a plan.
(4) Safe Harbor IV. If a distribution occurs more than 2 years after
an acquisition, and there was no agreement, understanding, arrangement,
or substantial negotiations concerning the distribution at the time of
the acquisition or within 6 months thereafter, the acquisition and the
distribution will not be considered part of a plan.
(5) Safe Harbor V--(i) In general. An acquisition of Distributing or
Controlled stock that is listed on an established market is not part of
a plan if, immediately before or immediately after the transfer, none of
the transferor, the transferee, and any coordinating group of which
either the transferor or the transferee is a member is--
(A) The acquired corporation (Distributing or Controlled);
(B) A corporation that the acquired corporation (Distributing or
Controlled) controls within the meaning of section 368(c);
(C) A member of a controlled group of corporations within the
meaning of section 1563 of which the acquired corporation (Distributing
or Controlled) is a member;
(D) An underwriter with respect to such acquisition;
(E) A controlling shareholder of the acquired corporation
(Distributing or Controlled); or
(F) A 10-percent shareholder of the acquired corporation
(Distributing or Controlled).
(ii) Special rules. (A) This paragraph (d)(5) does not apply to a
transfer of stock by or to a person if the corporation the stock of
which is being transferred knows, or has reason to know, that the person
or a coordinating group of which such person is a member intends to
become a controlling shareholder or a 10-percent shareholder of the
acquired corporation (Distributing or Controlled) at any time after the
acquisition and before the date that is 2 years after the distribution.
(B) If a transfer of stock to which this paragraph (d)(5) applies
results immediately, or upon a subsequent event or the passage of time,
in an indirect acquisition of voting power by a person other than the
transferee, this paragraph (d)(5) does not prevent an acquisition of
stock (with the voting power such stock represents after the transfer to
which this paragraph (d)(5) applies) by such other person from being
treated as part of a plan.
(6) Safe Harbor VI--(i) In general. If stock of Distributing or
Controlled is acquired by a person in connection with such person's
performance of services as an employee, director, or independent
contractor for Distributing, Controlled, or a person related to
Distributing or Controlled under section
[[Page 226]]
355(d)(7)(A) (and that is not excessive by reference to the services
performed) in a transaction to which section 83 or section 421(a)
applies, the acquisition and the distribution will not be considered
part of a plan.
(ii) Special rule. This paragraph (d)(6) does not apply to a stock
acquisition described in (d)(6)(i) if the acquirer or a coordinating
group of which the acquirer is a member is a controlling shareholder or
a 10-percent shareholder of the acquired corporation (Distributing or
Controlled) immediately after the acquisition.
(7) Safe Harbor VII--(i) In general. If stock of Distributing or
Controlled is acquired by a retirement plan of an employer that
qualifies under section 401(a) or 403(a), the acquisition and the
distribution will not be considered part of a plan.
(ii) Special rule. This paragraph (d)(7) does not apply to stock
acquisitions described in (d)(7)(i) of this section to the extent that
the stock acquired pursuant to such acquisitions by all of the qualified
plans of the employer described in paragraph (d)(7)(i) of this section,
and any other person treated as the same employer as that described in
paragraph (d)(7)(i) of this section under section 414(b), (c), (m), or
(o), during the 4-year period beginning 2 years before the distribution,
in the aggregate, represents 10 percent or more of the total combined
voting power of all classes of stock entitled to vote, or 10 percent or
more of the total value of shares of all classes of stock, of the
acquired corporation (Distributing or Controlled).
(e) Stock acquired by exercise of options, warrants, convertible
obligations, and other similar interests--(1) Treatment of options--(i)
General rule. For purposes of this section, if stock of Distributing or
Controlled is acquired pursuant to an option, the option will be treated
as an agreement, understanding, or arrangement to acquire the stock on
the earliest of the following dates: the date that the option is
written, if the option was more likely than not to be exercised as of
such date; the date that the option is transferred, if the option was
more likely than not to be exercised as of such date; and the date that
the option is modified in a manner that materially increases the
likelihood of exercise, if the option was more likely than not to be
exercised as of such date; provided, however, if the writing, transfer,
or modification had a principal purpose of avoiding section 355(e), the
option will be treated as an agreement, understanding, arrangement, or
substantial negotiations to acquire the stock on the date of the
distribution. The determination of whether an option was more likely
than not to be exercised is based on all the facts and circumstances,
taking control premiums and minority and blockage discounts into account
in determining the fair market value of stock underlying an option.
(ii) Agreement, understanding, or arrangement to write an option. If
there is an agreement, understanding, or arrangement to write an option,
the option will be treated as written on the date of the agreement,
understanding, or arrangement.
(iii) Substantial negotiations related to options. If an option is
treated as an agreement, understanding, or arrangement to acquire the
stock on the date that the option is written, substantial negotiations
to acquire the option will be treated as substantial negotiations to
acquire the stock subject to such option. If an option is treated as an
agreement, understanding, or arrangement to acquire the stock on the
date that the option is transferred, substantial negotiations regarding
the transfer of the option will be treated as substantial negotiations
to acquire the stock subject to such option. If an option is treated as
an agreement, understanding, or arrangement to acquire the stock on the
date that the option is modified in a manner that materially increases
the likelihood of exercise, substantial negotiations regarding such
modifications to the option will be treated as substantial negotiations
to acquire the stock subject to such option.
(2) Instruments treated as options. For purposes of this paragraph
(e), except to the extent provided in paragraph (e)(3) of this section,
call options, warrants, convertible obligations, the conversion feature
of convertible stock, put options, redemption agreements
[[Page 227]]
(including rights to cause the redemption of stock), any other
instruments that provide for the right or possibility to issue, redeem,
or transfer stock (including an option on an option), or any other
similar interests are treated as options.
(3) Instruments generally not treated as options. For purposes of
this paragraph (e), the following are not treated as options unless (in
the case of paragraphs (e)(3)(i), (iii), and (iv) of this section)
written, transferred (directly or indirectly), modified, or listed with
a principal purpose of avoiding the application of section 355(e) or
this section.
(i) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(ii) Compensatory options. An option to acquire stock in
Distributing or Controlled with customary terms and conditions provided
to a person in connection with such person's performance of services as
an employee, director, or independent contractor for the corporation or
a person related to it under section 355(d)(7)(A) (and that is not
excessive by reference to the services performed), provided that--
(A) The transfer of stock pursuant to such option is described in
section 421(a); or
(B) The option is nontransferable within the meaning of Sec. 1.83-
3(d) and does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b).
(iii) Options exercisable only upon death, disability, mental
incompetency, or separation from service. Any option entered into
between shareholders of a corporation (or a shareholder and the
corporation) that is exercisable only upon the death, disability, or
mental incompetency of the shareholder, or, in the case of stock
acquired in connection with the performance of services for the
corporation or a person related to it under section 355(d)(7)(A) (and
that is not excessive by reference to the services performed), the
shareholder's separation from service.
(iv) Rights of first refusal. A bona fide right of first refusal
regarding the corporation's stock with customary terms, entered into
between shareholders of a corporation (or between the corporation and a
shareholder).
(v) Other enumerated instruments. Any other instrument the
Commissioner may designate in revenue procedures, notices, or other
guidance published in the Internal Revenue Bulletin (see Sec.
601.601(d)(2) of this chapter).
(f) Multiple controlled corporations. Only the stock or securities
of a controlled corporation in which 1 or more persons acquire directly
or indirectly stock representing a 50-percent or greater interest as
part of a plan involving the distribution of that corporation will be
treated as not qualified property under section 355(e)(1) if--
(1) The stock or securities of more than 1 controlled corporation
are distributed in distributions to which section 355 (or so much of
section 356 as relates to section 355) applies; and
(2) One or more persons do not acquire, directly or indirectly,
stock representing a 50-percent or greater interest in Distributing
pursuant to a plan involving any of those distributions.
(g) Valuation. Except as provided in paragraph (e)(1)(i) of this
section, for purposes of section 355(e) and this section, all shares of
stock within a single class are considered to have the same value. Thus,
control premiums and minority and blockage discounts within a single
class are not taken into account.
(h) Definitions--(1) Agreement, understanding, arrangement, or
substantial negotiations. (i) Whether an agreement, understanding, or
arrangement exists depends on the facts and circumstances. The parties
do not necessarily have to have entered into a binding contract or have
reached agreement on all significant economic terms to have an
agreement, understanding, or arrangement. However, an agreement,
understanding, or arrangement clearly exists if a binding contract to
acquire stock exists.
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(ii) Substantial negotiations in the case of an acquisition (other
than involving a public offering) generally require discussions of
significant economic terms, e.g., the exchange ratio in a
reorganization, by one or more officers, directors, or controlling
shareholders of Distributing or Controlled, or another person or persons
with the implicit or explicit permission of one or more officers,
directors, or controlling shareholders of Distributing or Controlled,
with the acquirer or a person or persons with the implicit or explicit
permission of the acquirer.
(iii) In the case of an acquisition involving a public offering by
Distributing or Controlled, the existence of an agreement,
understanding, arrangement, or substantial negotiations will be based on
discussions by one or more officers, directors, or controlling
shareholders of Distributing or Controlled, or another person or persons
with the implicit or explicit permission of one or more officers,
directors, or controlling shareholders of Distributing or Controlled,
with an investment banker.
(2) Controlled corporation. For purposes of this section, a
controlled corporation is a corporation the stock of which is
distributed in a distribution to which section 355 (or so much of
section 356 as relates to section 355) applies.
(3) Controlling shareholder. (i) A controlling shareholder of a
corporation the stock of which is listed on an established market is a
5-percent shareholder who actively participates in the management or
operation of the corporation. For purposes of this paragraph (h)(3)(i),
a corporate director will be treated as actively participating in the
management of the corporation.
(ii) A controlling shareholder of a corporation the stock of which
is not listed on an established market is any person that owns, actually
or constructively under the rules of section 318, stock possessing
voting power representing a meaningful voice in the governance of the
corporation.
(iii) For purposes of this section, a person is a controlling
shareholder if that person meets the definition of controlling
shareholder in this paragraph (h)(3) immediately before or immediately
after the acquisition being tested.
(iv) If a distribution precedes an acquisition, Controlled's
controlling shareholders immediately after the distribution and
Distributing are included among Controlled's controlling shareholders at
the time of the distribution.
(4) Coordinating group. A coordinating group includes 2 or more
persons that, pursuant to a formal or informal understanding, join in
one or more coordinated acquisitions or dispositions of stock of
Distributing or Controlled. A principal element in determining if such
an understanding exists is whether the investment decision of each
person is based on the investment decision of one or more other existing
or prospective shareholders. A coordinating group is treated as a single
shareholder for purposes of determining whether the coordinating group
is treated as a controlling shareholder or a 10-percent shareholder.
(5) Discussions. Discussions by Distributing or Controlled generally
require discussions by one or more officers, directors, or controlling
shareholders of Distributing or Controlled, or another person or persons
with the implicit or explicit permission of one or more officers,
directors, or controlling shareholders of Distributing or Controlled.
Discussions with the acquirer generally require discussions with the
acquirer or a person or persons with the implicit or explicit permission
of the acquirer.
(6) Established market. An established market is--
(i) A national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (15 U.S.C. 78f);
(ii) An interdealer quotation system sponsored by a national
securities association registered under section 15A of the Securities
Act of 1934 (15 U.S.C. 78o-3); or
(iii) Any additional market that the Commissioner may designate in
revenue procedures, notices, or other guidance published in the Internal
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter).
(7) Five-percent shareholder. A person will be considered a 5-
percent shareholder of a corporation the stock of
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which is listed on an established market if the person owns, actually or
constructively under the rules of section 318, 5 percent or more of any
class of stock of the corporation whose stock is transferred. A person
is a 5-percent shareholder if the person meets the requirements
described above immediately before or immediately after the transfer.
All options owned by a person are treated as exercised for the purpose
of determining whether such person is a 5-percent shareholder. Absent
actual knowledge that a person is a 5-percent shareholder, a corporation
can rely on Schedules 13D and 13G (or any similar schedules) filed with
the Securities and Exchange Commission to identify its 5-percent
shareholders.
(8) Similar acquisition. In general, an actual acquisition (other
than a public offering or other stock issuance for cash) is similar to
another potential acquisition if the actual acquisition effects a direct
or indirect combination of all or a significant portion of the same
business operations as the combination that would have been effected by
such other potential acquisition. Thus, an actual acquisition may be
similar to another acquisition even if the timing or terms of the actual
acquisition are different from the timing or terms of the other
acquisition. For example, an actual acquisition of Distributing by
shareholders of another corporation in connection with a merger of such
other corporation with and into Distributing is similar to another
acquisition of Distributing by merger into such other corporation or
into a subsidiary of such other corporation. However, in general, an
actual acquisition (other than a public offering or other stock issuance
for cash) is not similar to another acquisition if the ultimate owners
of the business operations with which Distributing or Controlled is
combined in the actual acquisition are substantially different from the
ultimate owners of the business operations with which Distributing or
Controlled was to be combined in such other acquisition. In the case of
a public offering or other stock issuance for cash, an actual
acquisition may be similar to another acquisition, even though there are
changes in the terms of the stock, the class of stock being offered, the
size of the offering, the timing of the offering, the price of the
stock, or the participants in the offering.
(9) Ten-percent shareholder. A person will be considered a 10-
percent shareholder of a corporation the stock of which is listed on an
established market if the person owns, actually or constructively under
the rules of section 318, 10 percent or more of any class of stock of
the corporation whose stock is transferred. A person will be considered
a 10-percent shareholder of a corporation the stock of which is not
listed on an established market if the person owns, actually or
constructively under the rules of section 318, stock possessing 10
percent or more of the total voting power of the stock of the
corporation whose stock is transferred or stock having a value equal to
10 percent or more of the total value of the stock of the corporation
whose stock is transferred. A person is a 10-percent shareholder if the
person meets the requirements described above immediately before or
immediately after the transfer. All options owned by a person are
treated as exercised for the purpose of determining whether such person
is a 10-percent shareholder. Absent actual knowledge that a person is a
10-percent shareholder, a corporation the stock of which is listed on an
established market can rely on Schedules 13D and 13G (or any similar
schedules) filed with the Securities and Exchange Commission to identify
its 10-percent shareholders.
(i) [Reserved]
(j) Examples. The following examples illustrate paragraphs (a)
through (h) of this section. Throughout these examples, assume that
Distributing (D) owns all of the stock of Controlled (C). Assume further
that D distributes the stock of C in a distribution to which section 355
applies and to which section 355(d) does not apply. Unless otherwise
stated, assume the corporations do not have controlling shareholders. No
inference should be drawn from any example concerning whether any
requirements of section 355 other than those of section 355(e) are
satisfied. The examples are as follows:
Example 1. Unwanted assets. (i) D is in business 1. C is in business
2. D is relatively
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small in its industry. D wants to combine with X, a larger corporation
also engaged in business 1. X and D begin negotiating for X to acquire
D, but X does not want to acquire C. To facilitate the acquisition of D
by X, D agrees to distribute all the stock of C pro rata before the
acquisition. Prior to the distribution, D and X enter into a contract
for D to merge into X subject to several conditions. One month after D
and X enter into the contract, D distributes C and, on the day after the
distribution, D merges into X. As a result of the merger, D's former
shareholders own less than 50 percent of the stock of X.
(ii) The issue is whether the distribution of C and the merger of D
into X are part of a plan. No Safe Harbor applies to this acquisition.
To determine whether the distribution of C and the merger of D into X
are part of a plan, D must consider all the facts and circumstances,
including those described in paragraph (b) of this section.
(iii) The following tends to show that the distribution of C and the
merger of D into X are part of a plan: X and D had an agreement
regarding the acquisition during the 2-year period ending on the date of
the distribution (paragraph (b)(3)(i) of this section), and the
distribution was motivated by a business purpose to facilitate the
merger (paragraph (b)(3)(v) of this section). Because the merger was
agreed to at the time of the distribution, the fact described in
paragraph (b)(3)(i) of this section is given substantial weight.
(iv) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(v) The distribution of C and the merger of D into X are part of a
plan under paragraph (b) of this section.
Example 2. Public offering. (i) D's managers, directors, and
investment banker discuss the possibility of offering D stock to the
public. They decide a public offering of 20 percent of D's stock with D
as a stand alone corporation would be in D's best interest. One month
later, to facilitate a stock offering by D of 20 percent of its stock, D
distributes all the stock of C pro rata to D's shareholders. D issues
new shares amounting to 20 percent of its stock to the public in a
public offering 7 months after the distribution.
(ii) The issue is whether the distribution of C and the public
offering by D are part of a plan. No Safe Harbor applies to this
acquisition. Safe Harbor V, relating to public trading, does not apply
to public offerings (see paragraph (d)(5)(i)(A) of this section). To
determine whether the distribution of C and the public offering by D are
part of a plan, D must consider all the facts and circumstances,
including those described in paragraph (b) of this section.
(iii) The following tends to show that the distribution of C and the
public offering by D are part of a plan: D discussed the public offering
with its investment banker during the 2-year period ending on the date
of the distribution (paragraph (b)(3)(ii) of this section), and the
distribution was motivated by a business purpose to facilitate the
public offering (paragraph (b)(3)(v) of this section).
(iv) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(v) The distribution of C and the public offering by D are part of a
plan under paragraph (b) of this section.
Example 3. Hot market. (i) D is a widely-held corporation the stock
of which is listed on an established market. D announces a distribution
of C and distributes C pro rata to D's shareholders. By contract, C
agrees to indemnify D for any imposition of tax under section 355(e)
caused by the acts of C. The distribution is motivated by a desire to
improve D's access to financing at preferred customer interest rates,
which will be more readily available if D separates from C. At the time
of the distribution, although neither D nor C has been approached by any
potential acquirer of C, it is reasonably certain that soon after the
distribution either an acquisition of C will occur or there will be an
agreement, understanding, arrangement, or substantial negotiations
regarding an acquisition of C. Corporation Y acquires C in a merger
described in section 368(a)(2)(E) within 6 months after the
distribution. The C shareholders receive less than 50 percent of the
stock of Y in the exchange.
(ii) The issue is whether the distribution of C and the acquisition
of C by Y are part of a plan. No Safe Harbor applies to this
acquisition. Under paragraph (b)(2) of this section, because prior to
the distribution neither D nor C and Y had an agreement, understanding,
arrangement, or substantial negotiations regarding the acquisition or a
similar acquisition, the distribution of C by D and the acquisition of C
by Y are not part of a plan under paragraph (b) of this section.
Example 4. Unexpected opportunity. (i) D, the stock of which is
listed on an established market, announces that it will distribute all
the stock of C pro rata to D's shareholders. At the time of the
announcement, the distribution is motivated wholly by a corporate
business purpose (within the meaning of Sec. 1.355-2(b)) other than a
business purpose to facilitate an acquisition. After the announcement
but before the distribution, widely-held X becomes available as an
acquisition target. There were no discussions between D or C and X
before the announcement. D negotiates with and acquires X before the
distribution. After the acquisition, X's former shareholders own 55
percent of D's stock. D distributes the stock of C pro
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rata within 6 months after the acquisition of X.
(ii) The issue is whether the acquisition of X by D and the
distribution of C are part of a plan. No Safe Harbor applies to this
acquisition. To determine whether the acquisition of X by D and the
distribution of C are part of a plan, D must consider all the facts and
circumstances, including those described in paragraph (b) of this
section.
(iii) Depending on whether a person other than D or C intends to
cause a distribution and, as a result of the acquisition, can
meaningfully participate in the decision regarding whether to cause a
distribution, the fact described in (b)(3)(iii) of this section, tending
to show that a distribution and an acquisition are part of a plan, may
exist in this case.
(iv) Under paragraph (b)(4) of this section, D would assert that the
following tends to show that the distribution of C and the acquisition
of X by D are not part of a plan: the distribution was motivated by a
corporate business purpose (within the meaning of Sec. 1.355-2(b))
other than a business purpose to facilitate the acquisition or a similar
acquisition (paragraph (b)(4)(v) of this section), and the distribution
would have occurred at approximately the same time and in similar form
regardless of the acquisition or a similar acquisition (paragraph
(b)(4)(vi) of this section). That D decided to distribute C and
announced that decision before it became aware of the opportunity to
acquire X suggests that the distribution would have occurred at
approximately the same time and in similar form regardless of D's
acquisition of X or a similar acquisition. X's lack of participation in
the decision to distribute C, even though the X shareholders may have
been able to prevent a distribution of C, also helps establish that
fact.
(v) In determining whether the distribution of C and the acquisition
of X by D are part of a plan, one should consider the importance of D's
business purpose for the distribution in light of D's opportunity to
acquire X. If D can establish that the distribution continued to be
motivated by the stated business purpose, and if D would have
distributed C regardless of D's acquisition of X, then D's acquisition
of X and D's distribution of C are not part of a plan under paragraph
(b) of this section.
Example 5. Vote shifting transaction. (i) D is in business 1. C is
in business 2. D wants to combine with X, a larger corporation also
engaged in business 1. The stock of X is closely held. X and D begin
negotiating for D to acquire X, but the X shareholders do not want to
acquire an indirect interest in C. To facilitate the acquisition of X by
D, D agrees to distribute all the stock of C pro rata before the
acquisition of X. D and X enter into a contract for X to merge into D
subject to several conditions. Among those conditions is that D will
amend its corporate charter to provide for 2 classes of stock: Class A
and Class B. Under all circumstances, each share of Class A stock will
be entitled to 10 votes in the election of each director on D's board of
directors. Upon issuance, each share of Class B stock will be entitled
to 10 votes in the election of each director on D's board of directors;
however, a disposition of such share by its original holder will result
in such share being entitled to only 1 vote, rather than 10 votes, in
the election of each director. Immediately after the merger, the Class B
shares will be listed on an established market. One month after D and X
enter into the contract, D distributes C. Immediately after the
distribution, the shareholders of D exchange their D stock for the new
Class B shares. On the day after the distribution, X merges into D. In
the merger, the former shareholders of X exchange their X stock for
Class A shares of D. Immediately after the merger, D's historic
shareholders own stock of D representing 51 percent of the total
combined voting power of all classes of stock of D entitled to vote.
During the 30-day period following the merger, none of the Class A
shares are transferred, but a number of D's historic shareholders sell
their Class B stock of D in public trading with the result that, at the
end of that 30-day period, the Class A shares owned by the former X
shareholders represent 52 percent of the total combined voting power of
all classes of stock of D entitled to vote.
(ii) X acquisition. (A) The issue is whether the distribution of C
and the merger of X into D are part of a plan. No Safe Harbor applies to
this acquisition. To determine whether the distribution of C and the
merger of X into D are part of a plan, D must consider all the facts and
circumstances, including those described in paragraph (b) of this
section.
(B) The following tends to show that the distribution of C and the
merger of X into D are part of a plan: X and D had an agreement
regarding the acquisition during the 2-year period ending on the date of
the distribution (paragraph (b)(3)(i) of this section), and the
distribution was motivated by a business purpose to facilitate the
merger (paragraph (b)(3)(v) of this section). Because the merger was
agreed to at the time of the distribution, the fact described in
paragraph (b)(3)(i) of this section is given substantial weight.
(C) None of the facts and circumstances listed in paragraph (b)(4)
of this section, tending to show that a distribution and an acquisition
are not part of a plan, exist in this case.
(D) The distribution of C and the merger of X into D are part of a
plan under paragraph (b) of this section.
(iii) Public trading of Class B shares. (A) Assuming that each of
the transferors and the
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transferees of the Class B stock of D in public trading is not one of
the prohibited transferors or transferees listed in paragraph (d)(5)(i),
Safe Harbor V will apply to the acquisitions of the Class B stock during
the 30-day period following the merger such that the distribution and
those acquisitions will not be treated as part of the plan. However, to
the extent that those acquisitions result in an indirect acquisition of
voting power by a person other than the acquirer of the transferred
stock, Safe Harbor V does not prevent the acquisition of the D stock
(with the voting power such stock represents after those acquisitions)
by the former X shareholders from being treated as part of a plan.
(B) To the extent that the transfer of the Class B shares causes the
voting power of D to shift to the Class A stock acquired by the former X
shareholders, such shifted voting power will be treated as attributable
to the stock acquired by the former X shareholders as part of the plan
that includes the distribution and the X acquisition.
Example 6. Acquisition that is not similar. (i) D, X, and Y are each
corporations the stock of which is publicly traded and widely held. Each
of D, X, and Y are engaged in the manufacture and sale of trucks. C is
engaged in the manufacture and sale of buses. D and X engage in
substantial negotiations concerning X's acquisition of the stock of D
from the D shareholders in exchange for stock of X. D and X do not reach
an agreement regarding that acquisition. Three months after D and X
first began negotiations regarding that acquisition, D distributes the
stock of C pro rata to its shareholders. Three months after the
distribution, Y acquires the stock of D from the D shareholders in
exchange for stock of Y.
(ii) Although both X and Y engage in the manufacture and sale of
trucks, X's truck business and Y's truck business are not the same
business operations. Therefore, because Y's acquisition of D does not
effect a combination of the same business operations as X's acquisition
of D would have effected, Y's acquisition of D is not similar to X's
potential acquisition of D that was the subject of earlier negotiations.
Example 7. Acquisition that is similar. (i) D is engaged in the
business of writing custom software for several industries (industries 1
through 6). The software business of D related to industries 4, 5, and 6
is significant relative to the software business of D related to
industries 3, 4, 5, and 6. X, an unrelated corporation, is engaged in
the business of writing software and the business of manufacturing and
selling hardware devices. X's business of writing software is
significant relative to its total businesses. X and D engage in
substantial negotiations regarding X's acquisition of D stock from the D
shareholders in exchange for stock of X. Because X does not want to
acquire the software businesses related to industries 1 and 2, these
negotiations relate to an acquisition of D stock where D owns the
software businesses related only to industries 3, 4, 5, and 6.
Thereafter, D concludes that the intellectual property licenses central
to the software business related to industries 1 and 2 are not
transferable and that a separation of the software business related to
industry 3 from the software business related to industry 2 is not
desirable. One month after D begins negotiating with X, D contributes
the software businesses related to industries 4, 5, and 6 to C, and
distributes the stock of C pro rata to its shareholders. In addition, X
sells its hardware businesses for cash. After the distribution, C and X
negotiate for X's acquisition of the C stock from the C shareholders in
exchange for X stock, and X acquires the stock of C.
(ii) Although D and C are different corporations, C does not own the
custom software business related to industry 3, and X sold its hardware
business prior to the acquisition of C, because X's acquisition of C
involves a combination of a significant portion of the same business
operations as the combination that would have been effected by the
acquisition of D that was the subject of negotiations between D and X,
X's acquisition of C is the same as or similar to X's potential
acquisition of D that was the subject of earlier negotiations.
(k) Effective dates. This section applies to distributions occurring
after April 26, 2002. Taxpayers, however, may apply these regulations in
whole, but not in part, to a distribution occurring after April 16,
1997, and on or before April 26, 2002. For distributions occurring after
August 3, 2001, and on or before April 26, 2002 with respect to which a
taxpayer chooses not to apply these regulations, see Sec. 1.355-7T as
in effect prior to April 26, 2002 (see 26 CFR part 1 revised April 1,
2002).
[T.D. 8988, 67 FR 20632, Apr. 26, 2002; 67 FR 38200, June 3, 2002]
Sec. 1.356-1 Receipt of additional consideration in connection with
an exchange.
(a) If in any exchange to which the provisions of section 354 or
section 355 would apply except for the fact that there is received by
the shareholders or the security holders other property (in addition to
property permitted to be received without recognition of gain by such
sections) or money, then--
(1) The gain, if any, to the taxpayer shall be recognized in an
amount not in
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excess of the sum of the money and the fair market value of the other
property, but,
(2) The loss, if any, to the taxpayer from the exchange or
distribution shall not be recognized to any extent.
(b) If the distribution of such other property or money by or on
behalf of a corporation has the effect of the distribution of a
dividend, then there shall be chargeable to each distributee (either an
individual or a corporation)--
(1) As a dividend, such an amount of the gain recognized as is not
in excess of the distributee's ratable share of the undistributed
earnings and profits of the corporation accumulated after February 28,
1913, and
(2) As a gain from the exchange of property, the remainder of the
gain so recognized.
(c) This section may be illustrated by the following examples:
Example (1). In an exchange to which the provisions of section 356
apply and to which section 354 would apply but for the receipt of
property not permitted to be received without the recognition of gain or
loss, A (either an individual or a corporation), received the following
in exchange for a share of stock having an adjusted basis to him of $85:
One share of stock worth......................................... $100
Cash............................................................. 25
Other property (basis $25) fair market value..................... 50
------
Total fair market value of consideration received.............. 175
Adjusted basis of stock surrendered in exchange.................. 85
------
Total gain..................................................... 90
======
Gain to be recognized, limited to cash and other property 75
received........................................................
A's pro rata share of earnings and profits accumulated after 30
February 28, 1913 (taxable dividend)............................
------
Remainder to be treated as a gain from the exchange of property 45
Example (2). If, in Example (1), A's stock had an adjusted basis to
him of $200, he would have realized a loss of $25 on the exchange, which
loss would not be recognized.
(d) Section 301(b)(1)(B) and section 301(d)(2) do not apply to a
distribution of ``other property'' to a corporate shareholder if such
distribution is within the provisions of section 356.
(e) See paragraph (1) of Sec. 1.301-1 for certain transactions
which are not within the scope of section 356.
Sec. 1.356-2 Receipt of additional consideration not in connection with
an exchange.
(a) If, in a transaction to which section 355 would apply except for
the fact that a shareholder (individual or corporate) receives property
permitted by section 355 to be received without the recognition of gain,
together with other property or money, without the surrender of any
stock or securities of the distributing corporation, then the sum of the
money and the fair market value of the other property as of the date of
the distribution shall be treated as a distribution of property to which
the rules of section 301 (other than section 301(b) and section 301(d))
apply. See section 358 for determination of basis of such other
property.
(b) Paragraph (a) of this section may be illustrated by the
following examples:
Example (1). Individuals A and B each own 50 of the 100 outstanding
shares of common stock of Corporation X. Corporation X owns all of the
stock of Corporation Y, 100 shares. Corporation X distributes to each
shareholder 50 shares of the stock of Corporation Y plus $100 cash
without requiring the surrender of any shares of its own stock. The $100
cash received by each is treated as a distribution of property to which
the rules of section 301 apply.
Example (2). If, in the above example, Corporation X distributes 50
shares of stock of Corporation Y to A and 30 shares of such stock plus
$100 cash to B without requiring the surrender of any of its own stock,
the amount of cash received by B is treated as a distribution of
property to which the rules of section 301 apply.
Sec. 1.356-3 Rules for treatment of securities as ``other property''.
(a) As a general rule, for purposes of section 356, the term other
property includes securities. However, it does not include securities
permitted under section 354 or section 355 to be received tax free.
Thus, when securities are surrendered in a transaction to which section
354 or section 355 is applicable, the characterization of the securities
received as ``other property'' does not include securities received
where the principal amount of such securities does not exceed the
principal amount of securities surrendered in the transaction. If a
greater principal amount of securities is received in an exchange
[[Page 234]]
described in section 354 (other than subsection (c) or (d) thereof) or
section 355 over the principal amount of securities surrendered, the
term other property includes the fair market value of such excess
principal amount as of the date of the exchange. If no securities are
surrendered in exchange, the term other property includes the fair
market value, as of the date of receipt, of the entire principal amount
of the securities received.
(b) Except as provided in Sec. 1.356-6, for purposes of this
section, a right to acquire stock that is treated as a security for
purposes of section 354 or 355 has no principal amount. Thus, such right
is not other property when received in a transaction to which section
356 applies (regardless of whether securities are surrendered in the
exchange). This paragraph (b) applies to transactions occurring on or
after March 9, 1998.
(c) In the examples in this paragraph (c), stock means common stock
and warrants means rights to acquire common stock. The following
examples illustrate the rules of paragraph (a) of this section:
Example 1. A, an individual, exchanged 100 shares of stock for 100
shares of stock and a security in the principal amount of $1,000 with a
fair market value of $990. The amount of $990 is treated as ``other
property.''
Example 2. B, an individual, exchanged 100 shares of stock and a
security in the principal amount of $1,000 for 300 shares of stock and a
security in the principal amount of $1,500. The security had a fair
market value on the date of receipt of $1,575. The fair market value of
the excess principal amount, or $525, is treated as ``other property.''
Example 3. C, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $900. No part of the security received is treated as ``other
property.''
Example 4. D, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $1,200 with a fair market value of $1,100. The fair market
value of the excess principal amount, or $183.33, is treated as ``other
property.''
Example 5. E, an individual, exchanged a security in the principal
amount of $1,000 for another security in the principal amount of $1,200
with a fair market value of $1,080. The fair market value of the excess
principal amount, or $180, is treated as ``other property.''
Example 6. F, an individual, exchanged a security in the principal
amount of $1,000 for two different securities each in the principal
amount of $750. One of the securities had a fair market value of $750,
the other had a fair market value of $600. One-third of the fair market
value of each security ($250 and $200) is treated as ``other property.''
Example 7. G, an individual, exchanged stock for stock and a
warrant. The warrant had no principal amount. Thus, G received no excess
principal amount within the meaning of section 356(d).
Example 8. H, an individual, exchanged a warrant for stock and a
warrant. The warrants had no principal amount. Thus, H received no
excess principal amount within the meaning of section 356(d).
Example 9. I, an individual, exchanged a warrant for stock and a
debt security. The warrant had no principal amount. The debt security
had a $100 principal amount. I received $100 of excess principal amount
within the meaning of section 356(d).
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8752, 63 FR 410, Jan. 6, 1998; T.D. 8882, 65 FR
31078, May 16, 2000]
Sec. 1.356-4 Exchanges for section 306 stock.
If, in a transaction to which section 356 is applicable, other
property or money is received in exchange for section 306 stock, an
amount equal to the fair market value of the property plus the money, if
any, shall be treated as a distribution of property to which section 301
is applicable. The determination of whether section 306 stock is
surrendered for other property (including money) is a question of fact
to be decided under all of the circumstances of each case. Ordinarily,
the other property (including money) received will first be treated as
received in exchange for any section 306 stock owned by a shareholder
prior to such transaction. For example, if a shareholder who owns a
share of common stock (having a basis to him of $100) and a share of
preferred stock which is section 306 stock (having a basis to him of
$100) surrenders both shares in a transaction to which section 356 is
applicable for one share of common stock having a fair market value of
$80 and one $100 bond having a fair market value of $100, the bond will
be deemed received in exchange for the section 306 stock and it will be
treated as a distribution to which section 301 is applicable to the
[[Page 235]]
extent of its entire fair market value ($100).
Sec. 1.356-5 Transactions involving gift or compensation.
With respect to transactions described in sections 354, 355, or 356,
but which--
(a) Result in a gift, see section 2501 and following, and the
regulations pertaining thereto, or
(b) Have the effect of the payment of compensation, see section
61(a)(1), and the regulations pertaining thereto.
Sec. 1.356-6 Rules for treatment of nonqualified preferred stock as
other property.
(a) In general. For purposes of Sec. Sec. 1.354-1(e), 1.355-1(c),
and 1.356-3(b), the terms stock and securities do not include--
(1) Nonqualified preferred stock, as defined in section 351(g)(2),
received in exchange for (or in a distribution with respect to) stock,
or a right to acquire stock, other than nonqualified preferred stock; or
(2) A right to acquire such nonqualified preferred stock, received
in exchange for (or in a distribution with respect to) stock, or a right
to acquire stock, other than nonqualified preferred stock.
(b) Exceptions. The following exceptions apply:
(1) Certain recapitalizations. Paragraph (a) of this section does
not apply in the case of a recapitalization under section 368(a)(1)(E)
of a family-owned corporation as described in section
354(a)(2)(C)(ii)(II).
(2) Transition rule. Paragraph (a) of this section does not apply to
a transaction described in section 1014(f)(2) of the Taxpayer Relief Act
of 1997 (111 Stat. 921).
(c) Effective date. This section applies to nonqualified preferred
stock, or a right to acquire such stock, received in connection with a
transaction occurring on or after March 9, 1998.
[T.D. 8753, 63 FR 411, Jan. 6, 1998. Redesignated by T.D. 8882, 65 FR
31078, May 16, 2000]
Sec. 1.356-7 Rules for treatment of nonqualified preferred stock and
other preferred stock received in certain transactions.
(a) Stock issued prior to effective date. Stock described in section
351(g)(2) is nonqualified preferred stock (NQPS) regardless of the date
on which the stock is issued. However, sections 351(g), 354(a)(2)(C),
355(a)(3)(D), 356(e), and 1036(b) do not apply to any transaction
occurring prior to June 9, 1997, or to any transaction occurring after
June 8, 1997, that is described in section 1014(f)(2) of the Taxpayer
Relief Act of 1997, Public Law 105-34 (111 Stat. 788, 921). For purposes
of this section, preferred stock that is not NQPS is referred to as
Qualified Preferred Stock (QPS).
(b) Receipt of preferred stock in exchange for (or distribution on)
substantially identical preferred stock--(1) General rule. For purposes
of sections 354(a)(2)(C)(i), 355(a)(3)(D), and 356(e)(2), preferred
stock is QPS, even though it is described in section 351(g)(2), if it is
received in exchange for (or in a distribution with respect to)
preferred stock (the original preferred stock) that is QPS, provided--
(i) The original preferred stock is QPS solely because, on its issue
date, either a right or obligation described in clause (i), (ii), or
(iii) of section 351(g)(2)(A) was not exercisable until after a 20-year
period beginning on the issue date, or the right or obligation was
exercisable within the 20-year period beginning on the issue date but
was subject to a contingency which made remote the likelihood of the
redemption or purchase, or the issuer's (or a related party's) right to
redeem or purchase the stock was not more likely than not to be
exercised within a 20-year period beginning on the issue date, or
because of any combination of these reasons; and
(ii) The stock received is substantially identical to the original
preferred stock.
(2) Substantially identical. The stock received is substantially
identical to the original preferred stock if--
(i) The stock received does not contain any term or terms that, in
relation to any term or terms of the original preferred stock, either
decrease the
[[Page 236]]
period in which a right or obligation described in clause (i), (ii), or
(iii) of section 351(g)(2)(A) can be exercised, or increase the
likelihood that such a right or obligation will be exercised, or
accelerate the timing of the returns from the stock instrument,
including the timing of actual or deemed dividends or other
distributions received on the stock; and
(ii) As a result of the exchange or distribution, exercise of the
right or obligation does not become more likely than not to occur within
a 20-year period beginning on the issue date of the original preferred
stock.
(3) Treatment of stock received. The stock received will continue to
be treated as QPS in subsequent transactions involving such stock, and
the principles of this paragraph (b) apply to such transactions as
though the stock received is the original preferred stock issued on the
same date as the original preferred stock.
(c) Stock transferred for services. For purposes of sections
351(g)(1), 354(a)(2)(C)(i), 355(a)(3)(D), and 356(e)(2), preferred stock
containing a right or obligation described in clause (i), (ii) or (iii)
of section 351(g)(2)(A) that is exercisable only upon the holder's
separation from service from the issuer or a related person (as
described in section 351(g)(3)(B)) will be treated as transferred in
connection with the performance of services (and representing reasonable
compensation) within the meaning of section 351(g)(2)(C)(i)(II), if such
preferred stock is received in exchange for (or in a distribution with
respect to) existing stock containing a similar right or obligation
(exercisable only upon separation from service) and the existing stock
was transferred in connection with the performance of services for the
issuer or a related person (and represented reasonable compensation when
transferred). In applying the rules relating to NQPS, the preferred
stock received will continue to be treated as transferred in connection
with the performance of services (and representing reasonable
compensation) in subsequent transactions involving such stock, and the
principles of this paragraph (c) apply to such transactions.
(d) Rights to acquire stock. For purposes of Sec. 1.356-6, the
principles of paragraphs (a), (b), and (c) of this section apply.
(e) Examples. In the examples in this paragraph (e), T and P are
corporations, A is a shareholder of T, and A surrenders and receives (in
addition to the stock exchanged in the examples) common stock in the
reorganizations described. The following examples illustrate paragraphs
(a), (b), and (c) of this section:
Example 1. In 1995, A transfers property to T and receives T
preferred stock that is described in section 351(g)(2) in a transaction
under section 351. In 2002, pursuant to a reorganization under section
368(a)(1)(B), A surrenders the T preferred stock in exchange for P NQPS.
Under paragraph (a) of this section, the T preferred stock issued to A
in 1995 is NQPS. However, because section 351(g) does not apply to
transactions occurring before June 9, 1997, the T NQPS was not ``other
property'' within the meaning of section 351(b) when issued in 1995.
Under sections 354(a)(2)(C) and 356(e)(2), the P NQPS received by A in
2002 is not ``other property'' within the meaning of section
356(a)(1)(B) because it is received in exchange for NQPS.
Example 2. T issues QPS to A on January 1, 2000 that is not NQPS
solely because the holder cannot require T to redeem the stock until
January 1, 2022. In 2007, pursuant to a reorganization under section
368(a)(1)(A) in which T merges into P, A surrenders the T preferred
stock in exchange for P preferred stock with terms that are identical to
the terms of the T preferred stock, including the term that the holder
cannot require the redemption of the stock until January 1, 2022.
Because the P stock and the T stock have identical terms, and because
the redemption did not become more likely than not to occur within the
20-year period that begins on January 1, 2000 (which is the issue date
of the T preferred stock) as a result of the exchange, under paragraph
(b) of this section, the P preferred stock received by A is treated as
QPS. Thus, the P preferred stock received is not ``other property''
within the meaning of section 356(a)(1)(B).
Example 3. The facts are the same as in Example 2, except that, in
addition, in 2010, pursuant to a recapitalization of P under section
368(a)(1)(E), A exchanges the P preferred stock above for P NQPS that
permits the holder to require P to redeem the stock in 2020. Under
paragraph (b) of this section, the P preferred stock surrendered by A is
treated as QPS. Because the P preferred stock received by A in the
recapitalization is not substantially identical to the P preferred
[[Page 237]]
stock surrendered, the P preferred stock received by A is not treated as
QPS. Thus, the P preferred stock received is ``other property'' within
the meaning of section 356(a)(1)(B).
Example 4. T issues preferred stock to A on January 1, 2000 that
permits the holder to require T to redeem the stock on January 1, 2018,
or at any time thereafter, but which is not NQPS solely because, as of
the issue date, the holder's right to redeem is subject to a contingency
that makes remote the likelihood of redemption on or before January 1,
2020. In 2007, pursuant to a reorganization under section 368(a)(1)(A)
in which T merges into P, A surrenders the T preferred stock in exchange
for P preferred stock with terms that are identical to the terms of the
T preferred stock. Immediately before the exchange, the contingency to
which the holder's right to cause redemption of the T stock is subject
makes remote the likelihood of redemption before January 1, 2020, but
the P stock, although subject to the same contingency, is more likely
than not to be redeemed before January 1, 2020. Because, as a result of
the exchange of T stock for P stock, the exercise of the redemption
right became more likely than not to occur within the 20-year period
beginning on the issue date of the T preferred stock, the P preferred
stock received by A is not substantially identical to the T stock
surrendered, and is not treated as QPS. Thus, the P preferred stock
received is ``other property'' within the meaning of section
356(a)(1)(B).
Example 5. The facts are the same as in Example 4, except that,
immediately before the merger of T into P in 2007, the contingency to
which the holder's right to cause redemption of the T stock is subject
makes it more likely than not that the T stock will be redeemed before
January 1, 2020. Because exercise of the redemption right did not become
more likely than not to occur within the 20-year period beginning on the
issue date of the T preferred stock as a result of the exchange, the P
preferred stock received by A is substantially identical to the T stock
surrendered, and is treated as QPS. Thus, the P preferred stock received
is not ``other property'' within the meaning of section 356(a)(1)(B).
Example 6. A is an employee of T. In connection with A's performance
of services for T, T transfers to A in 2000 an amount of T common stock
that represents reasonable compensation. The T common stock contains a
term granting A the right to require T to redeem the common stock, but
only upon A's separation from service from T. In 2005, pursuant to a
reorganization under section 368(a)(1)(A) in which T merges into P, A
receives, in exchange for A's T common stock, P preferred stock granting
a similar redemption right upon A's separation from P's service. Under
paragraph (c) of this section, the P preferred stock received by A is
treated as transferred in connection with the performance of services
(and representing reasonable compensation) within the meaning of section
351(g)(2)(C)(i)(II). Thus, the P preferred stock received by A is QPS.
(f) Effective dates. This section applies to transactions occurring
on or after October 2, 2000.
[T.D. 8904, 65 FR 58651, Oct. 2, 2000]
Sec. 1.357-1 Assumption of liability.
(a) General rule. Section 357(a) does not affect the rule that
liabilities assumed are to be taken into account for the purpose of
computing the amount of gain or loss realized under section 1001 upon an
exchange. Section 357(a) provides, subject to the exceptions and
limitations specified in section 357 (b) and (c), that--
(1) Liabilities assumed are not to be treated as ``other property or
money'' for the purpose of determining the amount of realized gain which
is to be recognized under section 351, 361, 371, or 374, if the
transactions would, but for the receipt of ``other property or money''
have been exchanges of the type described in any one of such sections;
and
(2) If the only type of consideration received by the transferor in
addition to that permitted to be received by section 351, 361, 371, or
374, consists of an assumption of liabilities, the transaction, if
otherwise qualified, will be deemed to be within the provisions of
section 351, 361, 371, or 374.
(b) Application of general rule. The application of paragraph (a) of
this section may be illustrated by the following example:
Example. A, an individual, transfers to a controlled corporation
property with an adjusted basis of $10,000 in exchange for stock of the
corporation with a fair market value of $8,000, $3,000 cash, and the
assumption by the corporation of indebtedness of A amounting to $4,000.
A's gain is $5,000, computed as follows:
Stock received, fair market value............................. $8,000
Cash received................................................. 3,000
Liability assumed by transferee............................... 4,000
---------
Total consideration received................................. 15,000
Less: Adjusted basis of property transferred.................. 10,000
---------
Gain realized................................................ 5,000
Assuming that the exchange falls within section 351 as a transaction in
which the gain to be recognized is limited to ``other property or
[[Page 238]]
money'' received, the gain recognized to A will be limited to the $3,000
cash received, since, under the general rule of section 357(a), the
assumption of the $4,000 liability does not constitute ``other
property.''
(c) Tax avoidance purpose. The benefits of section 357(a) do not
extend to any exchange involving an assumption of liabilities where it
appears that the principal purpose of the taxpayer with respect to such
assumption was to avoid Federal income tax on the exchange, or, if not
such purpose, was not a bona fide business purpose. In such cases, the
total amount of liabilities assumed or acquired pursuant to such
exchange (and not merely a particular liability with respect to which
the tax avoidance purpose existed) shall, for the purpose of determining
the amount of gain to be recognized upon the exchange in which the
liabilities are assumed or acquired, be treated as money received by the
taxpayer upon the exchange. Thus, if in the example set forth in
paragraph (b) of this section, the principal purpose of the assumption
of the $4,000 liability was to avoid tax on the exchange, or was not a
bona fide business purpose, then the amount of gain recognized would be
$5,000. In any suit or proceeding where the burden is on the taxpayer to
prove that an assumption of liabilities is not to be treated as ``other
property or money'' under section 357, which is the case if the
Commissioner determines that the taxpayer's purpose with respect thereto
was a purpose to avoid Federal income tax on the exchange or was not a
bona fide business purpose, and the taxpayer contests such determination
by litigation, the taxpayer must sustain such burden by the clear
preponderance of the evidence. Thus, the taxpayer must prove his case by
such a clear preponderance of all the evidence that the absence of a
purpose to avoid Federal income tax on the exchange, or the presence of
a bona fide business purpose, is unmistakable.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR
399, Jan. 19, 1961]
Sec. 1.357-2 Liabilities in excess of basis.
(a) Section 357(c) provides in general that in an exchange to which
section 351 (relating to a transfer to a corporation controlled by the
transferor) is applicable, or to which section 361 (relating to the
nonrecognition of gain or loss to corporations) is applicable by reason
of a section 368(a)(1)(D) reorganization, if the sum of the amount of
liabilities assumed plus the amount of liabilities to which the property
is subject exceeds the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of
property which is not a capital asset as the case may be. Thus, if an
individual transfers, under section 351, properties having a total basis
in his hands of $20,000, one of which has a basis of $10,000 but is
subject to a mortgage of $30,000, to a corporation controlled by him,
such individual will be subject to tax with respect to $10,000, the
excess of the amount of the liability over the total adjusted basis of
all the properties in his hands. The same result will follow whether or
not the liability is assumed by the transferee. The determination of
whether a gain resulting from the transfer of capital assets is long-
term or short-term capital gain shall be made by reference to the
holding period to the transferor of the assets transferred. An exception
to the general rule of section 357(c) is made (1) for any exchange as to
which under section 357(b) (relating to assumption of liabilities for
tax-avoidance purposes) the entire amount of the liabilities is treated
as money received and (2) for an exchange to which section 371 (relating
to reorganizations in certain receivership and bankruptcy proceedings)
or section 374 (relating to gain or loss not recognized in certain
railroad reorganizations) is applicable.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example (1). If all such assets transferred are capital assets and
if half the assets (ascertained by reference to their fair market value
at the time of the transfer) have been held for less than 1 year (6
months for taxable years beginning before 1977; 9 months for taxable
years beginning in 1977), and the remaining half for more than 1 year (6
months for taxable years beginning before 1977; 9 months for taxable
years beginning in 1977), half the excess of the amount of the liability
over the total of the adjusted basis of the property transferred
pursuant to the exchange shall be treated as short-term capital
[[Page 239]]
gain, and the remaining half shall be treated as long-term capital gain.
Example (2). If half of the assets (ascertained by reference to
their fair market value at the time of the transfer) transferred are
capital assets and half are assets other than capital assets, then half
of the excess of the amount of the liability over the total of the
adjusted basis of the property transferred pursuant to the exchange
shall be treated as capital gain, and the remaining half shall be
treated as gain from the sale or exchange of assets other than capital
assets.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26 FR
399, Jan. 19, 1961; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.358-1 Basis to distributees.
(a) In the case of an exchange or distribution to which section 354,
355, or 371(b) applies in which, under the law applicable to the year in
which the exchange is made, only nonrecognition property is received,
the sum of the basis of all of the stock and securities in the
corporation whose stock and securities are exchanged or with respect to
which the distribution is made, held immediately after the transaction,
plus the basis of all stock and securities received in the transaction
shall be the same as the basis of all the stock and securities in such
corporation held immediately before the transaction allocated in the
manner described in Sec. 1.358-2. In the case of an exchange to which
section 351, 361, or 374 applies in which, under the law applicable to
the year in which the exchange was made, only nonrecognition property is
received, the basis of all the stock and securities received in the
exchange shall be the same as the basis of all property exchange
therefor. If in an exchange or distribution to which section 351, 356,
361, 371(b), or 374 applies both nonrecognition property and ``other
property'' are received, the basis of all the property except ``other
property'' held after the transaction shall be determined as described
in the preceding two sentences decreased by the sum of the money and the
fair market value of the ``other property'' (as of the date of the
transaction) and increased by the sum of the amount treated as a
dividend (if any) and the amount of the gain recognized on the exchange,
but the term gain as here used does not include any portion of the
recognized gain that was treated as a dividend. In any case in which a
taxpayer transfers property with respect to which loss is recognized,
such loss shall be reflected in determining the basis of the property
received in the exchange. The basis of the ``other property'' is its
fair market value as of the date of the transaction. See Sec. 1.460-
4(k)(3)(iv)(A) for rules relating to stock basis adjustments required
where a contract accounted for using a long-term contract method of
accounting is transferred in a transaction described in section 351 or a
reorganization described in section 368(a)(1)(D) with respect to which
the requirements of section 355 (or so much of section 356 as relates to
section 355) are met.
(b) The application of paragraph (a) of this section may be
illustrated by the following example:
Example. A purchased a share of stock in Corporation X in 1935 for
$150. Since that date he has received distributions out of other than
earnings and profits (as defined in section 316) totalling $60, so that
his adjusted basis for the stock is $90. In a transaction qualifying
under section 356, A exchanged this share for one share in Corporation
Y, worth $100, cash in the amount of $10, and other property with a fair
market value of $30. The exchanging had the effect of the distribution
of a dividend. A's ratable share of the earnings and profits of
Corporation X accumulated after February 28, 1913, was $5. A realized a
gain of $50 on the exchange, but the amount recognized is limited to
$40, the sum of the cash received and the fair market value of the other
property. Of the gain recognized, $5 is taxable as a dividend, and $35
as a gain from the exchange of property. The basis to A of the one share
of stock of Corporation Y is $90. That is, the adjusted basis of the one
share of stock Corporation X ($90), decreased by the sum of the cash
received ($10) and the fair market value of the other property received
($30) and increased by the sum of the amount treated as a dividend ($5)
and the amount treated as a gain from the exchange of property ($35).
The basis of the other property received is $30.
[T.D. 6500, 25 FR 11607. Nov. 26, 1960, as amended by T.D. 6533, 26 FR
404, Jan. 19, 1965; T.D. 7616, 44 FR 26869, May 8, 1979; T.D. 8995, 67
FR 34605, May 15, 2002]
Sec. 1.358-2 Allocation of basis among nonrecognition property.
(a)(1) As used in this paragraph the term stock means stock which is
not ``other property'' under section 356 or
[[Page 240]]
371(b), stock with respect to which a distribution is made, and, in the
case of a surrender of part of the stock of a particular class, the
retained part of such stock. The term securities means securities
(including, where appropriate, fractional parts of securities) which are
not ``other property'' under section 356 or 371(b) and in the case of a
surrender of part of the securities of a particular class, the retained
part of such securities. Stock, or securities, as the case may be, which
differ either because they are in different corporations or because the
rights attributable to them differ (although they are in the same
corporation) are considered different classes of stock or securities, as
the case may be, for purposes of this section.
(2) If as the result of an exchange or distribution under the terms
of section 354, 355, 356 or 371(b) a shareholder who owned stock of only
one class before the transaction owns stock of two or more classes after
the transaction, then the basis of all the stock held before the
transaction (as adjusted under Sec. 1.358-1) shall be allocated among
the stock of all classes (whether or not such stock was received in the
transaction) held immediately after the transaction in proportion to the
fair market values of the stock of each class.
(3) If as the result of an exchange under the terms of section 354,
355, 356 or 371(b) a security holder who owned only securities, all of
one class, before the transaction, owns securities or stock of more than
one class, or owns both stock and securities, then the basis of all the
securities held before the transaction (as adjusted under Sec. 1.358-1)
shall be allocated among all the stock and securities (whether or not
received in the transaction) held immediately after the transaction in
proportion to the fair market values of the stock of each class and the
securities of each class.
(4) In every case in which, before the transactions, a person owned
stock of more than one class or securities of more than one class or
owned both stock and securities, a determination must be made, upon the
basis of all the facts, of the stock or securities received with respect
to stock and securities of each class held (whether or not surrendered).
The allocation described in subparagraph (2) of this paragraph shall be
separately made as to the stock of each class with respect to which
there is an exchange or distribution and the allocation described in
subparagraph (3) of this paragraph shall be separately made with respect
to the securities of each class, part or all of which are surrendered in
the exchange.
(5) Notwithstanding the provisions of subparagraphs (2), (3), and
(4) of this paragraph, in any case in which a plan of recapitalization
under section 368(a)(1)(E) provides that each holder of stock or
securities of a particular class shall have an option to surrender some
or none of such stock or securities in exchange for stock or securities,
and a shareholder or security holder exchanges an identifiable part of
his stock or securities, the basis of the part of the stock or
securities retained shall remain unchanged and shall not be taken into
account in determining the basis of the stock or securities received.
(b)(1) As used in this paragraph the term stock refers only to stock
which is not ``other property'' under section 351, 361, or 374 and the
term securities refers only to securities which are not ``other
property'' under section 351, 361, or 374.
(2) If in an exchange to which section 351 or 361 applies property
is transferred to a corporation and the transferor receives stock or
securities of more than one class or receives both stock and securities,
then the basis of the property transferred (as adjusted under Sec.
1.358-1) shall be allocated among all of the stock and securities
received in proportion to the fair market values of the stock of each
class and the securities of each class.
(c) The application of paragraphs (a) and (b) of this section may be
illustrated by the following examples:
Example (1). A, an individual, owns stock in Corporation X with an
adjusted basis of $1,000. In a transaction qualifying under section 356
(so far as such section relates to section 354), he exchanged this stock
for 20 shares of stock of Corporation Y worth $1,200 and securities of
Corporation Y worth $400. A realizes a gain of $600 of which $400 is
recognized. The adjusted basis in A's hands of each share of the stock
of Corporation Y is
[[Page 241]]
$50 determined by allocating the basis of the stock of Corporation X
ratably to the stock of Corporation Y received in the exchange. The
securities of Corporation Y have a basis in the hands of A of $400.
Example (2). B, an individual, owns a security in the principal
amount of $10,000 with a basis of $5,000. In a transaction to which
section 354 is applicable, he exchanges this security for four
securities in the principal amount of $750 each, worth $800 each, four
securities in the principal amount of $750 each, worth $600 each, class
A common stock worth $1,000, and class B common stock worth $400. B
realizes a gain of $2,000, none of which is recognized. The basis of his
original security, $5,000, will be allocated 32/70ths to the four
securities worth $800, 24/70ths to the four securities worth $600, 10/
70ths to the class A common stock, and 4/70ths to the class B common
stock.
Example (3). C, an individual, owns stock of Corporation Y with a
basis of $5,000 and owns a security issued by Corporation Y in the
principal amount of $5,000 with a basis of $5,000. In a transaction to
which section 354 is applicable, he exchanges the stock of Corporation Y
for stock of Corporation Z with a value of $6,000, and he exchanges the
security of Corporation Y for stock of Corporation Z worth $1,500 and a
security of Corporation Z in the principal amount of $4,500 worth
$4,500. No gain is recognized to C on either exchange. The basis of the
stock of Corporation Z received for the stock of Corporation Y is
$5,000. The bases of the stock and security of Corporation Z received in
exchange for the security of Corporation Y are $1,250 and $3,750,
respectively.
Example (4). D, an individual, owns stock in Corporation M with a
basis of $15,000, worth $40,000, and owns a security issued by
Corporation M in the principal amount of $5,000 with a basis of $4,000.
In a transaction qualifying under section 356 (so far as such section
relates to section 355), he exchanges the security of Corporation M for
a security of Corporation O (a controlled corporation) in the principal
amount of $5,000, worth $5,000, and exchanges one-half of his stock of
Corporation M for stock of Corporation O worth $15,000 and a security of
Corporation O in the principal amount of $5,000, worth $5,000. All of
the stock and securities of Corporation O are distributed pursuant to
the transaction. D realizes a gain of $12,500 on the exchange of the
stock of Corporation M for the stock and security of Corporation O of
which $5,000 is recognized. D also realizes a gain of $1,000 on the
exchange of a security of Corporation M for a security of Corporation O,
none of which is recognized. The basis of his stock of Corporation M
held before the transaction is allocated 20/35ths to the stock of
Corporation M held after the transaction and 15/35ths to the stock of
Corporation O. The basis of the security of Corporation O received in
exchange for his security of Corporation M is $4,000, the basis of the
security of Corporation M exchanged. The basis of the security of
Corporation O received with respect to D's stock of Corporation M is
$5,000, its fair market value.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44 FR
26869, May 8, 1979; T.D. 8648, 60 FR 66079, Dec. 21, 1995]
Sec. 1.358-3 Treatment of assumption of liabilities.
(a) For purposes of section 358, where a party to the exchange
assumes a liability of a distributee or acquires from him property
subject to a liability, the amount of such liability is to be treated as
money received by the distributee upon the exchange, whether or not the
assumption of liabilities resulted in a recognition of gain or loss to
the taxpayer under the law applicable to the year in which the exchange
was made.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example (1). A, an individual, owns property with an adjusted basis
of $100,000 on which there is a purchase money mortgage of $25,000. On
December 1, 1945, A organizes Corporation X to which he transfers the
property in exchange for all the stock of Corporation X and the
assumption by Corporation X of the mortgage. The capital stock of the
Corporation X has a fair market value of $150,000. Under sections 351
and 357, no gain or loss is recognized to A. The basis in A's hands of
the stock of Corporation X is $75,000, computed as follows:
Adjusted basis of property transferred...................... $100,000
Less: Amount of money received (amount of liabilities --25,000
assumed)...................................................
-----------
Basis of Corporation X stock to A.......................... 75,000
Example (2). A, an individual, owns property with an adjusted basis
of $25,000 on which there is a mortgage of $50,000. On December 1, 1954,
A organizes Corporation X to which he transfers the property in exchange
for all the stock of Corporation X and the assumption by Corporation X
of the mortgage. The stock of Corporation X has a fair market value of
$50,000. Under sections 351 and 357, gain is recognized to A in the
amount of $25,000. The basis in A's hands of the stock of Corporation X
is zero, computed as follows:
Adjusted basis of property transferred...................... $25,000
Less: Amount of money received (amount of liabilities)...... --50,000
Plus: Amount of gain recognized to taxpayer................. 25,000
-----------
Basis of Corporation X stock to A.......................... 0
[[Page 242]]
Sec. 1.358-4 Exceptions.
(a) Plan of reorganization adopted after October 22, 1968. In the
case of a plan of reorganization adopted after October 22, 1968, section
358 does not apply in determining the basis of property acquired by a
corporation in connection with such reorganization by the exchange of
its stock or securities (or by the exchange of stock or securities of a
corporation which is in control of the acquiring corporation) as the
consideration in whole or in part for the transfer of the property to
it. See section 362 and the regulations pertaining to that section for
rules relating to basis to corporations of property acquired in such
cases.
(b) Plan of reorganization adopted before October 23, 1968. In the
case of a plan of reorganization adopted before October 23, 1968,
section 358 does not apply in determining the basis of property acquired
by a corporation in connection with such reorganization by the issuance
of stock or securities of such corporation (or by the issuance of stock
or securities of another corporation which is in control of such
corporation) as the consideration in whole or in part for the transfer
of the property to it. The term issuance of stock or securities includes
any transfer of stock or securities, including stock or securities which
were purchased or were acquired as a contribution to capital. See
section 362 and the regulations pertaining to that section for rules
relating to basis to corporations of property acquired in such cases.
[T.D. 7422, 41 FR 26569, June 28, 1976]
Sec. 1.358-5 [Reserved]
Sec. 1.358-6 Stock basis in certain triangular reorganizations.
(a) Scope. This section provides rules for computing the basis of a
controlling corporation in the stock of a controlled corporation as the
result of certain reorganizations involving the stock of the controlling
corporation as described in paragraph (b) of this section. The rules of
this section are in addition to rules under other provisions of the
Internal Revenue Code and principles of law. See, e.g., section 1001 for
the recognition of gain or loss by the controlled corporation on the
exchange of property for the assets or stock of a target corporation in
a reorganization described in section 368.
(b) Triangular reorganizations--(1) Nomenclature. For purposes of
this section--
(i) P is a corporation--
(A) That is a party to a reorganization,
(B) That is in control (within the meaning of section 368(c)) of
another party to the reorganization, and
(C) Whose stock is transferred pursuant to the reorganization.
(ii) S is a corporation--
(A) That is a party to the reorganization, and
(B) That is controlled by P.
(iii) T is a corporation that is another party to the
reorganization.
(2) Definitions of triangular reorganizations. This section applies
to the following reorganizations (which are referred to collectively as
triangular reorganizations):
(i) Forward triangular merger. A forward triangular merger is a
statutory merger of T and S, with S surviving, that qualifies as a
reorganization under section 368(a)(1)(A) or (G) by reason of the
application of section 368(a)(2)(D).
(ii) Triangular C reorganization. A triangular C reorganization is
an acquisition by S of substantially all of T's assets in exchange for P
stock in a transaction that qualifies as a reorganization under section
368(a)(1)(C).
(iii) Reverse triangular merger. A reverse triangular merger is a
statutory merger of S and T, with T surviving, that qualifies as a
reorganization under section 368(a)(1)(A) by reason of the application
of section 368(a)(2)(E).
(iv) Triangular B reorganization. A triangular B reorganization is
an acquisition by S of T stock in exchange for P stock in a transaction
that qualifies as a reorganization under section 368(a)(1)(B).
(c) General rules. Subject to the special rule provided in paragraph
(d) of this section, P's basis in the stock of S or T, as applicable, as
a result of a triangular reorganization, is adjusted under the following
rules--
(1) Forward triangular merger or triangular C reorganization--(i) In
general.
[[Page 243]]
In a forward triangular merger or a triangular C reorganization, P's
basis in its S stock is adjusted as if--
(A) P acquired the T assets acquired by S in the reorganization (and
P assumed any liabilities which S assumed or to which the T assets
acquired by S were subject) directly from T in a transaction in which
P's basis in the T assets was determined under section 362(b); and
(B) P transferred the T assets (and liabilities which S assumed or
to which the T assets acquired by S were subject) to S in a transaction
in which P's basis in S stock was determined under section 358.
(ii) Limitation. If, in applying section 358, the amount of T
liabilities assumed by S or to which the T assets acquired by S are
subject equals or exceeds T's aggregate adjusted basis in its assets,
the amount of the adjustment under paragraph (c)(1)(i) of this section
is zero. P recognizes no gain under section 357(c) as a result of a
triangular reorganization.
(2) Reverse triangular merger--(i) In general--(A) Treated as a
forward triangular merger. Except as otherwise provided in this
paragraph (c)(2), P's basis in its T stock acquired in a reverse
triangular merger equals its basis in its S stock immediately before the
transaction adjusted as if T had merged into S in a forward triangular
merger to which paragraph (c)(1) of this section applies.
(B) Allocable share. If P acquires less than all of the T stock in
the transaction, the basis adjustment described in paragraph
(c)(2)(i)(A) of this section is reduced in proportion to the percentage
of T stock not acquired in the transaction. The percentage of T stock
not acquired in the transaction is determined by taking into account the
fair market value of all classes of T stock.
(C) Special rule if P owns T stock before the transaction. Solely
for purposes of paragraphs (c)(2)(i)(A) and (B) of this section, if P
owns T stock before the transaction, P may treat that stock as acquired
in the transaction or not, without regard to the form of the
transaction.
(ii) Reverse triangular merger that qualifies as a section 351
transfer or section 368(a)(1)(B) reorganization. Notwithstanding
paragraph (c)(2)(i) of this section, if a reorganization qualifies as
both a reverse triangular merger and as a section 351 transfer or as
both a reverse triangular merger and a reorganization under section
368(a)(1)(B), P can--
(A) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applies; or
(B) Determine the basis in the T stock acquired as if P acquired
such stock from the former T shareholders in a transaction in which P's
basis in the T stock was determined under section 362(b).
(3) Triangular B reorganization. In a triangular B reorganization,
P's basis in its S stock is adjusted as if--
(i) P acquired the T stock acquired by S in the reorganization
directly from the T shareholders in a transaction in which P's basis in
the T stock was determined under section 362(b); and
(ii) P transferred the T stock to S in a transaction in which P's
basis in its S stock was determined under section 358.
(4) Examples. The rules of this paragraph (c) are illustrated by the
following examples. For purposes of these examples, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable triangular
reorganization provisions, and the facts set forth the only corporate
activity.
Example 1. Forward triangular merger. (a) Facts. T has assets with
an aggregate basis of $60 and fair market value of $100 and no
liabilities. Pursuant to a plan, P forms S with $5 cash (which S
retains), and T merges into S. In the merger, the T shareholders receive
P stock worth $100 in exchange for their T stock. The transaction is a
reorganization to which sections 368(a)(1)(A) and (a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $5 basis in its
S stock is adjusted as if P acquired the T assets acquired by S in the
reorganization directly from T in a transaction in which P's basis in
the T assets was determined under section 362(b). Under section 362(b),
P would have an aggregate basis of $60 in the T assets. P is then
treated as if it transferred the T assets to S in a transaction in which
P's basis in the S stock was determined under section 358. Under section
358,
[[Page 244]]
P's $5 basis in its S stock would be increased by the $60 basis in the T
assets deemed transferred. Consequently, P has a $65 basis in its S
stock as a result of the reorganization.
(c) Use of pre-existing S. The facts are the same as paragraph (a)
of this Example 1, except that S is an operating company with
substantial assets that has been in existence for several years. P has a
$110 basis in the S stock. Under Sec. 1.358-6(c)(1), P's $110 basis in
its S stock is increased by the $60 basis in the T assets deemed
transferred. Consequently, P has a $170 basis in its S stock as a result
of the reorganization.
(d) Mixed consideration. The facts are the same as paragraph (a) of
this Example 1, except that the T shareholders receive P stock worth $80
and $20 cash from P. Under section 358, P's $5 basis in its S stock is
increased by the $60 basis in the T assets deemed transferred.
Consequently, P has a $65 basis in its S stock as a result of the
reorganization.
(e) Liabilities. The facts are the same as paragraph (a) of this
Example 1, except that T's assets are subject to $50 of liabilities, and
the T shareholders receive $50 of P stock in exchange for their T stock.
Under section 358, P's basis in its S stock is increased by the $60
basis in the T assets deemed transferred and decreased by the $50 of
liabilities to which the T assets acquired by S are subject.
Consequently, P has a net basis adjustment of $10, and a $15 basis in
its S stock as a result of the reorganization.
(f) Liabilities in excess of basis. The facts are the same as in
paragraph (a) of this Example 1, except that T's assets are subject to
liabilities of $90, and the T shareholders receive $10 of P stock in
exchange for their T stock in the reorganization. Under Sec. 1.358-
6(c)(1)(ii), the adjustment under Sec. 1.358-6(c) is zero if the amount
of the liabilities which S assumed or to which the T assets acquired by
S are subject exceeds the aggregate adjusted basis in T's assets.
Consequently, P has no adjustment in its S stock, and P has a $5 basis
in its S stock as a result of the reorganization.
Example 2. Reverse triangular merger. (a) Facts. T has assets with
an aggregate basis of $60 and a fair market value of $100 and no
liabilities. P has a $110 basis in its S stock. Pursuant to a plan, S
merges into T with T surviving. In the merger, the T shareholders
receive $10 cash from P and P stock worth $90 in exchange for their T
stock. The transaction is a reorganization to which sections
368(a)(1)(A) and (a)(2)(E) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(2)(i)(A), P's basis in
the T stock acquired is P's $110 basis in its S stock before the
transaction, adjusted as if T had merged into S in a forward triangular
merger to which Sec. 1.358-6(c)(1) applies. In such a case, P's $110
basis in its S stock before the transaction would have been increased by
the $60 basis of the T assets deemed transferred. Consequently, P has a
$170 basis in its T stock immediately after the transaction.
(c) Reverse triangular merger that also qualifies under section
368(a)(1)(B). The facts relating to T are the same as in paragraph (a)
of this Example 2. P, however, forms S pursuant to the plan of
reorganization. The T shareholders receive $100 worth of P stock (and no
cash) in exchange for their T stock. The T shareholders have an
aggregate basis in their T stock of $85 immediately before the
reorganization. The reorganization qualifies as both a reverse
triangular merger and a reorganization under section 368(a)(1)(B). Under
Sec. 1.358-6(c)(2)(ii), P may determine its basis in its T stock either
as if Sec. 1.358-6(c)(2)(i) applied to the T stock acquired, or as if P
acquired the T stock from the former T shareholders in a transaction in
which P's basis in the T stock was determined under section 362(b).
Accordingly, P may determine a basis in its T stock of $60 (T's net
asset basis) or $85 (the T shareholders' aggregate basis in the T stock
immediately before the reorganization).
(d) Allocable share in a reverse triangular merger. The facts are
the same as in paragraph (a) of this Example 2, except that X, a 10%
shareholder of T, does not participate in the transaction. The remaining
T shareholders receive $10 cash from P and P stock worth $80 for their T
stock. P owns 90% of the T stock after the transaction. Under Sec.
1.358-6(c)(2)(i)(A), P's basis in its T stock is P's $110 basis in its S
stock before the reorganization, adjusted as if T had merged into S in a
forward triangular merger. In such a case, P's basis would have been
adjusted by the $60 basis in the T assets deemed transferred. Under
Sec. 1.358-6(c)(2)(i)(B), however, the basis adjustment determined
under Sec. 1.358-6(c)(2)(i)(A) is reduced in proportion to the
percentage of T stock not acquired by P in the transaction. The
percentage of T stock not acquired in the transaction is 10%. Therefore,
P reduces its $60 basis adjustment by 10%, resulting in a net basis
adjustment of $54. Consequently, P has a $164 basis in its T stock as a
result of the transaction.
(e) P's ownership of T stock. The facts are the same as in paragraph
(a) of this Example 2, except that P owns 10% of the T stock before the
transaction. P's basis in that T stock is $8. All the T shareholders
other than P surrender their T stock for $10 cash from P and P stock
worth $80. P does not surrender the stock in the transaction. Under
Sec. 1.358-6(c)(2)(i)(C), P may treat its T stock owned before the
transaction as acquired in the transaction or not. If P treats that T
stock as acquired in the transaction, P's basis in that T stock and the
T stock actually acquired in the transaction equals P's $110 basis in
its S stock before the transaction, adjusted by the $60 basis of the T
assets deemed transferred, for a total basis of $170.
[[Page 245]]
If P treats its T stock as not acquired, P retains its $8 pre-
transaction basis in that stock. P's basis in its other T shares equals
P's $110 basis in its S stock before the transaction, adjusted by $54
(the $60 basis in the T assets deemed transferred, reduced by 10%), for
a total basis of $164 in those shares. See Sec. 1.358-6(c)(2)(i)(A) and
(B). Consequently, if P treats its T shares as not acquired, P's total
basis in all of its T shares is $172.
Example 3. Triangular B reorganization. (a) Facts. T has assets with
a fair market value of $100 and no liabilities. The T shareholders have
an aggregate basis in their T stock of $85 immediately before the
reorganization. Pursuant to a plan, P forms S with $5 cash and S
acquires all of the T stock in exchange for $100 of P stock. The
transaction is a reorganization to which section 368(a)(1)(B) applies.
(b) Basis adjustment. Under Sec. 1.358-6(c)(3), P adjusts its $5
basis in its S stock by treating P as if it acquired the T stock
acquired by S in the reorganization directly from the T shareholders in
exchange for the P stock in a transaction in which P's basis in the T
stock was determined under section 362(b). Under section 362(b), P would
have an aggregate basis of $85 in the T stock received by S in the
reorganization. P is then treated as if it transferred the T stock to S
in a transaction in which P's basis in the S stock was determined under
section 358. Under section 358, P's basis in its S stock would be
increased by the $85 basis in the T stock deemed transferred.
Consequently, P has a $90 basis in its S stock as a result of the
reorganization.
(d) Special rule for consideration not provided by P--(1) In
general. The amount of P's adjustment to basis in its S or T stock, as
applicable, described in paragraph (c) of this section is decreased by
the fair market value of any consideration (including P stock in which
gain or loss is recognized, see Sec. 1.1032-2(c)) that is exchanged in
the reorganization and that is not provided by P pursuant to the plan of
reorganization. This paragraph (d) does not apply to the amount of T
liabilities assumed by S or to which the T assets acquired by S are
subject under paragraph (c)(1) of this section (or deemed assumed or
taken subject to by S under paragraph (c)(2)(i) of this section).
(2) Limitation. P makes no adjustment to basis under this section if
the decrease required under paragraph (d)(1) of this section equals or
exceeds the amount of the adjustment described in paragraph (c) of this
section.
(3) Example. The rules of this paragraph (d) are illustrated by the
following example. For purposes of this example, P, S, and T are
domestic corporations, P and S do not file consolidated returns, P owns
all of the only class of S stock, the P stock exchanged in the
transaction satisfies the requirements of the applicable triangular
reorganization provisions, and the facts set forth the only corporate
activity.
Example. (a) Facts. T has assets with an aggregate basis of $60 and
fair market value of $100 and no liabilities. S is an operating company
with substantial assets that has been in existence for several years. P
has a $100 basis in its S stock. Pursuant to a plan, T merges into S and
the T shareholders receive $70 of P stock provided by P pursuant to the
plan and $30 of cash provided by S in exchange for their T stock. The
transaction is a reorganization to which sections 368(a)(1)(A) and
(a)(2)(D) apply.
(b) Basis adjustment. Under Sec. 1.358-6(c)(1), P's $100 basis in
its S stock is increased by the $60 basis in the T assets deemed
transferred. Under Sec. 1.358-6(d)(1), the $60 adjustment is decreased
by the $30 of cash provided by S in the reorganization. Consequently, P
has a net adjustment of $30 in its S stock, and P has a $130 basis in
its S stock as a result of the reorganization.
(c) Appreciated asset. The facts are the same as in paragraph (a) of
this Example, except that in the reorganization S provides an asset with
a $20 adjusted basis and $30 fair market value instead of $30 of cash.
The basis results are the same as in paragraph (b) of this Example. In
addition, S recognizes $10 of gain under section 1001 on its disposition
of the asset in the reorganization.
(d) Depreciated asset. The facts are the same as in paragraph (c) of
this Example, except that S has a $60 adjusted basis in the asset. The
basis results are the same as in paragraph (b) of this Example. In
addition, S recognizes $30 of loss under section 1001 on its disposition
of the asset in the reorganization.
(e) P stock. The facts are the same as in paragraph (a) of this
Example, except that in the reorganization S provides P stock with a
fair market value of $30 instead of $30 of cash. S acquired the P stock
in an unrelated transaction several years before the reorganization. S
has a $20 adjusted basis in the P stock. The basis results are the same
as in paragraph (b) of this Example. In addition, S recognizes $10 of
gain on its disposition of the P stock in the reorganization. See Sec.
1.1032-2(c).
(e) Cross-reference. For rules relating to stock basis adjustments
made as a result of a triangular reorganization in
[[Page 246]]
which P and S, or P and T, as applicable, are, or become, members of a
consolidated group, see Sec. 1.1502-30. For rules relating to stock
basis adjustments after a group structure change, see Sec. 1.1502-31.
(f) Effective dates--(1) General rule. Except as otherwise provided
in this paragraph (f), this section applies to triangular
reorganizations occurring on or after December 23, 1994.
(2) Special rule for reverse triangular mergers. For a reverse
triangular merger occurring before December 23, 1994, P may--
(i) Determine the basis in its T stock as if paragraph (c)(2)(i) of
this section applied; or
(ii) Determine the basis in its T stock acquired as if P acquired
such stock from the former T shareholders in a transaction in which P's
basis in the T stock was determined under section 362(b).
[T.D. 8648, 60 FR 66079, Dec. 21, 1995; 61 FR 11547, Mar. 21, 1996]
effects on corporation
Sec. 1.361-1 Nonrecognition of gain or loss to corporations.
Section 361 provides the general rule that no gain or loss shall be
recognized if a corporation, a party to a reorganization, exchanges
property in pursuance of the plan of reorganization solely for stock or
securities in another corporation, a party to the reorganization. This
provision includes only stock and securities received in connection with
a reorganization defined in section 368(a). It also includes nonvoting
stock and securities in a corporation, a party to a reorganization,
received in a transaction to which section 368(a)(1)(C) is applicable
only by reason of section 368(a)(2)(B).
Sec. 1.362-1 Basis to corporations.
(a) In general. Section 362 provides, as a general rule, that if
property was acquired on or after June 22, 1954, by a corporation (1) in
connection with a transaction to which section 351 (relating to transfer
of property to corporation controlled by transferor) applies, (2) as
paid-in surplus or as a contribution to capital, or (3) in connection
with a reorganization to which part III, subchapter C, chapter 1 of the
Code applies, then the basis shall be the same as it would be in the
hands of the transferor, increased in the amount of gain recognized to
the transferor on such transfer. (See also Sec. 1.362-2.) See Sec.
1.460-4(k)(3)(iv)(B)(2) for rules relating to adjustments to the basis
of certain contracts accounted for using a long-term contract method of
accounting that are acquired in certain transfers described in section
351 and certain reorganizations described in section 368(a).
(b) Exceptions. (1) In the case of a plan of reorganization adopted
after October 22, 1968, section 362 does not apply if the property
acquired in connection with such reorganization consists of stock or
securities in a corporation a party to the reorganization, unless
acquired by the exchange of stock or securities of the transferee (or of
a corporation which is in control of the transferee) as the
consideration in whole or in part for the transfer.
(2) In the case of a plan of reorganization adopted before October
23, 1968, section 362 does not apply if the property acquired in
connection with such reorganization consists of stock or securities in a
corporation a party to the reorganization, unless acquired by the
issuance of stock or securities of the transferee (or, in the case of
transactions occurring after December 31, 1963, of a corporation which
is in control of the transferee) as the consideration in whole or in
part for the transfer. The term issuance of stock or securities includes
any transfer of stock or securities, including stock or securities which
were purchased or were acquired as a contribution to capital.
[T.D. 7422, 41 FR 26569, June 28, 1976, as amended by T.D. 8995, 67 FR
34605, May 15, 2002]
Sec. 1.362-2 Certain contributions to capital.
The following regulations shall be used in the application of
section 362(c):
(a) Property deemed to be acquired with contributed money shall be
that property, if any, the acquisition of which was the purpose
motivating the contribution;
[[Page 247]]
(b) In the case of an excess of the amount of money contributed over
the cost of the property deemed to be acquired with such money (as
defined in paragraph (a) of this section) such excess shall be applied
to the reduction of the basis (but not below zero) of other properties
held by the corporation, on the last day of the 12-month period
beginning on the day the contribution is received, in the following
order--
(1) All property of a character subject to an allowance for
depreciation (not including any properties as to which a deduction for
amortization is allowable),
(2) Property with respect to which a deduction for amortization is
allowable,
(3) Property with respect to which a deduction for depletion is
allowable under section 611 but not under section 613, and
(4) All other remaining properties.
The reduction of the basis of each of the properties within each of the
above categories shall be made in proportion to the relative bases of
such properties.
(c) With the consent of the Commissioner, the taxpayer may, however,
have the basis of the various units of property within a particular
category adjusted in a manner different from the general rule set forth
in paragraph (b) of this section. Variations from such rule may, for
example, involve adjusting the basis of only certain units of the
taxpayer's property within a given category. A request for variations
from the general rule should be filed by the taxpayer with its return
for the taxable year for which the transfer of the property has
occurred.
Sec. 1.367(a)-1T Transfers to foreign corporations subject to section
367(a): In general (temporary).
(a) Purpose and scope of regulations. These regulations set forth
rules relating to the provisions of section 367(a) concerning certain
transfers of property to foreign corportions. This section provides
general rules explaining the effect of section 367(a)(1) and describing
the transfers of property that are subject to the rule of that section.
Section 1.367(a)-2T provides rules concerning the exception from the
rule of section 367(a)(1) for transfers of property to be used in the
active conduct of a trade or business outside of the United States.
Rules concerning the application of section 367(a)(1) to transfers of
stock or securities are provided in Sec. 1.367(a)-3, while Sec.
1.367(a)-4T provides special rules regarding other specified transfers
of property. Section 1.367(a)-5T describes types of property that are
subject to the rule of section 367(a)(1) regardless of whether they are
transferred for use in a trade or business. Section 1.367(a)-6T provides
rules concerning the application of section 367(a) to the transfer of a
branch with previously deducted losses. Finally, Sec. 1.367(a)-7T
contains transitional rules concerning transfers of intangible property
to foreign corporations made after June 6, 1984 and before January 1,
1985. Rules explaining the operation of section 367(d), concerning
transfers of intangible property pursuant to an exchange described in
section 351 or 361, are provided in Sec. 1.367(d)-1T. Rules concerning
the reporting requirements of section 6038B are provided in Sec. Sec.
1.6038B-1 and 1.6038B-1T.
(b) General rules--(1) Foreign corporation not considered a
corporation for purposes of certain transfers. If a U.S. person
transfers property to a foreign corporation in connection with an
exchange described in section 332, 351, 354, 355, 356, or 361, then
pursuant to section 367(a)(1) the foreign corporation shall not be
considered to be a corporation for purposes of determining the extent to
which gain shall be recognized on the transfer. Section 367(a)(1) denies
nonrecognition treatment only to transfers of items of property on which
gain is realized. Thus, the amount of gain recognized because of section
367(a)(1) is unaffected by the transfer of items of property on which
loss is realized (but not recognized). The transfers of property that
are subject to section 367(a)(1) are further described in paragraph (c)
of this section, and relevant definitions are provided in paragraph (d)
of this section.
(2) Cases in which foreign corporate status is not disregarded.
Section 367(a)(1) shall not apply, and a foreign corporate transferee
shall, thus, be considered to be a corporation, in the case of any of
the following:
(i) [Reserved]
[[Page 248]]
(ii) The transfer of property for use in the active conduct of a
trade or business outside of the United States in accordance with the
rules of Sec. Sec. 1.367(a)-2T through 1.367(a)-6T; or
(iii) Certain other transfers of property described in Sec. Sec.
1.367(a)-2T through 1.367(a)-6T.
(3) Limitation of gain required to be recognized--(i) In general. If
a U.S. person transfers property to a foreign corporation in a
transaction on which gain is required to be recognized under section
367(a) and regulations thereunder, then the gain required to be
recognized by the U.S. person shall in no event exceed the gain that
would have been recognized on a taxable sale of those items of property
if sold individually and without offsetting individual losses against
individual gains.
(ii) Losses. No loss may be recognized by reason of the operation of
section 367.
(iii) Ordinary income and capital gain. If section 367(a) and
regulations thereunder require the recognition of ordinary income and
capital gain in excess of the limitation described in paragraph
(b)(3)(i) of this section, then the limitation shall be imposed by
making proportionate reductions in the amounts or ordinary income and
capital gain, regardless of the character of the gain that would have
been recognized on a taxable sale of the property.
(4) Character, source, and adjustments--(i) In general. If a U.S.
person is required to recognize gain under section 367 upon a transfer
of property to a foreign corporation, then--
(A) The character and source of such gain shall be determined as if
the property had been disposed of in a taxable exchange with the
transferee foreign corporation (unless otherwise provided by
regulation); and
(B) Appropriate adjustments to earnings and profits, basis, and
other affected items shall be made according to otherwise applicable
rules, taking into account the gain recognized because of section
367(a)(1). Any increase in the basis of the property received by the
foreign corporation resulting from the application of section 367(a) and
section 362 (a) or (b) shall be allocated over the transferred property
with respect to which gain is recognized in proportion to the amount
realized by the U.S. person on the transfer of each item of that
property. See paragraph (c)(3) of this section for special rules
applicable to transfers of partnership interests.
(ii) Example. The rules of this paragraph (b)(4) are illustrated by
the following example.
Example. Domestic corporation DC transfers inventory with a fair
market value of $1 million and adjusted basis of $800,000 to foreign
corporation FC in an exchange for stock of FC that is described in
section 351 (a). Title passes within the U.S. Pursuant to section
367(a), DC is required to recognize gain of $200,000 upon the transfer.
Under the rule of this paragraph (b)(4), such gain shall be treated as
ordinary income (sections 1201 and 1221) from sources within the U.S.
(section 861) arising from a taxable exchange with FC. Appropriate
adjustments to earnings and profits, basis, etc., shall be made as if
the transfer were subject to section 351. Thus, for example, DC's basis
in the FC stock received, and FC's basis in the transferred inventory,
will each be increased by the $200,000 gain recognized by DC, pursuant
to sections 358(a)(1) and 362(a), respectively.
(c) Transfers described in section 367(a)(1)--(1) In general. A
transfer described in section 367(a)(1) is any transfer of property by a
U.S. person to a foreign corporation pursuant to an exchange described
in section 332, 351, 354, 355, 356, or 361. Section 367(a)(1) applies to
such a transfer whether it is made directly, indirectly, or
constructively. Indirect or constructive transfers that are described in
section 367(a)(1) include the transfers described in subparagraphs (2)
through (7) of this paragraph (c).
(2) Indirect transfers in certain reorganizations. [Reserved]. For
further guidance, see Sec. 1.367(a)-3(d).
(3) Indirect transfers involving partnerships and interests
therein--(i) Transfer by partnership treated as transfer by partners--
(A) In general. If a partnership (whether foreign or domestic) transfers
property to a foreign corporation in an exchange described in section
367(a)(1), then a U.S. person that is a partner in the partnership shall
be treated as having transferred a proportionate share of the property
in an exchange described in section 367(a)(1). A U.S. person's
proportionate share of
[[Page 249]]
partnership property shall be determined under the rules and principles
of sections 701 through 761 and the regulations thereunder. The rule of
this paragraph (c)(3)(i)(A) is illustrated by the following example.
Example P is a partnership having five equal general partners, two
of whom are United States persons. P transfers property to F, a foreign
corporation, in connection with an exchange described in section 351.
The exchange includes an indirect transfer of property by the partners
to F. The transfers of property attributable to those partners who are
United States persons, that is, 40 percent of each asset transferred to
F, are transfers described in section 367(a)(1). The gain (if any)
recognized on the transfer of 40 percent of each asset to F is
attributable to the two partners who are United States persons.
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of this paragraph (c)(3)(i) as having transferred a
proportionate share of the property of a partnership in an exchange
described in section 367(a), and is therefore required to recognize gain
upon the transfer, then--
(1) The U.S. person's basis in the partnership shall be increased by
the amount of gain recognized by him;
(2) Solely for purposes of determining the basis of the partnership
in the stock of the transferee foreign corporation, the U.S. person
shall be treated as having newly acquired an interest in the partnership
(for an amount equal to the gain recognized), permitting the partnership
to make an optional adjustment to basis pursuant to sections 743 and
754; and
(3) The transferee foreign corporation's basis in the property
acquired from the partnership shall be increased by the amount of gain
recognized by U.S. persons under this paragraph (c)(3)(i).
(ii) Transfer of partnership interest treated as transfer of
proportionate share of assets--(A) In general. If a U.S. person
transfers an interest as a partner in a partnership (whether foreign or
domestic) in an exchange described in section 367(a)(1), then that
person shall be treated as having transferred a proportionate share of
the property of the partnership in an exchange described in section
367(a)(1). Accordingly, the applicability of the exception to section
367(a)(1) provided in Sec. 1.367(a)-2T shall be determined with
reference to the property of the partnership rather than the partnership
interest itself. A U.S. person's proportionate share of partnership
property shall be determined under the rules and principles of sections
701 through 761 and the regulations thereunder.
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of paragraph (c)(3)(ii)(A) of this section as having
transferred a proportionate share of the property of a partnership in an
exchange described in section 367(a), and is therefore required to
recognize gain upon the transfer, then--
(1) The U.S. person's basis in the stock of the transferee foreign
corporation shall be increased by the amount of gain so recognized by
that person;
(2) The transferee foreign corporation's basis in the transferred
partnership interest shall be increased by the amount of gain recognized
by the U.S. person; and
(3) Solely for purposes of determining the partnership's basis in
the property held by it, the U.S. person shall be treated as having
newly acquired an interest in the partnership (for an amount equal to
the gain recognized), permitting the partnership to make an optional
adjustment to basis pursuant to sections 743 and 754.
(C) Limited partnership interest. The transfer by a U.S. person of
an interest in a partnership shall not be subject to the rules of
paragraph (c)(3)(ii)(A) and (B) if--
(1) The interest transferred is a limited partnership interest; and
(2) Such interest is regularly traded on an established securities
market.
Instead, the transfer of such an interest shall be treated in the same
manner as a transfer of stock or securities. Thus, the consequences of
such a transfer shall be determined under the rules of Sec. 1.367(a)-3.
For purposes of this section, a limited partnership interest is an
interest as a limited partner in a partnership that is organized under
the laws of any State of the United States or the District of Columbia.
Whether such an interest is regularly traded on an established
securities market shall be determined under the provisions of paragraph
(c)(3)(ii)(D) of this section.
[[Page 250]]
(D) Regularly traded on an established securities market--(1)
Established securities market. For purposes of this paragraph
(c)(3)(ii), an established securities market is--
(i) A national securities exchange which is registered under section
6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f);
(ii) A foreign national securities exchange which is officially
recognized, sanctioned, or supervised by governmental authority; and
(iii) An over-the-counter market. An over-the-counter market is any
market reflected by the existence of an inter-dealer quotation system.
An inter-dealer quotation system is any system of general circulation to
brokers and dealers which regularly disseminates quotations of stock and
securities by identified brokers or dealers, other than by quotation
sheets which are prepared and distributed by a broker or dealer in the
regular course of business and which contain only quotations of such
broker or dealer.
(2) Regularly traded. A class of interests that is traded on an
established securities market is considered to be regularly traded if it
is regularly quoted by brokers or dealers making a market in such
interests. A class of interests shall be presumed to be regularly traded
if the entity has a total of 500 or more interest-holders.
(4) Transfers by trusts and estates--(i) In general. For purposes of
section 367(a), a transfer of property by an estate or trust shall be
treated as a transfer by the entity itself and not as an indirect
transfer by its beneficiaries. Thus, a transfer of property by a foreign
trust or estate (as defined in section 7701(a)(31)) is not described in
section 367(a)(1), regardless of whether the beneficiaries of the trust
or estate are U.S. persons. Similarly, a transfer of property by a
domestic trust or estate may be described in section 367(a)(1),
regardless of whether the beneficiaries of the trust or estate are
foreign persons.
(ii) Grantor trusts. A transfer of a portion or all of the assets of
a foreign or domestic trust to a foreign corporation in an exchange
described in section 367(a)(1) is considered a transfer by any U.S.
person who is treated as the owner of any such portion or all of the
assets of the trust under sections 671 through 679.
(5) Termination of election under section 1504(d). Section 367(A)
applies to the constructive reorganization and transfer of property from
a domestic corporation to a foreign corporation that occurs upon the
termination of an election under section 1504(d), which permits the
treatment of certain contiguous country corporations as domestic
corporations. The rule of this paragraph (c)(5) is illustrated by the
following example.
Example. Domestic corporation Y previously made a valid election
under section 1504(d) to have its wholly owned Canadian subsidiary, C,
treated as a domestic corporation. On July, 1, 1986, C fails to continue
to qualify for the election under section 1504 (d). A constructive
reorganization described in section 368(a)(1)(D) occurs. The resulting
constructive transfer of assests by ``domestic'' corporation C to
Canadian corporation C upon the termination of the election is a
transfer of property described in section 367(a)(1).
(6) Changes in classification of an entity. If a foreign entity is
classified as an entity other than an association taxable as a
corporation for United States tax purposes, and subsequently a change is
made in the governing documents, articles, or agreements of the entity
so that the entity is thereafter classified as an association taxable as
a corporation, the change in classification is considered a transfer of
property to a foreign corporation in connection with an exchange
described in section 351. For purposes of section 367(a)(1), the
transfer of property is considered as made by the persons determined
under the rules set forth in paragraph (c)(3) of this section with
respect to partnerships, and paragraph (c)(4)(i) or (ii), with respect
to trusts and estates, and the rules of such paragraphs apply
determining whether a transfer described in section 367(a)(1) has been
made.
(7) Contributions to capital. For rules with respect to the
treatment of a contribution to the capital of a foreign corporation as a
transfer described in section 367(a)(1), see section 367(c)(2) and the
regulations thereunder.
[[Page 251]]
(d) Definitions. The following definitions apply for purposes of
this section and Sec. 1.367(d)-1T.
(1) United States person. The term United States person includes
those persons described in section 7701(a)(30). The term includes a
citizen or resident of the United States, a domestic partnership, a
domestic corporation, and any estate or trust other than a foreign
estate or trust. (For definitions of these terms, see section 7701 and
regulations thereunder.) For purposes of this section, an individual
with respect to whom an election has been made under section 6013 (g) or
(h) is considered to be a resident of the United States while such
election is in effect. A nonresident alien or a foreign corporation will
not be considered a United States person because of its actual or deemed
conduct of a trade or business within the United States during a taxable
year.
(2) Foreign corporation. The term foreign corporation has the
meaning set forth in section 7701(a)(3) and (5) and Sec. 301.7701-5.
(3) Transfer. For purposes of section 367 and regulations
thereunder, the term transfer means any transaction that constitutes a
transfer for purposes of sections 332, 351, 354, 355, 356, or 361, as
applicable. A person's entering into a bona fide cost-sharing
arrangement under Sec. 1.482-2(d)(4) or acquiring rights to intangible
property under such an arrangement shall not be considered a transfer of
property described in section 367(a)(1). See Sec. 1.6038B-1T(b)(3) for
the date on which the transfer is considered to be made.
(4) Property. For purposes of section 367 and regulations
thereunder, the term property means any item that constitutes property
for purposes of sections 332, 351, 354, 355, 356, or 361, as applicable.
(5) Intangible property--(i) In general. For purposes of section 367
and regulations thereunder, the term intangible property means
knowledge, rights, documents, and any other intangible item within the
meaning of section 936(h)(3)(B) that constitutes property for purposes
of sections 332, 351, 354, 355, 356, or 361, as applicable. Such
property shall be treated as intangible property for purposes of section
367 (a) and (d) and the regulations thereunder without regard to whether
it is used or developed in the United States or in a foreign country and
without regard to whether it is used in manufacturing activities or in
marketing activities. A working interest in oil and gas properties shall
not be considered to be intangible property for purposes of section 367
and the regulations thereunder.
(ii) Operating intangibles. An operating intangible is any
intangible property of a type not ordinarily licensed or otherwise
transferred in transactions between unrelated parties for consideration
contingent upon the licensee's or transferee's use of the property.
Examples of operating intangibles may include long-term purchase or
supply contracts, surveys, studies, and customer lists.
(iii) Foreign goodwill or going concern value. Foreign goodwill or
going concern value is the residual value of a business operation
conducted outside of the United States after all other tangible and
intangible assets have been identified and valued. For purposes of
section 367 and regulations thereunder the value of the right to use a
corporate name in a foreign country shall be treated as foreign goodwill
or going concern value.
(iv) Transitional rule for certain marketing intangibles. For
transfers occurring after December 31, 1984, and before May 16, 1986,
for foreign trademarks, tradenames, brandnames, and similar marketing
intangibles developed by a foreign branch shall be treated as foreign
goodwill or going concern value.
(e) Close of taxable year in certain section 368(a)(1)(F)
reorganizations. If a domestic corporation is the transferor corporation
in a reorganization described in section 368(a)(1)(F) after March 30,
1987, in which the acquiring corporation is a foreign corporation, then
the taxable year of the transferor corporation shall end with the close
of the date of the transfer and the taxable year of the acquiring
corporation shall end with the close of the date on which the
transferor's taxable year would have ended but for the occurrence of the
transfer. With regard to the consequences of the closing of the taxable
[[Page 252]]
year, see section 381 and the regulations thereunder.
(f) Exchanges under sections 354(a) and 361(a) in certain section
368(a)(1)(F) reorganizations. In every reorganization under section
368(a)(1)(F), where the transferor corporation is a domestic corporation
and the acquiring corporation is a foreign corporation, there is
considered to exist--
(1) A transfer of assets by the transferor corporation to the
acquiring corporation under section 361(a) in exchange for stock of the
acquiring corporation and the assumption by the acquiring corporation of
the transferor corporation's liabilities;
(2) A distribution of the stock (or stock and securities) of the
acquiring corporation by the transferor corporation to the shareholders
(or shareholders and security holders) of the transferor corporation;
and
(3) An exchange by the transferor corporation's shareholders (or
shareholders and security holders) of the stock of the transferor
corporation for stock (or stock and securities) of the acquiring
corporation under section 354(a).
For this purpose, it shall be immaterial that the applicable foreign or
domestic law treats the acquiring corporation as a continuance of the
transferor corporation.
(g) Effective date of certain section--
(1) In general. Except as specifically provided to the contrary
elsewhere in these sections, Sec. Sec. 1.367(a)-1T through 1.367(a)-6T
apply to transfers occurring after December 31, 1984.
(2) Private rulings. The taxpayer may rely on a private ruling under
section 367(a) received by him before June 16, 1986.
(3) Certain indirect transfers. Sections 1.367(a)-1T(c)(2)(i) and
(iii) and 1.367(a)-1T(c)(3) apply to transfers made after June 16, 1986.
For transfers made before that date, see 26 CFR 1.367(a)-1(b) (revised
as of April 1, 1986).
[T.D. 8087, 51 FR 17938, May 16, 1986, as amended at T.D. 8280, 55 FR
1408, Jan. 16, 1990; T.D. 8770, 63 FR 33555, June 19, 1998]
Sec. 1.367(a)-2T Exception for transfers of property for use in the
active conduct of a trade or business (temporary).
(a) In general. Section 367(a)(1) shall not apply to property
transferred to a foreign corporation if--
(1) Such property is transferred for use by that corporation in the
active conduct of a trade or business outside of the United States; and
(2) The U.S. person that transfers the property complies with the
reporting requirements of section 6038B and regulations thereunder.
Where these conditions are satisifed, the foreign corporate transferee
of the property shall be considered to be a corporation for purposes of
determining the extent to which gain or loss is required to be
recognized upon the transfer pursuant to section 332, 351, 354 [reserved
as to section 355 or so much of section 356 as relates to section 355],
356, or 361. Paragraph (b) of this section provides rules concerning the
requirement that property be transferred for use in the active conduct
of a trade or business outside of the United States, while paragraph (c)
concerns the application of the requirement where the transferee itself
re-transfers the property. In addition, Sec. 1.367(a)-3T provides rules
concerning the treatment of stock or securities transferred to a foreign
corporation in an exchange described in section 367(a)(1), and Sec.
1.367(a)-4T provides special rules concerning the treatment of other
specified types of property. Finally, Sec. Sec. 1.367(a)-5T and
1.367(a)-6T provide rules concerning certain transfers of property that
are subject to section 367(a)(1) regardless of whether the property is
used in the active conduct of a trade or business.
(b) Active conduct of a trade or business outside the United
States--(1) In general. Property qualifies for the exception provided by
this section if it is transferred to a foreign corporation for use in
the active conduct of a trade or business outside of the United States.
Therefore, to determine whether property is subject to the exception
provided by this section, four factual determinations must be made:
(i) What is the trade or business of the transferee;
[[Page 253]]
(ii) Do the activities of the transferee constitute the active
conduct of that trade or business;
(iii) Is the trade or business conducted outside of the United
States; and
(iv) Is the transferred property used or held for use in the trade
or business?
Rules concerning these four determinations are provided in paragraphs
(b)(2), (3), (4), and (5) of this section.
(2) Trade or business. Whether the activities of a foreign
corporation constitute a trade or business must be determined under all
the facts and circumstances. In general, a trade or business is a
specific unified group of activities that constitute (or could
constitute) an independent economic enterprise carried on for profit.
For example, the activities of a foreign selling subsidiary could
constitute a trade or business if they could be independently carried on
for profit, even though the subsidiary acts exclusively on behalf of,
and has operations fully integrated with, its parent corporation. To
constitute a trade or business, a group of activities must ordinarily
include every operation which forms a part of, or a step in, a process
by which an enterprise may earn income or profit. In this regard, one or
more of such activities may be carried on by independent contractors
under the direct control of the foreign corporation. (However, see
paragraph (b)(3) of this section.) The group of activities must
ordinarily include the collection of income and the payment of expenses.
If the activities of a foreign corporation do not constitute a trade or
business, then the exception provided by this section does not apply,
regardless of the level of activities carried on by the corporation. The
following activities are not considered to constitute by themselves a
trade or business for purposes of this section:
(i) Any activity giving rise to expenses that would be deductible
only under section 212 if the activities were carried on by an
individual; or
(ii) The holding for one's own account of investments in stock,
securities, land, or other property, including casual sales thereof.
(3) Active conduct. Whether a trade or business is actively
conducted must be determined under all the facts and circumstances. In
general, a corporation actively conducts a trade or business only if the
officers and employees of the corporation carry out substantial
managerial and operational activities. A corporation may be engaged in
the active conduct of a trade or business even though incidental
activities of the trade or business are carried out on behalf of the
corporation by independent contractors. In determining whether the
officers and employees of the corporation carry out substantial
managerial and operational activities, however, the activities of
independent contractors shall be disregarded. On the other hand, the
officers and employees of the corporation are considered to include the
officers and employees of related entities who are made available to and
supervised on a day-to-day basis by, and whose salaries are paid by (or
reimbursed to the lending related entity by), the transferee foreign
corporation. Whether a trade or business that produces rents or
royalties is actively conducted shall be determined under the principles
of Sec. 1.954-2(d)(1) (but without regard to whether the rents or
royalties are received from an unrelated person). The rule of this
paragraph (b)(3) is illustrated by the following example.
Example. X, a domestic corporation, and Y, a foreign corporation not
related to X, transfer property to Z, a newly formed foreign corporation
organized for the purpose of combining the research activities of X and
Y. Z contracts all of its operational and research activities to Y for
an arm's-length fee. Z's activities do not constitute the active conduct
of a trade or business.
(4) Outside of the United States. Whether a foreign corporation
conducts a trade or business outside of the United States must be
determined under all the facts and circumstances. Generally, the primary
managerial and operational activities of the trade or business must be
conducted outside the United States and immediately after the transfer
the transferred assets must be located outside the United States. Thus,
the exception provided by this section would not apply to the transfer
of the assets of a domestic business to a foreign corporation if the
domestic business continued to operate
[[Page 254]]
in the United States after the transfer. In such a case, the primary
operational activities of the business would continue to be conducted in
the United States. Moreover, the transferred assets would be located in
the United States. However, it is not necessary that every item of
property transferred be used outside of the United States. As long as
the primary managerial and operational activities of the trade or
business are conducted outside of the United States and substantially
all of the transferred assets are located outside the United States,
incidental items of transferred property located in the United States
may be considered to have been transferred for use in the active conduct
of a trade or business outside of the United States.
(5) Use in the trade or business. Whether property is used or held
for use in a trade or business must be determined under all the facts
and circumstances. In general, property is used or held for use in a
foreign corporation's trade or business if it is--
(i) Held for the principal purpose of promoting the present conduct
of the trade or business;
(ii) Acquired and held in the ordinary course of the trade or
business; or
(iii) Otherwise held in a direct relationship to the trade or
business. Property is considered held in a direct relationship to a
trade or business if it is held to meet the present needs of that trade
or business and not its anticipated future needs.
Thus, property will not be considered to be held in a direct
relationship to a trade or business if it is held for the purpose of
providing for future diversification into a new trade or business,
future expansion of trade or business activities, future plant
replacement, or future business contingencies.
(c) Property transferred by transferee corporation--(1) General
rule. If a foreign corporation receives property in an exchange
described in section 367(a)(1) and as part of the same transaction
transfers the property to another person, then the exception provided by
this section shall not apply to the initial transfer. For purposes of
the preceding sentence, a subsequent transfer within six months of the
initial transfer shall be considered to be part of the same transaction,
and a subsequent transfer more than six months after the initial
transfer may be considered to be part of the same transaction upon the
application of step-transaction principles.
(2) Exception. Notwithstanding paragraph (c)(1) of this section, the
active conduct exception provided by this section shall apply to the
initial transfer if--
(i) The initial transfer is followed by one or more subsequent
transfers described in section 351 or 721; and
(ii) Each subsequent transferee is either a partnership in which the
preceding transferor is a general partner or a corporation in which the
preceding transferor owns common stock; and
(iii) The ultimate transferee uses the property in the active
conduct of a trade or business outside the United States.
(d) Transitional rule. Notwithstanding any other provision of this
section, property shall be considered to have been transferred for use
in the active conduct of a trade or business outside of the United
States, if--
(1) The property was transferred after December 31, 1984, and before
June 16, 1986;
(2) The property was, or would have been, considered to be
transferred for use by the transferee foreign corporation in the active
conduct, in any foreign country, or a trade or business, under the
principles of section 3.02(1) of Revenue Procedure 68-23, 1968-1 C.B.
821; and
(3) Based on all of the facts and circumstances, it was, or would
have been, determined under section 2.02 of Revenue Procedure 68-23 that
tax avoidance was not one of the principal purposes of the transaction.
[T.D. 8087, 51 FR 17942, May 16, 1986]
Sec. 1.367(a)-3 Treatment of transfers of stock or securities to foreign
corporations.
(a) In general. This section provides rules concerning the transfer
of stock or securities by a U.S. person to a foreign corporation in an
exchange described in section 367(a). In general, a transfer of stock or
securities by a U.S. person to a foreign corporation that is described
in section 351, 354 (including
[[Page 255]]
a reorganization described in section 368(a)(1)(B) and including an
indirect stock transfer described in paragraph (d) of this section), 356
or section 361(a) or (b) is subject to section 367(a)(1) and, therefore,
is treated as a taxable exchange, unless one of the exceptions set forth
in paragraph (b) of this section (regarding transfers of foreign stock
or securities) or paragraph (c) of this section (regarding transfers of
domestic stock or securities) applies. However, if in an exchange
described in section 354, a U.S. person exchanges stock of a foreign
corporation in a reorganization described in section 368(a)(1)(E), or a
U.S. person exchanges stock of a domestic or foreign corporation for
stock of a foreign corporation pursuant to an asset reorganization
described in section 368(a)(1)(C), (D) or (F) that is not treated as an
indirect stock transfer under paragraph (d) of this section, such
section 354 exchange is not a transfer to a foreign corporation subject
to section 367(a). See, e.g., paragraph (d)(3) Example 12. For rules
regarding other indirect or constructive transfers of stock or
securities subject to section 367(a), see Sec. 1.367(a)-1T(c). For
additional rules relating to an exchange involving a foreign corporation
in connection with which there is a transfer of stock, see section
367(b) and the regulations under that section. For additional rules
regarding a transfer of stock or securities in an exchange described in
section 361(a) or (b), see section 367(a)(5) and any regulations under
that section. For rules regarding reporting requirements with respect to
transfers described under section 367(a), see section 6038B and the
regulations thereunder.
(b) Transfers by U.S. persons of stock or securities of foreign
corporations to foreign corporations--(1) General rule. Except as
provided in section 367(a)(5), a transfer of stock or securities of a
foreign corporation by a U.S. person to a foreign corporation that would
otherwise be subject to section 367(a)(1) under paragraph (a) of this
section shall not be subject to section 367(a)(1) if either--
(i) Less than 5-percent shareholder. The U.S. person owns less than
five percent (applying the attribution rules of section 318, as modified
by section 958(b)) of both the total voting power and the total value of
the stock of the transferee foreign corporation immediately after the
transfer; or
(ii) 5-percent shareholder. The U.S. person enters into a five-year
gain recognition agreement with respect to the transferred stock or
securities as provided in Sec. 1.367(a)-8.
(2) Certain transfers subject to sections 367(a) and (b)--(i) In
general. A transfer of foreign stock or securities described in section
367(a) or any regulations thereunder as well as in section 367(b) or any
regulations thereunder shall be concurrently subject to sections 367(a)
and (b) and the regulations thereunder, except to the extent that the
transferee foreign corporation is not treated as a corporation under
section 367(a)(1). The example in paragraph (b)(2)(ii) of this section
illustrates the rules of this paragraph (b)(2). For an illustration of
the interaction of the indirect stock transfer rules under section
367(a) (described under paragraph (d) of this section) and the rules of
section 367(b), see paragraph (d)(3) Example 11 of this section.
(ii) Example. The following example illustrates the provisions of
this paragraph (b)(2):
Example. (i) Facts. DC, a domestic corporation, owns all of the
stock of FC1, a controlled foreign corporation within the meaning of
section 957(a). DC's basis in the stock of FC1 is $50, and the value of
such stock is $100. The section 1248 amount with respect to such stock
is $30. FC2, also a foreign corporation, is owned entirely by foreign
individuals who are not related to DC or FC1. In a reorganization
described in section 368(a)(1)(B), FC2 acquires all of the stock of FC1
from DC in exchange for 20 percent of the voting stock of FC2. FC2 is
not a controlled foreign corporation after the reorganization.
(ii) Result without gain recognition agreement. Under the provisions
of this paragraph (b), if DC fails to enter into a gain recognition
agreement, DC is required to recognize in the year of the transfer the
$50 of gain that it realized upon the transfer, $30 of which will be
treated as a dividend under section 1248.
(iii) Result with gain recognition agreement. If DC enters into a
gain recognition agreement under Sec. 1.367(a)-8 with respect to the
transfer of FC1 stock, the exchange will also be subject to the
provisions of section 367(b) and the regulations thereunder to the
extent that it is not subject to tax under section 367(a)(1). In such
case, DC will be required to
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recognize the section 1248 amount of $30 on the exchange of FC1 for FC2
stock. See Sec. 1.367(b)-4(b). The deemed dividend of $30 recognized by
DC will increase its basis in the FC1 stock exchanged in the transaction
and, therefore, the basis of the FC2 stock received in the transaction.
The remaining gain of $20 realized by DC (otherwise recognizable under
section 367(a)) in the exchange of FC1 stock will not be recognized if
DC enters into a gain recognition agreement with respect to the
transfer. (The result would be unchanged if, for example, the exchange
of FC1 stock for FC2 stock qualified as a section 351 exchange, or as an
exchange described in both sections 351 and 368(a)(1)(B).)
(c) Transfers by U.S. persons of stock or securities of domestic
corporations to foreign corporations--(1) In general. Except as provided
in section 367(a)(5), a transfer of stock or securities of a domestic
corporation by a U.S. person to a foreign corporation that would
otherwise be subject to section 367(a)(1) under paragraph (a) of this
section shall not be subject to section 367(a)(1) if the domestic
corporation the stock or securities of which are transferred (referred
to as the U.S. target company) complies with the reporting requirements
in paragraph (c)(6) of this section and if each of the following four
conditions is met:
(i) Fifty percent or less of both the total voting power and the
total value of the stock of the transferee foreign corporation is
received in the transaction, in the aggregate, by U.S. transferors
(i.e., the amount of stock received does not exceed the 50-percent
ownership threshold).
(ii) Fifty percent or less of each of the total voting power and the
total value of the stock of the transferee foreign corporation is owned,
in the aggregate, immediately after the transfer by U.S. persons that
are either officers or directors of the U.S. target company or that are
five-percent target shareholders (as defined in paragraph (c)(5)(iii) of
this section) (i.e., there is no control group). For purposes of this
paragraph (c)(1)(ii), any stock of the transferee foreign corporation
owned by U.S. persons immediately after the transfer will be taken into
account, whether or not it was received in the exchange for stock or
securities of the U.S. target company.
(iii) Either--
(A) The U.S. person is not a five-percent transferee shareholder (as
defined in paragraph (c)(5)(ii) of this section); or
(B) The U.S. person is a five-percent transferee shareholder and
enters into a five-year agreement to recognize gain with respect to the
U.S. target company stock or securities it exchanged in the form
provided in Sec. 1.367(a)-8; and
(iv) The active trade or business test (as defined in paragraph
(c)(3) of this section) is satisfied.
(2) Ownership presumption. For purposes of paragraph (c)(1) of this
section, persons who transfer stock or securities of the U.S. target
company in exchange for stock of the transferee foreign corporation are
presumed to be U.S. persons. This presumption may be rebutted in
accordance with paragraph (c)(7) of this section.
(3) Active trade or business test--(i) In general. The tests of this
paragraph (c)(3), collectively referred to as the active trade or
business test, are satisfied if:
(A) The transferee foreign corporation or any qualified subsidiary
(as defined in paragraph (c)(5)(vii) of this section) or any qualified
partnership (as defined in paragraph (c)(5)(viii) of this section) is
engaged in an active trade or business outside the United States, within
the meaning of Sec. 1.367(a)-2T(b)(2) and (3), for the entire 36-month
period immediately before the transfer;
(B) At the time of the transfer, neither the transferors nor the
transferee foreign corporation (and, if applicable, the qualified
subsidiary or qualified partnership engaged in the active trade or
business) have an intention to substantially dispose of or discontinue
such trade or business; and
(C) The substantiality test (as defined in paragraph (c)(3)(iii) of
this section) is satisfied.
(ii) Special rules. For purposes of paragraphs (c)(3)(i)(A) and (B)
of this section, the following special rules apply:
(A) The transferee foreign corporation, a qualified subsidiary, or a
qualified partnership will be considered to be engaged in an active
trade or business for the entire 36-month period preceding the exchange
if it acquires at the time of, or any time prior to, the
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exchange a trade or business that has been active throughout the entire
36-month period preceding the exchange. This special rule shall not
apply, however, if the acquired active trade or business assets were
owned by the U.S. target company or any affiliate (within the meaning of
section 1504(a) but excluding the exceptions contained in section
1504(b) and substituting ``50 percent'' for ``80 percent'' where it
appears therein) at any time during the 36-month period prior to the
acquisition. Nor will this special rule apply if the principal purpose
of such acquisition is to satisfy the active trade or business test.
(B) An active trade or business does not include the making or
managing of investments for the account of the transferee foreign
corporation or any affiliate (within the meaning of section 1504(a) but
excluding the exceptions contained in section 1504(b) and substituting
``50 percent'' for ``80 percent'' where it appears therein). (This
paragraph (c)(3)(ii)(B) shall not create any inference as to the scope
of Sec. 1.367(a)-2T(b)(2) and (3) for other purposes.)
(iii) Substantiality test--(A) General rule. A transferee foreign
corporation will be deemed to satisfy the substantiality test if, at the
time of the transfer, the fair market value of the transferee foreign
corporation is at least equal to the fair market value of the U.S.
target company.
(B) Special rules. (1) For purposes of paragraph (c)(3)(iii)(A) of
this section, the value of the transferee foreign corporation shall
include assets acquired outside the ordinary course of business by the
transferee foreign corporation within the 36-month period preceding the
exchange only if either--
(i) Both--
(A) At the time of the exchange, such assets or, as applicable, the
proceeds thereof, do not produce, and are not held for the production
of, passive income as defined in section 1296(b); and
(B) Such assets are not acquired for the principal purpose of
satisfying the substantiality test; or
(ii) Such assets consist of the stock of a qualified subsidiary or
an interest in a qualified partnership. See paragraph (c)(3)(iii)(B)(2)
of this section.
(2) For purposes of paragraph (c)(3)(iii)(A) of this section, the
value of the transferee foreign corporation shall not include the value
of the stock of any qualified subsidiary or the value of any interest in
a qualified partnership, held directly or indirectly, to the extent that
such value is attributable to assets acquired by such qualified
subsidiary or partnership outside the ordinary course of business and
within the 36-month period preceding the exchange unless those assets
satisfy the requirements in paragraph (c)(3)(iii)(B)(1) of this section.
(3) For purposes of paragraph (c)(3)(iii)(A) of this section, the
value of the transferee foreign corporation shall not include the value
of assets received within the 36-month period prior to the acquisition,
notwithstanding the special rule in paragraph (c)(3)(iii)(B)(1) of this
section, if such assets were owned by the U.S. target company or an
affiliate (within the meaning of section 1504(a) but without the
exceptions under section 1504(b) and substituting ``50 percent'' for
``80 percent'' where it appears therein) at any time during the 36-month
period prior to the transaction.
(4) Special rules--(i) Treatment of partnerships. For purposes of
this paragraph (c), if a partnership (whether domestic or foreign) owns
stock or securities in the U.S. target company or the transferee foreign
corporation, or transfers stock or securities in an exchange described
in section 367(a), each partner in the partnership, and not the
partnership itself, is treated as owning and as having transferred, or
as owning, a proportionate share of the stock or securities. See Sec.
1.367(a)-1T(c)(3).
(ii) Treatment of options. For purposes of this paragraph (c), one
or more options (or an interest similar to an option) will be treated as
exercised and thus will be counted as stock for purposes of determining
whether the 50-percent threshold is exceeded or whether a control group
exists if a principal purpose of the issuance or the acquisition of the
option (or other interest) was the avoidance of the general rule
contained in section 367(a)(1).
(iii) U.S. target has a vestigial ownership interest in transferee
foreign corporation. In cases where, immediately after
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the transfer, the U.S. target company owns, directly or indirectly
(applying the attribution rules of sections 267(c)(1) and (5)), stock of
the transferee foreign corporation, that stock will not in any way be
taken into account (and, thus, will not be treated as outstanding) in
determining whether the 50-percent threshold under paragraph (c)(1)(i)
of this section is exceeded or whether a control group under paragraph
(c)(1)(ii) of this section exists.
(iv) Attribution rule. Except as otherwise provided in this section,
the rules of section 318, as modified by the rules of section 958(b)
shall apply for purposes of determining the ownership or receipt of
stock, securities or other property under this paragraph (c).
(5) Definitions--(i) Ownership statement. An ownership statement is
a statement, signed under penalties of perjury, stating--
(A) The identity and taxpayer identification number, if any, of the
person making the statement;
(B) That the person making the statement is not a U.S. person (as
defined in paragraph (c)(5)(iv) of this section);
(C) That the person making the statement either--
(1) Owns less than 1 percent of the total voting power and total
value of a U.S. target company the stock of which is described in Rule
13d-1(d) of Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or
regulation to generally the same effect) promulgated by the Securities
and Exchange Commission under the Securities and Exchange Act of 1934
(15 USC 78m), and such person did not acquire the stock with a principal
purpose to enable the U.S. transferors to satisfy the requirement
contained in paragraph (c)(1)(i) of this section; or
(2) Is not related to any U.S. person to whom the stock or
securities owned by the person making the statement are attributable
under the rules of section 958(b), and did not acquire the stock with a
principal purpose to enable the U.S. transferors to satisfy the
requirement contained in paragraph (c)(1)(i) of this section;
(D) The citizenship, permanent residence, home address, and U.S.
address, if any, of the person making the statement; and
(E) The ownership such person has (by voting power and by value) in
the U.S. target company prior to the exchange and the amount of stock of
the transferee foreign corporation (by voting power and value) received
by such person in the exchange.
(ii) Five-percent transferee shareholder. A five-percent transferee
shareholder is a person that owns at least five percent of either the
total voting power or the total value of the stock of the transferee
foreign corporation immediately after the transfer described in section
367(a)(1). For special rules involving cases in which stock is held by a
partnership, see paragraph (c)(4)(i) of this section.
(iii) Five-percent target shareholder and certain other 5-percent
shareholders. A five-percent target shareholder is a person that owns at
least five percent of either the total voting power or the total value
of the stock of the U.S. target company immediately prior to the
transfer described in section 367(a)(1). If the stock of the U.S. target
company (or any company through which stock of the U.S. target company
is owned indirectly or constructively) is described in Rule 13d-1(d) of
Regulation 13D (17 CFR 240.13d-1(d)) (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934 (15 USC 78m), then,
in the absence of actual knowledge to the contrary, the existence or
absence of filings of Schedule 13-D or 13-G (or any similar schedules)
may be relied upon for purposes of identifying five-percent target
shareholders (or a five-percent shareholder of a corporation which
itself is a five-percent shareholder of the U.S. target company). For
special rules involving cases in which U.S. target company stock is held
by a partnership, see paragraph (c)(4)(i) of this section.
(iv) U.S. Person. For purposes of this section, a U.S. person is
defined by reference to Sec. 1.367(a)-1T(d)(1). For application of the
rules of this section to stock or securities owned or transferred by a
partnership that is a U.S. person, however, see paragraph (c)(4)(i) of
this section.
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(v) U.S. Transferor. A U.S. transferor is a U.S. person (as defined
in paragraph (c)(5)(iv) of this section) that transfers stock or
securities of one or more U.S. target companies in exchange for stock of
the transferee foreign corporation in an exchange described in section
367.
(vi) Transferee foreign corporation. A transferee foreign
corporation is the foreign corporation whose stock is received in the
exchange by U.S. persons.
(vii) Qualified Subsidiary. A qualified subsidiary is a foreign
corporation whose stock is at least 80-percent owned (by total voting
power and total value), directly or indirectly, by the transferee
foreign corporation. However, a corporation will not be treated as a
qualified subsidiary if it was affiliated with the U.S. target company
(within the meaning of section 1504(a) but without the exceptions under
section 1504(b) and substituting ``50 percent'' for ``80 percent'' where
it appears therein) at any time during the 36-month period prior to the
transfer. Nor will a corporation be treated as a qualified subsidiary if
it was acquired by the transferee foreign corporation at any time during
the 36-month period prior to the transfer for the principal purpose of
satisfying the active trade or business test, including the
substantiality test.
(viii) Qualified partnership. (A) Except as provided in paragraph
(c)(5)(viii)(B) or (C) of this section, a qualified partnership is a
partnership in which the transferee foreign corporation--
(1) Has active and substantial management functions as a partner
with regard to the partnership business; or -
(2) Has an interest representing a 25 percent or greater interest in
the partnership's capital and profits.
(B) A partnership is not a qualified partnership if the U.S. target
company or any affiliate of the U.S. target company (within the meaning
of section 1504(a) but without the exceptions under section 1504(b) and
substituting ``50 percent'' for ``80 percent'' where it appears therein)
held a 5 percent or greater interest in the partnership's capital and
profits at any time during the 36-month period prior to the transfer.
(C) A partnership is not a qualified partnership if the transferee
foreign corporation's interest was acquired by that corporation at any
time during the 36-month period prior to the transfer for the principal
purpose of satisfying the active trade or business test, including the
substantiality test.
(6) Reporting requirements of U.S. target company. (i) In order for
a U.S. person that transfers stock or securities of a domestic
corporation to qualify for the exception provided by this paragraph (c)
to the general rule under section 367(a)(1), in cases where 10 percent
or more of the total voting power or the total value of the stock of the
U.S. target company is transferred by U.S. persons in the transaction,
the U.S. target company must comply with the reporting requirements
contained in this paragraph (c)(6). The U.S. target company must attach
to its timely filed U.S. income tax return for the taxable year in which
the transfer occurs a statement titled ``Section 367(a)--Reporting of
Cross-Border Transfer Under Reg. Sec. 1.367(a)-3(c)(6),'' signed under
penalties of perjury by an officer of the corporation to the best of the
officer's knowledge and belief, disclosing the following information--
(A) A description of the transaction in which a U.S. person or
persons transferred stock or securities in the U.S. target company to
the transferee foreign corporation in a transfer otherwise subject to
section 367(a)(1);
(B) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received in the transaction, in the aggregate, by persons
who transferred stock or securities of the U.S. target company. For
additional information that may be required to rebut the ownership
presumption of paragraph (c)(2) of this section in cases where more than
50 percent of either the total voting power or the total value of the
stock of the transferee foreign corporation is received in the
transaction, in the aggregate, by persons who transferred stock or
securities of the U.S. target company, see paragraph (c)(7) of this
section;
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(C) The amount (if any) of transferee foreign corporation stock
owned directly or indirectly (applying the attribution rules of sections
267(c)(1) and (5)) immediately after the exchange by the U.S. target
company;
(D) A statement that there is no control group within the meaning of
paragraph (c)(1)(ii) of this section;
(E) A list of U.S. persons who are officers, directors or five-
percent target shareholders and the percentage of the total voting power
and the total value of the stock of the transferee foreign corporation
owned by such persons both immediately before and immediately after the
transaction; and
(F) A statement that includes the following--
(1) A statement that the active trade or business test described in
paragraph (c)(3) of this section is satisfied by the transferee foreign
corporation and a description of such business;
(2) A statement that on the day of the transaction, there was no
intent on the part of the transferee foreign corporation (or its
qualified subsidiary, if relevant) or the transferors of the transferee
foreign corporation (or qualified subsidiary, if relevant) to
substantially discontinue its active trade or business; and
(3) A statement that the substantiality test described in paragraph
(c)(3)(iii) of this section is satisfied, and documentation that such
test is satisfied, including the value of the transferee foreign
corporation and the value of the U.S. target company on the day of the
transfer, and either one of the following--
(i) A statement demonstrating that the value of the transferee
foreign corporation 36 months prior to the acquisition, plus the value
of any assets described in paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the transferee foreign corporation within
the 36-month period, less the amount of any liabilities acquired during
that period, exceeds the value of the U.S. target company on the
acquisition date; or
(ii) A statement demonstrating that the value of the transferee
foreign corporation on the date of the acquisition, reduced by the value
of any assets not described in paragraph (c)(3)(iii)(B) of this section
(including stock) acquired by the transferee foreign corporation within
the 36-month period, exceeds the value of the U.S. target company on the
date of the acquisition.
(ii) For purposes of this paragraph (c)(6), an income tax return
will be considered timely filed if such return is filed, together with
the statement required by this paragraph (c)(6), on or before the last
date for filing a Federal income tax return (taking into account any
extensions of time therefor) for the taxable year in which the transfer
occurs. If a return is not timely filed within the meaning of this
paragraph (c)(6), the District Director may make a determination, based
on all facts and circumstances, that the taxpayer had reasonable cause
for its failure to file a timely filed return and, if such a
determination is made, the requirement contained in this paragraph
(c)(6) shall be waived.
(7) Ownership statements. To rebut the ownership presumption of
paragraph (c)(2) of this section, the U.S. target company must obtain
ownership statements (described in paragraph (c)(5)(i) of this section)
from a sufficient number of persons that transfer U.S. target company
stock or securities in the transaction that are not U.S. persons to
demonstrate that the 50-percent threshold of paragraph (c)(1)(i) of this
section is not exceeded. In addition, the U.S. target company must
attach to its timely filed U.S. income tax return (as described in
paragraph (c)(6)(ii) of this section) for the taxable year in which the
transfer occurs a statement, titled ``Section 367(a)--Compilation of
Ownership Statements Under Reg. Sec. 1.367(a)-3(c),'' signed under
penalties of perjury by an officer of the corporation, disclosing the
following information:
(i) The amount (specified as to the percentage of the total voting
power and the total value) of stock of the transferee foreign
corporation received, in the aggregate, by U.S. transferors;
(ii) The amount (specified as to the percentage of total voting
power and total value) of stock of the transferee foreign corporation
received, in the aggregate, by foreign persons that filed ownership
statements;
[[Page 261]]
(iii) A summary of the information tabulated from the ownership
statements, including--
(A) The names of the persons that filed ownership statements stating
that they are not U.S. persons;
(B) The countries of residence and citizenship of such persons; and
(C) Each of such person's ownership (by voting power and by value)
in the U.S. target company prior to the exchange and the amount of stock
of the transferee foreign corporation (by voting power and value)
received by such persons in the exchange.
(8) Certain transfers in connection with performance of services.
Section 367(a)(1) shall not apply to a domestic corporation's transfer
of its own stock or securities in connection with the performance of
services, if the transfer is considered to be to a foreign corporation
solely by reason of Sec. 1.83-6(d)(1). The transfer may still, however,
be reportable under section 6038B. See Sec. 1.6038B-1(b)(2)(i)(A)(4)
and (b)(2)(i)(B)(4).
(9) Private letter ruling option. The Internal Revenue Service may,
in limited circumstances, issue a private letter ruling to permit the
taxpayer to qualify for an exception to the general rule under section
367(a)(1) if--
(i) A taxpayer is unable to satisfy all of the requirements of
paragraph (c)(3) of this section relating to the active trade or
business test of paragraph (c)(1)(iv) of this section, but such taxpayer
meets all of the other requirements contained in paragraphs (c)(1)(i)
through (c)(1)(iii) of this section, and such taxpayer is substantially
in compliance with the rules set forth in paragraph (c)(3) of this
section; or
(ii) A taxpayer is unable to satisfy any requirement of paragraph
(c)(1) of this section due to the application of paragraph (c)(4)(iv) of
this section. Notwithstanding the preceding sentence, in no event will
the Internal Revenue Service rule on the issue of whether the principal
purpose of an acquisition was to satisfy the active trade or business
test, including the substantiality test.
(10) Examples. This paragraph (c) may be illustrated by the
following examples:
Example 1. Ownership presumption. (i) FC, a foreign corporation,
issues 51 percent of its stock to the shareholders of S, a domestic
corporation, in exchange for their S stock, in a transaction described
in section 367(a)(1).
(ii) Under paragraph (c)(2) of this section, all shareholders of S
who receive stock of FC in the exchange are presumed to be U.S. persons.
Unless this ownership presumption is rebutted, the condition set forth
in paragraph (c)(1)(i) of this section will not be satisfied, and the
exception in paragraph (c)(1) of this section will not be available. As
a result, all U.S. persons that transferred S stock will recognize gain
on the exchange. To rebut the ownership presumption, S must comply with
the reporting requirements contained in paragraph (c)(6) of this
section, obtaining ownership statements (described in paragraph
(c)(5)(i) of this section) from a sufficient number of non-U.S. persons
who received FC stock in the exchange to demonstrate that the amount of
FC stock received by U.S. persons in the exchange does not exceed 50
percent.
Example 2. Filing of Gain Recognition Agreement. (i) The facts are
the same as in Example 1, except that FC issues only 40 percent of its
stock to the shareholders of S in the exchange. FC satisfies the active
trade or business test of paragraph (c)(1)(iv) of this section. A, a
U.S. person, owns 10 percent of S's stock immediately before the
transfer. All other shareholders of S own less than five percent of its
stock. None of S's officers or directors owns any stock in FC
immediately after the transfer. A will own 15 percent of the stock of FC
immediately after the transfer, 4 percent received in the exchange, and
the balance being stock in FC that A owned prior to and independent of
the transaction. No S shareholder besides A owns five percent or more of
FC immediately after the transfer. The reporting requirements under
paragraph (c)(6) of this section are satisfied.
(ii) The condition set forth in paragraph (c)(1)(i) of this section
is satisfied because, even after application of the presumption in
paragraph (c)(2) of this section, U.S. transferors could not receive
more than 50 percent of FC's stock in the transaction. There is no
control group because five-percent target shareholders and officers and
directors of S do not, in the aggregate, own more than 50 percent of the
stock of FC immediately after the transfer (A, the sole five-percent
target shareholder, owns 15 percent of the stock of FC immediately after
the transfer, and no officers or directors of S own any stock of FC
immediately after the transfer). Therefore, the condition set forth in
paragraph (c)(1)(ii) of this section is satisfied. The facts assume that
the condition set forth in paragraph (c)(1)(iv) of this section is
satisfied. Thus, U.S. persons that are not five-percent transferee
shareholders will not recognize gain on the exchange of S shares for FC
shares. A, a five-percent transferee shareholder, will not
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be required to include in income any gain realized on the exchange in
the year of the transfer if he files a 5-year gain recognition agreement
(GRA) and complies with section 6038B.
Example 3. Control Group. (i) The facts are the same as in Example
2, except that B, another U.S. person, is a 5-percent target
shareholder, owning 25 percent of S's stock immediately before the
transfer. B owns 40 percent of the stock of FC immediately after the
transfer, 10 percent received in the exchange, and the balance being
stock in FC that B owned prior to and independent of the transaction.
(ii) A control group exists because A and B, each a five-percent
target shareholder within the meaning of paragraph (c)(5)(iii) of this
section, together own more than 50 percent of FC immediately after the
transfer (counting both stock received in the exchange and stock owned
prior to and independent of the exchange). As a result, the condition
set forth in paragraph (c)(1)(ii) of this section is not satisfied, and
all U.S. persons (not merely A and B) who transferred S stock will
recognize gain on the exchange.
Example 4. Partnerships. (i) The facts are the same as in Example 3,
except that B is a partnership (domestic or foreign) that has five equal
partners, only two of whom, X and Y, are U.S. persons. Under paragraph
(c)(4)(i) of this section, X and Y are treated as the owners and
transferors of 5 percent each of the S stock owned and transferred by B
and as owners of 8 percent each of the FC stock owned by B immediately
after the transfer. U.S. persons that are five-percent target
shareholders thus own a total of 31 percent of the stock of FC
immediately after the transfer (A's 15 percent, plus X's 8 percent, plus
Y's 8 percent).
(ii) Because no control group exists, the condition in paragraph
(c)(1)(ii) of this section is satisfied. The conditions in paragraphs
(c)(1)(i) and (iv) of this section also are satisfied. Thus, U.S.
persons that are not five-percent transferee shareholders will not
recognize gain on the exchange of S shares for FC shares. A, X, and Y,
each a five-percent transferee shareholder, will not be required to
include in income in the year of the transfer any gain realized on the
exchange if they file 5-year GRAs and comply with section 6038B.
(11) Effective date. This paragraph (c) applies to transfers
occurring after January 29, 1997. However, taxpayers may elect to apply
this section in its entirety to all transfers occurring after April 17,
1994, provided that the statute of limitations of the affected tax year
or years is open.
(d) Indirect stock transfers in certain nonrecognition transfers--
(1) In general. For purposes of this section, a U.S. person who
exchanges, under section 354 (or section 356) stock or securities in a
domestic or foreign corporation for stock or securities in a foreign
corporation in connection with one of the following transactions
described in paragraphs (d)(1)(i) through (v) of this section (or who is
deemed to make such an exchange under paragraph (d)(1)(vi) of this
section) shall be treated as having made an indirect transfer of such
stock or securities to a foreign corporation that is subject to the
rules of this section, including, for example, the requirement, where
applicable, that the U.S. transferor enter into a gain recognition
agreement to preserve nonrecognition treatment under section 367(a). If
the U.S. person exchanges stock or securities of a foreign corporation,
see also section 367(b) and the regulations thereunder. For an example
of the concurrent application of the indirect stock transfer rules under
section 367(a) and the rules of section 367(b), see, e.g., paragraph
(d)(3) Example 11 of this section.
(i) Mergers described in sections 368(a)(1)(A) and (a)(2)(D). A U.S.
person exchanges stock or securities of a corporation (the acquired
corporation)
for stock or securities of a foreign corporation that controls the
acquiring corporation in a reorganization described in sections
368(a)(1)(A) and (a)(2)(D). See, e.g., paragraph (d)(3) Example 1 of
this section.
(ii) Mergers described in sections 368(a)(1)(A) and (a)(2)(E). A
U.S. person exchanges stock or securities of a corporation (the
acquiring corporation) for stock or securities in a foreign corporation
that controls the acquired corporation in a reorganization described in
sections 368(a)(1)(A) and (a)(2)(E).
(iii) Triangular reorganizations described in section 368(a)(1)(B).
A U.S. person exchanges stock of the acquired corporation for voting
stock of a foreign corporation that is in control (as defined in section
368(c)) of the acquiring corporation in connection with a reorganization
described in section 368(a)(1)(B). See, e.g., paragraph (d)(3) Example 4
of this section.
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(iv) Triangular reorganizations described in section 368(a)(1)(C). A
U.S. person exchanges stock or securities of a corporation (the acquired
corporation) for voting stock or securities of a foreign corporation
that controls the acquiring corporation in a reorganization described in
section 368(a)(1)(C). See, e.g., paragraph (d)(3) Example 5 of this
section (for an example of a triangular section 368(a)(1)(C)
reorganization involving domestic acquired and acquiring corporations),
and paragraph (d)(3) Example 7 of this section (for an example involving
a domestic acquired corporation and a foreign acquiring corporation). If
the acquired corporation is a foreign corporation, see paragraph (d)(3)
Example 11 of this section, and section 367(b) and the regulations
thereunder.
(v) Reorganizations described in sections 368(a)(1)(C) and
(a)(2)(C). A U.S. person exchanges stock or securities of a corporation
(the acquired corporation) for voting stock or securities of a foreign
acquiring corporation in a reorganization described in sections
368(a)(1)(C) and (a)(2)(C) (other than a triangular section 368(a)(1)(C)
reorganization described in paragraph (d)(1)(iv) of this section). In
the case of a reorganization in which some but not all of the assets of
the acquired corporation are transferred pursuant to section
368(a)(2)(C), the transaction shall be considered to be an indirect
transfer of stock or securities subject to this paragraph (d) only to
the extent of the assets so transferred. (Other assets shall be treated
as having been transferred in an asset transfer rather than an indirect
stock transfer, and such asset transfer would be subject to the other
provisions of section 367, including sections 367(a)(1), (3), (5) and
(d) if the acquired corporation is a domestic corporation). See, e.g.,
paragraph (d)(3) Example 5B of this section.
(vi) Successive transfers of property to which section 351 applies.
A U.S. person transfers property (other than stock or securities) to a
foreign corporation in an exchange described in section 351, and all or
a portion of such assets transferred to the foreign corporation by such
person are, in connection with the same transaction, transferred to a
second corporation that is controlled by the foreign corporation in one
or more exchanges described in section 351. For purposes of this
paragraph (d)(1) and Sec. 1.367(a)-8, the initial transfer by the U.S.
person shall be deemed to be a transfer of stock described in section
354. (Any assets transferred to the foreign corporation that are not
transferred by the foreign corporation to a second corporation shall be
treated as a transfer of assets subject to the general rules of section
367, including sections 367(a)(1), (3), (5) and (d), and not as an
indirect stock transfer under the rules of this paragraph (d).) See,
e.g., paragraph (d)(3) Example 10 and Example 10A of this section.
(2) Special rules for indirect transfers. If a U.S. person is
considered to make an indirect transfer of stock or securities described
in paragraph (d)(1) of this section, the rules of this section and Sec.
1.367(a)-8 shall apply to the transfer. For purposes of applying the
rules of this section and Sec. 1.367(a)-8:
(i) Transferee foreign corporation. The transferee foreign
corporation shall be the foreign corporation that issues stock or
securities to the U.S. person in the exchange.
(ii) Transferred corporation. The transferred corporation shall be
the acquiring corporation, except that in the case of a triangular
section 368(a)(1)(B) reorganization described in paragraph (d)(1)(iii)
of this section, the transferred corporation shall be the acquired
corporation; in the case of a triangular section 368(a)(1)(C)
reorganization described in paragraph (d)(1)(iv) of this section
followed by a section 368(a)(2)(C) transfer or a section 368(a)(1)(C)
reorganization followed by a section 368(a)(2)(C) transfer described in
paragraph (d)(1)(v) of this section, the transferred corporation shall
be the transferee corporation; and in the case of successive section 351
transfers described in paragraph (d)(1)(vi) of this section, the
transferred corporation shall be the transferee corporation in the final
section 351 transfer. The transferred property shall be the stock or
securities of the transferred corporation, as appropriate in the
circumstances.
(iii) Amount of gain. The amount of gain that a U.S. person is
required to
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include in income in the event of a disposition (or a deemed
disposition) of some or all of the stock or securities of the
transferred corporation shall be the proportionate share (as determined
under Sec. 1.367(a)-8(e)) of the U.S. person's gain realized but not
recognized in the initial exchange (or deemed exchange) of stock or
securities under section 354.
(iv) Gain recognition agreements involving multiple parties. The
U.S. transferor's agreement to recognize gain, as provided in Sec.
1.367(a)-8, shall include appropriate provisions, consistent with the
principles of these rules, requiring the transferor to recognize gain in
the event of a direct or indirect disposition of the stock or assets of
the transferred corporation. For example, in the case of a triangular
section 368(a)(1)(B) reorganization described in paragraph (d)(1)(iii)
of this section, a disposition of the transferred stock shall include an
indirect disposition of such stock by the transferee foreign
corporation, such as a disposition of such stock by the acquiring
corporation or a disposition of the stock of the acquiring corporation
by the transferee foreign corporation. See, e.g., paragraph (d)(3)
Example 4 of this section.
(v) Determination of whether the transferred corporation disposed of
substantially all of its assets. For purposes of applying Sec.
1.367(a)-8(e)(3)(i) to determine whether the transferred corporation has
disposed of substantially all of its assets, the following assets shall
be taken into account (but only if such assets are not fully taxable
under section 367 in the taxable year that includes the indirect
transfer)--
(A) In the case of a sections 368(a)(1)(A) and (a)(2)(D)
reorganization, and a triangular section 368(a)(1)(C) reorganization
described in paragraph (d)(1)(i) or (iv) of this section, respectively,
the assets of the acquired corporation;
(B) In the case of a sections 368(a)(1)(A) and (a)(2)(E)
reorganization described in paragraph (d)(1)(ii) of this section, the
assets of the acquiring corporation immediately prior to the
transaction;
(C) In the case of a sections 368(a)(1)(C) and (a)(2)(C)
reorganization described in paragraph (d)(1)(v) of this section, the
assets of the acquired corporation that are subject to a transfer
described in section 368(a)(2)(C); and
(D) In the case of successive section 351 exchanges described in
paragraph (d)(1)(vi) of this section, the assets that are both
transferred initially to the foreign corporation, and transferred by the
foreign corporation to a second corporation.
(vi) Coordination between asset transfer rules and indirect stock
transfer rules. If, pursuant to any of the transactions described in
paragraph (d)(1) of this section, a domestic corporation transfers (or
is deemed to transfer) assets to a foreign corporation (other than in an
exchange described in section 354), the rules of section 367, including
sections 367(a)(1), (a)(3) and (a)(5), as well as section 367(d), and
the regulations thereunder shall apply prior to the application of the
rules of this section. However, if a transaction is described in this
paragraph (d), section 367(a) shall not apply in the case of a domestic
acquired corporation that transfers its assets to a foreign acquiring
corporation, to the extent that such assets are re-transferred to a
domestic corporation in a transfer described in section 368(a)(2)(C) or
paragraph (d)(1)(vi) of this section, but only if the domestic
transferee's basis in the assets is no greater than the basis that the
domestic acquired company had in such assets. See, e.g., paragraph
(d)(3) Example 8 and Example 10A of this section.
(3) Examples. The rules of this paragraph (d) and Sec. 1.367(a)-8
are illustrated by the following examples:
Example 1. Section 368(a)(1)(A)/(a)(2)(D) reorganization--(i) Facts.
F, a foreign corporation, owns all the stock of Newco, a domestic
corporation. A, a domestic corporation, owns all of the stock of W, also
a domestic corporation. A and W file a consolidated Federal income tax
return. A does not own any stock in F (applying the attribution rules of
section 318, as modified by section 958(b)). In a reorganization
described in sections 368(a)(1)(A) and (a)(2)(D), Newco acquires all of
the assets of W, and A receives 40% of the stock of F in an exchange
described in section 354.
(ii) Result. Pursuant to paragraph (d)(1)(i) of this section, the
reorganization is subject to the indirect stock transfer rules. F is
treated as the transferee foreign corporation, and Newco is treated as
the transferred corporation. Provided that the requirements of
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paragraph (c)(1) of this section are satisfied, including the
requirement that A enter into a five-year gain recognition agreement as
described in Sec. 1.367(a)-8, A's exchange of W stock for F stock under
section 354 will not be subject to section 367(a)(1). If F disposes
(within the meaning of Sec. 1.367(a)-8(e)) of all (or a portion) of
Newco's stock within the five-year term of the agreement (and A has not
made a valid election under Sec. 1.367(a)-8(b)(1)(vii)), A is required
to file an amended return for the year of the transfer and include in
income, with interest, the gain realized but not recognized on the
initial section 354 exchange. If A has made a valid election under Sec.
1.367(a)-8(b)(1)(vii) to include the amount subject to the gain
recognition agreement in the year of the triggering event, A would
instead include the gain on its tax return for the taxable year that
includes the triggering event, together with interest.
Example 1A. Transferor is a subsidiary in consolidated group--(i)
Facts. The facts are the same as in Example 1, except that A is owned by
P, a domestic corporation, and for the taxable year in which the
transaction occurred, P, A and W filed a consolidated Federal income tax
return.
(ii) Result. Even though A is the U.S. transferor, P is required
under Sec. 1.367(a)-8(a)(3) to enter into the gain recognition
agreement and comply with the requirements under Sec. 1.367(a)-8. In
the event that A leaves the P group, A would make the annual
certifications required under Sec. 1.367(a)-8(b)(5)(ii). P would remain
liable with A under the gain recognition agreement.
Example 2. Taxable inversion pursuant to indirect stock transfer
rules--(i) Facts. The facts are the same as in Example 1, except that A
receives more than fifty percent of either the total voting power or the
total value of the stock of F in the transaction.
(ii) Result. A is required to include in income in the year of the
exchange the amount of gain realized on such exchange. See paragraph
(c)(1)(i) of this section. If A fails to include the income on its
timely-filed return, A will also be liable for the penalty under section
6038B (together with interest and other applicable penalties) unless A's
failure to include the income is due to reasonable cause and not willful
neglect. See Sec. 1.6038B-1(f).
Example 3. Disposition by U.S. transferred corporation of
substantially all of its assets--(i) Facts. The facts are the same as in
Example 1, except that, during the third year of the gain recognition
agreement, Newco disposes of substantially all (as described in Sec.
1.367(a)-8(e)(3)(i)) of the assets described in paragraph (d)(2)(v)(A)
of this section for cash and recognizes currently all of the gain
realized on the disposition.
(ii) Result. Under Sec. 1.367(a)-8(e)(3)(i), the gain recognition
agreement is generally triggered when the transferred corporation
disposes of substantially all of its assets. However, under the special
rule contained in Sec. 1.367(a)-8(h)(2), because A and W filed a
consolidated Federal income tax return prior to the transaction, and
Newco, the transferred corporation, is a domestic corporation, the gain
recognition agreement is terminated and has no further effect.
Example 4. Triangular section 368(a)(1)(B) reorganization--(i)
Facts. F, a foreign corporation, owns all the stock of S, a domestic
corporation. U, a domestic corporation, owns all of the stock of Y, also
a domestic corporation. U does not own any of the stock of F (applying
the attribution rules of section 318, as modified by section 958(b)). In
a triangular reorganization described in section 368(a)(1)(B) and
paragraph (d)(1)(iii) of this section, S acquires all the stock of Y,
and U receives 10% of the voting stock of F.
(ii) Result. U's exchange of Y stock for F stock will not be subject
to section 367(a)(1), provided that all of the requirements of paragraph
(c)(1) are satisfied, including the requirement that U enter into a
five-year gain recognition agreement. For purposes of this section, F is
treated as the transferee foreign corporation and Y is treated as the
transferred corporation. See paragraphs (d)(2)(i) and (ii) of this
section. Under paragraph (d)(2)(iv) of this section, the gain
recognition agreement would be triggered if F sold all or a portion of
the stock of S, or if S sold all or a portion of the stock of Y.
Example 5. Triangular section 368(a)(1)(C) reorganization--(i)
Facts. F, a foreign corporation, owns all of the stock of R, a domestic
corporation that operates an historical business. V, a domestic
corporation, owns all of the stock of Z, also a domestic corporation. V
does not own any of the stock of F (applying the attribution rules of
section 318 as modified by section 958(b)). In a triangular
reorganization described in section 368(a)(1)(C) (and paragraph
(d)(1)(iv) of this section), R acquires all of the assets of Z, and V
receives 30% of the voting stock of F.
(ii) Result. The consequences of the transfer are similar to those
described in Example 1; V is required to enter into a 5-year gain
recognition agreement under Sec. 1.367(a)-8 to secure nonrecognition
treatment under section 367(a). Under paragraphs (d)(2)(i) and (ii) of
this section, F is treated as the transferee foreign corporation and R
is treated as the transferred corporation. In determining whether, in a
later transaction, R has disposed of substantially all of its assets
under Sec. 1.367(a)-8(e)(3)(i), see paragraph (d)(2)(v)(A) of this
section.
Example 5A. Section 368(a)(1)(C) reorganization followed by section
368(a)(2)(C) exchange--(i) Facts. The facts are the same as in Example
5, except that the transaction is structured as a section 368(a)(1)(C)
reorganization, followed by a section 368(a)(2)(C)
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exchange, and R is a foreign corporation. The following additional facts
are present. Z has 3 businesses: Business A with a basis of $10 and a
value of $50, Business B with a basis of $10 and a value of $40, and
Business C with a basis of $10 and a value of $30. V and Z file a
consolidated Federal income tax return and V has a basis of $30 in the Z
stock, which has a value of $120. Assume that Businesses A and B consist
solely of assets that will satisfy the section 367(a)(3) active trade or
business exception; none of Business C's assets will satisfy the
exception. Z transfers all 3 businesses to F in exchange for 30 percent
of the F stock, which Z distributes to V pursuant to a section
368(a)(1)(C) reorganization. F then contributes Businesses B and C to R
pursuant to section 368(a)(2)(C).
(ii) Result. The transfer of the Business A assets by Z to F is
subject to the general rules under section 367, as such transfer does
not constitute an indirect stock transfer. The transfer by Z of the
Business B and C assets to F must first be tested under sections
367(a)(1), (3) and (5). Z recognizes $20 of gain on the outbound
transfer of the Business C assets, as such assets do not qualify for an
exception to section 367(a)(1). The Business B assets, which will be
used by R in an active trade or business outside the United States,
qualify for the exception under section 367(a)(3) and Sec. 1.367(a)-
2T(c)(2). V is deemed to transfer the stock of Z to F in a section 354
exchange subject to the rules of paragraph (d). V must enter into the
gain recognition agreement in the amount of $30 to preserve Z's
nonrecognition treatment with respect to its transfer of Business B
assets. Under paragraphs (d)(2)(i) and (ii) of this section, F is the
transferee foreign corporation and R is the transferred corporation.
Example 5B. Section 368(a)(1)(C) reorganization followed by section
368(a)(2)(C) exchange with U.S. transferee--(i) Facts. The facts are the
same as in Example 5A, except that R is a U.S. corporation.
(ii) Result. As in Example 5A, the outbound transfer of Business A
assets to F is subject to section 367(a) and is not affected by the
rules of this paragraph (d). The Business B assets qualified for
nonrecognition treatment; the Business C assets did not. However,
pursuant to paragraph (d)(2)(vi) of this section, the Business C assets
are not subject to section 367(a)(1), provided that the basis of the
assets in the hands of R is no greater than the basis of the assets in
the hands of Z. V is deemed to make an indirect transfer under the rules
of this paragraph (d). To preserve nonrecognition treatment under
section 367(a), V must enter into a 5-year gain recognition agreement in
the amount of $50, the amount of the appreciation in the Business B and
C assets, as the transfer of such assets by Z were not taxable under
section 367(a)(1) but were treated as an indirect stock transfer.
Example 6. Triangular section 368(a)(1)(C) reorganization followed
by 351 exchange--(i) Facts. The facts are the same as in Example 5,
except that, during the fourth year of the gain recognition agreement, R
transfers substantially all of the assets received from Z to K, a
wholly-owned domestic subsidiary of R, in an exchange described in
section 351.
(ii) Result. The disposition by R, the transferred corporation, of
substantially all of its assets would trigger the gain recognition
agreement if the assets were disposed of in a taxable transaction.
However, because the assets were transferred in a nonrecognition
transaction, such transfer does not trigger the gain recognition
agreement if V satisfies the reporting requirements contained in Sec.
1.367(a)-8(g)(3) (which includes the requirement that V amend its gain
recognition agreement to reflect the transaction). See also paragraph
(d)(2)(iv) of this section. To determine whether substantially all of
the assets are disposed of, any assets of Z that were transferred by Z
to R and then contributed by R to K are taken into account.
Example 6A. Triangular section 368(a)(1)(C) reorganization followed
by section 351 exchange with foreign transferee--(i) Facts. The facts
are the same as in Example 6 except that K is a foreign corporation.
(ii) Result. This transfer of assets by R to K must be analyzed to
determine its effect upon the gain recognition agreement, and such
transfer is also an outbound transfer of assets that is taxable under
section 367(a)(1) unless the active trade or business exception under
section 367(a)(3) applies. If the transfer is fully taxable under
section 367(a)(1), the transfer is treated as if the transferred
company, R, sold substantially all of its assets. Thus, the gain
recognition agreement would be triggered (but see Sec. 1.367(a)-
8(b)(3)(ii) for potential offsets to the gain to be recognized). If each
asset transferred qualifies for nonrecognition treatment under section
367(a)(3) and the regulations thereunder (which require, under Sec.
1.367(a)-2T(a)(2), the transferor to comply with the reporting
requirements under section 6038B), the result is the same as in Example
6. If a portion of the assets transferred qualify for nonrecognition
treatment under section 367(a)(3) and a portion are taxable under
section 367(a)(1) (but such portion does not result in the disposition
of substantially all of the assets), the gain recognition agreement will
not be triggered if such information is reported as required under Sec.
1.367(a)-8(b)(5) and (e)(3)(i).
Example 7. Concurrent application of asset transfer and indirect
stock transfer rules in consolidated return setting--(i) Facts. Assume
the same facts as in Example 5, except that R is a foreign corporation
and V and Z file a consolidated return for Federal income tax purposes.
The properties of Z consist of Business A assets, with an adjusted basis
of
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$50 and fair market value of $90, and Business B assets, with an
adjusted basis of $50 and a fair market value of $110. Assume that the
Business A assets do not qualify for the active trade or business
exception under section 367(a)(3), but that the Business B assets do
qualify for the exception. V's basis in the Z stock is $100, and the
value of such stock is $200.
(ii) Result. Under paragraph (d)(2)(vi), the assets of Businesses A
and B that are transferred to R must be tested under sections 367(a)(3)
and (a)(5) prior to consideration of the indirect stock transfer rules
of this paragraph (d). Thus, Z must recognize $40 of income under
section 367(a)(1) on the outbound transfer of Business A assets. Under
Sec. 1.1502-32, because V and Z file a consolidated return, V's basis
in its Z stock increases from $100 to $140 as a result of Z's $40 gain.
Provided that all of the other requirements under paragraph (c)(1) of
this section are satisfied, to qualify for nonrecognition treatment with
respect to V's indirect transfer of Z stock, V must enter into a gain
recognition agreement in the amount of $60 (the gain realized but not
recognized by V in the stock of Z after the $40 basis adjustment). If F
sells a portion of its stock in R during the term of the agreement, V
will be required to recognize a portion of the $60 gain subject to the
agreement. To determine whether R disposes of substantially all of its
assets (under Sec. 1.367(a)-8(e)(3)(i)), only the Business B assets
will be considered (because the transfer of the Business A assets was
taxable to Z under section 367). See paragraph (d)(2)(v)(A) of this
section.
Example 7A. Concurrent application without consolidated returns--(i)
Facts. The facts are the same as in Example 7, except that V and Z do
not file consolidated income tax returns.
(ii) Result. Z would still recognize $40 of gain on the transfer of
its Business A assets, and the Business B assets would still qualify for
the active trade or business exception under section 367(a)(3). However,
V's basis in its stock of Z would not be increased by the amount of Z's
gain. V's indirect transfer of stock will be taxable unless V enters
into a gain recognition agreement (as described in Sec. 1.367(a)-8) for
the $100 of gain realized but not recognized with respect to the stock
of Z.
Example 7B. Concurrent application with individual U.S.
shareholder--(i) Facts. The facts are the same as in Example 7, except
that V is an individual U.S. citizen.
(ii) Result. Section 367(a)(5) would prevent the application of the
active trade or business exception under section 367(a)(3). Thus, Z's
transfer of assets to R would be fully taxable under section 367(a)(1).
Z would recognize $100 of income. V's basis in its stock of Z is not
increased by this amount. V is taxable with respect to its indirect
transfer of its Z stock unless V enters into a gain recognition
agreement in the amount of the $100, the gain realized but not
recognized with respect to its Z stock.
Example 7C. Concurrent application with nonresident alien
shareholder--(i) Facts. The facts are the same as in Example 7, except
that V is a nonresident alien.
(ii) Result. Pursuant to section 367(a)(5), the active trade or
business exception under section 367(a)(3) is not available with respect
to Z's transfer of assets to R. Thus, Z has $100 of gain with respect to
the Business A and B assets. Because V is a nonresident alien, however,
V is not subject to section 367(a) with respect to its indirect transfer
of Z stock.
Example 8. Concurrent application with section 368(a)(2)(C)
Exchange--(i) Facts. The facts are the same as in Example 7, except that
R transfers the Business A assets to M, a wholly-owned domestic
subsidiary of R, in an exchange described in section 368(a)(2)(C).
(ii) Result. Pursuant to paragraph (d)(2)(vi) of this section,
section 367(a)(1) does not apply to Z's transfer of Business A assets to
R, because such assets are transferred to M, a domestic corporation.
Sections 367(a)(1), (3) and (5), as well as section 367(d), apply to Z's
transfer of assets to R to the extent that such assets are not
transferred to M. However, the Business B assets qualify for an
exception to taxation under section 367(a)(3). Thus, if the requirements
of paragraph (c)(1) of this section are satisfied, including the
requirement that V enter into a 5-year gain recognition agreement and
comply with the requirements of Sec. 1.367(a)-8 with respect to the
gain realized on the Z stock, $100, the entire transaction qualifies for
nonrecognition treatment under section 367(a)(1). See also section
367(a)(5) and any regulations issued thereunder. Under paragraphs
(d)(2)(i) and (ii) of this section, the transferee foreign corporation
is F and the transferred corporation is M. Pursuant to paragraph
(d)(2)(iv) of this section, a disposition by F of the stock of R, or a
disposition by R of the stock of M, will trigger the gain recognition
agreement. To determine whether substantially all of the assets have
been disposed of (as described under Sec. 1.367(a)-8(e)(3)(i)), the
Business A assets in M and the Business B assets in R must both be
considered.
Example 9. Concurrent application of direct and indirect stock
transfer rules--(i) Facts. F, a foreign corporation, owns all of the
stock of O, also a foreign corporation. D, a domestic corporation, owns
all of the stock of E, also a domestic corporation, which owns all of
the stock of N, also a domestic corporation. Prior to the transactions
described in this Example 9, D, E and N filed a consolidated income tax
return. D has a basis of $100 in the stock of E, which has a fair market
value of $160. The N stock has a fair market value of $100, and E has a
basis
[[Page 268]]
of $60 in such stock. In addition to the stock of N, E owns the assets
of Business X. The assets of Business X have a fair market value of $60,
and E has a basis of $50 in such assets. Assume that the Business X
assets qualify for nonrecognition treatment under section 367(a)(3). D
does not own any stock in F (applying the attribution rules of section
318 as modified by section 958(b)). In a triangular reorganization
described in section 368(a)(1)(C) and paragraph (d)(1)(iv) of this
section, O acquires all of the assets of E, and D exchanges its stock in
E for 40% of the voting stock of F.
(ii) Result. E's transfer of its assets, including the N stock, must
be tested under the general rules of section 367(a) before consideration
of D's indirect transfer of the stock of E. E's transfer of the assets
of Business X qualify for nonrecognition under section 367(a)(3). E
could qualify for nonrecognition treatment with respect to its transfer
of N stock if it enters into a gain recognition agreement (and all of
the requirements of paragraph (c)(1)(i) of this section are satisfied);
however under Sec. 1.367(a)-8(f)(2)(i), D, the parent of the
consolidated group, must enter into the agreement. O is the transferee
foreign corporation; N is the transferred corporation. D may also
qualify for nonrecognition with respect to its indirect transfer of the
stock of E if it enters into a separate gain recognition agreement with
respect to the E stock (and all of the requirements of paragraph
(c)(1)(i) of this section are satisfied). As to this transfer, F is the
transferee foreign corporation; O is the transferred corporation. The
amount of the gain recognition agreement is $60. See also section
367(a)(5) and any regulations issued thereunder.
Example 10. Successive section 351 exchanges--(i) Facts. D, a
domestic corporation, owns all the stock of X, a controlled foreign
corporation that operates an historical business, which owns all the
stock of Y, a controlled foreign corporation that also operates an
historical business. The properties of D consist of Business A assets,
with an adjusted basis of $50 and a fair market value of $90, and
Business B assets, with an adjusted basis of $50 and a fair market value
of $110. Assume that the Business B assets qualify for the exception
under section 367(a)(3) and Sec. 1.367(a)-2T(c)(2), but that the
Business A assets do not qualify for the exception. In an exchange
described in section 351, D transfers the assets of Businesses A and B
to X, and, in connection with the same transaction, X transfers the
assets of Business B to Y in another exchange described in section 351.
(ii) Result. Under paragraph (d)(1)(vi) of this section, this
transaction is treated as an indirect stock transfer for purposes of
section 367(a), but the transaction is not recharacterized for purposes
of section 367(b). Moreover, under paragraph (d)(2)(vi) of this section,
the assets of Businesses A and B that are transferred to X must be
tested under section 367(a)(3). The Business A assets, which were not
transferred to Y, are subject to the general rules of section 367(a),
and not the indirect stock transfer rules described in this paragraph
(d). D must recognize $40 of income on the outbound transfer of Business
A assets. The transfer of the Business B assets is subject to both the
asset transfer rules (under section 367(a)(3)) and the indirect stock
transfer rules of this paragraph (d) and Sec. 1.367(a)-8. Thus, D's
transfer of the Business B assets will not be subject to section
367(a)(1) if D enters into a five-year gain recognition agreement with
respect to the stock of Y. Under paragraphs (d)(2)(i) and (ii) of this
section, X will be treated as the transferee foreign corporation and Y
will be treated as the transferred corporation for purposes of applying
the terms of the agreement. If X sells all or a portion of the stock of
Y during the term of the agreement, D will be required to recognize a
proportionate amount of the $60 gain that was realized by D on the
initial transfer of the Business B assets.
Example 10A. Successive section 351 exchanges with ultimate domestic
transferee--(i) Facts. The facts are the same as in Example 10, except
that Y is a domestic corporation.
(ii) Result. As in Example 10, D must recognize $40 of income on the
outbound transfer of the Business A assets. Although the Business B
assets qualify for the exception under section 367(a)(3) (and end up in
U.S. corporate solution, in Y), the $60 of gain realized on the Business
B assets is nevertheless taxable under paragraphs (c)(1) and (d)(1)(vi)
of this section because the transaction is considered to be a transfer
by D of stock of a domestic corporation, Y, in which D receives more
than 50 percent of the stock of the transferee foreign corporation, X. A
gain recognition agreement is not permitted.
Example 11. Concurrent application of indirect stock transfer rules
and section 367(b)--(i) Facts. F, a foreign corporation, owns all of the
stock of Newco, which is also a foreign corporation. P, a domestic
corporation, owns all of the stock of S, a foreign corporation that is a
controlled foreign corporation within the meaning of section 957(a). P's
basis in the stock of S is $50 and the value of S is $100. The section
1248 amount with respect to S stock is $30. In a reorganization
described in section 368(a)(1)(C) (and paragraph (d)(1)(iv) of this
section), Newco acquires all of the properties of S, and P exchanges its
stock in S for 49 percent of the stock of F.
(ii) Result. P's exchange of S stock for F stock under section 354
will be taxable under section 367(a) (and section 1248 will be
applicable) if P fails to enter into a 5-year gain recognition agreement
in accordance with
[[Page 269]]
Sec. 1.367(a)-8. Under paragraph (b)(2) of this section, if P enters
into a gain recognition agreement, the exchange will be subject to the
provisions of section 367(b) and the regulations thereunder as well as
section 367(a). Under Sec. 1.367(b)-4(b), P must recognize the section
1248 amount of $30 because P exchanged stock of a controlled foreign
corporation, S, for stock of a foreign corporation that is not a
controlled foreign corporation, F. The indirect stock transfer rules do
not apply with respect to section 367(b). The deemed dividend of $30
recognized by P will increase P's basis in the F stock received in the
transaction, and F's basis in the Newco stock. Thus, the amount of the
gain recognition agreement is $20 ($50 gain realized on the transfer
less the $30 inclusion under section 367(b)). Under paragraphs (d)(2)(i)
and (ii) of this section, F is treated as the transferee foreign
corporation and Newco is the transferred corporation.
Example 11A. Triangular section 368(a)(1)(C) reorganization
involving foreign acquired corporation--(i) Facts. Assume the same facts
as in Example 11, except that P receives 51 percent of the stock of F.
(ii) Result. Assuming Sec. 1.367(b)-4(b) does not apply, there is
no income inclusion under section 367(b), and the amount of the gain
recognition agreement is $50.
Example 12. Direct asset reorganization not subject to stock
transfer rules--(i) Facts. D is a publicly traded domestic corporation.
D's assets consist of tangible assets, including stock or securities. In
a reorganization described in section 368(a)(1)(F), D becomes a foreign
corporation, F.
(ii) Result. The reorganization is characterized under Sec.
1.367(a)-1T(f). D's outbound transfer of assets is taxable under section
367(a)(1). Even if any of D's assets would have otherwise qualified for
an exception to section 367(a)(1), section 367(a)(5) provides that no
exception can apply. The section 368(a)(1)(F) reorganization is not an
indirect stock transfer described in paragraph (d) of this section.
Moreover, the exchange by D's shareholders of D stock for F stock in an
exchange described under section 354 is not an exchange described under
section 367(a). See paragraph (a) of this section.
(e) Effective dates--(1) In general. The rules in paragraphs (a),
(b) and (d) of this section apply to transfers occurring on or after
July 20, 1998. The rules in paragraph (c) of this section with respect
to transfers of domestic stock or securities are generally applicable
for transfers occurring after January 29, 1997. See Sec. 1.367(a)-
3(c)(11). For rules regarding transfers of domestic stock or securities
after December 16, 1987, and before January 30, 1997, and transfers of
foreign stock or securities after December 16, 1987, and before July 20,
1998, see paragraph (g) of this section.
(2) Election. Notwithstanding paragraphs (e)(1) and (g) of this
section, taxpayers may, by timely filing an original or amended return,
elect to apply paragraphs (b) and (d) of this section to all transfers
of foreign stock or securities occurring after December 16, 1987, and
before July 20, 1998, except to the extent that a gain recognition
agreement has been triggered prior to July 20, 1998. If an election is
made under this paragraph (e)(2), the provisions of Sec. 1.367(a)-3T(g)
(see 26 CFR part 1, revised April 1, 1998) shall apply, and, for this
purpose, the term substantial portion under Sec. 1.367(a)-3T(g)(3)(iii)
(see 26 CFR part 1, revised April 1, 1998) shall be interpreted to mean
substantially all as defined in section 368(a)(1)(C). In addition, if
such an election is made, the taxpayer must apply the rules under
section 367(b) and the regulations thereunder to any transfers occurring
within that period as if the election to apply Sec. 1.367(a)-3(b) and
(d) to transfers occurring within that period had not been made, except
that in the case of an exchange described in section 351 the taxpayer
must apply section 367(b) and the regulations thereunder as if the
exchange was described in Sec. 7.367(b)-7 of this chapter (as in effect
before February 23, 2000; see 26 CFR part 1, revised as of April 1,
1999). For example, if a U.S. person, pursuant to a section 351
exchange, transfers stock of a controlled foreign corporation in which
it is a United States shareholder but does not receive back stock of a
controlled foreign corporation in which it is a United States
shareholder, the U.S. person must include in income under Sec.
7.367(b)-7 of this chapter (as in effect before February 23, 2000; see
26 CFR part 1, revised as of April 1, 1999) the section 1248 amount
attributable to the stock exchanged (to the extent that the fair market
value of the stock exchanged exceeds its adjusted basis). Such inclusion
is required even though Sec. 7.367(b)-7 of this chapter (as in effect
before February 23, 2000; see 26 CFR part 1, revised as of April 1,
1999), by its terms, did not apply to section 351 exchanges.
(f) Former 10-year gain recognition agreements. If a taxpayer elects
to
[[Page 270]]
apply the rules of this section to all prior transfers occurring after
December 16, 1987, any 10-year gain recognition agreement that remains
in effect (has not been triggered in full) on July 20, 1998 will be
considered by the Internal Revenue Service to be a 5-year gain
recognition agreement with a duration of five full taxable years
following the close of the taxable year of the initial transfer.
(g) Transition rules regarding certain transfers of domestic or
foreign stock or securities after December 16, 1987, and prior to July
20, 1998--(1) Scope. Transfers of domestic stock or securities described
under section 367(a) that occurred after December 16, 1987, and prior to
April 17, 1994, and transfers of foreign stock or securities described
under section 367(a) that occur after December 16, 1987, and prior to
July 20, 1998 are subject to the rules contained in section 367(a) and
the regulations thereunder, as modified by the rules contained in
paragraph (g)(2) of this section. For transfers of domestic stock or
securities described under section 367(a) that occurred after April 17,
1994 and before January 30, 1997, see Temporary Income Regulations under
section 367(a) in effect at the time of the transfer (Sec. 1.367(a)-
3T(a) and (c), 26 CFR part 1, revised April 1, 1996) and paragraph
(c)(11) of this section. For transfers of domestic stock or securities
described under section 367(a) that occur after January 29, 1997, see
Sec. 1.367(a)-3(c).
(2) Transfers of domestic or foreign stock or securities: Additional
substantive rules--(i) Rule for less than 5-percent shareholders. Unless
paragraph (g)(2)(iii) of this section applies (in the case of domestic
stock or securities) or paragraph (g)(2)(iv) of this section applies (in
the case of foreign stock or securities), a U.S. transferor that
transfers stock or securities of a domestic or foreign corporation in an
exchange described in section 367(a) and owns less than 5 percent of
both the total voting power and the total value of the stock of the
transferee foreign corporation immediately after the transfer (taking
into account the attribution rules of section 958) is not subject to
section 367(a)(1) and is not required to enter into a gain recognition
agreement.
(ii) Rule for 5-percent shareholders. Unless paragraph (g)(2)(iii)
or (iv) of this section applies, a U.S. transferor that transfers
domestic or foreign stock or securities in an exchange described in
section 367(a) and owns at least 5 percent of either the total voting
power or the total value of the stock of the transferee foreign
corporation immediately after the transfer (taking into account the
attribution rules under section 958) may qualify for nonrecognition
treatment by filing a gain recognition agreement in accordance with
Sec. 1.367(a)-3T(g) in effect prior to July 20, 1998 (see 26 CFR part
1, revised April 1, 1998) for a duration of 5 or 10 years. The duration
is 5 years if the U.S. transferor (5-percent shareholder) determines
that all U.S. transferors, in the aggregate, own less than 50 percent of
both the total voting power and the total value of the transferee
foreign corporation immediately after the transfer. The duration is 10
years in all other cases. See, however, Sec. 1.367(a)-3(f). If a 5-
percent shareholder fails to properly enter into a gain recognition
agreement, the exchange is taxable to such shareholder under section
367(a)(1).
(iii) Gain recognition agreement option not available to controlling
U.S. transferor if U.S. stock or securities are transferred.
Notwithstanding the provisions of paragraph (g)(2)(ii) of this section,
in no event will any exception to section 367(a)(1) apply to the
transfer of stock or securities of a domestic corporation where the U.S.
transferor owns (applying the attribution rules of section 958) more
than 50 percent of either the total voting power or the total value of
the stock of the transferee foreign corporation immediately after the
transfer (i.e., the use of a gain recognition agreement to qualify for
nonrecognition treatment is unavailable in this case).
(iv) Loss of United States shareholder status in the case of a
transfer of foreign stock. Notwithstanding the provisions of paragraphs
(g)(2)(i) and (ii) of this section, in no event will any exception to
section 367(a)(1) apply to the transfer of stock of a foreign
corporation in which the U.S. transferor is a United States shareholder
(as defined in
[[Page 271]]
Sec. 7.367(b)-2(b) of this chapter (as in effect before February 23,
2000; see 26 CFR part 1, revised as of April 1, 1999) or section 953(c))
unless the U.S. transferor receives back stock in a controlled foreign
corporation (as defined in section 953(c), section 957(a) or section
957(b)) as to which the U.S. transferor is a United States shareholder
immediately after the transfer.
[T.D. 8702, 61 FR 68637, Dec. 30, 1996, as amended by T.D. 8770, 63 FR
33556, June 19, 1998; 64 FR 15687, Apr. 1, 1999; T.D. 8850, 64 FR 72550,
Dec. 28, 1999; T.D. 8862, 65 FR 3596, Jan. 24, 2000]
Sec. 1.367(a)-4T Special rules applicable to specified transfers of
property (temporary).
(a) In general. This section provides special rules for determining
the applicability of section 367(a)(1) to specified transfers of
property. Paragraph (b) of this section provides a special rule
requiring the recapture of depreciation upon the transfer abroad of
property previously used in the United States. Paragraphs (c) through
(f) of this section provide rules for determining whether certain types
of property are transferred for use in the active conduct of a trade or
business outside of the United States. Paragraph (g) excepts certain
transfers to FSCs from the operation of section 367(a)(1). The treatment
of any transfer of property described in this section shall be
determined exclusively under the rules of this section.
(b) Depreciated property used in the U.S.--(1) In general. If a U.S.
person transfers U.S. depreciated property (as defined in paragraph
(b)(2) of this section) to a foreign corporation in an exchange
described in section 367(a)(1), then that person shall include in its
gross income for the taxable year in which the transfer occurs ordinary
income equal to the gain realized that would have been includible in the
transferor's gross income as ordinary income under section 617(d)(1),
1245(a), 1250(a), 1252(a), or 1254(a), whichever is applicable, if at
the time of the transfer the transferor had sold the property at its
fair market value. Recapture of depreciation under this paragraph (b)
shall be required regardless of whether any exception to section
367(a)(1) (such as the exception for property transferred for use in the
active conduct of a foreign trade or business) would otherwise apply to
the transfer. However, any applicable exception shall apply with respect
to realized gain that is not included in ordinary income pursuant to
this paragraph (b).
(2) U.S. depreciated property. U.S. depreciated property subject to
the rules of this paragraph (b) is any property that--
(i) Is either mining property (as defined in section 617(f)(2)),
section 1245 property (as defined in section 1245(a)(3)), section 1250
property (as defined in section 1250(c)), farm land (as defined in
section 1252(a)(2)), or oil, gas, or geothermal property (as defined in
section 1254(a)(3)); and
(ii) Has been used in the United States or has qualified as section
38 property by virtue of section 48(a)(2)(B) prior to its transfer.
(3) Property used within and without the U.S. If U.S. depreciated
property has been used partly within and partly without the United
States, then the amount required to be included in ordinary income
pursuant to this paragraph (b) shall be reduced to an amount determined
in accordance with the following formula:
U.S. use
Full recapture amount X -------------
Total use
----------------------------------------------------------------------------------------------------------------
For purposes of the above fraction, the full recapture amount is the
amount that would otherwise be included in the transferor's income under
paragraph (b)(1) of this section. U.S. use is the number of months that
the property either was used within the United States or qualified as
section 38 property by virtue of section 48(a)(2)(B), and was subject to
depreciation by the transferor or a related person. Total use is the
total number of months that the property was used (or available for
use), and subject to depreciation, by the transferor or a related
person. For purposes of this paragraph (b)(3), property shall not be
considered to have been in use outside of the United States during any
period in which such property was, for purposes of section 48
[[Page 272]]
or 168, treated as property not used predominantly outside the United
States pursuant to the provisions of section 48(a)(2)(B). For purposes
of this paragraph (b)(3) the term related person shall have the meaning
set forth in Sec. 1.367(d)-1T(h).
(4) [Reserved]
(5) Effective date. This paragraph (b) applies to transfers
occurring on or after June 16, 1986.
(c) Property to be leased--(1) Leasing business of transferee.
Tangible property transferred to a foreign corporation that will be
leased to other persons by the foreign corporation shall be considered
to be transferred for use in the active conduct of a trade or business
outside of the United States only if--
(i) The transferee's leasing of the property constitutes the active
conduct of a leasing business;
(ii) The lessee of the property is not expected to, and does not,
use the property in the United States; and
(iii) The transferee has need for substantial investment in assets
of the type transferred.
The active conduct of a leasing business requires that the employees of
the foreign corporation perform substantial marketing, customer service,
repair and maintenance, and other substantial operational activities
with respect to the transferred property outside of the United States.
Tangible property subject to the rules of this paragraph (c) includes
real property located outside of the United States. The rules of Sec.
1.367(a)-5T(b) shall apply to transfers of property described in that
section regardless of satisfaction of the rules of this paragraph (c).
(2) De minimis leasing by transferee. Tangible property transferred
to a foreign corporation that will be leased to other persons by the
foreign corporation and that does not satisfy the conditions of
paragraph (b)(1) of this section shall, nevertheless, be considered to
be transferred for use in the active conduct of a trade or business if
either--
(i) The property transferred will be used by the transferee foreign
corporation in the active conduct of a trade or business but will be
leased during occasional brief periods when the property would otherwise
be idle, such as an airplane leased during periods of excess capacity;
or
(ii) The property transferred is real property located outside the
United States and--
(A) The property will be used primarily in the active conduct of a
trade or business of the transferee foreign corporation; and
(B) Not more than ten percent of the square footage of the property
will be leased to others.
(d) Property to be sold. Property shall not be considered to be
transferred for use in the active conduct of a trade or business and a
transfer of stock or securities shall not be excepted from section
367(a)(1) under the rules of Sec. 1.367(a)-3T if, at the time of the
transfer, it is reasonable to believe that, in the reasonably
foreseeable future, the transferee will sell or otherwise dispose of any
material portion of the transferred stock, securities, or other property
other than in the ordinary course of business.
(e) Oil and gas working interests--(1) In general. A working
interest in oil and gas properties shall be considered to be transferred
for use in the active conduct of a trade or business if--
(i) The transfer satisfies the conditions of paragraph (e)(2) of
this section;
(ii) At the time of the transfer, the transferee has no intention to
farmout or otherwise transfer any part of the transferred working
interest; and
(iii) During the first three years after the transfer there are no
farmouts or other transfers of any part of the transferred working
interest as a result of which the transferee retains less than a 50
percent share of the transferred working interest.
(2) Active use of working interest. Working interests in oil and gas
properties shall be considered to be transferred for use in the active
conduct of a trade or business if--
(i) The transferor is regularly and substantially engaged in
exploration for and extraction of minerals, either directly or through
working interests in joint ventures, other than by reason of the
property that is transferred;
(ii) The terms of the working interest transferred were actively
negotiated among the joint venturers;
[[Page 273]]
(iii) The working interest transferred constitutes at least a five
percent working interest;
(iv) Prior to and at the time of the transfer, through its own
employees or officers, the transferor was regularly and actively engaged
in--
(A) Operating the working interest, or
(B) Analyzing technical data relating to the activities of the
venture;
(v) Prior to and at the time of the transfer, through its own
employees or officers, the transferor was regularly and actively
involved in decisionmaking with respect to the operations of the
venture, including decisions relating to exploration, development,
production, and marketing; and
(vi) After the transfer, the transferee foreign corporation will for
the foreseeable future satisfy the requirements of subdivisions (iv) and
(v) of this paragraph (d)(2).
(3) Start-up operations. Working interests in oil and gas properties
that do not satisfy the requirements of paragraph (e)(2) of this section
shall, nevertheless, be considered to be transferred for use in the
active conduct of a trade or business if--
(i) The working interest was acquired by the transferor immediately
prior to the transfer and for the specific purpose of transferring it to
the transferee foreign corporation;
(ii) The requirements of paragraph (e)(2)(ii) and (iii) of this
section are satisfied; and
(iii) The transferee foreign corporation will for the foreseeable
future satisfy the requirements of paragraph (e)(2)(iv) and (v) of this
section.
(4) Other applicable rules. Oil and gas interests not described in
this paragraph (e) may nonetheless qualify for the exception to section
367(a)(1) contained in Sec. 1.367(a)-2T, relating to transfers of
property for use in the active conduct of a trade or business outside of
the United States. However, a mere royalty interest in oil and gas
properties will not be treated as transferred for use in the active
conduct of a trade or business outside the United States. Moreover, a
royalty or similar interest that constitutes intangible property will be
subject to the rules of Sec. 1.367(d)-1T, relating to transfers of
intangible property.
(f) Compulsory transfers. Property shall be presumed to be
transferred for use in the active conduct of a trade or business outside
of the United States, if--
(1) The property was previously in use in the country in which the
transferee foreign corporation is organized; and
(2) The transfer is either:
(i) Legally required by the foreign government as a necessary
condition of doing business in that country; or
(ii) Compelled by a genuine threat of immediate expropriation by the
foreign government.
(g) Relationship to other sections. The rules of Sec. Sec.
1.367(a)-5T, 1.367(a)-6T, and 1.367(d)-1T apply to transfers of property
whether or not the property is transferred for use in the active conduct
of a trade or business outside the United States. See Sec. 1.367(d)-
1T(g)(2)(ii) for a special election with respect to compulsory transfers
of intangible property.
(h) Transfers of certain property to FSCs--(1) In general. The
provisions of section 367 (a) and (d) and the regulations thereunder
shall not apply to a transfer of property by a U.S. person to a foreign
corporation that constitutes a FSC, as defined in section 922(a), if--
(i) The transferee FSC uses the property to generate exempt foreign
trade income, as defined in section 923(a);
(ii) The property is not excluded property, as defined in section
927(a)(2); and
(iii) The property consists of a corporate name or tangible property
that is appropriate for use in the operation of a FSC office.
(2) Exception. The general rule in paragraph (g)(1) of this section
shall not apply if, within three years after the original transfer, the
original transferee FSC (or a subsequent transferee FSC) disposes of the
property other than in the ordinary course of business or through a
transfer to another FSC. Thus, the U.S. transferor may recognize gain in
the taxable year in which the original transfer occurred
[[Page 274]]
through the application of section 367 and the regulations thereunder.
[T.D. 8087, 51 FR 17947, May 16, 1986, as amended by T.D. 8515, 59 FR
2960, Jan. 20, 1994]
Sec. 1.367(a)-5T Property subject to section 367(a)(1) regardless of
use in trade or business (temporary).
(a) In general. Section 367(a)(1) shall apply to a transfer of
property described in this section regardless of whether the property is
transferred for use in the active conduct of a trade or business.
Certain exceptions to the operation of this rule are provided in this
section, and a special gain limitation rule is provided in paragraph
(e). A transfer of property described in this section is subject to
section 367(a)(1) even if the transfer is a compulsory transfer
described in Sec. 1.367(a)-4T(f).
(b) Inventory, etc. Regardless of use in an active trade or
business, section 367(a)(1) shall apply to the transfer of--
(1) Stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of its trade or
business; and
(2) A copyright, a literary, musical, or artistic composition, a
letter or memorandum, or similar property, held by--
(i) A taxpayer whose personal efforts created such property;
(ii) In the case of a letter, memorandum, or similar property, a
taxpayer from whom such property was prepared or produced; or
(iii) A taxpayer in whose hands the basis of such property is
determined, for purposes of determining gain from a sale or exchange, in
whole or part by reference to the basis of such property in the hands of
a taxpayer described in subdivision (i) or (ii) of this paragraph
(b)(2).
For purposes of this section, the term inventory includes raw materials
and supplies, partially completed goods, and finished products.
(c) Installment obligations, etc. Regardless of use in an active
trade or business, section 367(a)(1) shall apply to the transfer of
installment obligations, accounts receivable, or similar property, but
only to the extent that the principal amount of any such obligation has
not previously been included by the taxpayer in its taxable income.
(d) Foreign currency, etc.--(1) In general. Regardless of use in an
active trade or business, section 367(a)(1) shall apply to the transfer
of foreign currency or other property denominated in foreign currency,
including installment obligations, futures contracts, forward contracts,
accounts receivable, or any other obligation entitling its payee to
receive payment in a currency other than U.S. dollars.
(2) Exception for certain obligations. If transferred property
denominated in a foreign currency--
(i) Is denominated in the currency of the country in which the
transferee foreign corporation is organized; and
(ii) Was acquired in the ordinary course of the business of the
transferor that will be carried on by the transferee foreign
corporation,
then section 367(a)(1) shall apply to the transfer only to the extent
that gain is required to be recognized with respect to previously
realized income reflected in installment obligations subject to
paragraph (c) of this section. The rule of this paragraph (d)(2) shall
not apply to transfers of foreign currency.
(3) Limitation of gain required to be recognized. If section
367(a)(1) applies to a transfer of property described in this paragraph,
then the gain required to be recognized shall be limited to--
(i) The gain realized upon the transfer of property described in
this paragraph (d), minus
(ii) Any loss realized as part of the same transaction upon the
transfer of property described in this paragraph (d).
This limitation applies in lieu of the rule in Sec. 1.367(a)-1T(b)(1).
No loss shall be recognized with respect to property described in this
paragraph (d).
(e) Intangible property. Regardless of use in an active trade or
business, a transfer of intangible property pursuant to section 332
shall be subject to section 367(a)(1), unless it constitutes foreign
goodwill or going concern value, as defined in Sec. 1.367(a)-
1T(d)(5)(iii). For rules concerning
[[Page 275]]
transfers of intangible property pursuant to section 351 or 361, see
section 367(d) and Sec. 1.367(d)-1T.
(f) Leased tangible property. Regardless of use in an active trade
or business, section 367(a)(1) shall apply to a transfer of tangible
property with respect to which the transferor is a lessor at the time of
the transfer, unless--
(1) With respect to property that will not be leased by the
transferee to third persons, the transferee was the lessee of the
property at the time of the transfer; or
(2) With respect to property that will be leased by the transferee
to third persons, the transferee satisfies the conditions set forth in
Sec. 1.367(a)-4T(c)(1) or (2).
[T.D. 8087, 51 FR 17949, May 16, 1986]
Sec. 1.367(a)-6T Transfer of foreign branch with previously deducted
losses (temporary).
(a) In general. This section provides special rules relating to the
transfer of the assets of a foreign branch with previously deducted
losses. Paragraph (b) of this section provides generally that such
losses must be recaptured by the recognition of the gain realized on the
transfer. Paragraph (c) of this section sets forth rules concerning the
character of, and limitations on, the gain required to be recognized.
Paragraph (d) of this section defines the term previously deducted
losses. Paragraph (e) of this section describes certain reductions that
are made to the previously deducted losses before they are taken into
income under this section. Finally, paragraph (g) of this section
defines the term foreign branch.
(b) Recognition of gain required--(1) In general. If a U.S. person
transfers any assets of a foreign branch to a foreign corporation in an
exchange described in section 367(a)(1), then the transferor shall
recognize gain equal to--
(i) The sum of the previously deducted branch ordinary losses as
defined and reduced in paragraphs (d) and (e) of this section; and
(ii) The sum of the previously deducted branch capital losses as
defined and reduced in paragraphs (d) and (e) of this section.
(2) No active conduct exception. The rules of this paragraph (b)
shall apply regardless of whether the assets of the foreign branch are
transferred for use in the active conduct of a trade or business outside
the United States.
(c) Special rules concerning gain recognized--(1) Character and
source of gain. The gain described in paragraph (b)(1)(i) of this
section shall be treated as ordinary income of the transferor, and the
gain described in paragraph (b)(1)(ii) of this section shall be treated
as long-term capital gain of the transferor. Gain that is recognized
pursuant to the rules of this section shall be treated as income from
sources outside the United States. Such recognized gain shall be treated
as foreign oil and gas extraction income (as defined in section 907) in
the same proportion that previously deducted foreign oil and gas
extraction losses bore to the total amount of previously deducted
losses.
(2) Gain limitation. For a rule limiting the amount of gain required
to be recognized under section 367(a) upon any transfer of property to a
foreign corporation, including the transfer of assets of a foreign
branch with previously deducted losses, see Sec. 1.367(a)-1T(b)(3).
(3) Foreign goodwill and going concern value. For purposes of this
section, the assets of a foreign branch shall include foreign goodwill
and going concern value related to the business of the foreign branch,
as defined in Sec. 1.367(a)-1T(d)(5)(iii). Thus, gain realized upon the
transfer of the foreign goodwill or going concern value of a foreign
branch to a foreign corporation will be taken into account in computing
the limitation on loss recapture under paragraph (c)(2) of this section.
(4) Transfers of certain intangible property. Gain realized on the
transfer of intangible property (computed with reference to the fair
market value of the intangible property as of the date of the transfer)
that is an asset of a foreign branch shall be taken into account in
computing the limitation on loss recapture under paragraph (c)(2) of
this section. For rules relating to the crediting of gain recognized
under this section against income deemed to arise by operation of
section 367(d), see Sec. 1.367(d)-1T(g)(3).
(d) Previously deducted losses--(1) In general. This paragraph (d)
provides
[[Page 276]]
rules for determining, for purposes of paragraph (b)(1) of this section,
the previously deducted losses of a foreign branch any of whose assets
are transferred to a foreign corporation in an exchange described in
section 367(a)(1). Initially, the two previously deducted losses of a
foreign branch for a taxable year are the total ordinary loss
(``previously deducted branch ordinary loss'') and the total capital
loss (``previously deducted branch capital loss'') that were realized by
the foreign branch in that taxable year (a ``branch loss year'') prior
to the transfer and that were or will be reflected on a U.S. income tax
return of the transferor. The previously deducted branch ordinary loss
for each branch loss year is reduced by expired net ordinary losses
under paragraph (d)(2) of this section, while the previously deducted
capital loss for each loss year is reduced by expired net capital losses
under paragraph (d)(3) of this section. For each branch loss year, the
remaining previously deducted branch ordinary loss and the remaining
previously deducted branch capital loss are then reduced, proceeding
from the first branch loss year to the last branch loss year, to reflect
expired foreign tax credits under paragraph (d)(4) of this section. The
reductions are made in the order of the taxable years in which the
foreign tax credits arose. Finally, similar reductions are made to
reflect expired investment credits under paragraph (d)(5) of this
section.
(2) Reduction by expired net ordinary loss--(i) In general. The
previously deducted branch ordinary loss for each branch loss year shall
be reduced under this paragraph (d)(2) by the amount of any expired net
ordinary loss with respect to that branch loss year. Expired net
ordinary losses arising in years other than the branch loss year shall
reduce the previously deducted branch ordinary loss for the branch loss
year only to the extent that the previously deducted branch ordinary
loss exceeds the net operating loss, if any, incurred by the transferor
in the branch loss year. The previously deducted branch ordinary losses
shall be reduced proceeding from the first branch loss year to the last
branch loss year. For each branch loss year, expired net operating
losses shall be applied to reduce the previously deducted branch
ordinary loss for that year in the order in which the expired net
ordinary losses arose.
(ii) Existence of expired net ordinary loss. An expired net ordinary
loss exists with respect to a branch loss year to the extent that--
(A) The transferor incurred a net operating loss (within the meaning
of section 172(c));
(B) That net operating loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 172(b)(1);
(C) That net operating loss has neither given rise to a net
operating loss deduction (within the meaning of section 172(a)) for any
taxable year prior to the year of the transfer, nor given rise to a
reduction of any previously deducted branch ordinary loss (pursuant to
paragraph (d)(2) of this section) of any foreign branch of the
transferor upon a previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a net operating
loss deduction with respect to that net operating loss has expired.
(3) Reduction by expired net capital loss--(i) In general. The
previously deducted branch capital loss for each branch loss year shall
be reduced under this paragraph (d)(3) by the amount of any expired net
capital loss with respect to that branch loss year. Expired net capital
losses arising in years other than the branch loss year shall reduce the
previously deducted branch capital loss for the branch loss year only to
the extent that the previously deducted branch capital loss exceeds the
net capital loss, if any, incurred by the transferor in the branch loss
year. The previously deducted branch capital losses shall be reduced
proceeding from the first branch loss year to the last branch loss year.
For each branch loss year, expired net capital losses shall be applied
to reduce the previously deducted branch capital loss for that year in
the order in which the expired net capital losses arose.
(ii) Existence of expired net capital loss. An expired net capital
loss exists with respect to a branch loss year to the extent that--
[[Page 277]]
(A) The transferor incurred a net capital loss (within the meaning
of section 1222(10));
(B) That net capital loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 1212;
(C) That net capital loss has neither been allowed for any taxable
year prior to the year of the transfer, nor given rise to a reduction of
any previously deducted branch capital loss (pursuant to paragraph
(c)(3) of this section) of any foreign branch of the transferor upon any
previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a capital loss
deduction with respect to that net capital loss has expired.
(4) Reduction for expired foreign tax credit--(i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year remaining after the
reductions described in paragraph (d)(2) and (3) of this section shall
be further reduced under this paragraph (d)(4) proportionately by the
amount of any expired foreign tax credit loss equivalent with respect to
that branch loss year. The previously deducted branch losses shall be
reduced proceeding from the first branch loss year to the last branch
loss year. For each branch loss year, expired foreign tax credit loss
equivalents shall be applied to reduce the previously deducted branch
loss for that year in the order in which the expired foreign tax credits
arose.
(ii) Existence of foreign tax credit loss equivalent. A foreign tax
credit loss equivalent exists with respect to a branch loss year if--
(A) The transferor paid, accrued, or is deemed under section 902 or
960 to have paid creditable foreign taxes in a taxable year;
(B) The creditable foreign taxes were paid, accrued, or deemed paid
in the branch loss year or were available for carryover or carryback to
the branch loss year under section 904(c);
(C) No foreign tax credit with respect to the foreign taxes paid,
accrued, or deemed paid has been taken because of the operation of
section 904(a) or similar limitations provided by the Code or an
applicable treaty, and such taxes have not given rise to a reduction
(pursuant to this paragraph (d)(5)) of any previously deducted branch
loss of the foreign branch for a prior taxable year or of any previously
deducted branch losses of any foreign branch of the transferor upon a
prior transfer to a foreign corporation; and
(D) The period during which the transferor may claim a foreign tax
credit for the foreign taxes paid, accrued, or deemed paid has expired.
(iii) Amount of foreign tax credit loss equivalent. The amount of
the foreign tax credit loss equivalent for the branch loss year with
respect to the creditable foreign taxes described in paragraph
(d)(4)(ii) of this section is the amount of those creditable foreign
taxes divided by the highest rate of tax to which the transferor was
subject in the loss year.
(5) Reduction for expired investment credits--(i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year shall be further reduced
under this paragraph (d)(5) proportionately by the amount of any expired
investment credit loss equivalent with respect to that branch year. The
previously deducted branch losses shall be reduced proceeding from the
first branch loss year to the last branch loss year. For each branch
loss year, expired investment credit loss equivalents shall be applied
to reduce the previously deducted branch loss for that year in the order
in which the expired investment credits were earned.
(ii) Existence of investment credit loss equivalent. An investment
credit loss equivalent exists with respect to a branch loss year if--
(A) The transferor earned an investment credit (within the meaning
of section 46(a)) in a taxable year;
(B) The investment credit was earned in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 39;
(C) The investment credit earned by the transferor in the credit
year has been denied by section 38(a) or by similar provisions of the
Code and has not given rise to a reduction (pursuant to this paragraph
(d)(5)) of any previously deducted branch loss of the foreign
[[Page 278]]
branch for a preceding taxable year or of the previously deducted losses
of any foreign branch of the transferor upon any previous transfer to a
foreign corporation; and
(D) The period during which the transferor may claim the investment
credit has expired.
(iii) Amount of investment tax credit loss equivalent. The amount of
the investment credit loss equivalent for the branch loss year with
respect to the investment credit described in paragraph (d)(5)(ii) of
this section is 85 percent of the amount of that investment credit
divided by the highest rate of tax to which the transferor was subject
in the loss year.
(e) Amounts that reduce previously deducted losses subject to
recapture--(1) In general. This paragraph (e) describes five amounts
that reduce the sum of the previously deducted branch ordinary losses
and the sum of the previously deducted branch capital losses before they
are taken into income under paragraph (b) of this section. Amounts
representing ordinary income shall be applied to reduce first the sum of
the previously deducted branch ordinary losses to the extent thereof,
and then the sum of the previously deducted branch capital losses to the
extent thereof. Similarly, amounts representing capital gains shall be
applied to reduce first the sum of the previously deducted branch
capital losses and then the sum of the previously deducted branch
ordinary losses.
(2) Taxable income. The previously deducted losses shall be reduced
by any taxable income of the foreign branch recognized through the close
of the taxable year of the transfer, whether before or after any taxable
year in which losses were incurred.
(3) Amounts currently recaptured under section 904(f)(3). The
previously deducted losses shall be reduced by the amount recognized
under section 904(f)(3) on account of the transfer.
(4) Gain recognized under section 367(a). The previously deducted
branch losses shall be reduced by any gain recognized pursuant to
section 367(a)(1) (other than by reason of the provisions of this
section) upon the transfer of the assets of the foreign branch to the
foreign corporation.
(5) Amounts previously recaptured under section 904(f)(3)--(i) In
general. The previously deducted branch losses shall be reduced by the
portion of any amount recognized under section 904(f)(3) upon a previous
transfer of property that was attributable to the losses of the foreign
branch, provided that the amount did not reduce any gain otherwise
required to be recognized under section 367(a)(3)(C) and this section
(or Revenue Ruling 78-201, 1978-1 C.B. 91).
(ii) Portion attributable to the losses of the foreign branch--(A)
Branch property. The full amount recognized under section 904(f)(3) upon
a previous transfer of property of the branch shall be treated as
attributable to the losses of the foreign branch.
(B) Non-branch property. The portion of the amount previously
recognized under section 904(f)(3) upon a transfer of non-branch
property that was attributable to the losses of the foreign branch shall
be the sum, over the taxable years in which the transferor sustained an
overall foreign loss some portion of which was recaptured on the
disposition, of the recaptured portions of those overall foreign losses
after multiplication by the following fraction:
Losses of the foreign branch for the year
-----------------------------------------------
All foreign losses for the year
----------------------------------------------------------------------------------------------------------------
For purposes of this fraction, the term losses of the foreign branch for
the year means the losses of the foreign branch that were taken into
account under section 904(f)(2) in determining the amount of the
transferor's overall foreign loss for the year, and the term all foreign
losses for the year means all of the losses of the transferor that were
taken into account under section 904(f)(2).
(6) Amounts previously recognized under the rules of this section.
The previously deducted losses shall be reduced by the amounts
previously recognized under the rules of this section upon a previous
transfer of assets of the foreign branch.
(f) Example. The rules of paragraphs (b) through (e) of this section
are illustrated by the following example.
[[Page 279]]
Example. (i) Facts. X, a U.S. corporation, is a calendar year
taxpayer. On January 1, 1981, X established a branch in foreign country
A to manufacture and sell X's products in country A. On July 1, 1986, X
organized corporation Y, a country A subsidiary, and transferred to Y
all of the assets of its country A branch, including goodwill and going
concern value. During the period from January 1, 1981, through July 1,
1986, X's country A branch earned income and incurred losses in the
following amounts:
Country A Branch
------------------------------------------------------------------------
Ordinary Capital
Year income gain
(loss) (loss)
------------------------------------------------------------------------
1981................................................ (200) 0
1982................................................ (300) (100)
1983................................................ (400) 0
1984................................................ (200) 0
1985................................................ (100) 0
1986................................................ 50 0
------------------------------------------------------------------------
At the time of the transfer of X's country A branch assets to Y,
those assets had a fair market value of $2,500 and an adjusted basis of
$1,000. For each of the assets, fair market value exceeded adjusted
basis. X had no net capital loss or unused investment credit during any
taxable year relevant to the transfer. In 1984, X incurred a net
operating loss of $400, $200 of which was carried back to prior years.
An additional $50 of the 1984 net operating loss was carried over to
1985. The remaining $150 of the 1984 net operating loss was not used in
any year prior to the transfer. In 1979, X paid creditable foreign taxes
of $330 that could not be claimed as a credit in that year or any
earlier year because of section 904. Of those foreign taxes, $100 were
carried over and claimed as a credit in 1983, but the remaining $230
were not used in any year prior to the transfer. X was not required to
recognize any gain under section 904(f)(3) on account of the 1986
transfer or any prior transfer. X was not required to recognize gain
upon the transfer under section 367(a) (other than by reason of the
provisions of this section).
(ii) Previously deducted losses. The previously deducted losses of
X's country A branch are $575 of ordinary losses and $25 of capital
losses, computed as follows: Initially, the branch has previously
deducted ordinary losses of $1,000 ($200+$300+$400+$100), and previously
deducted capital losses of $100. (See paragraph (d)(1) of this section.)
(iii) Expired losses and credits. Under the facts of this example,
there are no reductions for expired net ordinary losses or expired net
capital losses under paragraph (d)(2) or (3) of this section. However,
the previously deducted losses are reduced proceeding from the first
branch loss year to the last branch loss year to reflect the expired
foreign tax credit from 1979. The amount of the foreign tax credit loss
equivalent with respect to 1981 is $500 ($230/.46). It reduces the
previously deducted losses for 1981 proportionately. Thus, the
previously deducted ordinary loss for 1981 is reduced from $200 to $0.
(See paragraph (d)(4) of this section.) The amount of the foreign tax
credit loss equivalent with respect to 1982 is $300 ($500-$200, i.e.,
$138/.46). (See paragraph (d)(4)(ii)(C) of this section.) It reduces the
previously deducted losses for 1982 proportionately. Thus, the
previously deducted ordinary loss for 1982 is reduced from $300 to $75,
and the previously deducted capital loss for 1982 is reduced from $100
to $25.
(iv) Further reductions. The previously deducted ordinary losses of
$575 and the previously deducted capital losses of $25 are reduced by
the taxable income earned by the branch prior to the date of the
transfer ($250). (See paragraph (e)(2) of this section.) Since that
income was ordinary income, it is applied first to reduce the previously
deducted ordinary losses of $575 to $325. (See paragraph (e)(1) of this
section.)
(v) Recapture. Since the gain realized by X upon its transfer of the
branch assets to Y exceeds the sum of the previously deducted branch
losses as defined and reduced above $325+$25), the limitation in
paragraph (c)(2) of this section does not apply. Thus, X is required to
recognize $325 of ordinary income and $25 of long-term capital gain upon
the transfer. (See paragraph (b) and (c)(1) of this section.)
(g) Definition of foreign branch--(1) In general. For purposes of
this section, the term foreign branch means an integral business
operation carried on by a U.S. person outside the United States. Whether
the activities of a U.S. person outside the United States constitute a
foreign branch operation must be determined under all the facts and
circumstances. Evidence of the existence of a foreign branch includes,
but is not limited to, the existence of a separate set of books and
records, and the existence of an office or other fixed place of business
used by employees or officers of the U.S. person in carrying out
business activities outside the United States. Activities outside the
United States shall be deemed to constitute a foreign branch for
purposes of this section if the activities constitute a permanent
establishment under the terms of a treaty between the United States and
the country in which the activities are carried out. Any U.S. person may
be treated as having a foreign branch for purposes of this section,
whether
[[Page 280]]
that person is a corporation, partnership, trust, estate, or individual.
(2) More than one branch. If a U.S. person carries on more than one
branch operation outside the United States, then the rules of this
section must be separately applied with respect to each foreign branch
that is transferred to a foreign corporation. Thus, the previously
deducted losses of one branch may not be offset, for purposes of
determining the gain required to be recognized under the rules of this
section, by the income of another branch that is also transferred to a
foreign corporation. Similarly, the losses of one branch shall not be
recaptured upon a transfer of the assets of a separate branch. Whether
the foreign activities of a U.S. person are carried out through more
than one branch must be determined under all of the facts and
circumstances. In general, a separate branch exists if a particular
group of activities is sufficiently integrated to constitute a single
business that could be operated as an independent enterprise. For
purposes of determining the combination of activities that constitute a
branch operation as defined in this paragraph (g), the nominal
relationship among those activities shall not be controlling. Factors
suggesting that nominally separate business operations constitute a
single foreign branch include a substantial identity of products,
customers, operational facilities, operational processes, accounting and
record-keeping functions, management, employees, distribution channels,
or sales and purchasing forces. For examples of the application of the
principles of this paragraph (g)(2), see Revenue Ruling 81-82, 1981-1
C.B. 127.
(3) Consolidated group. For purposes of this section, the activities
of each of two domestic corporations outside the United States will be
considered to constitute a single foreign branch if--
(i) The two corporations are members of the same consolidated group
of corporations; and
(ii) The activities of the two corporations in the aggregate would
constitute a single foreign branch if conducted by a single corporation.
Notwithstanding the preceding rule of this paragraph (g)(3), gains of a
foreign branch of a domestic corporation arising in a year in which that
corporation did not file a consolidated return with a second domestic
corporation shall not be applied to reduce the previously deducted
losses of a foreign branch of the second corporation (but may be applied
to reduce such losses of the foreign branch of the first corporation)
upon the transfer of the two branches to a foreign corporation, even
though the two domestic corporations file a consolidated return for the
year in which the transfer occurs and the two branches are considered at
that time to constitute a single foreign branch. For an example of the
application of the principles of this paragraph (g)(3), see Revenue
Ruling 81-89, 1981-1 C.B. 129.
(4) Property not transferred. A U.S. transferor's failure to
transfer any property of a foreign branch shall be irrelevant to the
determination of the previously deducted losses of the branch subject to
recapture under the rules of this section. Thus, if the activities with
respect to untransferred property constituted a part of the branch
operation under the rules of this paragraph (g), then the losses
generated by those activities shall be subject to recapture,
notwithstanding the failure to transfer the property. For an example of
the application of the principles of this paragraph (g)(4), see Revenue
Ruling 80-247, 1980-2 C.B. 127, relating to property abandoned by the
U.S. transferor.
(h) Anti-abuse rule. If--
(1) A U.S. person transfers property of a foreign branch to a
domestic corporation for a principal purpose of avoiding the effect of
this section; and
(2) The domestic corporation thereafter transfers the property of
the foreign branch to a foreign corporation,
Then, solely for purposes of this section, that U.S. person shall be
treated as having transferred the property of the branch directly to the
foreign corporation. A U.S. person shall be presumed to have transferred
property of a foreign branch for a principal purpose of avoiding the
effect of this section if the property is transferred to the domestic
corporation less than two years prior to the domestic corporation's
transfer of the property to a foreign corporation. This presumption may
be rebutted by clear evidence that the
[[Page 281]]
subsequent transfer of the property was not contemplated at the time of
the initial transfer to the domestic corporation and that avoidance of
the effect of this section was not a principal purpose for the
transaction. A transfer may have more than one principal purpose.
(i) Basis adjustments. Basis adjustments reflecting gain recognized
pursuant to this section shall be made as described in Sec. 1.367(a)-
1T(b)(4)(ii).
[T.D. 8087, 51 FR 17950, May 16, 1986]
Sec. 1.367(a)-8 Gain recognition agreement requirements.
(a) In general. This section specifies the general terms and
conditions for an agreement to recognize gain entered into pursuant to
Sec. 1.367(a)-3(b) or (c) to qualify for nonrecognition treatment under
section 367(a).
(1) Filing requirements. A transferor's agreement to recognize gain
(described in paragraph (b) of this section) must be attached to, and
filed by the due date (including extensions) of, the transferor's income
tax return for the taxable year that includes the date of the transfer.
(2) Gain recognition agreement forms. Any agreement, certification,
or other document required to be filed pursuant to the provisions of
this section shall be submitted on such forms as may be prescribed
therefor by the Commissioner (or similar statements providing the same
information that is required on such forms). Until such time as forms
are prescribed, all necessary filings may be accomplished by providing
the required information to the Internal Revenue Service in accordance
with the rules of this section.
(3) Who must sign. The agreement to recognize gain must be signed
under penalties of perjury by a responsible officer in the case of a
corporate transferor, except that if the transferor is a member but not
the parent of an affiliated group (within the meaning of section
1504(a)(1)), that files a consolidated Federal income tax return for the
taxable year in which the transfer was made, the agreement must be
entered into by the parent corporation and signed by a responsible
officer of such parent corporation; by the individual, in the case of an
individual transferor (including a partner who is treated as a
transferor by virtue of Sec. 1.367(a)-1T(c)(3)); by a trustee,
executor, or equivalent fiduciary in the case of a transferor that is a
trust or estate; and by a debtor in possession or trustee in a
bankruptcy case under Title 11, United States Code. An agreement may
also be signed by an agent authorized to do so under a general or
specific power of attorney.
(b) Agreement to recognize gain--(1) Contents. The agreement must
set forth the following information, with the heading ``GAIN RECOGNITION
AGREEMENT UNDER Sec. 1.367(a)-8'', and with paragraphs labeled to
correspond with the numbers set forth as follows--
(i) A statement that the document submitted constitutes the
transferor's agreement to recognize gain in accordance with the
requirements of this section;
(ii) A description of the property transferred as described in
paragraph (b)(2) of this section;
(iii) The transferor's agreement to recognize gain, as described in
paragraph (b)(3) of this section;
(iv) A waiver of the period of limitations as described in paragraph
(b)(4) of this section;
(v) An agreement to file with the transferor's tax returns for the 5
full taxable years following the year of the transfer a certification as
described in paragraph (b)(5) of this section;
(vi) A statement that arrangements have been made in connection with
the transferred property to ensure that the transferor will be informed
of any subsequent disposition of any property that would require the
recognition of gain under the agreement; and
(vii) A statement as to whether, in the event all or a portion of
the gain recognition agreement is triggered under paragraph (e) of this
section, the taxpayer elects to include the required amount in the year
of the triggering event rather than in the year of the initial transfer.
If the taxpayer elects to include the required amount in the year of the
triggering event, such statement must be included with all of the other
information required under this paragraph (b), and filed by the due date
(including extensions) of the transferor's income tax return for the
[[Page 282]]
taxable year that includes the date of the transfer.
(2) Description of property transferred--(i) The agreement shall
include a description of each property transferred by the transferor, an
estimate of the fair market value of the property as of the date of the
transfer, a statement of the cost or other basis of the property and any
adjustments thereto, and the date on which the property was acquired by
the transferor.
(ii) If the transferred property is stock or securities, the
transferor must provide the information contained in paragraphs
(b)(2)(ii)(A) through (F) of this section as follows--
(A) The type or class, amount, and characteristics of the stock or
securities transferred, as well as the name, address, and place of
incorporation of the issuer of the stock or securities, and the
percentage (by voting power and value) that the stock (if any)
represents of the total stock outstanding of the issuing corporation;
(B) The name, address and place of incorporation of the transferee
foreign corporation, and the percentage of stock (by voting power and
value) that the U.S. transferor received or will receive in the
transaction;
(C) If stock or securities are transferred in an exchange described
in section 361(a) or (b), a statement that the conditions set forth in
the second sentence of section 367(a)(5) and any regulations under that
section have been satisfied, and an explanation of any basis or other
adjustments made pursuant to section 367(a)(5) and any regulations
thereunder;
(D) If the property transferred is stock or securities of a domestic
corporation, the taxpayer identification number of the domestic
corporation whose stock or securities were transferred, together with a
statement that all of the requirements of Sec. 1.367(a)-3(c)(1) are
satisfied;
(E) If the property transferred is stock or securities of a foreign
corporation, a statement as to whether the U.S. transferor was a United
States shareholder (a U.S. transferor that satisfies the ownership
requirements of section 1248(a)(2) or (c)(2)) of the corporation whose
stock was exchanged, and, if so, a statement as to whether the U.S.
transferor is a United States shareholder with respect to the stock
received, and whether any reporting requirements contained in
regulations under section 367(b) are applicable, and, if so, whether
they have been satisfied; and
(F) If the transaction involved the transfer of assets other than
stock or securities and the transaction was subject to the indirect
stock transfer rules of Sec. 1.367(a)-3(d), a statement as to whether
the reporting requirements under section 6038B have been satisfied with
respect to the transfer of property other than stock or securities, and
an explanation of whether gain was recognized under section 367(a)(1)
and whether section 367(d) was applicable to the transfer of such
assets, or whether any tangible assets qualified for nonrecognition
treatment under section 367(a)(3) (as limited by section 367(a)(5) and
Sec. Sec. 1.367(a)-4T, 1.367(a)-5T and 1.367(a)-6T).
(3) Terms of agreement--(i) General rule. If prior to the close of
the fifth full taxable year (i.e., not less than 60 months) following
the close of the taxable year of the initial transfer, the transferee
foreign corporation disposes of the transferred property in whole or in
part (as described in paragraphs (e)(1) and (2) of this section), or is
deemed to have disposed of the transferred property (under paragraph
(e)(3) of this section), then, unless an election is made in paragraph
(b)(1)(vii) of this section, by the 90th day thereafter the U.S.
transferor must file an amended return for the year of the transfer and
recognize thereon the gain realized but not recognized upon the initial
transfer, with interest. If an election under paragraph (b)(1)(vii) of
this section was made, then, if a disposition occurs, the U.S.
transferor must include the gain realized but not recognized on the
initial transfer in income on its Federal income tax return for the
period that includes the date of the triggering event. In accordance
with paragraph (b)(3)(iii) of this section, interest must be paid on any
additional tax due. (If a taxpayer properly makes the election under
paragraph (b)(1)(vii) of this section but later fails to include
[[Page 283]]
the gain realized in income, the Commissioner may, in his discretion,
include the gain in the taxpayer's income in the year of the initial
transfer.)
(ii) Offsets. No special limitations apply with respect to net
operating losses, capital losses, credits against tax, or similar items.
(iii) Interest. If additional tax is required to be paid, then
interest must be paid on that amount at the rates determined under
section 6621 with respect to the period between the date that was
prescribed for filing the transferor's income tax return for the year of
the initial transfer and the date on which the additional tax for that
year is paid. If the election in paragraph (b)(1)(vii) of this section
is made, taxpayers should enter the amount of interest due, labelled as
``sec. 367 interest'' at the bottom right margin of page 1 of the
Federal income tax return for the period that includes the date of the
triggering event (page 2 if the taxpayer files a Form 1040), and include
the amount of interest in their payment (or reduce the amount of any
refund due by the amount of the interest). If the election in paragraph
(b)(1)(vii) of this section is made, taxpayers should, as a matter of
course, include the amount of gain as taxable income on their Federal
income tax returns (together with other income or loss items). The
amount of tax relating to the gain should be separately stated at the
bottom right margin of page 1 of the Federal income tax return (page 2
if the taxpayer files a Form 1040), labelled as ``sec. 367 tax.''
(iv) Basis adjustments--(A) Transferee. If a U.S. transferor is
required to recognize gain under this section on the disposition by the
transferee foreign corporation of the transferred property, then in
determining for U.S. income tax purposes any gain or loss recognized by
the transferee foreign corporation upon its disposition of such
property, the transferee foreign corporation's basis in such property
shall be increased (as of the date of the initial transfer) by the
amount of gain required to be recognized (but not by any tax or interest
required to be paid on such amount) by the U.S. transferor. In the case
of a deemed disposition of the stock of the transferred corporation
described in paragraph (e)(3)(i) of this section, the transferee foreign
corporation's basis in the transferred stock deemed disposed of shall be
increased by the amount of gain required to be recognized by the U.S.
transferor.
(B) Transferor. If a U.S. transferor is required to recognize gain
under this section, then the U.S. transferor's basis in the stock of the
transferee foreign corporation shall be increased by the amount of gain
required to be recognized (but not by any tax or interest required to be
paid on such amount).
(C) Other adjustments. Other appropriate adjustments to basis that
are consistent with the principles of this paragraph (b)(3)(iv) may be
made if the U.S. transferor is required to recognize gain under this
section.
(D) Example. The principles of this paragraph (b)(3) are illustrated
by the following example:
Example. (i) Facts. D, a domestic corporation owning 100 percent of
the stock of S, a foreign corporation, transfers all of the S stock to
F, a foreign corporation, in an exchange described in section
368(a)(1)(B). The section 1248 amount with respect to the S stock is $0.
In the exchange, D receives 20 percent of the voting stock of F. All of
the requirements of Sec. 1.367(a)-3(c)(1) are satisfied, and D enters
into a five-year gain recognition agreement to qualify for
nonrecognition treatment and does not make the election contained in
paragraph (b)(1)(vii) of this section. One year after the initial
transfer, F transfers all of the S stock to F1 in an exchange described
in section 351, and D complies with the requirements of paragraph (g)(2)
of this section. Two years after the initial transfer, D transfers its
entire 20 percent interest in F's voting stock to a domestic partnership
in exchange for an interest in the partnership. Three years after the
initial exchange, S disposes of substantially all (as described in
paragraph (e)(3)(i) of this section) of its assets in a transaction that
would be taxable under U.S. income tax principles, and D is required by
the terms of the gain recognition agreement to recognize all the gain
that it realized on the initial transfer of the stock of S.
(ii) Result. As a result of this gain recognition and paragraph
(b)(3)(iv) of this section, D is permitted to increase its basis in the
partnership interest by the amount of gain required to be recognized
(but not by any tax or interest required to be paid on such amount), the
partnership is permitted to increase its basis in the 20 percent voting
stock of F, F is permitted to increase its basis in the stock of F1, and
F1 is permitted
[[Page 284]]
to increase its basis in the stock of S. S, however, is not permitted to
increase its basis in its assets for purposes of determining the direct
or indirect U.S. tax results, if any, on the sale of its assets.
(4) Waiver of period of limitation. The U.S. transferor must file,
with the agreement to recognize gain, a waiver of the period of
limitation on assessment of tax upon the gain realized on the transfer.
The waiver shall be executed on Form 8838 (Consent to Extend the Time to
Assess Tax Under Section 367--Gain Recognition Agreement) and shall
extend the period for assessment of such tax to a date not earlier than
the eighth full taxable year following the taxable year of the transfer.
Such waiver shall also contain such other terms with respect to
assessment as may be considered necessary by the Commissioner to ensure
the assessment and collection of the correct tax liability for each year
for which the waiver is required. The waiver must be signed by a person
who would be authorized to sign the agreement pursuant to the provisions
of paragraph (a)(3) of this section.
(5) Annual certification--(i) In general. The U.S. transferor must
file with its income tax return for each of the five full taxable years
following the taxable year of the transfer a certification that the
property transferred has not been disposed of by the transferee in a
transaction that is considered to be a disposition for purposes of this
section, including a disposition described in paragraph (e)(3) of this
section. The U.S. transferor must include with its annual certification
a statement describing any taxable dispositions of assets by the
transferred corporation that are not in the ordinary course of business.
The annual certification pursuant to this paragraph (b)(5) must be
signed under penalties of perjury by a person who would be authorized to
sign the agreement pursuant to the provisions of paragraph (a)(3) of
this section.
(ii) Special rule when U.S. transferor leaves its affiliated group.
If, at the time of the initial transfer, the U.S. transferor was a
member of an affiliated group (within the meaning of section 1504(a)(1))
filing a consolidated Federal income tax return but not the parent of
such group, the U.S. transferor will file the annual certification (and
provide a copy to the parent corporation) if it leaves the group during
the term of the gain recognition agreement, notwithstanding the fact
that the parent entered into the gain recognition agreement, extended
the statute of limitations pursuant to this section, and remains liable
(with other corporations that were members of the group at the time of
the initial transfer) under the gain recognition agreement in the case
of a triggering event.
(c) Failure to comply--(1) General rule. If a person that is
required to file an agreement under paragraph (b) of this section fails
to file the agreement in a timely manner, or if a person that has
entered into an agreement under paragraph (b) of this section fails at
any time to comply in any material respect with the requirements of this
section or with the terms of an agreement submitted pursuant hereto,
then the initial transfer of property is described in section 367(a)(1)
(unless otherwise excepted under the rules of this section) and will be
treated as a taxable exchange in the year of the initial transfer (or in
the year of the failure to comply if the agreement was filed with a
timely-filed (including extensions) original (not amended) return and an
election under paragraph (b)(1)(vii) of this section was made). Such a
material failure to comply shall extend the period for assessment of tax
until three years after the date on which the Internal Revenue Service
receives actual notice of the failure to comply.
(2) Reasonable cause exception. If a person that is permitted under
Sec. 1.367(a)-3(b) or (c) to enter into an agreement (described in
paragraph (b) of this section) fails to file the agreement in a timely
manner, as provided in paragraph (a)(1) of this section, or fails to
comply in any material respect with the requirements of this section or
with the terms of an agreement submitted pursuant hereto, the provisions
of paragraph (c)(1) of this section shall not apply if the person is
able to show that such failure was due to reasonable cause and not
willful neglect and if the person files the agreement or reaches
compliance as soon as he becomes aware of the failure. Whether a failure
[[Page 285]]
to file in a timely manner, or materially comply, was due to reasonable
cause shall be determined by the district director under all the facts
and circumstances.
(d) Use of security. The U.S. transferor may be required to furnish
a bond or other security that satisfies the requirements of Sec.
301.7101-1 of this chapter if the district director determines that such
security is necessary to ensure the payment of any tax on the gain
realized but not recognized upon the initial transfer. Such bond or
security will generally be required only if the stock or securities
transferred are a principal asset of the transferor and the director has
reason to believe that a disposition of the stock or securities may be
contemplated.
(e) Disposition (in whole or in part) of stock of transferred
corporation--(1) In general--(i) Definition of disposition. For purposes
of this section, a disposition of the stock of the transferred
corporation that triggers gain under the gain recognition agreement
includes any taxable sale or any disposition treated as an exchange
under this subtitle, (e.g., under sections 301(c)(3)(A), 302(a), 311,
336, 351(b) or section 356(a)(1)), as well as any deemed disposition
described under paragraph (e)(3) of this section. It does not include a
disposition that is not treated as an exchange, (e.g., under section
302(d) or 356(a)(2)). A disposition of all or a portion of the stock of
the transferred corporation by installment sale is treated as a
disposition of such stock in the year of the installment sale. A
disposition of the stock of the transferred corporation does not include
certain transfers treated as nonrecognition transfers (under paragraph
(g) of this section) in which the gain recognition agreement is retained
but modified, or certain transfers (under paragraph (h) of this section)
in which the gain recognition agreement is terminated and has no further
effect.
(ii) Example. The provisions of this paragraph (e) are illustrated
by the following example:
Example. Interaction between trigger of gain recognition agreement
and subpart F rules--(i) Facts. A U.S. corporation (USP) owns all of the
stock of two foreign corporations, CFC1 and CFC2. USP's section 1248
amount with respect to CFC2 is $30. USP has a basis of $50 in its stock
of CFC2; CFC2 has a value of $100. In a transaction described in section
351 and 368(a)(1)(B), USP transfers the stock of CFC2 in exchange for
additional stock of CFC1. The transaction is subject to both sections
367 (a) and (b). See Sec. Sec. 1.367(a)-3(b) and 1.367(b)-1(a). To
qualify for nonrecognition treatment under section 367(a), USP enters
into a 5-year gain recognition agreement for $50 under this section. No
election under paragraph 8(b)(1)(vii) of this section is made. USP also
complies with the notice requirement under Sec. 1.367(b)-1(c).
(ii) Trigger of gain recognition agreement with no election. Assume
that in year 2, CFC1 sells the stock of CFC2 for $120, and that there
were no distributions by CFC2 prior to the sale. USP must amend its
return for the year of the initial transfer and include $50 in income
(with interest), $30 of which will be recharacterized as a dividend
pursuant to section 1248. As a result, CFC1 has a basis of $100 in CFC2.
As a result of the sale of CFC2 stock by CFC1, USP will have $20 of
subpart F foreign personal holding company income. See section 951, et.
seq., and the regulations thereunder.
(iii) Trigger of gain recognition agreement with election. Assume
the same facts as in paragraphs (i) and (ii) of this Example, except
that when USP attached the gain recognition agreement to its timely
filed Federal income tax return for the year of the initial transfer, it
elected under paragraph (b)(1)(vii) of this section to include the
amount of gain realized but not recognized on the initial transfer, $50,
in the year of the triggering event rather than in the year of the
initial transfer. In such case, the result is the same as in paragraph
(e)(1)(ii)(B) of this section, except that USP will include the $50 of
gain on its year 2 return, together with interest. For purposes of
determining the dividend component, if any, of the $50 inclusion, USP
will take into account the section 1248 amount of CFC2 at the time of
the disposition in Year 2.
(2) Partial disposition. If the transferee foreign corporation
disposes of (or is deemed to dispose of) only a portion of the
transferred stock or securities, then the U.S. transferor is required to
recognize only a proportionate amount of the gain realized but not
recognized upon the initial transfer of the transferred property. The
proportion required to be recognized shall be determined by reference to
the relative fair market values of the transferred stock or securities
disposed of and retained. Solely for purposes of determining
[[Page 286]]
whether the U.S. transferor must recognize income under the agreement
described in paragraph (b) of this section, in the case of transferred
property (including stock or securities) that is fungible with other
property owned by the transferee foreign corporation, a disposition by
such corporation of any such property shall be deemed to be a
disposition of no less than a ratable portion of the transferred
property.
(3) Deemed dispositions of stock of transferred corporation--(i)
Disposition by transferred corporation of substantially all of its
assets--(A) In general. Unless an exception applies (as described in
paragraph (e)(3)(i)(B) of this section), a transferee foreign
corporation will be treated as having disposed of the stock or
securities of the transferred corporation if, within the term of the
gain recognition agreement, the transferred corporation makes a
disposition of substantially all (within the meaning of section
368(a)(1)(C)) of its assets (including stock in a subsidiary corporation
or an interest in a partnership). If the initial transfer that
necessitated the gain recognition agreement was an indirect stock
transfer, see Sec. 1.367(a)-3(d)(2)(v). If the transferred corporation
is a U.S. corporation, see paragraph (h)(2) of this section.
(B) The transferee foreign corporation will not be deemed to have
disposed of the stock of the transferred corporation if the transferred
corporation is liquidated into the transferee foreign corporation under
sections 337 and 332, provided that the transferee foreign corporation
does not dispose of substantially all of the assets formerly held by the
transferred corporation (and considered for purposes of the
substantially all determination) within the remaining period during
which the gain recognition agreement is in effect. A nonrecognition
transfer is not counted for purposes of the substantially all
determination as a disposition if the transfer satisfies the
requirements of paragraph (g)(3) of this section. A disposition does not
include a compulsory transfer as described in Sec. 1.367(a)-4T(f) that
was not reasonably forseeable by the U.S. transferor at the time of the
initial transfer.
(ii) U.S. transferor becomes a non-citizen nonresident. If a U.S.
transferor loses U.S. citizenship or a long-term resident ceases to be
taxed as a lawful permanent resident (as defined in section 877(e)(2)),
then immediately prior to the date that the U.S. transferor loses U.S.
citizenship or ceases to be taxed as a long-term resident, the gain
recognition agreement will be triggered as if the transferee foreign
corporation disposed of all of the stock of the transferred corporation
in a taxable transaction on such date. No additional inclusion is
required under section 877, and a gain recognition agreement under
section 877 may not be used to avoid taxation under section 367(a)
resulting from the trigger of the section 367(a) gain recognition
agreement.
(f) Effect on gain recognition agreement if U.S. transferor goes out
of existence--(1) In general. If an individual transferor that has
entered into an agreement under under paragraph (b) of this section
dies, or if a U.S. trust or estate that has entered into an agreement
under paragraph (b) of this section goes out of existence and is not
required to recognize gain as a consequence thereof with respect to all
of the stock of the transferee foreign corporation received in the
initial transfer and not previously disposed of, then the gain
recognition agreement will be triggered unless one of the following
requirements is met--
(i) The person winding up the affairs of the transferor retains, for
the duration of the waiver of the statute of limitations relating to the
gain recognition agreement, assets to meet any possible liability of the
transferor under the duration of the agreement;
(ii) The person winding up the affairs of the transferor provides
security as provided under paragraph (d) of this section for any
possible liability of the transferor under the agreement; or
(iii) The transferor obtains a ruling from the Internal Revenue
Service providing for successors to the transferor under the gain
recognition agreement.
(2) Special rule when U.S. transferor is a corporation--(i) U.S.
transferor goes out of existence pursuant to the transaction. If the
transferor is a U.S. corporation that goes out of existence in a
transaction in which the transferor's gain would have qualified for
nonrecognition treatment under Sec. 1.367(a)-3(b) or
[[Page 287]]
(c) had the U.S. transferor remained in existence and entered into a
gain recognition agreement, then the gain may generally qualify for
nonrecognition treatment only if the U.S. transferor is owned by a
single U.S. parent corporation and the U.S. transferor and its parent
corporation file a consolidated Federal income tax return for the
taxable year that includes the transfer, and the parent of the
consolidated group enters into the gain recognition agreement. However,
notwithstanding the preceding sentence, a U.S. transferor that was
controlled (within the meaning of section 368(c)) by five or fewer
domestic corporations may request a ruling that, if certain conditions
prescribed by the Internal Revenue Service are satisfied, the
transaction may qualify for nonrecognition treatment.
(ii) U.S. corporate transferor is liquidated after gain recognition
agreement is filed. If a U.S. transferor files a gain recognition
agreement but is liquidated during the term of the gain recognition
agreement, such agreement will be terminated if the liquidation does not
qualify as a tax-free liquidation under sections 337 and 332 and the
U.S. transferor includes in income any gain from the liquidation. If the
liquidation qualifies for nonrecognition treatment under sections 337
and 332, the gain recognition agreement will be triggered unless the
U.S. parent corporation and the U.S. transferor file a consolidated
Federal income tax return for the taxable year that includes the dates
of the initial transfer and the liquidation of the U.S. transferor, and
the U.S. parent enters into a new gain recognition agreement and
complies with reporting requirements similar to those contained in
paragraph (g)(2) of this section.
(g) Effect on gain recognition agreement of certain nonrecognition
transactions--(1) Certain nonrecognition transfers of stock or
securities of the transferee foreign corporation by the U.S. transferor.
If the U.S. transferor disposes of any stock of the transferee foreign
corporation in a nonrecognition transfer and the U.S. transferor
complies with reporting requirements similar to those contained in
paragraph (g)(2) of this section, the U.S. transferor shall continue to
be subject to the terms of the gain recognition agreement in its
entirety.
(2) Certain nonrecognition transfers of stock or securities of the
transferred corporation by the transferee foreign corporation. (i) If,
during the period the gain recognition agreement is in effect, the
transferee foreign corporation disposes of all or a portion of the stock
of the transferred corporation in a transaction in which gain or loss
would not be required to be recognized by the transferee foreign
corporation under U.S. income tax principles, such disposition will not
be treated as a disposition within the meaning of paragraph (e) of this
section if the transferee foreign corporation receives (or is deemed to
receive), in exchange for the property disposed of, stock in a
corporation, or an interest in a partnership, that acquired the
transferred property (or receives stock in a corporation that controls
the corporation acquiring the transferred property); and the U.S.
transferor complies with the requirements of paragraphs (g)(2)(ii)
through (iv) of this section.
(ii) The U.S. transferor must provide a notice of the transfer with
its next annual certification under paragraph (b)(5) of this section,
setting forth--
(A) A description of the transfer;
(B) The applicable nonrecognition provision; and
(C) The name, address, and taxpayer identification number (if any)
of the new transferee of the transferred property.
(iii) The U.S. transferor must provide with its next annual
certification a new agreement to recognize gain (in accordance with the
rules of paragraph (b) of this section) if, prior to the close of the
fifth full taxable year following the taxable year of the initial
transfer, either--
(A) The initial transferee foreign corporation disposes of the
interest (if any) which it received in exchange for the transferred
property (other than in a disposition which itself qualifies under the
rules of this paragraph (g)(2)); or
(B) The corporation or partnership that acquired the property
disposes of such property (other than in a disposition which itself
qualifies under the rules of this paragraph (g)(2)); or
[[Page 288]]
(C) There is any other disposition that has the effect of an
indirect disposition of the transferred property.
(iv) If the U.S. transferor is required to enter into a new gain
recognition agreement, as provided in paragraph (g)(2)(iii) of this
section, the U.S. transferor must provide with its next annual
certification (described in paragraph (b)(5) of this section) a
statement that arrangements have been made, in connection with the
nonrecognition transfer, ensuring that the U.S. transferor will be
informed of any subsequent disposition of property with respect to which
recognition of gain would be required under the agreement.
(3) Certain nonrecognition transfers of assets by the transferred
corporation. A disposition by the transferred corporation of all or a
portion of its assets in a transaction in which gain or loss would not
be required to be recognized by the transferred corporation under U.S.
income tax principles, will not be treated as a disposition within the
meaning of paragraph (e)(3) of this section if the transferred
corporation receives in exchange stock or securities in a corporation or
an interest in a partnership that acquired the assets of the transferred
corporation (or receives stock in a corporation that controls the
corporation acquiring the assets). If the transaction would be treated
as a disposition of substantially all of the transferred corporation's
assets, the preceding sentence shall only apply if the U.S. transferor
complies with reporting requirements comparable to those of paragraphs
(g)(2)(ii) through (iv) of this section, providing for notice, an
agreement to recognize gain in the case of a direct or indirect
disposition of the assets previously held by the transferred
corporation, and an assurance that necessary information will be
provided to appropriate parties.
(h) Transactions that terminate the gain recognition agreement--(1)
Taxable disposition of stock or securities of transferee foreign
corporation by U.S. transferor. (i) If the U.S. transferor disposes of
all of the stock of the transferee foreign corporation that it received
in the initial transfer in a transaction in which all realized gain (if
any) is recognized currently, then the gain recognition agreement shall
terminate and have no further effect. If the transferor disposes of a
portion of the stock of the transferee foreign corporation that it
received in the initial transfer in a taxable transaction, then in the
event that the gain recognition agreement is later triggered, the
transferor shall be required to recognize only a proportionate amount of
the gain subject to the gain recognition agreement that would otherwise
be required to be recognized on a subsequent disposition of the
transferred property under the rules of paragraph (b)(2) of this
section. The proportion required to be recognized shall be determined by
reference to the percentage of stock (by value) of the transferee
foreign corporation received in the initial transfer that is retained by
the United States transferor.
(ii) The rule of this paragraph (h) is illustrated by the following
example:
Example. A, a United States citizen, owns 100 percent of the
outstanding stock of foreign corporation X. In a transaction described
in section 351, A exchanges his stock in X (and other assets) for 100
percent of the outstanding voting and nonvoting stock of foreign
corporation Y. A submits an agreement under the rules of this section to
recognize gain upon a later disposition. In the following year, A
disposes of 60 percent of the fair market value of the stock of Y, thus
terminating 60 percent of the gain recognition agreement. One year
thereafter, Y disposes of 50 percent of the fair market value of the
stock of X. A is required to include in his income in the year of the
later disposition 20 percent (40 percent interest in Y multiplied by a
50 percent disposition of X) of the gain that A realized but did not
recognize on his initial transfer of X stock to Y.
(2) Certain dispositions by a domestic transferred corporation of
substantially all of its assets. If the transferred corporation is a
domestic corporation and the U.S. transferor and the transferred
corporation filed a consolidated Federal income tax return at the time
of the transfer, the gain recognition agreement shall terminate and
cease to have effect if, during the term of such agreement, the
transferred corporation disposes of substantially all of its assets in a
transaction in which all realized gain is recognized currently. If an
indirect stock transfer necessitated the filing of the gain recognition
agreement, such agreement shall terminate if, immediately prior to the
indirect
[[Page 289]]
transfer, the U.S. transferor and the acquired corporation filed a
consolidated return (or, in the case of a section 368(a)(1)(A) and
(a)(2)(E) reorganization described in Sec. 1.367(a)-3(d)(1)(ii), the
U.S. transferor and the acquiring corporation filed a consolidated
return) and the transferred corporation disposes of substantially all of
its assets (taking into account Sec. 1.367(a)-3(d)(2)(v)) in a
transaction in which all realized gain is recognized currently.
(3) Distribution by transferee foreign corporation of stock of
transferred corporation that qualifies under section 355 or section 337.
If, during the term of the gain recognition agreement, the transferee
foreign corporation distributes to the U.S. transferor, in a transaction
that qualifies under section 355, or in a liquidating distribution that
qualifies under sections 332 and 337, the stock that initially
necessitated the filing of the gain recognition agreement (and any
additional stock received after the initial transfer), the gain
recognition agreement shall terminate and have no further effect,
provided that immediately after the section 355 distribution or section
332 liquidation, the U.S. transferor's basis in the transferred stock is
less than or equal to the basis that it had in the transferred stock
immediately prior to the initial transfer that necessitated the GRA.
(i) Effective date. The rules of this section shall apply to
transfers that occur on or after July 20, 1998. For matters covered in
this section for periods before July 20, 1998, the corresponding rules
of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 1998) and
Notice 87-85 ((1987-2 C.B. 395); see Sec. 601.601(d)(2)(ii) of this
chapter) apply. In addition, if a U.S. transferor entered into a gain
recognition agreement for transfers prior to July 20, 1998, then the
rules of Sec. 1.367(a)-3T(g) (see 26 CFR part 1, revised April 1, 1998)
shall continue to apply in lieu of this section in the event of any
direct or indirect nonrecognition transfer of the same property. See,
also, Sec. 1.367(a)-3(f).
[T.D. 8770, 63 FR 33562, June 19, 1998]
Sec. 1.367(b)-0 Table of contents.
This section lists the paragraphs contained in Sec. Sec. 1.367(b)-1
through 1.367(b)-6 and 1.367(b)-12.
Sec. 1.367(b)-1 Other transfers.
(a) Scope.
(b) General rules.
(1) Rules.
(2) Example.
(c) Notice required.
(1) In general.
(2) Persons subject to section 367(b) notice.
(3) Time and manner for filing notice.
(i) United States persons described in Sec. 1.367(b)-1(c)(2).
(ii) Foreign corporations described in Sec. 1.367(b)-1(c)(2).
(4) Information required.
(5) Abbreviated notice provision for shareholders that make the
election described in Sec. 1.367(b)-3(c)(3).
(6) Supplemental published guidance.
Sec. 1.367(b)-2 Definitions and special rules.
(a) Controlled foreign corporation.
(b) Section 1248 shareholder.
(c) Section 1248 amount.
(1) Rule.
(2) Examples.
(d) All earnings and profits amount.
(1) General rule.
(2) Rules for determining earnings and profits.
(i) Domestic rules generally applicable.
(ii) Certain adjustments to earnings and profits.
(iii) Effect of section 332 liquidating distribution.
(3) Amount attributable to a block of stock.
(i) Application of section 1248 principles.
(A) In general.
(1) Rule.
(2) Example.
(B) Foreign shareholders.
(ii) Limitation on amounts attributable to holding periods
determined under section 1223.
(A) Rule.
(B) Example.
(iii) Exclusion of lower-tier earnings.
(e) Treatment of deemed dividends.
(1) In general.
(2) Consequences of dividend characterization.
(3) Ordering rules.
(4) Examples.
(f) Deemed asset transfer and closing of taxable year in certain
section 368(a)(1)(F) reorganizations.
(1) Scope.
(2) Deemed asset transfer.
(3) Other applicable rules.
(4) Closing of taxable year.
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(g) Stapled stock under section 269B.
(h) Section 953(d) domestication elections.
(1) Effect of election.
(2) Post-election exchanges.
(i) Section 1504(d) elections.
(j) Sections 985 through 989.
(1) Change in functional currency of a qualified business unit.
(i) Rule.
(ii) Example.
(2) Previously taxed earnings and profits.
(i) Exchanging shareholder that is a United States person.
(ii) Exchanging shareholder that is a foreign corporation.
(3) Other rules.
(k) Partnerships, trusts and estates.
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
(a) Scope.
(b) Exchange of stock owned directly by a United States shareholder
or by certain foreign corporate shareholders.
(1) Scope.
(2) United States shareholder.
(3) Income inclusion.
(i) Inclusion of all earnings and profits amount.
(ii) Examples.
(iii)Recognition of exchange gain or loss with respect to capital.
[Reserved]
(4) [Reserved]
(c) Exchange of stock owned by a United States person that is not a
United States shareholder.
(1) Scope.
(2) Requirement to recognize gain.
(3) Election to include all earnings and profits amount.
(4) De minimis exception.
(5) Examples.
(d) Carryover of certain foreign taxes.
(1) Rule.
(2) Example.
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by a
foreign corporation in certain nonrecognition transactions.
(a) Scope.
(b) Income inclusion.
(1) Exchange that results in loss of status as section 1248
shareholder.
(i) Rule.
(ii) Examples.
(2) Receipt by exchanging shareholder of preferred or other stock in
certain instances.
(i) Rule.
(ii) Examples.
(3) Certain recapitalizations.
(c) Exclusion of deemed dividend from foreign personal holding
company income.
(1) Rule.
(2) Example.
(d) Rules for subsequent exchanges.
(1) In general.
(2) Subsequent dispositions by a foreign acquiring corporation.
(3) Examples.
Sec. 1.367(b)-5 Distributions of stock described in section 355.
(a) In general.
(1) Scope.
(2) Treatment of distributees as exchanging shareholders.
(b) Distribution by a domestic corporation.
(1) General rule.
(2) Section 367(e) transactions.
(3) Determining whether distributees are individuals.
(4) Applicable cross-references.
(c) Pro rata distribution by a controlled foreign corporation.
(1) Scope.
(2) Adjustment to basis in stock and income inclusion.
(3) Interaction with Sec. 1.367(b)-2(e)(3)(ii).
(4) Basis redistribution.
(d) Non-pro rata distribution by a controlled foreign corporation.
(1) Scope.
(2) Treatment of certain shareholders as distributees.
(3) Inclusion of excess section 1248 amount by exchanging
shareholder.
(4) Interaction with Sec. 1.367(b)-2(e)(3)(ii).
(i) Limited application.
(ii) Interaction with predistribution amount.
(e) Definitions.
(1) Predistribution amount.
(2) Postdistribution amount.
(f) Exclusion of deemed dividend from foreign personal holding
company income.
(g) Examples.
Sec. 1.367(b)-6 Effective dates and coordination rules.
(a) Effective date.
(1) In general.
(2) Exception.
(b) Certain recapitalizations described in Sec. 1.367(b)-4(b)(3).
(c) Use of reasonable method to comply with prior published
guidance.
(1) Prior exchanges.
(2) Future exchanges.
(d) Effect of removal of attribution rules.
Sec. 1.367(b)-12 Subsequent treatment of amounts attributed or included
in income.
(a) In general.
(b) Applicable rules.
(c) Effective date.
[T.D. 8862, 65 FR 3596, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000, as
amended by T.D. 8937, 66 FR 2257, Jan. 11, 2001]
[[Page 291]]
Sec. 1.367(b)-1 Other transfers.
(a) Scope. The regulations promulgated under section 367(b) (the
section 367(b) regulations) set forth rules regarding the proper
inclusions and adjustments that must be made as a result of an exchange
described in section 367(b) (a section 367(b) exchange). A section
367(b) exchange is any exchange described in section 332, 351, 354, 355,
356 or 361, with respect to which the status of a foreign corporation as
a corporation is relevant for determining the extent to which income
shall be recognized or for determining the effect of the transaction on
earnings and profits, basis of stock or securities, basis of assets, or
other relevant tax attributes. Notwithstanding the preceding sentence, a
section 367(b) exchange does not include a transfer to the extent the
foreign corporation fails to be treated as a corporation by reason of
section 367(a)(1). See Sec. 1.367(a)-3(b)(2)(ii) for an illustration of
the interaction of section 367(a) and (b).
(b) General rules--(1) Rules. The following general rules apply
under the section 367(b) regulations--
(i) A foreign corporation in a section 367(b) exchange is considered
to be a corporation and, as a result, all of the related provisions
(e.g., section 381) shall apply, except to the extent provided in the
section 367(b) regulations; and
(ii) Nothing in the section 367(b) regulations shall permit--
(A) The nonrecognition of income that would otherwise be required to
be recognized under another provision of the Internal Revenue Code or
the regulations thereunder; or
(B) The recognition of a loss or deduction that would otherwise not
be recognized under another provision of the Internal Revenue Code or
the regulations thereunder.
(2) Example. The following example illustrates the rules of this
paragraph (b):
Example. (i) Facts. DC, a domestic corporation, owns 90 percent of
P, a partnership. The remaining 10 percent of P is owned by a person
unrelated to DC. P owns all of the outstanding stock of FC, a controlled
foreign corporation. FC liquidates into P.
(ii) Result. FC's liquidation is not a transaction described in
section 332. Nothing in the section 367(b) regulations, including Sec.
1.367(b)-2(k), permits FC's liquidation to qualify as a liquidation
described in section 332.
(c) Notice Required--(1) In general. A notice under this paragraph
(c) (section 367(b) notice) must be filed with regard to any person
described in paragraph (c)(2) of this section. A section 367(b) notice
must be filed in the time and manner described in paragraph (c)(3) of
this section and must include the information described in paragraph
(c)(4) of this section.
(2) Persons subject to section 367(b) notice. The following persons
are described in this paragraph (c)(2)--
(i) A shareholder described in Sec. 1.367(b)-3(b)(1) that realizes
income in a transaction described in Sec. 1.367(b)-3(a);
(ii) A shareholder that makes the election described in Sec.
1.367(b)-3(c)(3);
(iii) A shareholder described in Sec. 1.367(b)-4(b)(1)(i)(A)(1) or
(2) that realizes income in a transaction described in Sec. 1.367(b)-
4(a); and
(iv) A shareholder that realizes income in a transaction described
in Sec. 1.367(b)-5(c) or 1.367(b)-5(d) and that is either--
(A) A section 1248 shareholder of the distributing or controlled
corporation; or
(B) A foreign corporation with one or more shareholders that are
described in paragraph (c)(2)(iv)(A) of this section.
(3) Time and manner for filing notice--(i) United States persons
described in Sec. 1.367(b)-1(c)(2). A United States person described in
paragraph (c)(2) of this section must file a section 367(b) notice
attached to a timely filed Federal tax return (including extensions) for
the person's taxable year in which income is realized in the section
367(b) exchange. In the case of a shareholder that makes the election
described in Sec. 1.367(b)-3(c)(3), notification of such election must
be sent to the foreign acquired corporation (or its successor in
interest) on or before the date the section 367(b) notice is filed, so
that appropriate corresponding adjustments can be made in accordance
with the rules of Sec. 1.367(b)-2(e).
(ii) Foreign corporations described in Sec. 1.367(b)-1(c)(2). Each
United States person listed in this paragraph (c)(3)(ii)
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must file a section 367(b) notice with regard to a foreign corporation
described in paragraph (c)(2) of this section. Such notice must be
attached to a timely filed Federal tax return (including extensions) for
the United States person's taxable year in which income is realized in
the section 367(b) exchange and, if the United States person is required
to file a Form 5471 (Information Return of U.S. Persons With Respect To
Certain Foreign Corporations), the section 367(b) notice must be
attached to the Form 5471. The following persons are listed in this
paragraph (c)(3)(ii)--
(A) United States shareholders (as defined in Sec. 1.367(b)-
3(b)(2)) of foreign corporations described in paragraph (c)(2)(i) of
this section; and
(B) Section 1248 shareholders of foreign corporations described in
paragraph (c)(2)(iii) or (iv) of this section.
(4) Information required. Except as provided in paragraph (c)(5) of
this section, a section 367(b) notice shall include the following
information--
(i) A statement that the exchange is a section 367(b) exchange;
(ii) A complete description of the exchange;
(iii) A description of any stock, securities or other consideration
transferred or received in the exchange;
(iv) A statement that describes any amount required, under the
section 367(b) regulations, to be taken into account as income or loss
or as an adjustment to basis, earnings and profits, or other tax
attributes as a result of the exchange;
(v) Any information that is or would be required to be furnished
with a Federal income tax return pursuant to regulations under section
332, 351, 354, 355, 356, 361 or 368 (whether or not a Federal income tax
return is required to be filed), if such information has not otherwise
been provided by the person filing the section 367(b) notice;
(vi) Any information required to be furnished with respect to the
exchange under sections 6038, 6038A, 6038B, 6038C or 6046, or the
regulations under those sections, if such information has not otherwise
been provided by the person filing the section 367(b) notice; and
(vii) If applicable, a statement that the shareholder is making the
election described in Sec. 1.367(b)-3(c)(3). This statement must
include--
(A) A copy of the information the shareholder received from the
foreign acquired corporation (or its successor in interest) establishing
and substantiating the shareholder's all earnings and profits amount
with respect to the shareholder's stock in the foreign acquired
corporation; and
(B) A representation that the shareholder has notified the foreign
acquired corporation (or its successor in interest) that the shareholder
is making the election described in Sec. 1.367(b)-3(c)(3).
(5) Abbreviated notice provision for shareholders that make the
election described in Sec. 1.367(b)-3(c)(3). In the case of a foreign
acquired corporation that has never had earnings and profits that would
result in any shareholder having an all earnings and profits amount, a
shareholder making the election described in Sec. 1.367(b)-3(c)(3) may
satisfy the information requirements of paragraph (c)(4) of this section
by filing a section 367(b) notice that includes--
(i) A statement from the foreign acquired corporation (or its
successor in interest) that the foreign acquired corporation has never
had any earnings and profits that would result in any shareholder having
an all earnings and profits amount; and
(ii) The information described in paragraphs (c)(4) (i) through
(iii) of this section.
(6) Supplemental published guidance. The section 367(b) notice
requirements may be updated or amended by revenue procedure or other
published guidance.
[T.D. 8862, 65 FR 3597, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000]
Sec. 1.367(b)-2 Definitions and special rules.
(a) Controlled foreign corporation. The term controlled foreign
corporation means a controlled foreign corporation as defined in section
957 (taking into account section 953(c)).
(b) Section 1248 shareholder. The term section 1248 shareholder
means any United States person that satisfies the ownership requirements
of section 1248 (a)(2) or (c)(2) with respect to a foreign corporation.
(c) Section 1248 amount--(1) Rule. The term section 1248 amount with
respect
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to stock in a foreign corporation means the net positive earnings and
profits (if any) that would have been attributable to such stock and
includible in income as a dividend under section 1248 and the
regulations thereunder if the stock were sold by the shareholder. In the
case of a transaction in which the shareholder is a foreign corporation
(foreign shareholder), the following additional rules shall apply--
(i) The foreign shareholder shall be deemed to be a United States
person for purposes of this paragraph (c), except that the foreign
shareholder shall not be considered a United States person for purposes
of determining whether the stock owned by the foreign shareholder is
stock of a controlled foreign corporation; and
(ii) The foreign shareholder's holding period in the stock of the
foreign corporation shall be determined by reference to the period that
the foreign shareholder's section 1248 shareholders held (directly or
indirectly) an interest in the foreign corporation. This paragraph
(c)(1)(ii) applies in addition to the section 1248 regulations'
incorporation of section 1223 holding periods, as modified by Sec.
1.367(b)-4(d) (as applicable).
(2) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1. (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC1, a controlled foreign corporation (CFC). FC1
owns all of the outstanding stock of FC2, a CFC. DC has always owned all
of the stock of FC1, and FC1 has always owned all of the stock of FC2.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to all of FC1's and
FC2's earnings and profits. See section 1248(c)(2). Because FC1's
section 1248 shareholder (DC) always indirectly held all of the stock of
FC2, FC1's section 1248 amount with respect to its FC2 stock is computed
by reference to all of FC2's earnings and profits.
Example 2. (i) Facts. DC, a domestic corporation, owns 40 percent of
the outstanding stock of FC1, a foreign corporation. The other 60
percent of FC1 stock is owned (directly and indirectly) by foreign
persons that are unrelated to DC. FC1 owns all of the outstanding stock
of FC2, a foreign corporation. On January 1, 2001, DC purchases the
remaining 60 percent of FC1 stock.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to FC1's and FC2's
earnings and profits that accumulated on or after January 1, 2001, the
date FC1 and FC2 became controlled foreign corporations (CFCs). See
section 1248(a). Because FC1 is not considered a United States person
for purposes of determining whether FC2 is a CFC, FC1's section 1248
amount with respect to its FC2 stock is computed by reference to FC2's
earnings and profits that accumulated on or after January 1, 2001, the
date FC2 became an actual CFC.
Example 3. (i) Facts. FC1, a foreign corporation, owns all of the
outstanding stock of FC2, a foreign corporation. DC is a domestic
corporation that is unrelated to FC1, FC2, and their direct and indirect
owners. On January 1, 2001, DC purchases all of the outstanding stock of
FC1.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to FC1's and FC2's
earnings and profits that accumulated on or after January 1, 2001, the
first day DC held the stock of FC1. See section 1248(a). FC1's section
1248 amount with respect to its FC2 stock is computed by reference to
FC2's earnings and profits that accumulated on or after January 1, 2001,
the first day FC1's section 1248 shareholder (DC) indirectly held the
stock of FC2.
Example 4. (i) Facts. DC, a domestic corporation, directly owns all
of the outstanding stock of FC1 and FC2, controlled foreign
corporations. DC has always owned all of the stock of FC1 and FC2. On
January 1, 2001, DC contributes all of the stock of FC2 to FC1 in a
nonrecognition exchange that does not require an income inclusion under
the section 367(a) or 367(b) regulations. See Sec. Sec. 1.367(a)-8 and
1.367(b)-4.
(ii) Result. Under this paragraph (c), DC's section 1248 amount with
respect to its FC1 stock is computed by reference to all of FC1's and
FC2's earnings and profits. See section 1248(c)(2). Because FC1's
section 1248 shareholder (DC) always held (directly or indirectly) all
of the stock of FC2, FC1's section 1248 amount with respect to its FC2
stock is computed by reference to all of FC2's earnings and profits.
(d) All earnings and profits amount--(1) General rule. The term all
earnings and profits amount with respect to stock in a foreign
corporation means the net positive earnings and profits (if any)
determined as provided under paragraph (d)(2) of this section and
attributable to such stock as provided under paragraph (d)(3) of this
section. The all earnings and profits amount shall be determined without
regard to the amount of gain that would be realized
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on a sale or exchange of the stock of the foreign corporation.
(2) Rules for determining earnings and profits--(i) Domestic rules
generally applicable. For purposes of this paragraph (d), except as
provided in sections 312(k)(4) and (n)(8), 964 and 986, the earnings and
profits of a foreign corporation for any taxable year shall be
determined according to principles substantially similar to those
applicable to domestic corporations.
(ii) Certain adjustments to earnings and profits. Notwithstanding
paragraph (d)(2)(i) of this section, for purposes of this paragraph (d),
the earnings and profits of a foreign corporation for any taxable year
shall not include the amounts specified in section 1248(d). In the case
of amounts specified in section 1248(d)(4), the preceding sentence
requires that the earnings and profits for any taxable year be decreased
by the net positive amount (if any) of earnings and profits attributable
to activities described in section 1248(d)(4), and increased by the net
reduction (if any) in earnings and profits attributable to activities
described in section 1248(d)(4).
(iii) Effect of section 332 liquidating distribution. The all
earnings and profits amount with respect to stock of a corporation that
distributes all of its property in a liquidation described in section
332 shall be determined without regard to the adjustments prescribed by
section 312(a) and (b) resulting from the distribution of such property
in liquidation, except that gain or loss realized by the corporation on
the distribution shall be taken into account to the extent provided in
section 312(f)(1). See Sec. 1.367(b)-3(b)(3)(ii) Example 3.
(3) Amount attributable to a block of stock--(i) Application of
section 1248 principles--(A) In general--(1) Rule. The all earnings and
profits amount with respect to stock of a foreign corporation is
determined according to the attribution principles of section 1248 and
the regulations thereunder. The attribution principles of section 1248
shall apply without regard to the requirements of section 1248 that are
not relevant to the determination of a shareholder's pro rata portion of
earnings and profits. Thus, for example, the all earnings and profits
amount is determined without regard to whether the foreign corporation
was a controlled foreign corporation at any time during the five years
preceding the section 367(b) exchange in question, without regard to
whether the shareholder owned a 10 percent or greater interest in the
stock, and without regard to whether the earnings and profits of the
foreign corporation were accumulated in post-1962 taxable years or while
the corporation was a controlled foreign corporation.
(2) Example. The following example illustrates the rules of this
paragraph (d)(3)(i)(A):
Example. (i) Facts. On January 1, 2001, DC, a domestic corporation,
purchases 9 percent of the outstanding stock of FC, a foreign
corporation. On January 1, 2002, DC purchases an additional 1 percent of
FC stock. On January 1, 2003, DC exchanges its stock in FC in a section
367(b) exchange in which DC is required to include the all earnings and
profits amount in income. FC was not a controlled foreign corporation
during the entire period DC held its FC stock.
(ii) Result. The all earnings and profits amount with respect to
DC's stock in FC is computed by reference to 9 percent of FC's earnings
and profits from January 1, 2001, through December 31, 2001, and by
reference to 10 percent of FC's earnings and profits from January 1,
2002, through January 1, 2003.
(B) Foreign shareholders. In the case of a transaction in which the
exchanging shareholder is a foreign corporation (foreign shareholder),
the following additional rules shall apply--
(1) The attribution principles of section 1248 shall apply without
regard to whether the person directly owning the stock is a United
States person; and
(2) The foreign shareholder's holding period in the stock of the
foreign acquired corporation shall be determined by reference to the
period that the foreign shareholder's United States shareholders (as
defined in Sec. 1.367(b)-3(b)(2)) held (directly or indirectly) an
interest in the foreign acquired corporation. This paragraph
(d)(3)(i)(B)(2) applies in addition to the section 1248 regulations'
incorporation of section 1223 holding periods, as modified by paragraph
(d)(3)(ii) of this section and Sec. 1.367(b)-4(d) (as applicable).
[[Page 295]]
(ii) Limitation on amounts attributable to holding periods
determined under section 1223--(A) Rule. In applying the attribution
principles of section 1248 and the regulations thereunder to determine
the all earnings and profits amount with respect to the stock of a
foreign corporation, earnings and profits attributable to a section
1223(2) holding period that relates to a period of direct ownership of
the stock of the foreign corporation by a non-United States person shall
not be included, except to the extent of earnings and profits
attributable to a period when the stock of the foreign corporation was
indirectly owned by United States shareholders (as defined in Sec.
1.367(b)-3(b)(2)).
(B) Example. The following example illustrates the rules of this
paragraph (d)(3)(ii):
Example. (i) Facts. (A) FC1 is a foreign corporation. The
outstanding stock of FC1 is directly owned by the following unrelated
persons: 20 percent by DP, a domestic partnership; 20 percent by DC, a
domestic corporation; 20 percent by FC, a foreign corporation that is
directly and indirectly owned by foreign persons; 20 percent by FP, a
foreign partnership that is equally owned by 2 partners, DI, a United
States citizen, and FI, a nonresident alien; and 20 percent by a variety
of minority shareholders, none of whom owns, applying the ownership
rules of section 958, 10 percent or more of the outstanding stock of FC
(the small shareholders).
(B) FC1 owns all of the outstanding stock of FC2, a foreign
corporation that is not a controlled foreign corporation subject to the
rules of section 953(c). FC2 has net positive earnings and profits. In a
reorganization described in section 368(a)(1)(B), DA, a domestic
corporation, acquires all of the stock of FC2 from FC1 in exchange for
DA voting stock.
(ii) Result. (A) Under section 1223(2), DA holds the stock of FC2
with a holding period that includes the period that FC2 was held by FC1.
As a result, the rules of this paragraph (d)(3)(ii) apply for purposes
of computing DA's all earnings and profits amount.
(B) In applying the attribution principles of section 1248, earnings
and profits attributable to a section 1223(2) holding period that refers
to a period of direct ownership of the stock of a foreign corporation by
a non-United States person are not included, except to the extent the
stock of the foreign corporation was indirectly owned by United States
shareholders as defined in Sec. 1.367(b)-3(b)(2). Accordingly, DA's all
earnings and profits amount does not include the FC2 earnings and
profits attributable to FC, FI, and the small shareholders. DA's all
earnings and profits amount does include the FC2 earnings and profits
attributable to DP, DC, and DI. See Sec. 1.367(b)-2(k) for rules
concerning the treatment of partnerships under the section 367(b)
regulations.
(iii) Exclusion of lower-tier earnings. In applying the attribution
principles of section 1248 and the regulations thereunder to determine
the all earnings and profits amount with respect to stock of a foreign
corporation, the earnings and profits of subsidiaries of the foreign
corporation shall not be taken into account notwithstanding section
1248(c)(2).
(e) Treatment of deemed dividends--(1) In general. In certain
circumstances these regulations provide that an exchanging shareholder
shall include an amount in income as a deemed dividend. This paragraph
provides rules for the treatment of the deemed dividend.
(2) Consequences of dividend characterization. A deemed dividend
described in paragraph (e)(1) of this section shall be treated as a
dividend for purposes of the Internal Revenue Code. The deemed dividend
shall be considered as paid out of the earnings and profits with respect
to which the amount of the deemed dividend was determined. Thus, for
example, a deemed dividend that is determined by reference to the all
earnings and profits amount or the section 1248 amount will never be
considered as paid out of (and therefore will never reduce) earnings and
profits specified in section 1248(d), because such earnings and profits
are excluded in computing the all earnings and profits amount (under
paragraph (d)(2)(ii) of this section) and the section 1248 amount (under
section 1248(d) and paragraph (c)(1) of this section). If the deemed
dividend is determined by reference to the earnings and profits of a
foreign corporation that is owned indirectly (i.e., through one or more
tiers of intermediate owners) by the person that is required to include
the deemed dividend in income, the deemed dividend shall be considered
as having been paid by such corporation to such person through the
intermediate owners, rather than directly to such person.
[[Page 296]]
(3) Ordering rules. In the case of an exchange of stock in which the
exchanging shareholder is treated as receiving a deemed dividend from a
foreign corporation, the following ordering rules concerning the timing,
treatment, and effect of such a deemed dividend shall apply. See also
paragraph (j)(2) of this section.
(i) For purposes of the section 367(b) regulations, the gain
realized by an exchanging shareholder shall be determined before
increasing (as provided in paragraph (e)(3)(ii) of this section) the
basis in the stock of the foreign corporation by the amount of the
deemed dividend.
(ii) Except as provided in paragraph (e)(3)(i) of this section, the
deemed dividend shall be considered to be received immediately before
the exchanging shareholder's receipt of consideration for its stock in
the foreign corporation, and the shareholder's basis in the stock
exchanged shall be increased by the amount of the deemed dividend. Such
basis increase shall be taken into account before determining the gain
otherwise recognized on the exchange (for example, under section 356),
the basis that the exchanging shareholder takes in the property that it
receives in the exchange (under section 358(a)(1)), and the basis that
the transferee otherwise takes in the transferred stock (under section
362).
(iii) Except as provided in paragraph (e)(3)(i) of this section, the
earnings and profits of the appropriate foreign corporation shall be
reduced by the deemed dividend amount before determining the
consequences of the recognition of gain in excess of the deemed dividend
amount (for example, under section 356(a)(2) or sections 356(a)(1) and
1248).
(4) Examples. The following examples illustrate the rules of this
paragraph (e):
Example 1. DC, a domestic corporation, exchanges stock in FC, a
foreign corporation, in a section 367(b) exchange in which DC includes
the all earnings and profits amount in income as a deemed dividend.
Under paragraph (e)(2) of this section, a deemed dividend is treated as
a dividend for purposes of the Internal Revenue Code. As a result, if
the requirements of section 902 are met, DC may qualify for a deemed
paid foreign tax credit with respect to the deemed dividend that it
receives from FC.
Example 2. DC, a domestic corporation, exchanges stock in FC1, a
foreign corporation that is a controlled foreign corporation, in a
transaction in which DC is required to include the section 1248 amount
in income as a deemed dividend. A portion of the section 1248 amount is
determined by reference to the earnings and profits of FC1 (the upper-
tier portion of the section 1248 amount), and the remainder of the
section 1248 amount is determined by reference to the earnings and
profits of FC2, which is a wholly owned foreign subsidiary of FC1 (the
lower-tier portion of the section 1248 amount). Under paragraph (e)(2)
of this section, DC computes its deemed paid foreign tax credit as if
the lower-tier portion of the section 1248 amount were distributed as a
dividend by FC2 to FC1, and as if such portion and the upper-tier
portion of the section 1248 amount were then distributed as a dividend
by FC1 to DC.
Example 3. DC, a domestic corporation, exchanges stock in FC, a
foreign corporation that is a controlled foreign corporation, in a
transaction in which DC realizes gain of $100 (prior to the application
of the section 367(b) regulations). In connection with the transaction,
DC is required to include $40 in income as a deemed dividend under the
section 367(b) regulations. In addition to receiving property permitted
to be received under section 354 without the recognition of gain, DC
also receives cash in the amount of $70. Under paragraph (e)(3) of this
section, the $40 deemed dividend increases DC's basis in its FC stock
before determining the gain to be recognized under section 356. Thus, in
applying section 356, DC is considered to realize $60 of gain on the
exchange, all of which is recognized under section 356(a)(1).
(f) Deemed asset transfer and closing of taxable year in certain
section 368(a)(1)(F) reorganizations--(1) Scope. This paragraph applies
to a reorganization described in section 368(a)(1)(F) in which the
transferor corporation is a foreign corporation.
(2) Deemed asset transfer. In a reorganization described in
paragraph (f)(1) of this section, there is considered to exist--
(i) A transfer of assets by the foreign transferor corporation to
the acquiring corporation in exchange for stock (or stock and
securities) of the acquiring corporation and the assumption by the
acquiring corporation of the foreign transferor corporation's
liabilities;
(ii) A distribution of such stock (or stock and securities) by the
foreign
[[Page 297]]
transferor corporation to its shareholders (or shareholders and security
holders); and
(iii) An exchange by the foreign transferor corporation's
shareholders (or shareholders and security holders) of their stock (or
stock and securities) for stock (or stock and securities) of the
acquiring corporation.
(3) Other applicable rules. For purposes of this paragraph (f), it
is immaterial that the applicable foreign or domestic law treats the
acquiring corporation as a continuation of the foreign transferor
corporation.
(4) Closing of taxable year. In a reorganization described in
paragraph (f)(1) of this section, the taxable year of the foreign
transferor corporation shall end with the close of the date of the
transfer and, except as otherwise required under the Internal Revenue
Code (e.g. section 1502 and the regulations thereunder), the taxable
year of the acquiring corporation shall end with the close of the date
on which the transferor's taxable year would have ended but for the
occurrence of the reorganization if--
(i) The acquiring corporation is a domestic corporation; or
(ii) The foreign transferor corporation has effectively connected
earnings and profits (as defined in section 884(d)) or accumulated
effectively connected earnings and profits (as defined in section
884(b)(2)(B)(ii)).
(g) Stapled stock under section 269B. For rules treating a foreign
corporation as a domestic corporation if it and a domestic corporation
are stapled entities, see section 269B. The deemed conversion of a
foreign corporation to a domestic corporation under section 269B is
treated as a reorganization under section 368(a)(1)(F).
(h) Section 953(d) domestication elections--(1) Effect of election.
A foreign corporation that elects under section 953(d) to be treated as
a domestic corporation shall be treated for purposes of section 367(b)
as transferring, as of the first day of the first taxable year for which
the election is effective, all of its assets to a domestic corporation
in a reorganization described in section 368(a)(1)(F). Notwithstanding
paragraph (d) of this section, for purposes of determining the
consequences of the reorganization under Sec. 1.367(b)-3, the all
earnings and profits amount shall not be considered to include earnings
and profits accumulated in taxable years beginning before January 1,
1988.
(2) Post-election exchanges. For purposes of applying section 367(b)
to post-election exchanges with respect to a corporation that has made a
valid election under section 953(d) to be treated as a domestic
corporation, such corporation shall be treated as a domestic corporation
as to earnings and profits that were taken into account at the time of
the section 953(d) election or which accrue after such election, and
shall be treated as a foreign corporation as to earnings and profits
accumulated in taxable years beginning before January 1, 1988. Thus, for
example, if the section 953(d) corporation subsequently transfers its
assets to a domestic corporation (other than another section 953(d)
corporation) in a transaction described in section 381(a), the rules of
Sec. 1.367(b)-3 shall apply to such transaction to the extent of the
section 953(d) corporation's earnings and profits accumulated in taxable
years beginning before January 1, 1988.
(i) Section 1504(d) elections. An election under section 1504(d),
which permits certain foreign corporations to be treated as domestic
corporations, is treated as a transfer of property to a domestic
corporation and will generally constitute a reorganization described in
section 368(a)(1)(F). However, if an election under section 1504(d) is
made with respect to a foreign corporation from the first day of the
foreign corporation's existence, then the foreign corporation shall be
treated as a domestic corporation, and the section 367(b) regulations
will not apply.
(j) Sections 985 through 989--(1) Change in functional currency of a
qualified business unit--(i) Rule. If, as a result of a transaction
described in section 381(a), a qualified business unit (as defined in
section 989(a)) (QBU) has a different functional currency determined
under the rules of section 985(b) than it used prior to the transaction,
then the QBU shall be deemed to have automatically changed its
functional currency immediately prior to the transaction. A QBU that is
deemed to change its functional currency pursuant to this paragraph (j)
[[Page 298]]
must make the adjustments described in Sec. 1.985-5.
(ii) Example. The following example illustrates the rule of this
paragraph (j)(1):
Example. (i) Facts. DC, a domestic corporation, owns 100 percent of
FC1, a foreign corporation. FC1 owns and operates a qualified business
unit (QBU) (B1) in France, whose functional currency is the euro. FC2,
an unrelated foreign corporation, owns and operates a QBU (B2) in
France, whose functional currency is the dollar. FC2 acquires FC1's
assets (including B1) in a reorganization described in section
368(a)(1)(C). As a part of the reorganization, B1 and B2 combine their
operations into one QBU. Applying the rules of section 985(b), the
functional currency of the combined operations of B1 and B2 is the euro.
(ii) Result. FC2's acquisition of FC1's assets is a section 367(b)
exchange that is described in section 381(a). Because the functional
currency of the combined operations of B1 and B2 after the exchange is
the euro, B2 is deemed to have automatically changed its functional
currency to the euro immediately prior to the section 367(b) exchange.
B2 must make the adjustments described in Sec. 1.985-5.
(2) Previously taxed earnings and profits--(i) Exchanging
shareholder that is a United States person. If an exchanging shareholder
that is a United States person is required to include in income either
the all earnings and profits amount or the section 1248 amount under the
provisions of Sec. 1.367(b)-3 or 1.367(b)-4, then immediately prior to
the exchange, and solely for the purpose of computing exchange gain or
loss under section 986(c), the exchanging shareholder shall be treated
as receiving a distribution of previously taxed earnings and profits
from the appropriate foreign corporation that is attributable (under the
principles of section 1248) to the exchanged stock. If an exchanging
shareholder that is a United States person is a distributee in an
exchange described in Sec. 1.367(b)-5(c) or (d), then immediately prior
to the exchange, and solely for the purpose of computing exchange gain
or loss under section 986(c), the exchanging shareholder shall be
treated as receiving a distribution of previously taxed earnings and
profits from the appropriate foreign corporation to the extent such
shareholder has a diminished interest in such previously taxed earnings
and profits after the exchange. The exchange gain or loss recognized
under this paragraph (j)(2)(i) will increase or decrease the exchanging
shareholder's adjusted basis in the stock of the foreign corporation,
including for purposes of computing gain or loss realized with respect
to the stock on the transaction. The exchanging shareholder's dollar
basis with respect to each account of previously taxed income shall be
increased or decreased by the exchange gain or loss recognized.
(ii) Exchanging shareholder that is a foreign corporation. If an
exchanging shareholder that is a foreign corporation is required to
include in income either the all earnings and profits amount or the
section 1248 amount under the provisions of Sec. 1.367(b)-3 or
1.367(b)-4, then, immediately prior to the exchange, the exchanging
shareholder shall be treated as receiving a distribution of previously
taxed earnings and profits from the appropriate foreign corporation that
is attributable (under the principles of section 1248) to the exchanged
stock. If an exchanging shareholder that is a foreign corporation is a
distributee in an exchange described in Sec. 1.367(b)-5(c) or (d), then
the exchanging shareholder shall be treated as receiving (immediately
prior to the exchange) a distribution of previously taxed earnings and
profits from the appropriate foreign corporation. Such distribution
shall be measured by the extent to which the exchanging shareholder's
direct or indirect United States shareholders (as defined in section
951(b)) have a diminished interest in such previously taxed earnings and
profits after the exchange.
(3) Other rules. See sections 985 through 989 for other currency
rules that may apply in connection with a section 367(b) exchange.
(k) Partnerships, trusts and estates. In applying the section 367(b)
regulations, stock of a corporation that is owned by a foreign
partnership, trust or estate shall be considered as owned
proportionately by its partners, owners, or beneficiaries under the
principles of Sec. 1.367(e)-1(b)(2). Stock owned by an entity that is
disregarded as an entity separate from its owner under Sec. 301.7701-3
is owned directly by the owner of such entity. In applying Sec.
1.367(b)-5(b), the principles of
[[Page 299]]
Sec. 1.367(e)-1(b)(2) shall also apply to a domestic partnership, trust
or estate.
[T.D. 8862, 65 FR 3598, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000]
Sec. 1.367(b)-3 Repatriation of foreign corporate assets in certain
nonrecognition transactions.
(a) Scope. This section applies to an acquisition by a domestic
corporation (the domestic acquiring corporation) of the assets of a
foreign corporation (the foreign acquired corporation) in a liquidation
described in section 332 or an asset acquisition described in section
368(a)(1).
(b) Exchange of stock owned directly by a United States shareholder
or by certain foreign corporate shareholders--(1) Scope. This paragraph
(b) applies in the case of an exchanging shareholder that is either--
(i) A United States shareholder of the foreign acquired corporation;
or
(ii) A foreign corporation with respect to which there are one or
more United States shareholders.
(2) United States shareholder. For purposes of this section (and for
purposes of the other section 367(b) regulation provisions that
specifically refer to this paragraph (b)(2)), the term United States
shareholder means any shareholder described in section 951(b) (without
regard to whether the foreign corporation is a controlled foreign
corporation), and also any shareholder described in section 953(c)(1)(A)
(but only if the foreign corporation is a controlled foreign corporation
as defined in section 953(c)(1)(B) subject to the rules of section
953(c)).
(3) Income inclusion--(i) Inclusion of all earnings and profits
amount. An exchanging shareholder shall include in income as a deemed
dividend the all earnings and profits amount with respect to its stock
in the foreign acquired corporation. For the consequences of the deemed
dividend, see Sec. 1.367(b)-2(e). Notwithstanding Sec. 1.367(b)-2(e),
however, a deemed dividend from the foreign acquired corporation to an
exchanging foreign corporate shareholder shall not qualify for the
exception from foreign personal holding company income provided by
section 954(c)(3)(A)(i), although it may qualify for the look-through
treatment provided by section 904(d)(3) if the requirements of that
section are met with respect to the deemed dividend.
(ii) Examples. The following examples illustrate the rules of
paragraph (b)(3)(i) of this section:
Example 1-- (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $30 in such stock. The all earnings
and profits amount attributable to the FC stock owned by DC is $20, of
which $15 is described in section 1248(a) and the remaining $5 is not
(for example, because it accumulated prior to 1963). FC has a basis of
$50 in its assets. In a liquidation described in section 332, FC
distributes all of its property to DC, and the FC stock held by DC is
canceled.
(ii) Result. Under paragraph (b)(3)(i) of this section, DC must
include $20 in income as a deemed dividend from FC. Under section 337(a)
FC does not recognize gain or loss in the assets that it distributes to
DC, and under section 334(b), DC takes a basis of $50 in such assets.
Because the requirements of section 902 are met, DC qualifies for a
deemed paid foreign tax credit with respect to the deemed dividend that
it receives from FC.
Example 2-- (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $30 in such stock. The all earnings
and profits amount attributable to the FC stock owned by DC is $75. FC
has a basis of $50 in its assets. In a liquidation described in section
332, FC distributes all of its property to DC, and the FC stock held by
DC is canceled.
(ii) Result. Under paragraph (b)(3)(i) of this section, DC must
include $75 in income as a deemed dividend from FC. Under section 337(a)
FC does not recognize gain or loss in the assets that it distributes to
DC, and under section 334(b), DC takes a basis of $50 in such assets.
Because the requirements of section 902 are met, DC qualifies for a
deemed paid foreign tax credit with respect to the deemed dividend that
it receives from FC.
Example 3-- (i) Facts. DC, a domestic corporation, owns 80 percent
of the outstanding stock of FC, a foreign corporation. DC has owned its
80 percent interest in FC since FC was incorporated. The remaining 20
percent of the outstanding stock of FC is owned by a person unrelated to
DC (the minority shareholder). The stock of FC owned by DC has a value
of $80, and DC has a basis of $24 in such stock. The stock of FC owned
by the minority shareholder has a value of $20, and the minority
shareholder has a basis of $18 in such stock. FC's only asset is land
having a value of $100, and FC has a basis of $50 in the land. Gain on
the land would not generate
[[Page 300]]
earnings and profits qualifying under section 1248(d) for an exclusion
from earnings and profits for purposes of section 1248. FC has earnings
and profits of $20 (determined under the rules of Sec. 1.367(b)-2(d)(2)
(i) and (ii)), $16 of which is attributable to the stock owned by DC
under the rules of Sec. 1.367(b)-2(d)(3). FC subdivides the land and
distributes to the minority shareholder land with a value of $20 and a
basis of $10. As part of the same transaction, in a liquidation
described in section 332, FC distributes the remainder of its land to
DC, and the FC stock held by DC and the minority shareholder is
canceled.
(ii) Result. Under section 336, FC must recognize the $10 of gain it
realizes in the land it distributes to the minority shareholder, and
under section 331 the minority shareholder recognizes its gain of $2 in
the stock of FC. Such gain is included in income by the minority
shareholder as a dividend to the extent provided in section 1248 if the
minority shareholder is a United States person that is described in
section 1248(a)(2). Under Sec. 1.367(b)-2(d)(2)(iii), the $10 of gain
recognized by FC increases its earnings and profits for purposes of
computing the all earnings and profits amount and, as a result, $8 of
such increase (80 percent of $10) is considered to be attributable to
the FC stock owned by DC under Sec. 1.367(b)-2(d)(3)(i)(A)(1). DC's all
earnings and profits amount with respect to its stock in FC is $24 (the
$16 of initial all earnings and profits amount with respect to the FC
stock held by DC, plus the $8 addition to such amount that results from
FC's recognition of gain on the distribution to the minority
shareholder). Under paragraph (b)(3)(i) of this section, DC must include
the $24 all earnings and profits amount in income as a deemed dividend
from FC.
Example 4-- (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of DC2, a domestic corporation. DC1 also owns all of
the outstanding stock of FC, a foreign corporation. The stock of FC has
a value of $100, and DC1 has a basis of $30 in such stock. The assets of
FC have a value of $100. The all earnings and profits amount with
respect to the FC stock owned by DC1 is $20. In a reorganization
described in section 368(a)(1)(D), DC2 acquires all of the assets of FC
solely in exchange for DC2 stock. FC distributes the DC2 stock to DC1,
and the FC stock held by DC1 is canceled.
(ii) Result. DC1 must include $20 in income as a deemed dividend
from FC under paragraph (b)(3)(i) of this section. Under section 361, FC
does not recognize gain or loss in the assets that it transfers to DC2
or in the DC2 stock that it distributes to DC1, and under section 362(b)
DC2 takes a basis in the assets that it acquires from FC equal to the
basis that FC had therein. Under Sec. 1.367(b)-2(e)(3)(ii) and section
358(a)(1), DC1 takes a basis of $50 (its $30 basis in the stock of FC,
plus the $20 that was treated as a deemed dividend to DC1) in the stock
of DC2 that it receives in exchange for the stock of FC. Under Sec.
1.367(b)-2(e)(3)(iii) and section 312(a), the earnings and profits of FC
are reduced by the $20 deemed dividend.
Example 5-- (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of DC2, a domestic corporation. DC1 also owns all of
the outstanding stock of FC1, a foreign corporation. FC1 owns all of the
outstanding stock of FC2, a foreign corporation. The all earnings and
profits amount with respect to the FC2 stock owned by FC1 is $20. In a
reorganization described in section 368(a)(1)(D), DC2 acquires all of
the assets and liabilities of FC2 in exchange for DC2 stock. FC2
distributes the DC2 stock to FC1, and the FC2 stock held by FC1 is
canceled.
(ii) Result. FC1 must include $20 in income as a deemed dividend
from FC2 under paragraph (b)(3)(i) of this section. The deemed dividend
is treated as a dividend for purposes of the Internal Revenue Code as
provided in Sec. 1.367(b)-2(e)(2); however, under paragraph (b)(3)(i)
of this section the deemed dividend cannot qualify for the exception
from foreign personal holding company income provided by section
954(c)(3)(A)(i), even if the provisions of that section would otherwise
have been met in the case of an actual dividend.
Example 6-- (i) Facts. DC1, a domestic corporation, owns 99 percent
of USP, a domestic partnership. The remaining 1 percent of USP is owned
by a person unrelated to DC1. DC1 and USP each directly own 9 percent of
the outstanding stock of FC, a foreign corporation that is not a
controlled foreign corporation subject to the rule of section 953(c). In
a reorganization described in section 368(a)(1)(C), DC2, a domestic
corporation, acquires all of the assets and liabilities of FC in
exchange for DC2 stock. FC distributes to its shareholders DC2 stock,
and the FC stock held by its shareholders is canceled.
(ii) Result. (A) DC1 and USP are United States persons that are
exchanging shareholders in a transaction described in paragraph (a) of
this section. As a result, DC1 and USP are subject to the rules of
paragraph (b) of this section if they qualify as United States
shareholders as defined in paragraph (b)(2) of this section.
Alternatively, if they do not qualify as United States shareholders as
defined in paragraph (b)(2) of this section, DC1 and USP are subject to
the rules of paragraph (c) of this section. Paragraph (b)(2) of this
section defines the term United States shareholder to include any
shareholder described in section 951(b) (without regard to whether the
foreign corporation is a controlled foreign corporation). A shareholder
described in section 951(b) is a United States person that is considered
to own, applying the rules of section 958(a) and 958(b), 10 percent or
more of the total combined voting power of all classes of stock entitled
to vote of a foreign corporation. Under section
[[Page 301]]
958(b), the rules of section 318(a), as modified by section 958(b) and
the regulations thereunder, apply so that, in general, stock owned
directly or indirectly by a partnership is considered as owned
proportionately by its partners, and stock owned directly or indirectly
by a partner is considered as owned by the partnership. Thus, under
section 958(b), DC1 is treated as owning its proportionate share of FC
stock held by USP, and USP is treated as owning all of the FC stock held
by DC1.
(B) Accordingly, for purposes of determining whether DC1 is a United
States shareholder under paragraph (b)(2) of this section, DC1 is
considered as owning 99 percent of the 9 percent of FC stock held by
USP. Because DC1 also owns 9 percent of FC stock directly, DC1 is
considered as owning more than 10 percent of FC stock. DC1 is thus a
United States shareholder of FC under paragraph (b)(2) of this section
and, as a result, is subject to the rules of paragraph (b) of this
section. However, for purposes of determining DC1's all earnings and
profits amount, DC1 is not treated as owning the FC stock held by USP.
Under Sec. 1.367(b)-2(d)(3), DC1's all earnings and profits amount is
determined by reference to the 9 percent of FC stock that it directly
owns.
(C) For purposes of determining whether USP is a United States
shareholder under paragraph (b)(2) of this section, USP is considered as
owning the 9 percent of FC stock held by DC1. Because USP also owns 9
percent of FC stock directly, USP is considered as owning more than 10
percent of FC stock. USP is thus a United States shareholder of FC under
paragraph (b)(2) of this section and, as a result, is subject to the
rules of paragraph (b) of this section. However, for purposes of
determining USP's all earnings and profits amount, USP is not treated as
owning the FC shares held by DC1. Under Sec. 1.367(b)-2(d)(3), USP's
all earnings and profits amount is determined by reference to the 9
percent of FC stock that it directly owns.
(iii) Recognition of exchange gain or loss with respect to capital.
[Reserved]
(4) Reserved. For further guidance concerning section 367(b)
exchanges occurring before February 23, 2001, see Sec. 1.367(b)-
3T(b)(4).
(c) Exchange of stock owned by a United States person that is not a
United States shareholder--(1) Scope. This paragraph (c) applies in the
case of an exchanging shareholder that is a United States person not
described in paragraph (b)(1)(i) of this section (i.e., a United States
person that is not a United States shareholder of the foreign acquired
corporation).
(2) Requirement to recognize gain. An exchanging shareholder
described in paragraph (c)(1) of this section shall recognize realized
gain (but not loss) with respect to the stock of the foreign acquired
corporation.
(3) Election to include all earnings and profits amount. In lieu of
the treatment prescribed by paragraph (c)(2) of this section, an
exchanging shareholder described in paragraph (c)(1) of this section may
instead elect to include in income as a deemed dividend the all earnings
and profits amount with respect to its stock in the foreign acquired
corporation. For the consequences of a deemed dividend, see Sec.
1.367(b)-2(e). Such election may be made only if--
(i) The foreign acquired corporation (or its successor in interest)
has provided the exchanging shareholder information to substantiate the
exchanging shareholder's all earnings and profits amount with respect to
its stock in the foreign acquired corporation; and
(ii) The exchanging shareholder complies with the section 367(b)
notice requirement described in Sec. 1.367(b)-1(c), including the
specific rules contained therein concerning the time and manner for
electing to apply the rules of this paragraph (c)(3).
(4) De minimis exception. This paragraph (c) shall not apply in the
case of an exchanging shareholder whose stock in the foreign acquired
corporation has a fair market value of less than $50,000 on the date of
the section 367(b) exchange.
(5) Examples. The following examples illustrate the rules of this
paragraph (c):
Example 1-- (i) Facts. DC1, a domestic corporation, owns 5 percent
of the outstanding stock of FC, a foreign corporation that is not a
controlled foreign corporation subject to the rule of section 953(c).
Persons unrelated to DC1 own the remaining 95 percent of the outstanding
stock of FC. DC1 has owned its 5 percent interest in FC since FC was
incorporated. DC1's stock in FC has a basis of $40,000 and a value of
$100,000. The all earnings and profits amount with respect to DC1's
stock in FC is $50,000. In a reorganization described in section
368(a)(1)(C), DC2, a domestic corporation, acquires all of the assets
and liabilities of FC in exchange for DC2 stock. FC distributes DC2
stock to its shareholders, and the FC stock held by its shareholders is
canceled.
(ii) Alternate result 1. If DC1 does not make the election described
in paragraph (c)(3) of
[[Page 302]]
this section, then the general rule of paragraph (c)(2) of this section
applies and DC1 must recognize its $60,000 gain in the FC stock. Under
section 358(a)(1), DC1 has a $100,000 basis (its $40,000 basis in the FC
stock, plus the $60,000 recognized gain) in the DC2 stock that it
receives in exchange for its FC stock. Because DC1 is not a shareholder
described in section 1248(a)(2), section 1248 does not apply to
recharacterize any of DC1's gain as a dividend.
(iii) Alternate result 2. If DC1 makes a valid election under
paragraph (c)(3) of this section, then DC1 must include in income as a
deemed dividend the $50,000 all earnings and profits amount with respect
to its FC stock. Under Sec. 1.367(b)-2(e)(3) and section 358(a)(1), DC1
has a $90,000 basis (its $40,000 basis in the FC stock, plus the $50,000
that was treated as a deemed dividend to DC1) in the DC2 stock that it
receives in exchange for its FC stock. Because DC1 owns less than 10
percent of the voting stock of FC, DC1 does not qualify for a deemed
paid foreign tax credit under section 902.
Example 2-- (i) Facts. The facts are the same as in Example 1,
except that DC1's stock in FC has a fair market value of $48,000 on the
date DC1 receives the DC2 stock.
(ii) Result. Because DC1's stock in FC has a fair market value of
less than $50,000 on the date of the section 367(b) exchange, the de
minimis exception of paragraph (c)(4) of this section applies. As a
result, DC1 is not subject to the gain or income inclusion requirements
of this paragraph (c).
(d) Carryover of certain foreign taxes--(1) Rule. Excess foreign
taxes under section 904(c) allowable to the foreign acquired corporation
under section 906 shall carry over to the domestic acquiring corporation
and become allowable under section 901, subject to the limitations
prescribed by the Internal Revenue Code (for example, sections 383, 904
and 907). The domestic acquiring corporation shall not succeed to any
other foreign taxes paid or incurred by the foreign acquired
corporation.
(2) Example. The following example illustrates the rules of this
paragraph (d):
Example-- (i) Facts. DC, a domestic corporation owns 100 percent of
the outstanding stock of FC, a foreign corporation. FC has net positive
earnings and profits, none of which are attributable to DC's FC stock
under Sec. 1.367(b)-2(d)(3). FC has paid foreign taxes that are not
eligible for credit under section 906. In a liquidation described in
section 332, FC distributes all of its property to DC, and the FC stock
held by DC is canceled.
(ii) Result. The liquidation of FC into DC is a section 367(b)
exchange. Thus, DC is subject to the section 367(b) regulations, and
must file a section 367(b) notice pursuant to Sec. 1.367(b)-1(c).
Pursuant to the provisions of paragraph (d)(1) of this section, the
foreign taxes paid by FC do not carryover to DC because FC's foreign
taxes are not eligible for credit under section 906.
[T.D. 8862, 65 FR 3601, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000]
Sec. 1.367(b)-3T Repatriation of foreign corporate assets in certain
nonrecognition transactions (temporary).
(a)-(b)(3). [Reserved]. For further guidance, see Sec. 1.367(b)-
3(a) through (b)(3).
(4) Election of taxable exchange treatment--(i) Rules--(A) In
general. In lieu of the treatment prescribed by Sec. 1.367(b)-
3(b)(3)(i), an exchanging shareholder described in Sec. 1.367(b)-
3(b)(1) may instead elect to recognize the gain (but not loss) that it
realizes in the exchange (taxable exchange election). To make a taxable
exchange election, the following requirements must be satisfied--
(1) The exchanging shareholder (and its direct or indirect owners
that would be affected by the election, in the case of an exchanging
shareholder that is a foreign corporation) reports the exchange in a
manner consistent therewith (see, e.g., sections 954(c)(1)(B)(i), 1001
and 1248);
(2) The notification requirements of paragraph (b)(4)(i)(C) of this
section are satisfied; and
(3) The adjustments described in paragraph (b)(4)(i)(B) of this
section are made when the following circumstances are present--
(i) The transaction is described in section 332 or is an asset
acquisition described in section 368(a)(1), with regard to which one
U.S. person owns (directly or indirectly) 100 percent of the foreign
acquired corporation; and
(ii) The all earnings and profits amount described in Sec.
1.367(b)-3(b)(3)(i) with respect to the exchange exceeds the gain
recognized by the exchanging shareholder.
(B) Attribute reduction--(1) Reduction of NOL carryovers. The amount
by which the all earnings and profits amount exceeds the gain recognized
by the exchanging shareholder (the excess earnings and profits amount)
shall be
[[Page 303]]
applied to reduce the net operating loss carryovers (if any) of the
foreign acquired corporation to which the domestic acquiring corporation
would otherwise succeed under section 381(a) and (c)(1). See also Rev.
Rul. 72-421 (1972-2 C.B. 166) (see Sec. 601.601(d)(2) of this chapter).
(2) Reduction of capital loss carryovers. After the application of
paragraph (b)(4)(i)(B)(1) of this section, any remaining excess earnings
and profits amount shall be applied to reduce the capital loss
carryovers (if any) of the foreign acquired corporation to which the
domestic acquiring corporation would otherwise succeed under section
381(a) and (c)(3).
(3) Reduction of basis. After the application of paragraph
(b)(4)(i)(B)(2) of this section, any remaining excess earnings and
profits amount shall be applied to reduce (but not below zero) the basis
of the assets (other than dollar-denominated money) of the foreign
acquired corporation that are acquired by the domestic acquiring
corporation. Such remaining excess earnings and profits amount shall be
applied to reduce the basis of such assets in the following order:
first, tangible depreciable or depletable assets, according to their
class lives (beginning with those assets with the shortest class life);
second, other non-inventory tangible assets; third, intangible assets
that are amortizable; and finally, the remaining assets of the foreign
acquired corporation that are acquired by the domestic acquiring
corporation. Within each of these categories, if the total basis of all
assets in the category is greater than the excess earnings and profits
amount to be applied against such basis, the taxpayer may choose to
which specific assets in the category the basis reduction first applies.
(C) Notification. The exchanging shareholder shall elect to apply
the rules of this paragraph (b)(4)(i) by attaching a statement of its
election to its section 367(b) notice. See Sec. 1.367(b)-1(c) For the
rules concerning filing a section 367(b) notice.
(D) Example. The following example illustrates the rules of this
paragraph (b)(4)(i):
Example-- (i) Facts. DC, a domestic corporation, owns all of the
outstanding stock of FC, a foreign corporation. The stock of FC has a
value of $100, and DC has a basis of $80 in such stock. The assets of FC
are one parcel of land with a value of $60 and a basis of $30, and
tangible depreciable assets with a value of $40 and a basis of $80. FC
has no net operating loss carryovers or capital loss carryovers. The all
earnings and profits amount with respect to the FC stock owned by DC is
$30, of which $19 is described in section 1248(a) and the remaining $11
is not (for example, because it was earned prior to 1963). In a
liquidation described in section 332, FC distributes all of its property
to DC, and the FC stock held by DC is canceled. Rather than including in
income as a deemed dividend the all earnings and profits amount of $30
as provided in Sec. 1.367(b)-3(b)(3)(i), DC instead elects taxable
exchange treatment under paragraph (b)(4)(i)(A) of this section.
(ii) Result. DC recognizes the $20 of gain it realizes on its stock
in FC. Of this $20 amount, $19 is included in income by DC as a dividend
pursuant to section 1248(a). (For the source of the remaining $1 of gain
recognized by DC, see section 865. For the treatment of the $1 for
purposes of the foreign tax credit limitation, see generally section
904(d)(2)(A)(i).) Because the transaction is described in section 332
and because the all earnings and profits amount with respect to the FC
stock held by DC ($30) exceeds by $10 the income recognized by DC ($20),
the attribute reduction rules of paragraph (b)(4)(i)(B) of this section
apply. Accordingly, the $10 excess earnings and profits amount is
applied to reduce the basis of the tangible depreciable assets of FC,
beginning with those assets with the shortest class lives. Under section
337(a) FC does not recognize gain or loss in the assets that it
distributes to DC, and under section 334(b) (which is applied taking
into account the basis reduction prescribed by paragraph (b)(4)(i)(A)(3)
of this section) DC takes a basis of $30 in the land and $70 in the
tangible depreciable assets that it receives from FC.
(ii) Effective date. This paragraph (b)(4) applies for section
367(b) exchanges that occur between February 23, 2000, and February 23,
2001.
(c)-(d) [Reserved]. For further guidance, see Sec. 1.367(b)-3(c)
through (d).
[T.D. 8863, 65 FR 3588, Jan. 24, 2000]
Sec. 1.367(b)-4 Acquisition of foreign corporate stock or assets by
a foreign corporation in certain nonrecognition transactions.
(a) Scope. This section applies to an acquisition by a foreign
corporation (the foreign acquiring corporation) of
[[Page 304]]
the stock or assets of a foreign corporation (the foreign acquired
corporation) in an exchange described in section 351 or a reorganization
described in section 368(a)(1)(B), (C), (D), (E), (F) or (G). This
section applies notwithstanding that the foreign acquiring corporation
and the foreign acquired corporation may be the same corporation (such
as in a section 368(a)(1)(E) reorganization). See Sec. 1.367(a)-3(b)(2)
for additional rules that may apply.
(b) Income inclusion. If an exchange is described in paragraph
(b)(1)(i), (2)(i) or (3) of this section, the exchanging shareholder
shall include in income as a deemed dividend the section 1248 amount
attributable to the stock that it exchanges.
(1) Exchange that results in loss of status as section 1248
shareholder--(i) Rule. An exchange is described in this paragraph
(b)(1)(i) if--
(A) Immediately before the exchange, the exchanging shareholder is--
(1) A United States person that is a section 1248 shareholder with
respect to the foreign acquired corporation; or
(2) A foreign corporation, and a United States person is a section
1248 shareholder with respect to such foreign corporation and with
respect to the foreign acquired corporation; and
(B) Either of the following conditions is satisfied--
(1) Immediately after the exchange, the stock received in the
exchange is not stock in a corporation that is a controlled foreign
corporation as to which the United States person described in paragraph
(b)(1)(i)(A) of this section is a section 1248 shareholder; or
(2) Immediately after the exchange, the foreign acquiring
corporation or the foreign acquired corporation (if any, such as in a
transaction described in section 368(a)(1)(B) and/or section 351), is
not a controlled foreign corporation as to which the United States
person described in paragraph (b)(1)(i)(A) of this section is a section
1248 shareholder.
(ii) Examples. The following examples illustrate the rules of this
paragraph (b)(1):
Example 1-- (i) Facts. FC1 is a foreign corporation that is owned,
directly and indirectly (applying the ownership rules of section 958),
solely by foreign persons. DC is a domestic corporation that is
unrelated to FC1. DC owns all of the outstanding stock of FC2, a foreign
corporation. Thus, under Sec. 1.367(b)-2(a) and (b), DC is a section
1248 shareholder with respect to FC2, and FC2 is a controlled foreign
corporation. Under Sec. 1.367(b)-2(c)(1), the section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a reorganization
described in section 368(a)(1)(C), FC1 acquires all of the assets and
assumes all of the liabilities of FC2 in exchange for FC1 voting stock.
The FC1 voting stock received does not represent more than 50 percent of
the voting power or value of FC1's stock. FC2 distributes the FC1 stock
to DC, and the FC2 stock held by DC is canceled.
(ii) Result. FC1 is not a controlled foreign corporation immediately
after the exchange. As a result, the exchange is described in paragraph
(b)(1)(i) of this section. Under paragraph (b) of this section, DC must
include in income, as a deemed dividend from FC2, the section 1248
amount ($20) attributable to the FC2 stock that DC exchanged.
Example 2-- (i) Facts. The facts are the same as in Example 1,
except that the voting stock of FC1, which is received by FC2 in
exchange for its assets and distributed by FC2 to DC, represents more
than 50 percent of the voting power of FC1's stock under the rules of
section 957(a).
(ii) Result. Paragraph (b)(1)(i) of this section does not apply to
require inclusion in income of the section 1248 amount, because FC1 is a
controlled foreign corporation as to which DC is a section 1248
shareholder immediately after the exchange.
Example 3-- (i) Facts. The facts are the same as in Example 1,
except that FC2 receives and distributes voting stock of FP, a foreign
corporation that is in control (within the meaning of section 368(c)) of
FC1, instead of receiving and distributing voting stock of FC1.
(ii) Result. For purposes of section 367(a), the transfer is an
indirect stock transfer subject to section 367(a). See Sec. 1.367(a)-
3(d)(1)(iv). Accordingly, DC's exchange of FC2 stock for FP stock under
section 354 will be taxable under section 367(a) (and section 1248 will
be applicable) if DC fails to enter into a gain recognition agreement in
accordance with Sec. 1.367(a)-8. Under Sec. 1.367(a)-3(b)(2), if DC
enters into a gain recognition agreement, the exchange will be subject
to the provisions of section 367(b) and the regulations thereunder, as
well as section 367(a). If FP and FC1 are controlled foreign
corporations as to which DC is a (direct or indirect) section 1248
shareholder immediately after the reorganization, then the section
367(b) result is the same as in Example 2--that is, paragraph (b)(1)(i)
of this section does not apply to require inclusion in income of the
section 1248 amount. Under these circumstances, the amount of the gain
recognition agreement would equal the amount of the gain realized
[[Page 305]]
on the indirect stock transfer. If FP or FC1 is not a controlled foreign
corporation as to which DC is a (direct or indirect) section 1248
shareholder immediately after the exchange, then the section 367(b)
result is the same as in Example 1--that is, DC must include in income,
as a deemed dividend from FC2, the section 1248 amount ($20)
attributable to the FC2 stock that DC exchanged. Under these
circumstances, the amount of the gain recognition agreement would equal
the amount of the gain realized on the indirect stock transfer, less the
$20 section 1248 amount inclusion.
Example 4-- (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of DC2, a domestic corporation. DC2 owns various
assets including all of the outstanding stock of FC2, a foreign
corporation. The stock of FC2 has a value of $100, and DC2 has a basis
of $30 in such stock. The section 1248 amount attributable to the FC2
stock held by DC2 is $20. DC2 does not own any other stock in a foreign
corporation. FC1 is a foreign corporation that is unrelated to DC1, DC2
and FC2. In a reorganization described in section 368(a)(1)(C), FC1
acquires all of the assets and liabilities of DC2 in exchange for FC1
voting stock that represents 20 percent of the outstanding voting stock
of FC1. DC2 distributes the FC1 stock to DC1, and the DC2 stock held by
DC1 is canceled. DC1 properly files a gain recognition agreement under
Sec. 1.367(a)-8 to qualify for nonrecognition treatment under section
367(a) with respect to DC2's transfer of the FC2 stock to FC1. See Sec.
1.367(a)-8(f)(2).
(ii) Result. Pursuant to paragraph (b)(1)(i)(A) of this section, DC2
is the exchanging shareholder that is a section 1248 shareholder with
respect to FC2, the foreign acquired corporation. Immediately after the
exchange, DC2 is not a section 1248 shareholder with respect to FC1, the
corporation whose stock is received in the exchange (because the DC2
stock is canceled). Thus, paragraph (b)(1)(i)(B) of this section is
satisfied and, as a result, paragraph (b)(1)(i) of this section applies
to DC2's section 361 exchange of FC2 stock. Accordingly, under paragraph
(b) of this section, DC2 must include in income, as a deemed dividend
from FC2, the section 1248 amount ($20) attributable to the FC2 stock
that DC2 exchanges. This result arises without regard to whether FC1 and
FC2 are controlled foreign corporations immediately after the exchange.
For the tax treatment of DC2's transfer of assets (other than stock) to
FC1, see sections 367(a)(1) and (a)(3), and the regulations thereunder.
Because the exchange is also described in section 361(a) or (b), see
section 367(a)(5) and any regulations thereunder. If any of the assets
transferred are intangible assets, see section 367(d) and the
regulations thereunder.
(2) Receipt by exchanging shareholder of preferred or other stock in
certain instances--(i) Rule. An exchange is described in this paragraph
(b)(2)(i) if--
(A) Immediately before the exchange, the foreign acquired
corporation and the foreign acquiring corporations are not members of
the same affiliated group (within the meaning of section 1504(a), but
without regard to the exceptions set forth in section 1504(b), and
substituting the words ``more than 50'' in place of the words ``at least
80'' in sections 1504(a)(2)(A) and (B));
(B) Immediately after the exchange, a domestic corporation meets the
ownership threshold specified by section 902(a) or (b) such that it may
qualify for a deemed paid foreign tax credit if it receives a
distribution from the foreign acquiring corporation (directly or through
tiers); and
(C) The exchanging shareholder receives preferred stock (other than
preferred stock that is fully participating with respect to dividends,
redemptions and corporate growth) in consideration for common stock or
preferred stock that is fully participating with respect to dividends,
redemptions and corporate growth, or, in the discretion of the
Commissioner or the Commissioner's delegate (and without regard to
whether the stock exchanged is common stock or preferred stock),
receives stock that entitles it to participate (through dividends,
redemption payments or otherwise) disproportionately in the earnings
generated by particular assets of the foreign acquired corporation or
foreign acquiring corporation.
(ii) Examples. The following examples illustrate the rules of this
paragraph (b)(2):
Example 1-- (i) Facts. FC1 is a foreign corporation. DC is a
domestic corporation that is unrelated to FC1. DC owns all of the
outstanding stock of FC2, a foreign corporation, and FC2 has no
outstanding preferred stock. The value of FC2 is $100 and DC has a basis
of $50 in the stock of FC2. Under Sec. 1.367(b)-2(c)(1), the section
1248 amount attributable to the stock of FC2 held by DC is $20. In a
reorganization described in section 368(a)(1)(B), FC1 acquires all of
the stock of FC2 and, in exchange, DC receives FC1 voting preferred
stock that constitutes 10 percent of the voting stock of FC1 for
purposes of section 902(a). Immediately after the exchange, FC1 and FC2
are controlled foreign corporations and DC is a section 1248 shareholder
of FC1
[[Page 306]]
and FC2, so paragraph (b)(1)(i) of this section does not require
inclusion in income of the section 1248 amount.
(ii) Result. Pursuant to Sec. 1.367(a)-3(b)(2), the transfer is
subject to both section 367(a) and section 367(b). Under Sec. 1.367(a)-
3(b)(1), DC will not be subject to tax under section 367(a)(1) if it
enters into a gain recognition agreement in accordance with Sec.
1.367(a)-8. Even though paragraph (b)(1)(i) of this section does not
apply to require inclusion in income by DC of the section 1248 amount,
DC must nevertheless include the $20 section 1248 amount in income as a
deemed dividend from FC2 under paragraph (b)(2)(i) of this section.
Thus, if DC enters into a gain recognition agreement, the amount is $30
(the $50 gain realized less the $20 recognized under section 367(b)). If
DC fails to enter into a gain recognition agreement, it must include in
income under section 367(a)(1) the $50 of gain realized ($20 of which is
treated as a dividend under section 1248). Section 367(b) does not apply
in such case.
Example 2-- (i) Facts. The facts are the same as in Example 1,
except that DC owns all of the outstanding stock of FC1 immediately
before the transaction.
(ii) Result. Both section 367(a) and section 367(b) apply to the
transfer. Paragraph (b)(2)(i) of this section does not apply to require
inclusion of the section 1248 amount. Under paragraph (b)(2)(i)(A) of
this section, the transaction is outside the scope of paragraph
(b)(2)(i) of this section because FC1 and FC2 are, immediately before
the transaction, members of the same affiliated group (within the
meaning of such paragraph). Thus, if DC enters into a gain recognition
agreement in accordance with Sec. 1.367(a)-8, the amount of such
agreement is $50. As in Example 1, if DC fails to enter into a gain
recognition agreement, it must include in income $50, $20 of which will
be treated as a dividend under section 1248.
Example 3-- (i) Facts. FC1 is a foreign corporation. DC is a
domestic corporation that is unrelated to FC1. DC owns all of the
outstanding stock of FC2, a foreign corporation. The section 1248 amount
attributable to the stock of FC2 held by DC is $20. In a reorganization
described in section 368(a)(1)(B), FC1 acquires all of the stock of FC2
in exchange for FC1 voting stock that constitutes 10 percent of the
voting stock of FC1 for purposes of section 902(a). The FC1 voting stock
received by DC in the exchange carries voting rights in FC1, but by
agreement of the parties the shares entitle the holder to dividends,
amounts to be paid on redemption, and amounts to be paid on liquidation,
that are to be determined by reference to the earnings or value of FC2
as of the date of such event, and that are affected by the earnings or
value of FC1 only if FC1 becomes insolvent or has insufficient capital
surplus to pay dividends.
(ii) Result. Under Sec. 1.367(a)-3(b)(1), DC will not be subject to
tax under section 367(a)(1) if it enters into a gain recognition
agreement with respect to the transfer of FC2 stock to FC1. Under Sec.
1.367(a)-3(b)(2), the exchange will be subject to the provisions of
section 367(b) and the regulations thereunder to the extent that it is
not subject to tax under section 367(a)(1). Furthermore, even if DC
would not otherwise be required to recognize income under this section,
the Commissioner or the Commissioner's delegate may nevertheless require
that DC include the $20 section 1248 amount in income as a deemed
dividend from FC2 under paragraph (b)(2)(i) of this section.
(3) Certain recapitalizations. An exchange pursuant to a
recapitalization under section 368(a)(1)(E) shall be deemed to be an
exchange described in this paragraph (b)(3) if the following conditions
are satisfied--
(i) During the 24-month period immediately preceding or following
the date of the recapitalization, the corporation that undergoes the
recapitalization (or a predecessor of, or successor to, such
corporation) also engages in a transaction that would be described in
paragraph (b)(2)(i) of this section but for paragraph (b)(2)(i)(C) of
this section, either as the foreign acquired corporation or the foreign
acquiring corporation; and
(ii) The exchange in the recapitalization is described in paragraph
(b)(2)(i)(C) of this section.
(c) Exclusion of deemed dividend from foreign personal holding
company income--(1) Rule. In the event the section 1248 amount is
included in income as a deemed dividend by a foreign corporation under
paragraph (b) of this section, such deemed dividend shall not be
included as foreign personal holding company income under section
954(c).
(2) Example. The following example illustrates the rule of this
paragraph (c):
Example-- (i) Facts. FC1 is a foreign corporation that is owned,
directly and indirectly (applying the ownership rules of section 958),
solely by foreign persons. DC is a domestic corporation that is
unrelated to FC1. DC owns all of the outstanding stock of FC2, a foreign
corporation. FC2 owns all of the outstanding stock of FC3, a foreign
corporation. Under Sec. 1.367(b)-2(c)(1), the section 1248 amount
attributable to the stock of FC3 held by FC2 is $20. In a reorganization
described in section 368(a)(1)(B), FC1 acquires from FC2 all of the
stock of FC3 in exchange for FC1 voting stock. The FC1 voting stock
received by FC2 does not represent more
[[Page 307]]
than 50 percent of the voting power or value of FC1's stock.
(ii) Result. FC1 is not a controlled foreign corporation immediately
after the exchange. Under paragraph (b)(1) of this section, FC2 must
include in income, as a deemed dividend from FC3, the section 1248
amount ($20) attributable to the FC3 stock that FC2 exchanged. The
deemed dividend is treated as a dividend for purposes of the Internal
Revenue Code as provided in Sec. 1.367(b)-2(e)(2); however, under this
paragraph (c) the deemed dividend is not foreign personal holding
company income to FC2.
(d) Rules for subsequent exchanges--(1) In general. If income is not
required to be included under paragraph (b) of this section in a section
367(b) exchange described in paragraph (a) of this section (non-
inclusion exchange) then, for purposes of applying section 367(b) or
1248 to subsequent exchanges and subject to the limitation of Sec.
1.367(b)-2(d)(3)(iii) (in the case of a transaction described in Sec.
1.367(b)-3), the determination of the earnings and profits attributable
to an exchanging shareholder's stock received in the non-inclusion
exchange shall include a computation that refers to the exchanging
shareholder's pro rata interest in the earnings and profits of the
foreign acquiring corporation (and, in the case of a stock transfer, the
foreign acquired corporation) that accumulate after the non-inclusion
exchange, as well as its pro rata interest in the earnings and profits
of the foreign acquired corporation that accumulated before the non-
inclusion exchange. See also section 1248(c)(2)(D)(ii). The earnings and
profits attributable to the stock received by an exchanging shareholder
in the non-inclusion exchange shall not include any earnings and profits
of the foreign acquiring corporation that accumulated before the non-
inclusion exchange. In the case of a non-inclusion exchange in which the
exchanging shareholder is a foreign corporation, this paragraph (d)(1)
shall also apply for purposes of determining the earnings and profits
attributable to the exchanging foreign corporation's shareholders, as
well as for purposes of determining the earnings and profits
attributable to the exchanging foreign corporation when applying section
964(e) to subsequent sales or exchanges of the stock of the foreign
acquiring corporation.
(2) Subsequent dispositions by a foreign acquiring corporation. In
the case of an exchange by a foreign acquiring corporation that is
subject to section 367(b) or 964(e) and that follows a non-inclusion
exchange (as defined in paragraph (d)(1) of this section), the rules of
paragraph (d)(1) of this section shall not apply. However, as a result
of such a subsequent exchange, proportionate reductions shall be made to
the earnings and profits that accumulated before the non-inclusion
exchange and that were attributed under paragraph (d)(1) of this
section. Such reductions shall be made without regard to whether gain is
recognized on the subsequent sale or exchange.
(3) Examples. The following examples illustrate the rules of this
section:
Example 1-- (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of FC1, a foreign corporation. DC1 has owned all of
the stock of FC1 since FC1's formation. FC1 has $20 of earnings and
profits, all of which is eligible for inclusion in the section 1248
amount attributable to DC1's stock in FC1. DC2, a domestic corporation,
owns all of the outstanding stock of FC2, a foreign corporation. DC2 has
owned all of the stock of FC2 since FC2's formation. FC2 has $40 of
earnings and profits, all of which is eligible for inclusion in the
section 1248 amount attributable to DC2's stock in FC2. DC1 and DC2 are
unrelated. In a reorganization described in section 368(a)(1)(B), DC1
transfers all of the stock of FC1 to FC2 in exchange for 40 percent of
FC2 stock. DC1 enters into a five-year gain recognition agreement under
the provisions of Sec. Sec. 1.367(a)-3(b) and 1.367(a)-8 with respect
to its transfer of FC1 stock to FC2.
(ii) Result. (A) DC1's transfer of FC1 to FC2 is not described in
paragraph (b)(1)(i), (2)(i), or (3) of this section. As a result, DC1 is
not required to include in income the section 1248 amount attributable
to its FC1 stock and the rules of paragraph (d)(1) of this section
apply. Thus, for purposes of applying section 367(b) or 1248 to
subsequent exchanges of FC2 stock, the determination of the earnings and
profits attributable to DC1's stock in FC2 will include a computation
that refers to 40 percent of the post-reorganization earnings and
profits of FC1 and FC2, and that refers to 100 percent of the $20 of
pre-reorganization earnings and profits of FC1. The earnings and profits
attributable to DC1's stock in FC2 will not include any of the $40 of
earnings and profits accumulated by FC2 prior to the transaction. Those
earnings and profits are attributable to DC2 under section 1248.
However, paragraph (d)(1) of this section does not apply for purposes of
[[Page 308]]
applying section 367(b) or 964(e) to subsequent exchanges of FC1 stock
by FC2. For these purposes, the determination of the earnings and
profits attributable to FC2's stock in FC1 is made under the principles
of section 1248 and, as a result, includes a computation that refers to
the $20 of earnings and profits attributable to FC2's section 1223(2)
holding period in the FC1 stock.
(B) In the event FC2 exchanges FC1 stock in a transaction that is
subject to section 367(b) or 964(e), a proportionate reduction must be
made to the $20 of earnings and profits that was previously attributed
under paragraph (d)(1) of this section to DC1's stock in FC2. Thus, for
example, if FC2 sells 50 percent of its FC1 stock (at a time when there
have been no other reductions that affect the $20 of FC1 earnings and
profits), paragraph (d)(2) of this section requires DC1 to
proportionately reduce the $20 of earnings and profits that was
previously attributed to its FC2 stock (to $10). This reduction occurs
without regard to whether FC2 recognizes gain on its sale of FC1 stock.
Example 2-- (i) Facts. The facts are the same as in Example 1,
except that in a reorganization described in section 368(a)(1)(C), FC1
transfers all of its assets to FC2 in exchange for 40 percent of FC2
stock. FC1 then distributes the stock of FC2 to DC1, and the FC1 stock
held by DC1 is canceled. None of FC1's assets include stock.
(ii) Result. FC2's acquisition of FC1 is not described in paragraph
(b)(1)(i), (2)(i), or (3) of this section. As a result, DC1 is not
required to include in income the section 1248 amount attributable to
its FC1 stock and the rules of paragraph (d)(1) of this section apply.
Thus, for purposes of applying section 367(b) or 1248 to subsequent
exchanges, the determination of the earnings and profits attributable to
DC1's stock in FC2 will include a computation that refers to 40 percent
of the post-reorganization earnings and profits of FC2, and that refers
to 100 percent of the pre-reorganization earnings and profits of FC1.
The earnings and profits attributable to DC1's stock in FC2 will not
include any of the $40 of earnings and profits accumulated by FC2 prior
to the transaction. Those earnings and profits are attributable to DC2
under section 1248.
Example 3-- (i) Facts. DC1, a domestic corporation, owns all of the
outstanding stock of FC1, a foreign corporation. FC1 owns all of the
outstanding stock of FC3, a foreign corporation. DC1 has owned all of
the stock of FC1 since FC1's formation, and FC1 has owned all of the
stock of FC3 since FC3's formation. FC3 has $20 of earnings and profits,
all of which is eligible for inclusion in the section 1248 amount
attributable to DC1's stock in FC1 and in the section 1248 amount
attributable to FC1's stock in FC3. Such earnings and profits are
similarly eligible for inclusion as a dividend attributable to FC1's
stock in FC3 under section 964(e). DC2, a domestic corporation, owns all
of the outstanding stock of FC2, a foreign corporation. DC2 has owned
all of the stock of FC2 since FC2's formation. FC2 has $40 of earnings
and profits, all of which is eligible for inclusion in the section 1248
amount attributable to DC2's stock in FC2. DC1 and DC2 are unrelated. In
a reorganization described in section 368(a)(1)(B), FC1 transfers all of
the stock of FC3 to FC2 in exchange for 40 percent of FC2 stock.
(ii) Result. (A) FC1's transfer of FC3 to FC2 is not described in
paragraph (b)(1)(i), (2)(i), or (3) of this section. As a result, FC1 is
not required to include in income the section 1248 amount attributable
to its FC3 stock and the rules of paragraph (d)(1) of this section
apply. Thus, for purposes of applying section 367(b) or 1248 to
subsequent exchanges of FC1 stock, the determination of the earnings and
profits attributable to DC1's stock in FC1 will include a computation
that refers to 40 percent of the post-reorganization earnings and
profits of FC2 and FC3, and that refers to 100 percent of the $20 of
pre-reorganization earnings and profits of FC3. The earnings and profits
attributable to FC1's stock in FC2 will not include any of the $40 of
earnings and profits accumulated by FC2 prior to the transaction. Those
earnings and profits are attributable to DC2 under section 1248. For
purposes of applying section 367(b) or 964(e) to subsequent exchanges of
FC2 stock, the determination of the earnings and profits attributable to
FC1's stock in FC2 will include a computation that refers to 40 percent
of the post-reorganization earnings and profits of FC2 and FC3, and that
refers to 100 percent of the $20 of pre-reorganization earnings and
profits of FC3. The earnings and profits attributable to FC1's interest
in FC2 do not include any of the $40 of earnings and profits accumulated
by FC2 prior to the transaction. However, paragraph (d)(1) of this
section does not apply for purposes of applying section 367(b) or 964(e)
to subsequent exchanges of FC3 stock by FC2. For these purposes, the
determination of the earnings and profits attributable to FC2's stock in
FC3 is made under the principles of section 1248 and, as a result,
includes a computation that refers to the $20 of earnings and profits
attributable to FC2's section 1223(2) holding period in the FC3 stock.
(B) In the event FC2 exchanges FC3 stock in a transaction that is
subject to section 367(b) or 964(e), a proportionate reduction must be
made to the $20 of earnings and profits that was previously attributed
under paragraph (d)(1) of this section to DC1's stock in FC1 (for
purposes of subsequent application of section 367(b) or 1248) as well as
to FC1's stock in FC2 (for purposes of subsequent application of section
367(b) or 964(e)). Thus, for example, if FC2 sells 50 percent of
[[Page 309]]
its FC3 stock (at a time when there have been no other reductions that
affect the $20 of FC3 earnings and profits), paragraph (d)(2) of this
section requires DC1 and FC1 to proportionately reduce the $20 of
earnings and profits that was previously attributed to their FC1 and FC2
stock, respectively (to $10). These reductions occur without regard to
whether FC2 recognizes gain on its sale of FC3 stock.
[T.D. 8862, 65 FR 3603, Jan. 24, 2000; 65 FR 66501, Nov. 6, 2000]
Sec. 1.367(b)-5 Distributions of stock described in section 355.
(a) In general--(1) Scope. This section provides rules relating to a
distribution described in section 355 (or so much of section 356 as
relates to section 355) and to which section 367(b) applies. For
purposes of this section, the terms distributing corporation, controlled
corporation, and distributee have the same meaning as used in section
355 and the regulations thereunder.
(2) Treatment of distributees as exchanging shareholders. For
purposes of the section 367(b) regulations, all distributees in a
transaction described in paragraph (b), (c), or (d) of this section
shall be treated as exchanging shareholders that realize income in a
section 367(b) exchange.
(b) Distribution by a domestic corporation--(1) General rule. In a
distribution described in section 355, if the distributing corporation
is a domestic corporation and the controlled corporation is a foreign
corporation, the following general rules shall apply--
(i) If the distributee is a corporation, then the controlled
corporation shall be considered to be a corporation; and
(ii) If the distributee is an individual, then, solely for purposes
of determining the gain recognized by the distributing corporation, the
controlled corporation shall not be considered to be a corporation, and
the distributing corporation shall recognize any gain (but not loss)
realized on the distribution.
(2) Section 367(e) transactions. The rules of paragraph (b)(1) of
this section shall not apply to a foreign distributee to the extent gain
is recognized under section 367(e)(1) and the regulations thereunder.
(3) Determining whether distributees are individuals. All
distributees in a distribution described in paragraph (b)(1) of this
section are presumed to be individuals. However, the shareholder
identification principles of Sec. 1.367(e)-1(d) (including the
reporting procedures in Sec. 1.367(e)-1(d)(2) and (3)) shall apply for
purposes of rebutting this presumption.
(4) Applicable cross-references. For rules with respect to a
distributee that is a partnership, trust or estate, see Sec. 1.367(b)-
2(k). For additional rules relating to a distribution of stock of a
foreign corporation by a domestic corporation, see section 1248(f) and
the regulations thereunder. For additional rules relating to a
distribution described in section 355 by a domestic corporation to a
foreign distributee, see section 367(e)(1) and the regulations
thereunder.
(c) Pro rata distribution by a controlled foreign corporation--(1)
Scope. This paragraph (c) applies to a distribution described in section
355 in which the distributing corporation is a controlled foreign
corporation and in which the stock of the controlled corporation is
distributed pro rata to each of the distributing corporation's
shareholders.
(2) Adjustment to basis in stock and income inclusion. If the
distributee's postdistribution amount (as defined in paragraph (e)(2) of
this section) with respect to the distributing or controlled corporation
is less than the distributee's predistribution amount (as defined in
paragraph (e)(1) of this section) with respect to such corporation, then
the distributee's basis in such stock immediately after the distribution
(determined under the normal principles of section 358) shall be reduced
by the amount of the difference. However, the distributee's basis in
such stock shall not be reduced below zero, and to the extent the
foregoing reduction would have reduced basis below zero, the distributee
shall instead include such amount in income as a deemed dividend from
such corporation.
(3) Interaction with Sec. 1.367(b)-2(e)(3)(ii). The basis increase
provided in Sec. 1.367(b)-2(e)(3)(ii) shall not apply to a deemed
dividend that is included in income pursuant to paragraph (c)(2) of this
section.
(4) Basis redistribution. If a distributee reduces the basis in the
stock of the
[[Page 310]]
distributing or controlled corporation (or has an inclusion with respect
to such stock) under paragraph (c)(2) of this section, the distributee
shall increase its basis in the stock of the other corporation by the
amount of the basis decrease (or deemed dividend inclusion) required by
paragraph (c)(2) of this section. However, the distributee's basis in
such stock shall not be increased above the fair market value of such
stock and shall not be increased to the extent the increase diminishes
the distributee's postdistribution amount with respect to such
corporation.
(d) Non-pro rata distribution by a controlled foreign corporation--
(1) Scope. This paragraph (d) applies to a distribution described in
section 355 in which the distributing corporation is a controlled
foreign corporation and in which the stock of the controlled corporation
is not distributed pro rata to each of the distributing corporation's
shareholders.
(2) Treatment of certain shareholders as distributees. For purposes
of the section 367(b) regulations, all persons owning stock of the
distributing corporation immediately after a transaction described in
paragraph (d)(1) of this section shall be treated as distributees of
such stock. For other applicable rules, see paragraph (a)(2) of this
section.
(3) Inclusion of excess section 1248 amount by exchanging
shareholder. If the distributee's postdistribution amount (as defined in
paragraph (e)(2) of this section) with respect to the distributing or
controlled corporation is less than the distributee's predistribution
amount (as defined in paragraph (e)(1) of this section) with respect to
such corporation, then the distributee shall include in income as a
deemed dividend the amount of the difference. For purposes of this
paragraph (d)(3), if a distributee owns no stock in the distributing or
controlled corporation immediately after the distribution, the
distributee's postdistribution amount with respect to such corporation
shall be zero.
(4) Interaction with Sec. 1.367(b)--2(e)(3)(ii)--(i) Limited
application. The basis increase provided in Sec. 1.367(b)--2(e)(3)(ii)
shall apply to a deemed dividend that is included in income pursuant to
paragraph (d)(3) of this section only to the extent that such basis
increase does not increase the distributee's basis above the fair market
value of such stock and does not diminish the distributee's
postdistribution amount with respect to such corporation.
(ii) Interaction with predistribution amount. For purposes of this
paragraph (d), the distributee's predistribution amount (as defined in
paragraph (e)(1) of this section) shall be determined without regard to
any basis increase permitted under paragraph (d)(4)(i) of this section.
(e) Definitions--(1) Predistribution amount. For purposes of this
section, the predistribution amount with respect to a distributing or
controlled corporation is the distributee's section 1248 amount (as
defined in Sec. 1.367(b)--2(c)(1)) computed immediately before the
distribution (and after any section 368(a)(1)(D) transfer connected with
the section 355 distribution), but only to the extent that such amount
is attributable to the distributing corporation and any corporations
controlled by it immediately before the distribution (the distributing
group) or the controlled corporation and any corporations controlled by
it immediately before the distribution (the controlled group), as the
case may be, under the principles of Sec. Sec. 1.1248-1(d)(3), 1.1248-2
and 1.1248-3. However, the predistribution amount with regard to the
distributing group shall be computed without taking into account the
distributee's predistribution amount with respect to the controlled
group.
(2) Postdistribution amount. For purposes of this section, the
postdistribution amount with respect to a distributing or controlled
corporation is the distributee's section 1248 amount (as defined in
Sec. 1.367(b)-2(c)(1)) with respect to such stock, computed immediately
after the distribution (but without regard to paragraph (c) or (d) of
this section (whichever is applicable)). The postdistribution amount
under this paragraph (e)(2) shall be computed before taking into account
the effect (if any) of any inclusion under section 356(a) or (b).
(f) Exclusion of deemed dividend from foreign personal holding
company income.
[[Page 311]]
In the event an amount is included in income as a deemed dividend by a
foreign corporation under paragraph (c) or (d) of this section
(including amounts received as an intermediate owner under the rule of
Sec. 1.367(b)-2(e)(2)), such deemed dividend shall not be included as
foreign personal holding company income under section 954(c).
(g) Examples. The following examples illustrate the rules of this
section:
Example 1-- (i) Facts. USS, a domestic corporation, owns 40 percent
of the outstanding stock of FD, a controlled foreign corporation (CFC).
USS has owned the stock since FD was incorporated, and FD has always
been a CFC. USS has a basis of $80 in its FD stock, which has a fair
market value of $200. FD owns 100 percent of the outstanding stock of
FC, a foreign corporation. FD has owned the stock since FC was
incorporated. Neither FD nor FC own stock in any other corporation. FD
has earnings and profits of $0 and a fair market value of $250 (not
considering its ownership of FC). FC has earnings and profits of $300,
none of which is described in section 1248(d), and a fair market value
of $250. In a pro rata distribution described in section 355, FD
distributes to USS stock in FC worth $100; thereafter, USS's FD stock is
worth $100 as well.
(ii) Result--(A) FD's distribution is a transaction described in
paragraph (c)(1) of this section. Under paragraph (c)(2) of this
section, USS must compare its predistribution amounts with respect to FD
and FC to its respective postdistribution amounts. Under paragraph
(e)(1) of this section, USS's predistribution amount with respect to FD
or FC is its section 1248 amount computed immediately before the
distribution, but only to the extent such amount is attributable to FD
or FC. Under Sec. 1.367(b)-2(c)(1), USS's section 1248 amount computed
immediately before the distribution is $120, all of which is
attributable to FC. Thus, USS's predistribution amount with respect to
FD is $0, and its predistribution amount with respect to FC is $120.
These amounts are computed as follows: If USS had sold its FD stock
immediately before the transaction, it would have recognized $120 of
gain ($200 fair market value $80 basis). All of the gain would have been
treated as a dividend under section 1248, and all of the section 1248
amount would have been attributable to FC (based on USS's pro rata share
of FC's earnings and profits (40 percent x $300)).
(B) Under paragraph (e)(2) of this section, USS's postdistribution
amount with respect to FD or FC is its section 1248 amount with respect
to such corporation, computed immediately after the distribution (but
without regard to paragraph (c) of this section). Under Sec. 1.367(b)-
2(c)(1), USS's section 1248 amounts computed immediately after the
distribution with respect to FD and FC are $0 and $60, respectively.
These amounts, which are USS's postdistribution amounts, are computed as
follows: Under the normal principles of section 358, USS allocates its
$80 predistribution basis in FD between FD and FC according to the stock
blocks' relative values, yielding a $40 basis in each block. If USS sold
its FD stock immediately after the distribution, none of the resulting
gain would be treated as a dividend under section 1248. If USS sold its
FC stock immediately after the distribution, it would have a $60 gain
($100 fair market value--$40 basis), all of which would be treated as a
dividend under section 1248.
(C) The basis adjustment and income inclusion rules of paragraph
(c)(2) of this section apply to the extent of any difference between
USS's postdistribution and predistribution amounts. In the case of FD,
there is no difference between the two amounts and, as a result, no
adjustment or income inclusion is required. In the case of FC, USS's
postdistribution amount is $60 less than its predistribution amount.
Accordingly, under paragraph (c)(2) of this section, USS is required to
reduce its basis in its FC stock from $40 to $0 and include $20 in
income as a deemed dividend. Under Sec. 1.367(b)-2(e)(2), the $20
deemed dividend is considered as having been paid by FC to FD, and by FD
to USS, immediately prior to the distribution. Under paragraph (f) of
this section, the deemed dividend is not included by FD as foreign
personal holding company income under section 954(c). Under paragraph
(c)(3) of this section, the basis increase provided in Sec. 1.367(b)-
2(e)(3)(ii) does not apply with regard to the $20 deemed dividend. Under
the rules of paragraph (c)(4) of this section, USS increases its basis
in FD by the amount by which it decreased its basis in FC, as well as by
the amount of its deemed dividend inclusion ($40 + $40 + $20 = $100).
Example 2-- (i) Facts. USS1 and USS2, domestic corporations, each
own 50 percent of the outstanding stock of FD, a controlled foreign
corporation (CFC). USS1 and USS2 have owned their FD stock since it was
incorporated, and FD has always been a CFC. USS1 and USS2 each have a
basis of $500 in their FD stock, and the fair market value of each block
of FD stock is $750. FD owns 100 percent of the outstanding stock of FC,
a foreign corporation. FD owned the stock since FC was incorporated.
Neither FD nor FC own stock in any other corporation. FD has earnings
and profits of $0 and a fair market value of $750 (not considering its
ownership of FC). FC has earnings and profits of $500, none of which is
described in section 1248(d), and a fair market value of $750. In a non-
pro rata distribution described in section 355, FD distributes all of
the stock of FC to USS2 in exchange for USS2's FD stock.
[[Page 312]]
(ii) Result--(A) FD's distribution is a transaction described in
paragraph (d)(1) of this section. Under paragraph (d)(2) of this
section, USS1 is considered a distributee of FD stock. Under paragraph
(d)(3) of this section, USS1 and USS2 must compare their predistribution
amounts with respect to FD and FC stock to their respective
postdistribution amounts. Under paragraph (e)(1) of this section, USS1's
predistribution amount with respect to FD or FC is USS1's section 1248
amount computed immediately before the distribution, but only to the
extent such amount is attributable to FD or FC. USS2's predistribution
amount is determined in the same manner. Under Sec. 1.367(b)-2(c)(1),
USS1 and USS2 each have a section 1248 amount computed immediately
before the distribution of $250, all of which is attributable to FC.
Thus, USS1 and USS2 each have a predistribution amount with respect to
FD of $0, and each have a predistribution amount with respect to FC of
$250. These amounts are computed as follows: If either USS1 or USS2 had
sold its FD stock immediately before the transaction, it would have
recognized $250 of gain ($750 fair market value--$500 basis). All of the
gain would have been treated as a dividend under section 1248, and all
of the section 1248 amount would have been attributable to FC (based on
USS1's and USS2's pro rata shares of FC's earnings and profits (50
percent x $500)).
(B) Under paragraph (d)(3) of this section, a distributee that owns
no stock in the distributing or controlled corporation immediately after
the distribution has a postdistribution amount with regard to that stock
of zero. Accordingly, USS2 has a postdistribution amount of $0 with
respect to FD and USS1 has a postdistribution amount of $0 with respect
to FC. Under paragraph (e)(2) of this section, USS1's postdistribution
amount with respect to FD is its section 1248 amount with respect to
such corporation, computed immediately after the distribution (but
without regard to paragraph (d) of this section). USS2's
postdistribution amount with respect to FC is determined in the same
manner. Under Sec. 1.367(b)-2(c)(1), USS1's section 1248 amount
computed immediately after the distribution with respect to FD is $0 and
USS2's section 1248 amount computed immediately after the distribution
with respect to FC is $250. These amounts, which are USS1's and USS2's
postdistribution amounts, are computed as follows: After the non-pro
rata distribution, USS1 owns all the stock of FD and USS2 owns all the
stock of FC. If USS1 sold its FD stock immediately after the
distribution, none of the resulting $250 gain ($750 fair market value
$500 basis) would be treated as a dividend under section 1248. If USS2
sold its FC stock immediately after the distribution, it would have a
$250 gain ($750 fair market value--$500 basis), all of which would be
treated as a dividend under section 1248.
(C) The income inclusion rule of paragraph (d)(3) of this section
applies to the extent of any difference between USS1's and USS2's
postdistribution and predistribution amounts. In the case of USS2, there
is no difference between the two amounts with respect to either FD or FC
and, as a result, no income inclusion is required. In the case of USS1,
there is no difference between the two amounts with respect to its FD
stock. However, USS1's postdistribution amount with respect to FC is
$250 less than its predistribution amount. Accordingly, under paragraph
(d)(3) of this section, USS1 is required to include $250 in income as a
deemed dividend. Under Sec. 1.367(b)-2(e)(2), the $250 deemed dividend
is considered as having been paid by FC to FD, and by FD to USS1,
immediately prior to the distribution. This deemed dividend increases
USS1's basis in FD ($500 + $250 = $750). Under paragraph (f) of this
section, the deemed dividend is not included by FD as foreign personal
holding company income under section 954(c).
[T.D. 8862, 65 FR 3606, Jan. 24, 2000; 65 FR 66502, Nov. 6, 2000]
Sec. 1.367(b)-6 Effective dates and coordination rules.
(a) Effective date--(1) In general. Sections 1.367(b)-1 through
1.367(b)-5, and this section, apply to section 367(b) exchanges that
occur on or after February 23, 2000.
(2) Exception. A taxpayer may, however, elect to have Sec. Sec.
1.367(b)-1 through 1.367(b)-5, and this section, apply to section 367(b)
exchanges that occur (or occurred) before February 23, 2000, if the due
date for the taxpayer's timely filed Federal tax return (including
extensions) for the taxable year in which the section 367(b) exchange
occurs (or occurred) is after February 23, 2000. The election under this
paragraph (a)(2) will be valid only if--
(i) The electing taxpayer makes the election on a timely filed
section 367(b) notice;
(ii) In the case of an exchanging shareholder that is a foreign
corporation, the election is made on the section 367(b) notice that is
filed by each of its shareholders listed in Sec. 1.367(b)-1(c)(3)(ii);
and
(iii) The electing taxpayer provides notice of the election to all
corporations (or their successors in interest) whose earnings and
profits are affected
[[Page 313]]
by the election on or before the date the section 367(b) notice is
filed.
(b) Certain recapitalizations described in Sec. 1.367(b)-4(b)(3).
In the case of a recapitalization described in Sec. 1.367(b)-4(b)(3)
that occurred prior to July 20, 1998, the exchanging shareholder shall
include the section 1248 amount on its tax return for the taxable year
that includes the exchange described in Sec. 1.367(b)-4(b)(3)(i) (and
not in the taxable year of the recapitalization), except that no
inclusion is required if both the recapitalization and the exchange
described in Sec. 1.367(b)-4(b)(3)(i) occurred prior to July 20, 1998.
(c) Use of reasonable method to comply with prior published
guidance--(1) Prior exchanges. The taxpayer may use a reasonable method
to comply with the following prior published guidance to the extent such
guidance relates to section 367(b): Notice 88-71 (1988-2 C.B. 374);
Notice 89-30 (1989-1 C.B. 670); and Notice 89-79 (1989-2 C.B. 392) (see
Sec. 601.601(d)(2) of this chapter). This rule applies to section
367(b) exchanges that occur (or occurred) before February 23, 2000, or,
if a taxpayer makes the election described in paragraph (a)(2) of this
section, for section 367(b) exchanges that occur (or occurred) before
the date described in paragraph (a)(2) of this section. This rule also
applies to section 367(b) exchanges and distributions described in
paragraph (d) of this section.
(2) Future exchanges. Section 367(b) exchanges that occur on or
after February 23, 2000, (or, if a taxpayer makes the election described
in paragraph (a)(2) of this section, for section 367(b) exchanges that
occur on or after the date described in paragraph (a)(2) of this
section) are governed by the section 367(b) regulations and, as a
result, paragraph (c)(1) of this section shall not apply.
(d) Effect of removal of attribution rules. To the extent that the
rules under Sec. Sec. 7.367(b)-9 and 7.367(b)-10(h) of this chapter, as
in effect prior to February 23, 2000 (see 26 CFR part 1, revised as of
April 1, 1999), attributed earnings and profits to the stock of a
foreign corporation in connection with an exchange described in section
351, 354, 355, or 356 before February 23, 2000, the foreign corporation
shall continue to be subject to the rules of Sec. 7.367(b)-12 of this
chapter in the event of any subsequent exchanges and distributions with
respect to such stock, notwithstanding the fact that such subsequent
exchange or distribution occurs on or after the effective date described
in paragraph (a) of this section.
[T.D. 8862, 65 FR 3608, Jan. 24, 2000]
Sec. 1.367(b)-12 Subsequent treatment of amounts attributed or included
in income.
(a) In general. This section applies to distributions with respect
to, or a disposition of, stock--
(1) To which, in connection with an exchange occurring before
February 23, 2000, an amount has been attributed pursuant to Sec.
7.367(b)-9 or 7.367(b)-10 of this chapter (as in effect prior to
February 23, 2000, see 26 CFR part 1 revised as of April 1, 1999); or
(2) In respect of which, before February 23, 2000, an amount has
been included in income or added to earnings and profits pursuant to
Sec. 7.367(b)-7 or Sec. 7.367(b)-10 of this chapter (as in effect
prior to February 23, 2000, see 26 CFR part 1 revised as of April 1,
1999).
(b) Applicable rules. See Sec. 7.367(b)-12(b) through (e) of this
chapter (as in effect prior to January 11, 2001, see 26 CFR part 1
revised as of April 1, 2000) for purposes of applying paragraph (a) of
this section.
(c) Effective date. This section applies to distributions or
dispositions that occur on or after January 11, 2001.
[T.D. 8937, 66 FR 2257, Jan. 11, 2001]
Sec. 1.367(d)-1T Transfers of intangible property to foreign corporations
(temporary).
(a) Purpose and scope. This section provides rules under section
367(d) concerning transfers of intangible property by U.S. persons to
foreign corporations pursuant to section 351 or 361. Paragraph (b) of
this section specifies the transfers that are subject to section 367(d)
and the rules of this section, while paragraph (c) provides rules
concerning the consequences of such a transfer. In general, the U.S.
transferor will be treated as receiving annual payments contingent on
productivity or use of the transferred property, over the useful life of
the property (regardless of whether such payments are in
[[Page 314]]
fact made by the transferee). Paragraphs (d), (e), and (f) of this
section provide rules for cases in which there is a later direct or
indirect disposition of the intangible property transferred. In general,
deemed annual license payments will continue if a transfer is made to a
related person, while gain must be recognized immediately if the
transfer is to an unrelated person. Paragraph (g) of this section
provides several special rules, including a rule allowing appropriate
adjustments where deemed payments under section 367(d) are not in fact
received by the U.S. transferor of the intangible property, and a rule
providing for a limited election to treat certain transfers of
intangible property as sales at fair market value (in lieu of applying
the general useful life-contingent payment rule). In addition, paragraph
(g) of this section provides rules coordinating the application of
section 367(d) with other relevant Code sections. Paragraph (h) of this
section defines the term related person for purposes of this section.
Finally, paragraph (i) of this section provides the effective date of
this section. For rules concerning transfers of intangible property
pursuant to section 332, see Sec. 1.367(a)-5T(e). For purposes of
determining whether a U.S. person has made a transfer of intangible
property that is subject to the rules of section 367(d), the rules of
Sec. 1.367(a)-1T(c) shall apply.
(b) Intangible property subject to section 367(d). Section 367(d)
and the rules of this section shall apply to the transfer of any
intangible property, as defined in Sec. 1.367(a)-1T(d)(5)(i). However,
section 367(d) and the rules of this section shall not apply to the
transfer of foreign goodwill or going concern value, as defined in
Sec. 1.367(a)-1T(d)(5)(iii), or to the transfer of intangible property
described in Sec. 1.367(a)-5T(b)(2). However, the transfer of those
items to a foreign corporation is subject to the rules set forth in
Sec. 1.367(a)-6T, and the transfer of intangible property described in
Sec. 1.367(a)-5T(b)(2) is subject to the rules set forth in Sec.
1.367(a)-5T. For a special rule relating to the transfer of operating
intangibles, as defined in Sec. 1.367(a)-1T(d)(5)(ii), see paragraph
(g)(3) of this section. Transfers of intangible property to foreign
corporations pursuant to section 351 or 361 are subject to the rules of
this section regardless of whether the property is to be used in the
United States, in connection with goods to be sold or consumed in the
United States, or in connection with a trade or business outside the
United States.
(c) Deemed payments upon transfer of intangible property to foreign
corporation--(1) In general. If a U.S. person transfers intangible
property that is subject to section 367(d) and the rules of this section
to a foreign corporation in an exchange described in section 351 or 361,
then such person shall be treated as having transferred that property in
exchange for annual payments contingent on the productivity or use of
the property. Such person shall, over the useful life of the property,
annually include in gross income an amount that represents an
appropriate arms-length charge for the use of the property. The
appropriate charge shall be determined in accordance with the provisions
of section 482 and regulations thereunder. See Sec. 1.482-2(d). The
amount of the deemed payment thus calculated shall be reduced by any
royalty or other periodic payment made or accrued by the transferee to
an unrelated person during that taxable year for the right to use the
intangible property. Amounts so included in the transferor's income
shall be treated as ordinary income from sources within the United
States. For purposes of computing estimated tax payments, deemed
payments under this paragraph (c) shall be treated as received by the
transferor on the last day of its taxable year.
(2) Required adjustments. The following adjustments shall be made
with respect to a U.S. person's recognition of a deemed payment for the
use of intangible property under this paragraph (c):
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
such deemed payment; and
(ii) For purposes of subpart F of part III of subchapter N of the
Code, the transferee foreign corporation may treat such deemed payment
as an expense (whether or not that amount is
[[Page 315]]
actually paid), properly allocated and apportioned to gross income
subject to subpart F, in accordance with the provisions of Sec. Sec.
1.954-1(c) and 1.861-8.
No other special adjustments to earning the profits, basis, or gross
income shall be permitted by reason of the recognition of a deemed
payment under this paragraph (c). However, see paragraph (g)(1) of this
section for rules permitting the establishment of an account receivable
with respect to deemed payments not actually received by the U.S.
person.
(3) Useful life. For purposes of this section, the useful life of
intangible property is the entire period during which the property has
value. However, in no event shall the useful life of an item of
intangible property be considered to exceed twenty years. If intangible
property derives its value from secrecy or from protections afforded by
law, the useful life of such property shall terminate when the property
is no longer secret or no longer legally protected.
(4) Blocked income. No deemed payment included in a taxpayer's
income under paragraph (c)(1) of this section shall be treated as
deferrable income for purposes of applying rules relating to blocked
foreign income. See Revenue Ruling 74-351, 1974-2 C.B. 144.
(d) Subsequent transfer of stock of transferee foreign corporation
to unrelated person--(1) Treatment as sale of intangible property. If a
U.S. person transfers intangible property that is subject to section
367(d) and the rules of this section to a foreign corporation in an
exchange described in section 351 or 361, and within the useful life of
the intangible property that U.S. transferor subsequently disposes of
the stock of the transferee foreign corporation to a person that is not
a related person (within the meaning of paragraph (h) of this section),
then the U.S. transferor shall be treated as having simultaneously sold
the intangible property to the person acquiring the stock of the
transferee foreign corporation. The U.S. transferor shall be required to
recognize gain (but not loss) from sources within the United States in
an amount equal to the difference between the fair market value of the
transferred intangible property on the date of the subsequent
disposition and the U.S. transferor's former adjusted basis in that
property (determined as of the original transfer). If the U.S.
transferor's disposition of the stock of the transferee foreign
corporation is subject to U.S. tax other than by reason of this
paragraph (d), then the amount of gain otherwise required to be
recognized with respect to the stock of the transferee foreign
corporation shall be reduced by the amount of gain recognized with
respect to the intangible property pursuant to this paragraph (d).
(2) Required adjustments. If a U.S. person disposes of the stock of
a transferee foreign corporation, and under paragraph (d)(1) of this
section is treated as having simultaneously sold intangible property,
then, for purposes of computing basis and earnings and profits, the
person acquiring the stock of the transferee foreign corporation shall
be deemed to have purchased that property at fair market value and to
have immediately thereafter contributed it to the transferee foreign
corporation in a transaction not covered by section 367(d). Therefore,
for purposes of chapter 1 of the Code--
(i) The transferee foreign corporation's basis in the intangible
property will be equal to its fair market value (as calculated for
purposes of determining the gain required to be recognized by the U.S.
transferor);
(ii) The acquiring person's basis in the stock of the transferee
foreign corporation shall be determined as if no portion of the
consideration given by the acquiring person for the stock is
attributable to the intangible property; and
(iii) The earnings and profits of the transferee foreign corporation
will not be affected by the transfer of its stock or the deemed transfer
to it of the intangible property.
(e) Subsequent transfer of stock of transferee foreign corporation
to related person--(1) Transfer to related U.S. person treated as
disposition of intangible property. If a U.S. person transfers
intangible property that is subject to section 367(d) and the rules of
this section to a foreign corporation in an exchange described in
section 351 or 361 and, within the useful life of the transferred
intangible property, that U.S.
[[Page 316]]
transferor subsequently transfers the stock of the transferee foreign
corporation to U.S. persons that are related to the transferor within
the meaning of paragraph (h) of this section, then the following rules
shall apply:
(i) Each such related U.S. person shall be treated as having
received (with the stock of the transferee foreign corporation) a right
to receive a proportionate share of the contingent annual payments that
would otherwise be deemed to be received by the U.S. transferor under
paragraph (c) of this section.
(ii) Each such related U.S. person shall, over the useful life of
the property, annually include in gross income a proportionate share of
the amount that would have been included in the income of the U.S.
transferor pursuant to paragraph (c) of this section. Such amounts shall
be treated as ordinary income from sources within the United States.
(iii) The amount of income required to be recognized by the U.S.
transferor pursuant to the rule of paragraph (d)(1) of this section
shall be reduced to the amount determined in accordance with the
following formula:
(d)(1) amountx(100%-(e) percentage)
For purposes of the above formula, the (d)(1) amount is the income that
would otherwise be required to be recognized by the transferor
corporation pursuant to paragraph (d)(1) of this section, and the (e)
percentage is the percentage of the transferor corporation's total
deemed rights to receive contingent annual payments under paragraph (c)
of this section that is deemed to be transferred to related U.S. persons
under the rules of this paragraph (e).
(iv) The rules of paragraphs (d) and (e) of this section shall be
reapplied in the case of any later transfer of the stock of the
transferee foreign corporation by a related U.S. person that received
such stock in a transfer that was subject to the rules of this paragraph
(e). For purposes of reapplying the rules of paragraphs (d) and (e),
each such related U.S. person shall be treated as a U.S. transferor of
intangible property to the transferee foreign corporation (to the extent
of the interest attributed to such person pursuant to subdivision (i) of
this paragraph (e)(1)).
(2) Required adjustments. If a U.S. person transfers stock of a
transferee foreign corporation to a U.S. related person in a transaction
that is subject to the rules of paragraph (e)(1) of this section, the
following adjustments shall be made:
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
any payment deemed to be received by a related U.S. person under
paragraph (e)(1)(ii) of this section;
(ii) For purposes of subpart F of part III of subchapter N of the
Code, the transferee foreign corporation may allocate and apportion such
deemed payments (whether or not such payments are actually made to gross
income subject to subpart F to the extent appropriate under the
provisions of Sec. Sec. 1.954-1(c) and 1.861-8;
(iii) For purposes of reapplying the rules of paragraph (d) and (e)
of this section, if the related U.S. person is deemed to have received a
right to contingent annual payments for the use of intangible property,
then the U.S. related person shall be deemed to have held a
proportionate share of the property with a basis equal to a
proportionate share of the U.S. transferor's adjusted basis plus the
gain, if any, recognized by the U.S. transferor on the earlier transfer
of the stock to the U.S. related person, and then to have transferred
that proportionate share of the property to the foreign corporation in a
transfer subject to section 367(d); and
(iv) If the U.S. transferor is itself required to recognize gain
upon the transfer by reason of the operation of paragraphs (d)(1) and
(e)(1)(iii) of this section (because stock of the transferee foreign
corporation is also transferred to unrelated persons), then those
unrelated persons shall be deemed to have purchased a proportionate
share of the transferred intangible property at fair market value and
immediately contributed that property to the transferee foreign
corporation, consistent with the general rule of paragraph (d)(2) of
this section concerning transfers of
[[Page 317]]
stock to unrelated persons. Therefore, for purposes of chapter 1 of the
Code--
(A) Each unrelated person's basis in the stock of the transferee
foreign corporation shall be increased to the extent of the gain
recognized by the U.S. transferor upon the deemed purchase of intangible
property by that person; and
(B) The transferee foreign corporation will receive an increase in
its basis in the transferred intangible property equal to the fair
market value of that portion of the intangible property deemed to be
contributed to the transferee foreign corporation by unrelated persons
(as calculated for purposes of determining the gain required to be
recognized by the U.S. transferor).
(3) Transfer to related foreign person not treated as disposition of
intangible property. If a U.S. person transfers intangible property that
is subject to section 367(d) and the rules of this section to a foreign
corporation in an exchange described in section 351 or 361, and within
the useful life of the transferred intangible property, that U.S.
transferor subsequently transfers any of the stock of the transferee
foreign corporation to one or more foreign persons that are related to
the transferor within the meaning of paragraph (h) of this section, then
the U.S. transferor shall continue to include in its income the deemed
payments described in paragraph (c) of this section in the same manner
as if the subsequent transfer of stock had not occurred. The rule of
this paragraph (e)(3) shall not apply with respect to the subsequent
transfer by the U.S. person of any of the remaining stock to any related
U.S. person or unrelated person.
(4) Proportionate share. For purposes of this paragraph (e), any
``proportionate share'' shall be determined by reference to the fair
market value (at the time of the original transfer) of the stock of the
transferee foreign corporation that was transferred by the U.S.
transferor and the fair market value of all of the stock of the
transferee foreign corporation originally received by the U.S.
transferor.
(f) Subsequent disposition of transferred intangible property by
transferee foreign corporation--(1) In general. If a U.S. person
transfers intangible property that is subject to section 367(d) and the
rules of this section to a foreign corporation in an exchange described
in section 351 or 361, and within the useful life of the intangible
property that transferee foreign corporation subsequently disposes of
the intangible property to an unrelated person, then--
(i) The U.S. transferor of the intangible property (or any person
treated as such pursuant to paragraph (e)(1) of this section) shall be
required to recognize gain from U.S. sources (but not loss) in an amount
equal to the difference between the fair market value of the transferred
intangible property on the date of the subsequent disposition and the
U.S. transferor's former adjusted basis in that property (determined as
of the orginial transfer); and
(ii) The U.S. transferor shall be required to recognize a deemed
payment under paragraph (c) of this section for that part of its taxable
year that the intangible property was held by the transferee foreign
corporation and thereafter shall not be required to recognize any
further deemed payments under paragraph (c) or (e)(1) of this section
with respect to the transferred intangible property disposed of by the
transferee foreign corporation.
(2) Required adjustments. If a U.S. transferor is required to
recognize gain under paragraph (f)(1) of this section, then--
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
gain required to be recognized; and
(ii) The U.S. transferor's recognition of gain will permit the
establishment of an account receivable from the transferee foreign
corporation, in accordance with paragraph (g)(1) of this section.
(3) Subsequent transfer of intangible property to related person.
The requirement that a U.S. person recognize gain under paragraph (c) or
(e) of this section shall not be affected by the transferee foreign
corporation's subsequent disposition of the transferred intangible
property to a related person. For purposes of any required adjustments,
and of any accounts receivable created under paragraph (g)(1) of this
section,
[[Page 318]]
the related person that receives the intangible property shall be
treated as the transferee foreign corporation.
(g) Special rules--(1) Establishment of accounts receivable--(i) In
general. If a U.S. person is required to recognize income under the
provisions of paragraph (c), (e), or (f) of this section, and the amount
deemed to be received is not actually paid by the transferee foreign
corporation, then the U.S. person may establish an account receivable
from the transferee foreign corporation equal to the amount deemed paid
that was not actually paid. A separate account receivable must be
established for each taxable year in which payments deemed to be
received are not actually made. Payments received from the transferee
foreign corporation must be designated as payments upon a particular
account and must be deducted from that account. Accounts receivable
under this paragraph (g)(1) may be established and paid without further
U.S. income tax consequences to the U.S. transferor or the transferee
foreign corporation. No interest shall be paid or accrued on an account
receivable created under this paragraph (g)(1), nor shall any bad debt
deduction be allowed under section 166 with respect to any failure to
receive payment on an account.
(ii) Unpaid receivable treated as contribution to capital. If any
portion of an account receivable established under this paragraph (g)(1)
remains unpaid as of the last day of the third taxable year following
the taxable year to which the account relates, then--
(A) Such portion shall be deemed to have been paid on that date; and
(B) The U.S. person shall be deemed to have contributed an
equivalent amount to the capital of the foreign corporation, and the
U.S. person's basis in the stock of the foreign corporation shall,
therefore, be increased by that amount.
(2) Election to treat transfer as sale. A U.S. person that transfers
intangible property to a foreign corporation in a transaction subject to
section 367(d) may elect to recognize income in accordance with the
rules of this paragraph (g)(2), if--
(i) The intangible property transferred constitutes an operating
intangible, as defined in Sec. 1.367(a)-1T(d)(5)(ii); or
(ii) The transfer of the intangible property is either legally
required by the government of the country in which the transferee
corporation is organized as a condition of doing business in that
country, or compelled by a genuine threat of immediate expropriation by
the foreign government; or
(iii)(A) The U.S. person transferred the intangible property to the
foreign corporation within three months of the organization of that
corporation and as part of the original plan of capitalization of that
corporation;
(B) Immediately after the transfer, the U.S. person owns at least 40
percent but not more than 60 percent of the total voting power and total
value of the stock of the transferee foreign corporation;
(C) Immediately after the transfer, at least 40 percent of the total
voting power and total value of the stock of the transferee foreign
corporation is owned by foreign persons unrelated to the U.S. person;
(D) Intangible property constitutes at least 50 percent of the fair
market value of the property transferred to the foreign corporation by
the U.S. transferor; and
(E) The transferred intangible property will be used in the active
conduct of a trade or business outside of the United States within the
meaning of Sec. 1.367(a)-2T and will not be used in connection with the
manufacture or sale of products in or for use or consumption in the
United States.
A person that makes the election under this paragraph (g)(2) shall not
be subject to the provisions of paragraphs (c) through (f) of this
section. Such person shall instead recognize in the year of the transfer
ordinary income from sources within the United States in an amount equal
to the difference between the fair market value of the intangible
property transferred and its adjusted basis. A U.S. person shall make an
election under this paragraph (g)(2) by notifying the Internal Revenue
Service of the election in accordance with the requirements of section
6038B and regulations thereunder, and subsequently including the
appropriate amounts in
[[Page 319]]
gross income in a timely filed tax return for the year of the transfer.
(3) Intangible property transferred from branch with previously
deducted losses. If income is required to be recognized under section
904(f)(3) and the regulations thereunder or under Sec. 1.367(a)-6T upon
the transfer of intangible property of a foreign branch that had
previously deducted losses, then the income recognized under those
sections with respect to that property shall be credited against amounts
that would otherwise be required to be recognized with respect to that
same property under paragraphs (c) through (f) of this section in either
the current or future taxable years. The amount recognized under section
904(f)(3) or Sec. 1.367(a)-6T with respect to the transferred
intangible property shall be determined in accordance with the following
formula:
[GRAPHIC] [TIFF OMITTED] TC17OC91.001
For purposes of the above formula, the loss recapture income is the
total amount required to be recognized by the U.S. transferor pursuant
to section 904(f)(3) or Sec. 1.367(a)-6T. The gain from intangibles is
the total amount of gain realized by the U.S. transferor pursuant to
section 904(f)(3) and Sec. 1.367(a)-6T upon the transfer of items of
intangible property that are subject to section 367(d). (``Gain from
intangibles'' does not include gain realized upon the transfer of
property described in Sec. 1.367(a)-5T(b)(2), foreign goodwill or going
concern value, or intangible property with respect to which the taxpayer
has made the election provided for in Sec. 1.367(d)-1T(g)(2).) The gain
from all branch assets is the total amount of gain realized by the
transferor upon the transfer of items of property of the branch in which
gain is realized. The fraction shall not exceed 1.
(4) Coordination with section 482--(i) In general. Section 367(d)
and the rules of this section shall not apply in the case of an actual
sale or license of intangible property by a U.S. person to a foreign
corporation. If an adjustment under section 482 is required with respect
to an actual sale or license of intangible property, then section 367(d)
and the rules of this section shall not apply with respect to the
required adjustment. If a U.S. person transfers intangible property to a
related foreign corporation without consideration, or in exchange for
stock or securities of the transferee in a transaction described in
sections 351 or 361, no sale or license subject to adjustment under
section 482 will be deemed to have occurred. Instead, the U.S. person
shall be treated as having made a transfer of the intangible property
that is subject to section 367(d).
(ii) Sham licenses and sales. For purposes of paragraph (g)(4)(i) of
this section, a purported sale or license of intangible property may be
disregarded, and treated as a transfer subject to section 367(d) and the
rules of this section, if--
(A) The purported sale or license is made to a foreign corporation
in which the transferor holds (or is acquiring) an interest; and
(B) The terms of the purported sale or license differ so greatly
from the economic substance of the transaction or the terms that would
obtain between unrelated persons that the purported sale or license is a
sham.
The terms of a purported sale or license, for purposes of applying the
rule of this paragraph (g)(4)(ii), shall be determined by reference not
only to the nominal terms of the agreement but also to the actual
practice of the parties under that agreement. A sale or license of
intangible property shall not be disregarded under this paragraph
(g)(4)(ii) solely because other property of an integrated business is
simultaneously transferred to the foreign corporation by the U.S.
transferor in a transaction described in section 367(a)(1) or any
statutory or regulatory exception to section 367(a)(1).
(5) Determination of fair market value. For purposes of determining
the gain
[[Page 320]]
required to be recognized immediately under paragraph (d), (f), or
(g)(2) of this section, the fair market value of transferred property
shall be the single payment arm's-length price that would be paid for
the property by an unrelated purchaser determined in accordance with the
principles of section 482 and regulations thereunder. The allocation of
a portion of the purchase price to intangible property agreed to by the
parties to the transaction shall not necessarily be controlling for this
purpose.
(6) Anti-abuse rule. If a U.S. person--
(i) Transfers intangible property to a domestic corporation with a
principal purpose of avoiding the effect of section 367(d) and the rules
of this section; and
(ii) Thereafter transfers the stock of that domestic corporation to
a related foreign corporation,
then solely for purposes of section 367(d) that U.S. person shall be
treated as having transferred the intangible property directly to the
foreign corporation. A U.S. person shall be presumed to have transferred
intangible property for a principal purpose of avoiding the effect of
section 367(d) if the property is transferred to the domestic
corporation less than two years prior to the transfer of the stock of
that domestic corporation to a foreign corporation. The presumption
created by the previous sentence may be rebutted by clear evidence that
the subsequent transfer of the stock of the domestic transferee
corporation was not contemplated at the time the intangible property was
transferred to that corporation and that avoidance of section 367(d) and
the rules of this section was not a principal purpose of the
transaction. A transfer may have more than one principal purpose.
(h) Related person. For purposes of this section, persons are
considered to be related if--
(1) They are partners or partnerships described in section 707(b)(1)
of the Code; or
(2) They are related within the meaning of section 267 (b), (c), and
(f) of the Code, except that--
(i) ``10 percent or more'' shall be substituted for ``more than 50
percent'' each place it appears; and
(ii) Section 1563 shall apply (for purposes of section 267(d)),
without regard to section 1563(b)(2).
(i) Effective date. Except as specifically provided to the contrary
elsewhere in this section, this section applies to transfers occurring
after December 31, 1984.
[T.D. 8087, 51 FR 17953, May 16, 1986, as amended by T.D. 8770, 63 FR
33568, June 19, 1998]
Sec. 1.367(e)-0 Outline of Sec. Sec. 1.367(e)-1 and 1.367(e)-2.
This section lists captioned paragraphs contained in Sec. Sec.
1.367(e)-1 and 1.367(e)-2 as follows:
Sec. 1.367(e)-1 Distributions described in section 367(e)(1).
(a) Purpose and scope.
(b) Gain recognition.
(1) General rule.
(2) Stock owned through partnerships, disregarded entities, trusts,
and estates.
(3) Gain computation.
(4) Treatment of distributee.
(c) Nonrecognition of gain.
(d) Determining whether distributees are qualified U.S. persons.
(1) General rule--presumption of foreign status.
(2) Non-publicly traded distributing corporations.
(3) Publicly traded distributing corporations.
(i) Five percent shareholders.
(ii) Other distributees.
(4) Qualified exchange or other market.
(e) Reporting under section 6038B.
(f) Effective date.
Sec. 1.367(e)-2 Distributions described in section 367(e)(2).
(a) Purpose and scope.
(1) In general.
(2) Nonapplicability of section 367(a).
(b) Distribution by a domestic corporation.
(1) General rule.
(i) Recognition of gain and loss.
(ii) Operating rules.
(A) General rule.
(B) Overall loss limitation.
(1) Overall loss limitation rule.
(2) Example.
(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations.
(iii) Distribution of partnership interest.
(A) General rule.
(B) Gain or loss calculation. [Reserved]
(C) Basis adjustments.
(D) Publicly traded partnerships.
(2) Exceptions.
[[Page 321]]
(i) Distribution of property used in a U.S. trade or business.
(A) Conditions for nonrecognition.
(B) Qualifying property.
(C) Required statement.
(1) Declaration and certification.
(2) Property description.
(3) Distributee identification.
(4) Treaty benefits waiver.
(5) Statute of limitations extension.
(D) Failure to file statement.
(E) Operating rules.
(1) Gain or loss recognition by the foreign distributee corporation.
(i) Taxable dispositions.
(ii) Other triggering events.
(2) Gain recognition by the domestic liquidating corporation.
(i) General rule.
(ii) Amended return.
(iii) Interest.
(iv) Joint and several liability.
(3) Schedule for property no longer used in a U.S. trade or
business.
(4) Nontriggering events.
(i) Conversions, certain exchanges, and abandonment.
(ii) Amendment to Master Property Description
(5) Nontriggering transfers to qualified transferees.
(ii) Distribution of certain U.S. real property interests.
(iii) Distribution of stock of domestic subsidiary corporations.
(A) Conditions for nonrecognition.
(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation.
(C) Anti-abuse rule.
(D) Required statement.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Reporting under section 6038B.
(iii) Other rules.
(c) Distribution by a foreign corporation.
(1) General rule--gain and loss not recognized.
(2) Exceptions.
(i) Property used in a U.S. trade or business.
(A) General rule.
(B) Ten-year active U.S. business exception.
(C) Required statement.
(D) Operating rules.
(ii) Property formerly used in a U.S. trade or business.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Other rules.
(d) Anti-abuse rule.
(e) Effective date.
[T.D. 8834, 64 FR 43075, Aug. 9, 1999]
Sec. 1.367(e)-1 Distributions described in section 367(e)(1).
(a) Purpose and scope. This section provides rules for recognition
(and nonrecognition) of gain by a domestic corporation (distributing
corporation) on a distribution of stock or securities of a corporation
(controlled corporation) to foreign persons that is described in section
355. Paragraph (b) of this section contains the general rule that gain
is recognized on the distribution to the extent stock or securities of
controlled are distributed to foreign persons. Paragraph (c) of this
section provides an exception to the gain recognition rule for
distributions of stock or securities of a domestic corporation.
Paragraph (d) of this section contains rules for determining whether
distributees of stock or securities in a section 355 distribution are
qualified U.S. persons. Paragraph (e) of this section cross-references
section 6038B for certain reporting obligations. Finally, paragraph (f)
of this section specifies the effective date of this section.
(b) Gain recognition--(1) General rule. If a domestic corporation
makes a distribution of stock or securities of a corporation that
qualifies for nonrecognition under section 355 to a person who is not a
qualified U.S. person, then, except as provided in paragraph (c) of this
section, the distributing corporation shall recognize gain (but not
loss) on the distribution under section 367(e)(1). A distributing
corporation shall not recognize gain under this section with respect to
a section 355 distribution to a qualified U.S. person. For purposes of
this section, a qualified U.S. person is--
(A) A citizen or resident of the United States; or
(B) A domestic corporation.
(2) Stock owned through partnerships, disregarded entities, trusts,
and estates. For purposes of this section, distributing corporation
stock or securities owned by or for a partnership (whether foreign or
domestic) are owned proportionately by its partners. A partner's
proportionate share of the stock or securities of the distributing
corporation shall be equal to the partner's distributive share of the
gain that would have been recognized had the partnership
[[Page 322]]
sold the stock or securities (at a taxable gain) immediately before the
distribution. The partner's distributive share of gain shall be
determined under the rules and principles of sections 701 through 761
and the regulations thereunder. For purposes of this section, stock or
securities owned by or for an entity that is disregarded as an entity
separate from its owner (disregarded entity) under Sec. 301.7701-3 of
this chapter are owned directly by the owner of such disregarded entity.
For purposes of this section, stock or securities owned by or for a
trust or estate (whether foreign or domestic) are owned proportionately
by the persons who would be treated as owning such stock or securities
under section 318(a)(2)(A) and (B). In applying section 318(a)(2)(B)(i),
if a trust includes interests that are not actuarially ascertainable,
all such interests shall be considered to be owned by foreign persons.
In a case where an interest holder in a partnership, a disregarded
entity, trust, or estate that (directly or indirectly) owns stock of the
distributing corporation is itself a partnership, disregarded entity,
trust, or estate, the rules of this paragraph (b)(2) apply to such
interest holder.
(3) Gain computation. Gain recognized under paragraph (b)(1) of this
section shall be equal to the excess of the fair market value of the
stock or securities distributed to persons who are not qualified U.S.
persons (determined as of the time of the distribution) over the
distributing corporation's adjusted basis in the stock or securities
distributed to such distributees. For purposes of the preceding
sentence, the distributing corporation's adjusted basis in each unit of
each class of stock or securities distributed to a distributee shall be
equal to the distributing corporation's total adjusted basis in all of
the units of the respective class of stock or securities owned
immediately before the distribution, divided by the total number of
units of the class of stock or securities owned immediately before the
distribution.
(4) Treatment of distributee. If the distribution otherwise
qualifies for nonrecognition under section 355, each distributee shall
be considered to have received stock or securities in a distribution
qualifying for nonrecognition under section 355, even though the
distributing corporation may recognize gain on the distribution under
this section. Thus, the distributee shall not be considered to have
received a distribution described in section 301 or a distribution in an
exchange described in section 302(b) upon the receipt of the stock or
securities of the controlled corporation, and the domestic distributing
corporation shall have no withholding responsibilities under section
1441. Except where section 897(e)(1) and the regulations thereunder
cause gain to be recognized by the distributee, the basis of the
distributed domestic or foreign corporation stock in the hands of the
foreign distributee shall be the basis of the distributed stock
determined under section 358 without any increase for any gain
recognized by the domestic corporation on the distribution.
(c) Nonrecognition of gain. A domestic distributing corporation
shall not recognize gain under paragraph (b)(1) of this section on the
distribution of stock or securities of a domestic corporation.
(d) Determining whether distributees are qualified U.S. persons--(1)
General rule--presumption of foreign status. Except as provided in
paragraphs (d)(2) and (3) of this section, all distributions of stock or
securities in a distribution described in section 355 in which the
distributing corporation is domestic and the controlled corporation is
foreign are presumed to be to persons who are not qualified U.S.
persons, as defined in paragraph (b)(1) of this section.
(2) Non-publicly traded distributing corporations. If the class of
stock or securities of the distributing corporation (in respect to which
stock or securities of the controlled corporation are distributed) is
not regularly traded on a qualified exchange or other market (as defined
in paragraph (d)(4) of this section), then the distributing corporation
may only rebut the presumption contained in paragraph (d)(1) of this
section by identifying the qualified U.S. persons to which controlled
corporation stock or securities were distributed and by certifying the
amount of stock or securities that were distributed to the qualified
U.S. persons.
[[Page 323]]
(3) Publicly traded distributing corporations. If the class of stock
or securities of the distributing corporation (in respect to which stock
or securities of the controlled corporation are distributed) is
regularly traded on a qualified exchange or other market (as defined in
paragraph (d)(4) of this section), then the distributing corporation may
only rebut the presumption contained in paragraph (d)(1) of this section
as described in this paragraph (d)(3).
(i) Five percent shareholders. A publicly traded distributing
corporation may only rebut the presumption contained in paragraph (d)(1)
of this section with respect to distributees that are five percent
shareholders of the class of stock or securities of the distributing
corporation (in respect to which stock or securities of the controlled
corporation are distributed) by identifying the qualified U.S. persons
to which controlled corporation stock or securities were distributed and
by certifying the amount of stock or securities that were distributed to
the qualified U.S. persons. A five percent shareholder is a distributee
who is required under U.S. securities laws to file with the Securities
and Exchange Commission (SEC) a Schedule 13D or 13G under 17 CFR
240.13d-1 or 17 CFR 240.13d-2, and provide a copy of same to the
distributing corporation under 17 CFR 240.13d-7.
(ii) Other distributees. A distributing corporation that has made a
distribution described in paragraph (d)(3) of this section may rebut the
presumption contained in paragraph (d)(1) of this section with respect
to distributees that are not five percent shareholders (as defined in
this paragraph (d)(3)) by relying on and providing a reasonable analysis
of shareholder records and other relevant information that demonstrates
a number of distributees that are qualified U.S. persons. Taxpayers may
rely on such analysis, unless it is subsequently determined that there
are actually fewer distributees who are qualified U.S. persons than were
demonstrated in the analysis.
(4) Qualified exchange or other market. For purposes of paragraph
(d) of this section, the term qualified exchange or other market means,
for any taxable year--
(i) A national securities exchange which is registered with the SEC
or the national market system established pursuant to section 11A of the
Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(ii) A foreign securities exchange that is regulated or supervised
by a governmental authority of the country in which the market is
located and which has the following characteristics--
(A) The exchange has trading volume, listing, financial disclosure,
and other requirements designed to prevent fraudulent and manipulative
acts and practices, to remove impediments to and perfect the mechanism
of a free and open market, and to protect investors; and the laws of the
country in which the exchange is located and the rules of the exchange
ensure that such requirements are actually enforced; and
(B) The rules of the exchange ensure active trading of listed
stocks.
(e) Reporting under section 6038B. See the regulations under section
6038B for reporting requirements for distributions under this section.
(f) Effective date. This section shall be applicable to
distributions occurring in taxable years ending after August 8, 1999.
[T.D. 8834, 64 FR 43076, Aug. 9, 1999; 65 FR 14467, Mar. 3, 2000]
Sec. 1.367(e)-2 Distributions described in section 367(e)(2).
(a) Purpose and scope--(1) In general. This section provides rules
requiring gain and loss recognition by a corporation on its distribution
of property to a foreign corporation in a complete liquidation described
in section 332. Paragraph (b)(1) of this section contains the general
rule that gain and loss are recognized when a domestic corporation makes
a distribution of property in complete liquidation under section 332 to
a foreign corporation that meets the stock ownership requirements of
section 332(b) with respect to stock in the domestic corporation.
Paragraph (b)(2) of this section provides the only exceptions to the
gain and loss recognition rule of paragraph (b)(1) of this section.
[[Page 324]]
Paragraph (b)(3) of this section refers to other consequences of
distributions described in paragraphs (b)(1) and (2) of this section.
Paragraph (c)(1) of this section contains the general rule that gain and
loss are not recognized when a foreign corporation makes a distribution
of property in complete liquidation under section 332 to a foreign
corporation that meets the stock ownership requirements of section
332(b) with respect to stock in the foreign liquidating corporation.
Paragraph (c)(2) of this section provides the only exceptions to the
nonrecognition rule of paragraph (c)(1) of this section. Paragraph
(c)(3) of this section refers to other consequences of distributions
described in paragraphs (c)(1) and (2) of this section. Paragraph (d) of
this section contains an anti-abuse rule. Finally, paragraph (e) of this
section specifies the effective date for the rules of this section. The
rules of this section are issued pursuant to the authority conferred by
section 367(e)(2).
(2) Nonapplicability of section 367(a). Section 367(a) shall not
apply to a complete liquidation described in section 332 by a domestic
liquidating corporation into a foreign corporation that meets the stock
ownership requirements of section 332(b).
(b) Distribution by a domestic corporation--(1) General rule--(i)
Recognition of gain and loss. If a domestic corporation (domestic
liquidating) makes a distribution of property in complete liquidation
under section 332 to a foreign corporation (foreign distributee) that
meets the stock ownership requirements of section 332(b) with respect to
stock in the domestic liquidating corporation, then--
(A) Pursuant to section 367(e)(2), section 337(a) and (b)(1) shall
not apply; and
(B) The domestic liquidating corporation shall recognize gain or
loss on the distribution of property to the foreign distributee, except
as provided in paragraph (b)(2) of this section.
(ii) Operating rules--(A) General rule. Except as provided in
paragraphs (b)(1)(ii) (B) and (C) of this section, the rules contained
in section 336 will apply to the gain and loss recognized pursuant to
this section.
(B) Overall loss limitation--(1) Overall loss limitation rule. Loss
in excess of gain from the distribution shall not be recognized. If
realized losses exceed recognized losses, the losses shall be recognized
on a pro rata basis with respect to the realized loss attributable to
each distributed loss asset in the category of assets (i.e., capital or
ordinary) to which the realized but unrecognized loss relates. For
additional limitations on the recognition of losses, see, e.g., section
1211.
(2) Example. The following example illustrates the overall loss
limitation rule, the pro rata loss allocation method, and the general
capital loss limitation rule in section 1211(a):
Example. F, a foreign corporation, owns all stock of US1, a domestic
corporation. US1 owns the following capital assets: Asset A, which has a
fair market value of $100 and an adjusted basis of $40; Asset B, which
has a fair market value of $60 and an adjusted basis of $80; and, Asset
C, which has a fair market value of $40 and an adjusted basis of $100.
US1 also owns the following business assets that will generate ordinary
income (or loss) upon disposition: Asset D, which has a fair market
value of $100 and an adjusted basis of $40; Asset E, which has a fair
market value of $60 and an adjusted basis of $100; and, Asset F, which
has a fair market value of $40 and an adjusted basis of $80. US1
liquidates into F and distributes all assets to F in liquidation. None
of the assets qualify for nonrecognition under paragraph (b)(2) of this
section. US1's total realized capital loss is $80, but it may only
recognize $60 of that loss. See section 1211(a). US1's total realized
ordinary loss is $80, but it may only recognize $60 of that loss. See
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $15 (60 X
.25) of the recognized capital loss to Asset B and will allocate the
remaining $45 (60 X .75) of recognized capital loss to Asset C. See
paragraph (b)(1)(ii)(B)(1) of this section. US1 will allocate $30 (60 X
.50) of the recognized ordinary loss to Asset E and will allocate the
remaining $30 (60 X .50) to Asset F. See paragraph (b)(1)(ii)(B)(1) of
this section.
(C) Special rules for built-in gains and losses attributable to
property received in liquidations and reorganizations. Built-in losses
attributable to property received in a transaction described in sections
332 or 361 (during the two-year period ending on the date of the
distribution in liquidation covered by this section) shall not offset
gain from property not received in the same transaction.
[[Page 325]]
Built-in gains attributable to property received in a transaction
described in sections 332 or 361 (during the two-year period ending on
the date of the distribution in liquidation covered by this section)
shall not be offset by a loss from property not received in the same
transaction. Built-in gain or loss is that amount of gain or loss on
property that existed at the time the domestic liquidating corporation
acquired such property. See sections 336(d) and 382 for additional
limitations on the recognition of losses.
(iii) Distribution of partnership interest--(A) General rule. If a
domestic corporation distributes a partnership interest (whether foreign
or domestic) in a distribution described in paragraph (b)(1)(i) of this
section, then for purposes of applying this section the domestic
liquidating corporation shall be treated as having distributed a
proportionate share of partnership property. Accordingly, the
applicability of the recognition rules of paragraphs (b)(1) (i) and (ii)
of this section, and of any exception to recognition provided in this
section shall be determined with reference to the partnership property,
rather than to the partnership interest itself. Where the partnership
property includes an interest in a lower-tier partnership, the
applicability of any exception with respect to the interest in the
lower-tier partnership shall be determined with reference to the lower-
tier partnership property. In the case of multiple tiers of
partnerships, the applicability of an exception shall be determined with
reference to the property of each partnership, applying the rule
contained in the preceding sentence. A domestic liquidating
corporation's proportionate share of partnership property shall be
determined under the rules and principles of sections 701 through 761
and the regulations thereunder.
(B) Gain or loss calculation. [Reserved]
(C) Basis adjustments. The foreign distributee corporation's basis
in the distributed partnership interest shall be equal to the domestic
liquidating corporation's basis in such partnership interest immediately
prior to the distribution, increased by the amount of gain and reduced
by the amount of loss recognized by the domestic liquidating corporation
on the distribution of the partnership interest. Solely for purposes of
sections 743 and 754, the foreign distributee corporation shall be
treated as having purchased the partnership interest for an amount equal
to the foreign corporation's adjusted basis therein.
(D) Publicly traded partnerships. The distribution by a domestic
liquidating corporation of an interest in a publicly traded partnership
that is treated as a corporation for U.S. income tax purposes under
section 7704(a) shall not be subject to the rules of paragraphs
(b)(1)(iii) (A) and (B) of this section. Instead, the distribution of
such an interest shall be treated in the same manner as a distribution
of stock. Thus, a transfer of an interest in a publicly traded
partnership that is treated as a U.S. corporation for U.S. income tax
purposes shall be treated in the same manner as stock in a domestic
corporation, and a transfer of an interest in a publicly traded
partnership that is treated as a foreign corporation for U.S. income tax
purposes shall be treated in the same manner as stock in a foreign
corporation.
(2) Exceptions--(i) Distribution of property used in a U.S. trade or
business--(A) Conditions for nonrecognition. A domestic liquidating
corporation shall not recognize gain or loss under paragraph (b)(1) of
this section on its distribution of property (including inventory) used
by the domestic liquidating corporation in the conduct of a trade or
business within United States, if--
(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the date of the distribution of
such property, uses the property in the conduct of a trade or business
within the United States;
(2) The domestic liquidating corporation attaches the statement
described in paragraph (b)(2)(i)(C) of this section to its U.S. income
tax returns for the taxable years that include the distributions in
liquidation; and
(3) The foreign distributee corporation attaches a copy of the
property description contained in paragraph (b)(2)(i)(C)(2) of this
section to its U.S. income tax return for the tax year that includes the
date of distribution.
[[Page 326]]
(B) Qualifying property. Property is used by the foreign distributee
corporation in the conduct of a trade or business in the United States
within the meaning of this paragraph (b)(2)(i) only if all income from
the use of the property and all income or gain from the sale or exchange
of the property would be subject to taxation under section 882(a) as
effectively connected income. Also, stock held by a dealer as inventory
or for sale in the ordinary course of its trade or business shall be
treated as inventory and not as stock in the hands of both the domestic
liquidating corporation and the distributee foreign corporation.
Notwithstanding the foregoing, the exception provided in this paragraph
(b)(2)(i) shall not apply to intangibles described in section
936(h)(3)(B).
(C) Required statement. The statement required by paragraph
(b)(2)(i)(A) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(b)(2)(i)'' and shall be prepared by the domestic
liquidating corporation and signed under penalties of perjury by an
authorized officer of the domestic liquidating corporation and by an
authorized officer of the foreign distributee corporation. The statement
shall contain the following items:
(1) Declaration and certification. A declaration that the
distribution to the foreign distributee corporation is one to which the
rules of this paragraph (b)(2)(i) apply and a certification that the
domestic liquidating corporation and the foreign distributee corporation
agree to all of the terms and conditions set forth in this paragraph
(b)(2)(i).
(2) Property description. A description of all property distributed
by the domestic liquidating corporation (irrespective of whether the
property qualifies for nonrecognition). Such description shall be
entitled ``Master Property Description'' and shall identify the property
that continues to be used by the foreign distributee corporation in the
conduct of a trade or business within the United States, including the
location, adjusted basis, estimated fair market value, a summary of the
method (including appraisals if any) used for determining such value,
and the date of distribution of such items of property. The description
shall also identify the property excepted from gain recognition under
paragraphs (b)(2)(ii) and (iii) of this section.
(3) Distributee identification. An identification of the foreign
distributee corporation, including its name and address, taxpayer
identification number, residence, and place of incorporation.
(4) Treaty benefits waiver. With respect to property entitled to
nonrecognition pursuant to this paragraph (b)(2)(i), a declaration by
the foreign distributee corporation that it irrevocably waives any right
under any treaty (whether or not currently in force at the time of the
liquidation) to sell or exchange any item of such property without U.S.
income taxation or at a reduced rate of taxation, or to derive income
from the use of any item of such property without U.S. income taxation
or at a reduced rate of taxation.
(5) Statute of limitations extension. An agreement by the domestic
liquidating corporation and the foreign distributee corporation to
extend the statute of limitations on assessments and collections (under
section 6501) with respect to the domestic liquidating corporation on
the distribution of each item of property until three years after the
date on which all such items of property have ceased to be used in a
trade or business within the United States, but in no event shall the
extension be for a period longer than 13 years from the filing of the
original U.S. income tax return for the taxable year of the last
distribution of any such item of property. The agreement to extend the
statute of limitation shall be executed on a Form 8838, ``Consent to
Extend the Time to Assess Tax Under Section 367--Gain Recognition
Agreement.''
(D) Failure to file statement. If a domestic liquidating corporation
that would otherwise qualify for nonrecognition on the distribution of
property under this paragraph (b)(2)(i) fails to file the statement
described in paragraph (b)(2)(i)(C) of this section or files a statement
that does not comply with the requirements of paragraph (b)(2)(i)(C) of
this section, the Commissioner may treat the domestic liquidating
corporation as if it had claimed nonrecognition under this paragraph
(b)(2)(i) and met all the requirements of paragraph (b)(2)(i)(C) of this
section,
[[Page 327]]
if such treatment is necessary to prevent the domestic liquidating
corporation or the foreign distributee corporation from otherwise
deriving a tax benefit by such failure.
(E) Operating rules. By the domestic liquidating corporation's
claiming nonrecognition under this paragraph (b)(2)(i) and filing a
statement described in paragraph (b)(2)(i)(C) of this section, the
domestic liquidating corporation and the foreign distributee corporation
agree to be subject to the rules of this paragraph (b)(2)(i)(E).
(1) Gain or loss recognition by the foreign distributee
corporation--(i) Taxable dispositions. If, within the ten-year period
from the date of a distribution of qualifying property, the foreign
distributee corporation disposes of any qualifying property in a
transaction subject to tax under section 882(a), then the foreign
distributee corporation shall recognize such gain (or loss) and properly
report it on a timely filed U.S. income tax return. If the foreign
distributee corporation recognizes gain (or loss) under this paragraph
(b)(2)(i)(E)(1)(i) and properly reports such gain (or loss) on its U.S.
income tax return, then the domestic liquidating corporation shall not
recognize gain attributable to such property under paragraph
(b)(2)(i)(E)(2) of this section.
(ii) Other triggering events. If, within the ten-year period from
the date of distribution, any qualifying property ceases to be used by
the foreign distributee corporation in the conduct of a trade or
business in the United States (other than by reason of a taxable
disposition described in paragraph (b)(2)(i)(E)(1)(i) of this section, a
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this
section, or a nontriggering transfer described in paragraph
(b)(2)(i)(E)(5) of this section), then the foreign distributee
corporation shall recognize gain (but not loss) attributable to such
property and properly report it on a timely filed U.S. income tax
return. If the foreign distributee corporation properly reports gain
under this paragraph (or if such qualified property is not gain property
on the date that it ceases to be used in the foreign distributee
corporation's U.S. trade or business), then the domestic liquidating
corporation shall not recognize gain attributable to such property under
paragraph (b)(2)(i)(E)(2) of this section. The gain recognized under
this paragraph (b)(2)(i)(E)(1)(ii) shall be an amount equal to the fair
market value of the property on the date it ceases to be used in the
foreign distributee corporation's U.S. trade or business less the
foreign distributee corporation's adjusted basis in such property.
(2) Gain recognition by the domestic liquidating corporation--(i)
General rule. If, within the ten-year period from the date of
distribution, any qualifying property described in paragraph
(b)(2)(i)(B) of this section ceases to be used by the foreign
distributee corporation (or a qualifying transferee described in
paragraph (b)(2)(i)(E)(5) of this section) in the conduct of a trade or
business in the United States for any reason (including but not limited
to the sale or exchange of such property or the removal of the property
from conduct of the trade or business), then, except to the extent gain
(or loss) is recognized under paragraph (b)(1)(i)(E)(1) of this section,
the domestic liquidating corporation shall recognize the gain (but not
loss) realized but not recognized upon the initial distribution of such
item of property. The domestic liquidating corporation shall recognize
gain pursuant to this paragraph (b)(2)(i)(E)(2)(i) on the amended U.S.
income tax return described in paragraph (b)(2)(i)(E)(2)(ii) of this
section.
(ii) Amended return. If gain recognition is required pursuant to
paragraph (b)(2)(i)(E)(2)(i) of this section, the foreign distributee
corporation shall file an amended U.S. income tax return on behalf of
the domestic liquidating corporation for the year of the distribution of
such item of property. On the amended return, the domestic liquidating
corporation may use any losses (or credits) existing in the year of the
distribution to offset the gain recognized pursuant to paragraph
(b)(2)(i)(E)(2)(i) of this section (or the tax thereon), provided that
the losses (or credits) were otherwise available in the year
distribution and were not used in another year. The amended return shall
be filed no later than the due date
[[Page 328]]
(including extensions) for the return of the foreign distributee
corporation for the taxable year in which the property ceases to be used
by the foreign distributee corporation in the conduct of a trade or
business in the United States.
(iii) Interest. If the domestic liquidating corporation owes
additional tax pursuant to paragraph (b)(2)(i)(E)(2)(i) of this section
for the year of liquidation, then interest must be paid on that amount
at the rates determined under section 6621. The interest due will be
calculated from the due date of the domestic liquidating corporation's
U.S. income tax return for the year of the distribution to the date on
which the additional tax for that year is paid.
(iv) Joint and several liability. The foreign distributee
corporation shall be jointly and severally liable for any tax owed by
the domestic liquidating corporation as a result of the application of
this section, and shall succeed to the domestic liquidating
corporation's agreement to extend the statute of limitations on
assessments and collections under section 6501.
(3) Schedule for property no longer used in a U.S. trade or
business. If qualifying property (other than inventory) ceases to be
used by the foreign distributee corporation in the conduct of a U.S.
trade or business in the ten-year period beginning on the date of
distribution of such property from the domestic liquidating corporation
to the foreign distributee corporation, then the foreign distributee
corporation shall list on a separate schedule (attached to its U.S.
income tax return for the year of cessation) all such qualifying
property. For purposes of this paragraph (b)(2)(i)(E)(3), property
ceases to be used in a U.S. trade or business whenever such property is
sold, exchanged, or otherwise removed from the U.S. trade or business,
irrespective of whether the domestic liquidating corporation filed an
amended return under paragraph (b)(2)(i)(E)(2) of this section, and
irrespective of whether the property ceases to be used in the foreign
distributee corporation's U.S. trade or business by virtue of a
nontriggering event described in paragraph (b)(2)(i)(E)(4) of this
section or a nontriggering transfer described in paragraph
(b)(2)(i)(E)(5) of this section.
(4) Nontriggering events--(i) Conversions, certain exchanges, and
abandonment. Gain (or loss) under this paragraph (b)(2)(i)(E) shall not
be triggered if qualifying property described in paragraph (b)(2)(i)(B)
of this section is involuntarily converted into, or exchanged for,
similar qualifying property used in the conduct of a trade or business
in the United States, to the extent such conversion or exchange
qualifies for nonrecognition under section 1033 or 1031. Also, the
abandonment or disposal of worthless or obsolete property shall not
trigger gain (or loss) under this paragraph (b)(2)(i)(E).
(ii) Amendment to Master Property Description. If the foreign
distributee corporation acquires replacement property by virtue of a
conversion or exchange of the qualifying property under this paragraph
(b)(2)(i)(E)(4), then the foreign distributee corporation shall attach
to its U.S. income tax return for the year of the acquisition such
replacement property a schedule entitled ``Amendment to Master Property
Description Required by Sec. 1.367(e)-2(b)(2)(i)'' that lists the
replacement property and the property being replaced.
(5) Nontriggering transfers to qualified transferees. Gain (or loss)
under this paragraph (b)(2)(i)(E) will not be triggered if qualifying
property described in paragraph (b)(2)(i)(B) of this section is
transferred to another person (qualified transferee) in a transaction
qualifying for nonrecognition under the Internal Revenue Code (other
than transactions described in paragraphs (b)(2)(i)(E)(4)(i) and (c)(1)
of this section), if--
(i) The qualified transferee (and all other subsequent qualified
transferees), immediately thereafter and for the ten-year period
beginning on the date of the initial distribution of such qualifying
property from the domestic liquidating corporation to the foreign
distributee corporation, uses the property in the conduct of a trade or
business in the United States;
(ii) The foreign distributee corporation (or its successor in
interest) prepares and attaches to its U.S. income tax return for the
year of transfer a
[[Page 329]]
statement entitled ``Required Statement under Sec. 1.367(e)-
2(b)(2)(i)(E)(5) for Property Transferred to a Qualified Transferee''
that is signed under penalties of perjury by an authorized officer of
the foreign distributee corporation and by a person similarly authorized
by the qualified transferee;
(iii) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall contain a description of all qualifying property
transferred by the foreign distributee corporation (or qualified
transferee) to the qualified transferee (or subsequent qualified
transferee);
(iv) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of
this section shall also contain an identification of the qualified
transferee (or subsequent qualified transferee), including its name and
address, taxpayer identification number, residence, and place of
incorporation (if applicable);
(v) The statement described in paragraph (b)(2)(i)(E)(5)(ii) of this
section shall also contain a declaration by the qualifying transferee
(or subsequent qualifying transferee) that it irrevocably waives any
right under any treaty (whether or not currently in force at the time of
the liquidation) to sell or exchange any item of such property without
U.S. income taxation or at a reduced rate of taxation, or to derive
income from the use of any item of such qualifying property without U.S.
income taxation or at a reduced rate of taxation; and
(vi) A declaration that the transfer to the qualifying transferee
(or subsequent qualifying transferee) is one to which the rules of this
paragraph (b)(2)(i)(E)(5) apply and a certification that the foreign
distributee corporation (or its successor in interest) and the
qualifying transferee (or subsequent qualifying transferee) agree to all
of the terms and conditions set forth in paragraph (b)(2)(i)(E)(1) of
this section, replacing ``foreign distributee corporation'' with
``qualifying transferee'' and replacing references to ``section 882(a)''
with ``section 871(b)'' (as the case may be).
(ii) Distribution of certain U.S. real property interests. A
domestic liquidating corporation shall not recognize gain (or loss)
under paragraph (b)(1) of this section on the distribution of a U.S.
real property interest (other than stock in a former U.S. real property
holding corporation that is treated as a U.S. real property interest for
five years under section 897(c)(1)(A)(ii)). If property distributed by
the domestic liquidating corporation is a U.S. real property interest
that qualifies for nonrecognition under this paragraph (b)(2)(ii) in
addition to nonrecognition provided by paragraph (b)(2)(i) of this
section, then the domestic liquidating corporation shall secure
nonrecognition pursuant to this paragraph (b)(2)(ii) and not pursuant to
the provisions of paragraph (b)(2)(i) of this section.
(iii) Distribution of stock of domestic subsidiary corporations--(A)
Conditions for nonrecognition. A domestic liquidating corporation shall
not recognize gain or loss under paragraph (b)(1) of this section on a
distribution of stock of an 80 percent domestic subsidiary corporation,
if the domestic liquidating corporation attaches a statement described
in paragraph (b)(2)(iii)(D) of this section to its U.S. income tax
return for the year of the distribution of such stock. For purposes of
this paragraph (b)(2)(iii), a corporation is an 80 percent domestic
subsidiary corporation, if--
(1) The subsidiary corporation is a domestic corporation (but not a
foreign corporation that has made an election under section 897(i) to be
treated as a U.S. corporation for purposes of section 897);
(2) The domestic liquidating corporation owns (directly and without
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of
the total voting power of the stock of such corporation; and
(3) The domestic liquidating corporation owns (directly and without
regard to paragraph (b)(1)(iii) of this section) at least 80 percent of
the total value of all stock of such corporation.
(B) Exceptions when the liquidating corporation is a U.S. real
property holding corporation. If the domestic liquidating corporation is
a U.S. real property holding corporation (as defined in section
897(c)(2)) at the time of liquidation (or is a former U.S. real property
holding corporation the stock of which
[[Page 330]]
is treated as a U.S. real property interest for five years under section
897(c)(1)(A)(ii)), then the exception in paragraph (b)(2)(iii)(A) of
this section shall apply only to the distribution of stock of an 80
percent domestic subsidiary corporation that is a U.S. real property
holding corporation (as defined in section 897(c)(2)) at the time of the
liquidation and immediately thereafter.
(C) Anti-abuse rule. (1) The exception in paragraph (b)(2)(iii)(A)
of this section shall not apply, if a principal purpose of the
distribution of the 80 percent domestic subsidiary corporation's stock
is the avoidance of U.S. tax that would have been imposed on the
domestic liquidating corporation's disposition of such stock when taken
together to an unrelated party. A distribution may have a principal
purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes (when taken together or separately).
(2) For purposes of paragraph (b)(2)(iii)(C)(1) of this section, a
distribution of stock of the 80 percent domestic subsidiary corporation
will be deemed to have been made pursuant to a plan, one of the
principal purposes of which was the avoidance of U.S. tax, if the
foreign distributee corporation disposes of (whether in a recognition or
nonrecognition transaction) any such stock within two years of such
distribution. The rule in this paragraph (b)(2)(iii)(C)(2) will not
apply if the foreign distributee corporation can demonstrate to the
satisfaction of the Commissioner that the avoidance of U.S. tax was not
a principal purpose of the liquidation.
(D) Required statement. The statement required by paragraph
(b)(2)(iii)(A) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(b)(2)(iii) for Stock of 80 Percent Domestic
Subsidiary Corporations'' and shall be prepared by the domestic
liquidating corporation and shall be signed under penalties of perjury
by an authorized officer of the domestic liquidating corporation and by
an authorized officer of the foreign distributee corporation. The
required statement shall contain a certification that states that if the
foreign distributee corporation disposes of any stock subject to
paragraph (b)(2)(iii)(A) of this section in a transaction described in
paragraph (b)(2)(iii)(C) of this section, then the domestic liquidating
corporation shall recognize all realized gain attributable to the
distributed stock at the time of distribution, and the domestic
liquidating corporation (or the foreign distributee corporation on
behalf of the domestic liquidating corporation) shall file a U.S. income
tax return (or amended U.S. income tax return, as the case may be) for
the year of distribution reporting the gain attributable to such stock.
(3) Other consequences--(i) Distributee basis in property. The
foreign distributee corporation's basis in property subject to this
paragraph (b) shall be the same as the domestic liquidating
corporation's basis in such property immediately before the liquidation,
increased by any gain, or reduced by any loss recognized by the domestic
liquidating corporation on such property pursuant to paragraph (b)(1) of
this section.
(ii) Reporting under section 6038B. Section 6038B and the
regulations thereunder apply to a domestic liquidating corporation's
transfer of property to a foreign distributee corporation under section
367(e)(2).
(iii) Other rules. For other rules that may be applicable, see
sections 1248, 897, and 381.
(c) Distribution by a foreign corporation--(1) General rule--gain
and loss not recognized. If a foreign corporation (foreign liquidating)
makes a distribution of property in complete liquidation under section
332 to a foreign corporation (foreign distributee) that meets the stock
ownership requirements of section 332(b) with respect to stock in the
foreign liquidating corporation, then, except as provided in paragraph
(c)(2) of this section, section 337 (a) and (b)(1) shall apply and the
foreign liquidating corporation shall not recognize gain (or loss) on
the distribution under section 367(e)(2). If a foreign liquidating
corporation distributes a partnership interest (whether foreign or
domestic), then such corporation shall be treated as having distributed
a proportionate share of partnership property
[[Page 331]]
in accordance with the principles of paragraph (b)(1)(iii) of this
section.
(2) Exceptions--(i) Property used in a U.S. trade or business--(A)
General rule. A foreign liquidating corporation (including a corporation
that has made an effective election under section 897(i)) that makes a
distribution described in paragraph (c)(1) of this section shall
recognize gain (or loss in accordance with principles contained in
paragraph (b)(1)(ii) of this section) on the distribution of qualified
property, as described in paragraph (b)(2)(i)(B) of this section (other
than U.S. real property interests), that is used by the foreign
liquidating corporation in the conduct of a trade or business within the
United States at the time of distribution.
(B) Ten-year active U.S. business exception. A foreign liquidating
corporation shall not recognize gain under paragraph (c)(2)(i)(A) of
this section, if--
(1) The foreign distributee corporation, immediately thereafter and
for the ten-year period beginning on the date of the distribution of
such property, uses the property in the conduct of a trade or business
in the United States;
(2) The foreign distributee corporation is not entitled to benefits
under a comprehensive income tax treaty (this requirement shall apply
only if the foreign liquidating corporation (or predecessor corporation)
was not entitled to benefits under a comprehensive income tax treaty);
and
(3) The foreign liquidating corporation and foreign distributee
corporation attach the statement described in paragraph (c)(2)(i)(C) of
this section to their U.S. income tax returns for their taxable years
that include the distribution.
(C) Required statement. The statement required by paragraph
(c)(2)(i)(B)(3) of this section shall be entitled ``Required Statement
under Sec. 1.367(e)-2(c)(2)(i),'' shall be prepared by foreign
liquidating corporation, shall be signed under penalties of perjury by
an authorized officer of the foreign liquidating corporation and by an
authorized officer of the foreign distributee corporation, and shall be
identical to the statement described in paragraph (b)(2)(i)(C) of this
section, except that ``Sec. 1.367(e)-2(c)(2)(i)(B)'' shall be
substituted for references to ``Sec. 1.367(e)-2(b)(2)(i)'' and
``foreign liquidating corporation'' shall be substituted for ``domestic
liquidating corporation'' each time it appears. References in the rules
of paragraph (b)(2)(i)(C) of this section to various rules in paragraph
(b) of this section shall be applied as if such references were to this
paragraph (c). However, the statement described in this paragraph
(c)(2)(i)(C) shall be modified as follows:
(1) The foreign distributee corporation shall not be required to
waive its income tax treaty benefits as required by Sec. 1.367(e)-
2(b)(2)(i)(C)(4), unless--
(i) The foreign liquidating corporation was required to waive its
treaty benefits under paragraph (b)(2)(i)(C)(4) of this section in
connection with the distribution of such property in a prior liquidation
distribution subject to the provisions of this section; or (ii) The
foreign distributee corporation is entitled benefits under a treaty to
which the foreign liquidating corporation was not entitled.
(2) If the foreign distributee is required to waive treaty benefits
because of paragraph (c)(2)(i)(C)(1)(ii) of this section, then the
foreign distributee shall only be required to waive benefits that were
not available to the foreign liquidating corporation (or a predecessor
corporation) prior to liquidation.
(3) The property description described in paragraph (b)(2)(i)(C)(2)
of this section shall include only the qualified U.S. trade or business
property described in paragraph (c)(2)(i) of this section.
(D) Operating rules. By the foreign liquidating corporation's
claiming nonrecognition under paragraph (c)(2)(i)(B) of this section and
filing a statement described in paragraph (c)(2)(i)(C) of this section,
the foreign liquidating corporation and the foreign distributee
corporation agree to be subject to the rules of paragraph (c)(2)(i) of
this section, as well as the rules of paragraphs (b)(2)(i)(D) and (E) of
this section. In applying the rules of paragraphs (b)(2)(i)(D) and (E)
of this section, ``foreign liquidating corporation'' shall be used
instead of ``domestic liquidating
[[Page 332]]
corporation'' each time it appears. References in the rules of
paragraphs (b)(2)(i)(D) and (E) of this section to various rules in
paragraph (b) of this section shall be applied as if such references
were to this paragraph (c).
(ii) Property formerly used in a United States trade or business. A
foreign liquidating corporation that makes a distribution described in
paragraph (c)(1) of this section shall recognize gain (but not loss) on
the distribution of property (other than U.S. real property interests)
that had ceased to be used by the foreign liquidating corporation in the
conduct of a U.S. trade or business within the ten-year period ending on
the date of distribution and that would have been subject to section
864(c)(7) had it been disposed. Section 864(c)(7) shall govern the
treatment of any gain recognized on the distribution of assets described
in this paragraph as income effectively connected with the conduct of a
trade or business within the United States.
(3) Other consequences--(i) Distributee basis in property. The
foreign distributee corporation's basis in property subject to this
paragraph (c) shall be the same as the foreign liquidating corporation's
basis in such property immediately before the liquidation, increased by
any gain, or reduced by any loss recognized by the foreign liquidating
corporation on such property, pursuant to paragraph (c)(2) of this
section.
(ii) Other rules. For other rules that may apply, see sections
367(b) and 381.
(d) Anti-abuse rule. The Commissioner may require a domestic
liquidating corporation to recognize gain on a distribution in
liquidation described in paragraph (b) of this section (or treat the
liquidating corporation as if it had recognized loss on a distribution
in liquidation), if a principal purpose of the liquidation is the
avoidance of U.S. tax (including, but not limited to, the distribution
of a liquidating corporation's earnings and profits with a principal
purpose of avoiding U.S. tax). A liquidation may have a principal
purpose of tax avoidance even though the tax avoidance purpose is
outweighed by other purposes when taken together.
(e) Effective date. This section shall be applicable to
distributions occurring on or after September 7, 1999 or, if taxpayer so
elects, to distributions in taxable years ending after August 8, 1999.
[T.D. 8834, 64 FR 43077, Aug. 9, 1999; 65 FR 11467, Mar. 3, 2000; as
amended by T.D. 9066, 68 FR 39452, July 2, 2003]
special rule; definitions
Sec. 1.368-1 Purpose and scope of exception of reorganization exchanges.
(a) Reorganizations. As used in the regulations under parts I, II,
and III (section 301 and following), subchapter C, chapter 1 of the
Code, the terms reorganization and party to a reorganization mean only a
reorganization or a party to a reorganization as defined in subsections
(a) and (b) of section 368. In determining whether a transaction
qualifies as a reorganization under section 368(a), the transaction must
be evaluated under relevant provisions of law, including the step
transaction doctrine. But see Sec. Sec. 1.368-2 (f) and (k) and 1.338-
3(d). The preceding two sentences apply to transactions occurring after
January 28, 1998, except that they do not apply to any transaction
occurring pursuant to a written agreement which is binding on January
28, 1998, and at all times thereafter. With respect to insolvency
reorganizations, see part IV, subchapter C, chapter 1 of the Code.
(b) Purpose. Under the general rule, upon the exchange of property,
gain or loss must be accounted for if the new property differs in a
material particular, either in kind or in extent, from the old property.
The purpose of the reorganization provisions of the Code is to except
from the general rule certain specifically described exchanges incident
to such readjustments of corporate structures made in one of the
particular ways specified in the Code, as are required by business
exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms. Requisite to a
reorganization under the Internal Revenue Code are a continuity of the
business enterprise through the issuing corporation under the modified
corporate form as described in paragraph (d) of this section, and
(except as provided in section 368(a)(1)(D)) a continuity of interest as
[[Page 333]]
described in paragraph (e) of this section. (For rules regarding the
continuity of interest requirement under section 355, see Sec. 1.355-
2(c).) For purposes of this section, the term issuing corporation means
the acquiring corporation (as that term is used in section 368(a)),
except that, in determining whether a reorganization qualifies as a
triangular reorganization (as defined in Sec. 1.358-6(b)(2)), the
issuing corporation means the corporation in control of the acquiring
corporation. The preceding three sentences apply to transactions
occurring after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. The continuity of
business enterprise requirement is described in paragraph (d) of this
section. The Code recognizes as a reorganization the amalgamation
(occurring in a specified way) of two corporate enterprises under a
single corporate structure if there exists among the holders of the
stock and securities of either of the old corporations the requisite
continuity of interest in the new corporation, but there is not a
reorganization if the holders of the stock and securities of the old
corporation are merely the holders of short-term notes in the new
corporation. In order to exclude transactions not intended to be
included, the specifications of the reorganization provisions of the law
are precise. Both the terms of the specifications and their underlying
assumptions and purposes must be satisfied in order to entitle the
taxpayer to the benefit of the exception from the general rule.
Accordingly, under the Code, a short-term purchase money note is not a
security of a party to a reorganization, an ordinary dividend is to be
treated as an ordinary dividend, and a sale is nevertheless to be
treated as a sale even though the mechanics of a reorganization have
been set up.
(c) Scope. The nonrecognition of gain or loss is prescribed for two
specifically described types of exchanges, viz: The exchange that is
provided for in section 354(a)(1) in which stock or securities in a
corporation, a party to a reorganization, are, in pursuance of a plan of
reorganization, exchanged for the stock or securities in a corporation,
a party to the same reorganization; and the exchange that is provided
for in section 361(a) in which a corporation, a party to a
reorganization, exchanges property, in pursuance of a plan of
reorganization, for stock or securities in another corporation, a party
to the same reorganization. Section 368(a)(1) limits the definition of
the term reorganization to six kinds of transactions and excludes all
others. From its context, the term a party to a reorganization can only
mean a party to a transaction specifically defined as a reorganization
by section 368(a). Certain rules respecting boot received in either of
the two types of exchanges provided for in section 354(a)(1) and section
361(a) are prescribed in sections 356, 357, and 361(b). A special rule
respecting a transfer of property with a liability in excess of its
basis is prescribed in section 357(c). Under section 367 a limitation is
placed on all these provisions by providing that except under specified
conditions foreign corporations shall not be deemed within their scope.
The provisions of the Code referred to in this paragraph are
inapplicable unless there is a plan of reorganization. A plan of
reorganization must contemplate the bona fide execution of one of the
transactions specifically described as a reorganization in section
368(a) and for the bona fide consummation of each of the requisite acts
under which nonrecognition of gain is claimed. Such transaction and such
acts must be an ordinary and necessary incident of the conduct of the
enterprise and must provide for a continuation of the enterprise. A
scheme, which involves an abrupt departure from normal reorganization
procedure in connection with a transaction on which the imposition of
tax is imminent, such as a mere device that puts on the form of a
corporate reorganization as a disguise for concealing its real
character, and the object and accomplishment of which is the
consummation of a preconceived plan having no business or corporate
purpose, is not a plan of reorganization.
(d) Continuity of business enterprise--(1) General rule. Continuity
of business enterprise (COBE) requires that the issuing corporation (P),
as defined in
[[Page 334]]
paragraph (b) of this section, either continue the target corporation's
(T's) historic business or use a significant portion of T's historic
business assets in a business. The preceding sentence applies to
transactions occurring after January 28, 1998, except that it does not
apply to any transaction occurring pursuant to a written agreement which
is binding on January 28, 1998, and at all times thereafter. The
application of this general rule to certain transactions, such as
mergers of holding companies, will depend on all facts and
circumstances. The policy underlying this general rule, which is to
ensure that reorganizations are limited to readjustments of continuing
interests in property under modified corporate form, provides the
guidance necessary to make these facts and circumstances determinations.
(2) Business continuity. (i) The continuity of business enterprise
requirement is satisfied if P continues T' s historic business. The fact
P is in the same line of business as T tends to establish the requisite
continuity, but is not alone sufficient.
(ii) If T has more than one line of business, continuity of business
enterprise requires only that P continue a significant line of business.
(iii) In general, a corporation's historic business is the business
it has conducted most recently. However, a corporation's historic
business is not one the corporation enters into as part of a plan of
reorganization.
(iv) All facts and circumstances are considered in determining the
time when the plan comes into existence and in determining whether a
line of business is ``significant''.
(3) Asset continuity. (i) The continuity of business enterprise
requirement is satisfied if P uses a significant portion of T' s
historic business assets in a business.
(ii) A corporation's historic business assets are the assets used in
its historic business. Business assets may include stock and securities
and intangible operating assets such as good will, patents, and
trademarks, whether or not they have a tax basis.
(iii) In general, the determination of the portion of a
corporation's assets considered ``significant'' is based on the relative
importance of the assets to operation of the business. However, all
other facts and circumstances, such as the net fair market value of
those assets, will be considered.
(4) Acquired assets or stock held by members of the qualified group
or partnerships. The following rules apply in determining whether the
COBE requirement of paragraph (d)(1) of this section is satisfied:
(i) Businesses and assets of members of a qualified group. The
issuing corporation is treated as holding all of the businesses and
assets of all of the members of the qualified group, as defined in
paragraph (d)(4)(ii) of this section.
(ii) Qualified group. A qualified group is one or more chains of
corporations connected through stock ownership with the issuing
corporation, but only if the issuing corporation owns directly stock
meeting the requirements of section 368(c) in at least one other
corporation, and stock meeting the requirements of section 368(c) in
each of the corporations (except the issuing corporation) is owned
directly by one of the other corporations.
(iii) Partnerships--(A) Partnership assets. Each partner of a
partnership will be treated as owning the T business assets used in a
business of the partnership in accordance with that partner's interest
in the partnership.
(B) Partnership businesses. The issuing corporation will be treated
as conducting a business of a partnership if --
(1) Members of the qualified group, in the aggregate, own an
interest in the partnership representing a significant interest in that
partnership business; or
(2) One or more members of the qualified group have active and
substantial management functions as a partner with respect to that
partnership business.
(C) Conduct of the historic T business in a partnership. If a
significant historic T business is conducted in a partnership, the fact
that P is treated as conducting such T business under paragraph
(d)(4)(iii)(B) of this section tends to establish the requisite
continuity, but is not alone sufficient.
(iv) Effective date. This paragraph (d)(4) applies to transactions
occurring after January 28, 1998, except that it
[[Page 335]]
does not apply to any transaction occurring pursuant to a written
agreement which is binding on January 28, 1998, and at all times
thereafter.
(5) Examples. The following examples illustrate this paragraph (d).
All corporations have only one class of stock outstanding. The preceding
sentence and paragraph (d)(5) Example 6 through Example 12 apply to
transactions occurring after January 28, 1998, except that they do not
apply to any transaction occurring pursuant to a written agreement which
is binding on January 28, 1998, and at all times thereafter.
Example 1. T conducts three lines of business: manufacture of
synthetic resins, manufacture of chemicals for the textile industry, and
distribution of chemicals. The three lines of business are approximately
equal in value. On July 1, 1981, T sells the synthetic resin and
chemicals distribution businesses to a third party for cash and
marketable securities. On December 31, 1981, T transfers all of its
assets to P solely for P voting stock. P continues the chemical
manufacturing business without interruption. The continuity of business
enterprise requirement is met. Continuity of business enterprise
requires only that P continue one of T' s three significant lines of
business.
Example 2. P manufactures computers and T manufactures components
for computers. T sells all of its output to P. On January 1, 1981, P
decides to buy imported components only. On March 1, 1981, T merges into
P. P continues buying imported components but retains T' s equipment as
a backup source of supply. The use of the equipment as a backup source
of supply constitutes use of a significant portion of T' s historic
business assets, thus establishing continuity of business enterprise. P
is not required to continue T' s business.
Example 3. T is a manufacturer of boys' and men's trousers. On
January 1, 1978, as part of a plan of reorganization, T sold all of its
assets to a third party for cash and purchased a highly diversified
portfolio of stocks and bonds. As part of the plan T operates an
investment business until July 1, 1981. On that date, the plan of
reorganization culminates in a transfer by T of all its assets to P, a
regulated investment company, solely in exchange for P voting stock. The
continuity of business enterprise requirement is not met. T' s
investment activity is not its historic business, and the stocks and
bonds are not T' s historic business assets.
Example 4. T manufactures children's toys and P distributes steel
and allied products. On January 1, 1981, T sells all of its assets to a
third party for $100,000 cash and $900,000 in notes. On March 1, 1981, T
merges into P. Continuity of business enterprise is lacking. The use of
the sales proceeds in P' s business is not sufficient.
Example 5. T manufactures farm machinery and P operates a lumber
mill. T merges into P. P disposes of T' s assets immediately after the
merger as part of the plan of reorganization. P does not continue T' s
farm machinery manufacturing business. Continuity of business enterprise
is lacking.
Example 6. Use of a significant portion of T's historic business
assets by the qualified group. (i) Facts. T operates an auto parts
distributorship. P owns 80 percent of the stock of a holding company
(HC). HC owns 80 percent of the stock of ten subsidiaries, S-1 through
S-10. S-1 through S-10 each separately operate a full service gas
station. Pursuant to a plan of reorganization, T merges into P and the T
shareholders receive solely P stock. As part of the plan of
reorganization, P transfers T's assets to HC, which in turn transfers
some of the T assets to each of the ten subsidiaries. No one subsidiary
receives a significant portion of T's historic business assets. Each of
the subsidiaries will use the T assets in the operation of its full
service gas station. No P subsidiary will be an auto parts distributor.
(ii) Continuity of business enterprise. Under paragraph (d)(4)(i) of
this section, P is treated as conducting the ten gas station businesses
of S-1 through S-10 and as holding the historic T assets used in those
businesses. P is treated as holding all the assets and conducting the
businesses of all of the members of the qualified group, which includes
S-1 through S-10 (paragraphs (d)(4)(i) and (ii) of this section). No
member of the qualified group continues T's historic distributorship
business. However, subsidiaries S-1 through S-10 continue to use the
historic T assets in a business. Even though no one corporation of the
qualified group is using a significant portion of T's historic business
assets in a business, the COBE requirement of paragraph (d)(1) of this
section is satisfied because, in the aggregate, the qualified group is
using a significant portion of T's historic business assets in a
business.
Example 7. Continuation of the historic T business in a partnership
satisfies continuity of business enterprise. (i) Facts. T manufactures
ski boots. P owns all of the stock of S-1. S-1 owns all of the stock of
S-2, and S-2 owns all of the stock of S-3. T merges into P and the T
shareholders receive consideration consisting of P stock and cash. The T
ski boot business is to be continued and expanded. In anticipation of
this expansion, P transfers all of the T assets to S-1, S-1 transfers
all of the T assets to S-2, and S-2 transfers all of the T assets to S-
3. S-3 and X (an unrelated party) form a new partnership (PRS). As part
of the plan of reorganization, S-3 transfers all the T assets to PRS,
and S-3, in its capacity as a partner, performs active and substantial
management functions
[[Page 336]]
for the PRS ski boot business, including making significant business
decisions and regularly participating in the overall supervision,
direction, and control of the employees of the ski boot business. S-3
receives a 20 percent interest in PRS. X transfers cash in exchange for
an 80 percent interest in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(2) of this section, P is treated as conducting T's
historic business because S-3 performs active and substantial management
functions for the ski boot business in S-3's capacity as a partner. P is
treated as holding all the assets and conducting the businesses of all
of the members of the qualified group, which includes S-3 (paragraphs
(d)(4)(i) and (ii) of this section). The COBE requirement of paragraph
(d)(1) of this section is satisfied.
Example 8. Continuation of the historic T business in a partnership
does not satisfy continuity of business enterprise. (i) Facts. The facts
are the same as Example 7 except that S-3 transfers the historic T
business to PRS in exchange for a 1 percent interest in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(2) of this section, P is treated as conducting T's
historic business because S-3 performs active and substantial management
functions for the ski boot business in S-3's capacity as a partner. The
fact that a significant historic T business is conducted in PRS, and P
is treated as conducting such T business under (d)(4)(iii)(B) tends to
establish the requisite continuity, but is not alone sufficient
(paragraph (d)(4)(iii)(C) of this section). The COBE requirement of
paragraph (d)(1) of this section is not satisfied.
Example 9. Continuation of the T historic business in a partnership
satisfies continuity of business enterprise. (i) Facts. The facts are
the same as Example 7 except that S-3 transfers the historic T business
to PRS in exchange for a 33\1/3\ percent interest in PRS, and no member
of P's qualified group performs active and substantial management
functions for the ski boot business operated in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(1) of this section, P is treated as conducting T's
historic business because S-3 owns an interest in the partnership
representing a significant interest in that partnership business. P is
treated as holding all the assets and conducting the businesses of all
of the members of the qualified group, which includes S-3 (paragraphs
(d)(4)(i) and (ii) of this section). The COBE requirement of paragraph
(d)(1) of this section is satisfied.
Example 10. Use of T's historic business assets in a partnership
business. (i) Facts. T is a fabric distributor. P owns all of the stock
of S-1. T merges into P and the T shareholders receive solely P stock.
S-1 and X (an unrelated party) own interests in a partnership (PRS). As
part of the plan of reorganization, P transfers all of the T assets to
S-1, and S-1 transfers all the T assets to PRS, increasing S-1's
percentage interest in PRS from 5 to 33\1/3\ percent. After the
transfer, X owns the remaining 66\2/3\ percent interest in PRS. Almost
all of the T assets consist of T's large inventory of fabric, which PRS
uses to manufacture sportswear. All of the T assets are used in the
sportswear business. No member of P's qualified group performs active
and substantial management functions for the sportswear business
operated in PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(A) of this section, S-1 is treated as owning 33\1/3\ percent
of the T assets used in the PRS sportswear manufacturing business. Under
paragraph (d)(4)(iii)(B)(1) of this section, P is treated as conducting
the sportswear manufacturing business because S-1 owns an interest in
the partnership representing a significant interest in that partnership
business. P is treated as holding all the assets and conducting the
businesses of all of the members of the qualified group, which includes
S-1 (paragraphs (d)(4)(i) and (ii) of this section). The COBE
requirement of paragraph (d)(1) of this section is satisfied.
Example 11. Aggregation of partnership interests among members of
the qualified group: use of T's historic business assets in a
partnership business. (i) Facts. The facts are the same as Example 10,
except that S-1 transfers all the T assets to PRS, and P and X each
transfer cash to PRS in exchange for partnership interests. After the
transfers, P owns 11 percent, S-1 owns 22\1/3\ percent, and X owns 66\2/
3\ percent of PRS.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(B)(1) of this section, P is treated as conducting the
sportswear manufacturing business because members of the qualified
group, in the aggregate, own an interest in the partnership representing
a significant interest in that business. P is treated as owning 11
percent of the assets directly, and S-1 is treated as owning 22\1/3\
percent of the assets, used in the PRS sportswear business (paragraph
(d)(4)(iii)(A) of this section). P is treated as holding all the assets
of all of the members of the qualified group, which includes S-1, and
thus in the aggregate, P is treated as owning 33\1/3\ of the T assets
(paragraphs (d)(4)(i) and (ii) of this section). The COBE requirement of
paragraph (d)(1) of this section is satisfied because P is treated as
using a significant portion of T's historic business assets in its
sportswear manufacturing business.
Example 12. Tiered partnerships: use of T's historic business assets
in a partnership business. (i) Facts. T owns and manages a commercial
office building in state Z. Pursuant to a plan of reorganization, T
merges into P, solely in exchange for P stock, which is distributed to
the T shareholders. P transfers all of the T assets to a partnership,
PRS-1, which owns and operates television stations
[[Page 337]]
nationwide. After the transfer, P owns a 50 percent interest in PRS-1. P
does not have active and substantial management functions as a partner
with respect to the PRS-1 business. X, not a member of P's qualified
group, owns the remaining 50 percent interest in PRS-1. PRS-1, in an
effort to expand its state Z television operation, enters into a joint
venture with U, an unrelated party. As part of the plan of
reorganization, PRS-1 transfers all the T assets and its state Z
television station to PRS-2, in exchange for a 75 percent partnership
interest. U contributes cash to PRS-2 in exchange for a 25 percent
partnership interest and oversees the management of the state Z
television operation. PRS-1 does not actively and substantially manage
PRS-2's business. PRS-2's state Z operations are moved into the acquired
T office building. All of the assets that P acquired from T are used in
PRS-2's business.
(ii) Continuity of business enterprise. Under paragraph
(d)(4)(iii)(A) of this section, PRS-1 is treated as owning 75 percent of
the T assets used in PRS-2's business. P, in turn, is treated as owning
50 percent of PRS-1's interest the T assets. Thus, P is treated as
owning 37\1/2\ percent (50 percent x 75 percent) of the T assets used in
the PRS-2 business. Under paragraph (d)(4)(iii)(B)(1) of this section, P
is treated as conducting PRS-2's business, the operation of the state Z
television station, and under paragraph (d)(4)(iii)(A) of this section,
P is treated as using 37\1/2\ percent of the historic T business assets
in that business. The COBE requirement of paragraph (d)(1) of this
section is satisfied because P is treated as using a significant portion
of T's historic business assets in its television business.
(e) Continuity of interest--(1) General rule. (i) The purpose of the
continuity of interest requirement is to prevent transactions that
resemble sales from qualifying for nonrecognition of gain or loss
available to corporate reorganizations. Continuity of interest requires
that in substance a substantial part of the value of the proprietary
interests in the target corporation be preserved in the reorganization.
A proprietary interest in the target corporation is preserved if, in a
potential reorganization, it is exchanged for a proprietary interest in
the issuing corporation (as defined in paragraph (b) of this section),
it is exchanged by the acquiring corporation for a direct interest in
the target corporation enterprise, or it otherwise continues as a
proprietary interest in the target corporation. However, a proprietary
interest in the target corporation is not preserved if, in connection
with the potential reorganization, it is acquired by the issuing
corporation for consideration other than stock of the issuing
corporation, or stock of the issuing corporation furnished in exchange
for a proprietary interest in the target corporation in the potential
reorganization is redeemed. All facts and circumstances must be
considered in determining whether, in substance, a proprietary interest
in the target corporation is preserved. For purposes of the continuity
of interest requirement, a mere disposition of stock of the target
corporation prior to a potential reorganization to persons not related
(as defined in paragraph (e)(3) of this section determined without
regard to paragraph (e)(3)(i)(A) of this section) to the target
corporation or to persons not related (as defined in paragraph (e)(3) of
this section) to the issuing corporation is disregarded and a mere
disposition of stock of the issuing corporation received in a potential
reorganization to persons not related (as defined in paragraph (e)(3) of
this section) to the issuing corporation is disregarded.
(ii) For purposes of paragraph (e)(1)(i) of this section, a
proprietary interest in the target corporation (other than one held by
the acquiring corporation) is not preserved to the extent that
consideration received prior to a potential reorganization, either in a
redemption of the target corporation stock or in a distribution with
respect to the target corporation stock, is treated as other property or
money received in the exchange for purposes of section 356, or would be
so treated if the target shareholder also had received stock of the
issuing corporation in exchange for stock owned by the shareholder in
the target corporation.
(2) Related person acquisitions. A proprietary interest in the
target corporation is not preserved if, in connection with a potential
reorganization, a person related (as defined in paragraph (e)(3) of this
section) to the issuing corporation acquires, with consideration other
than a proprietary interest in the issuing corporation, stock of the
target
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corporation or stock of the issuing corporation furnished in exchange
for a proprietary interest in the target corporation in the potential
reorganization, except to the extent those persons who were the direct
or indirect owners of the target corporation prior to the potential
reorganization maintain a direct or indirect proprietary interest in the
issuing corporation.
(3) Definition of related person--(i) In general. For purposes of
this paragraph (e), two corporations are related persons if either--
(A) The corporations are members of the same affiliated group as
defined in section 1504 (determined without regard to section 1504(b));
or
(B) A purchase of the stock of one corporation by another
corporation would be treated as a distribution in redemption of the
stock of the first corporation under section 304(a)(2) (determined
without regard to Sec. 1.1502-80(b)).
(ii) Special rules. The following rules apply solely for purposes of
this paragraph (e)(3):
(A) A corporation will be treated as related to another corporation
if such relationship exists immediately before or immediately after the
acquisition of the stock involved.
(B) A corporation, other than the target corporation or a person
related (as defined in paragraph (e)(3) of this section determined
without regard to paragraph (e)(3)(i)(A) of this section) to the target
corporation, will be treated as related to the issuing corporation if
the relationship is created in connection with the potential
reorganization.
(4) Acquisitions by partnerships. For purposes of this paragraph
(e), each partner of a partnership will be treated as owning or
acquiring any stock owned or acquired, as the case may be, by the
partnership in accordance with that partner's interest in the
partnership. If a partner is treated as acquiring any stock by reason of
the application of this paragraph (e)(4), the partner is also treated as
having furnished its share of any consideration furnished by the
partnership to acquire the stock in accordance with that partner's
interest in the partnership.
(5) Successors and predecessors. For purposes of this paragraph (e),
any reference to the issuing corporation or the target corporation
includes a reference to any successor or predecessor of such
corporation, except that the target corporation is not treated as a
predecessor of the issuing corporation and the issuing corporation is
not treated as a successor of the target corporation.
(6) Examples. For purposes of the examples in this paragraph (e)(6),
P is the issuing corporation, T is the target corporation, S is a wholly
owned subsidiary of P, all corporations have only one class of stock
outstanding, A and B are individuals, PRS is a partnership, all
reorganization requirements other than the continuity of interest
requirement are satisfied, and the transaction is not otherwise subject
to recharacterization. The following examples illustrate the application
of this paragraph (e):
Example 1. Sale of stock to third party. (i) Sale of issuing
corporation stock after merger. A owns all of the stock of T. T merges
into P. In the merger, A receives P stock having a fair market value of
$50x and cash of $50x. Immediately after the merger, and pursuant to a
preexisting binding contract, A sells all of the P stock received by A
in the merger to B. Assume that there are no facts and circumstances
indicating that the cash used by B to purchase A's P stock was in
substance exchanged by P for T stock. Under paragraphs (e)(1) and (2) of
this section, the sale to B is disregarded because B is not a person
related to P within the meaning of paragraph (e)(3) of this section.
Thus, the transaction satisfies the continuity of interest requirement
because 50 percent of A's T stock was exchanged for P stock, preserving
a substantial part of the value of the proprietary interest in T.
(ii) Sale of target corporation stock before merger. The facts are
the same as paragraph (i) of this Example 1, except that B buys A's T
stock prior to the merger of T into P and then exchanges the T stock for
P stock having a fair market value of $50x and cash of $50x. The sale by
A is disregarded. The continuity of interest requirement is satisfied
because B's T stock was exchanged for P stock, preserving a substantial
part of the value of the proprietary interest in T.
Example 2. Relationship created in connection with potential
reorganization. Corporation X owns 60 percent of the stock of P and 30
percent of the stock of T. A owns the remaining 70 percent of the stock
of T. X buys A's T stock for cash in a transaction which is not a
qualified stock purchase within the meaning of section 338. T then
merges into P. In
[[Page 339]]
the merger, X exchanges all of its T stock for additional stock of P. As
a result of the issuance of the additional stock to X in the merger, X's
ownership interest in P increases from 60 to 80 percent of the stock of
P. X is not a person related to P under paragraph (e)(3)(i)(B) of this
section, because a purchase of stock of P by X would not be treated as a
distribution in redemption of the stock of P under section 304(a)(2).
However, X is a person related to P under paragraphs (e)(3)(i)(A) and
(ii)(B) of this section, because X becomes affiliated with P in the
merger. The continuity of interest requirement is not satisfied, because
X acquired a proprietary interest in T for consideration other than P
stock, and a substantial part of the value of the proprietary interest
in T is not preserved. See paragraph (e)(2) of this section.
Example 3. Participation by issuing corporation in post-merger sale.
A owns 80 percent of the T stock and none of the P stock, which is
widely held. T merges into P. In the merger, A receives P stock. In
addition, A obtains rights pursuant to an arrangement with P to have P
register the P stock under the Securities Act of 1933, as amended. P
registers A's stock, and A sells the stock shortly after the merger. No
person who purchased the P stock from A is a person related to P within
the meaning of paragraph (e)(3) of this section. Under paragraphs (e)(1)
and (2) of this section, the sale of the P stock by A is disregarded
because no person who purchased the P stock from A is a person related
to P within the meaning of paragraph (e)(3) of this section. The
transaction satisfies the continuity of interest requirement because A's
T stock was exchanged for P stock, preserving a substantial part of the
value of the proprietary interest in T.
Example 4. Redemptions and purchases by issuing corporation or
related persons. (i) Redemption by issuing corporation. A owns 100
percent of the stock of T and none of the stock of P. T merges into S.
In the merger, A receives P stock. In connection with the merger, P
redeems all of the P stock received by A in the merger for cash. The
continuity of interest requirement is not satisfied, because, in
connection with the merger, P redeemed the stock exchanged for a
proprietary interest in T, and a substantial part of the value of the
proprietary interest in T is not preserved. See paragraph (e)(1) of this
section.
(ii) Purchase of target corporation stock by issuing corporation.
The facts are the same as paragraph (i) of this Example 4, except that,
instead of P redeeming its stock, prior to and in connection with the
merger of T into S, P purchases 90 percent of the T stock from A for
cash. The continuity of interest requirement is not satisfied, because
in connection with the merger, P acquired a proprietary interest in T
for consideration other than P stock, and a substantial part of the
value of the proprietary interest in T is not preserved. See paragraph
(e)(1) of this section. However, see Sec. 1.338-3(d) (which may change
the result in this case by providing that, by virtue of section 338,
continuity of interest is satisfied for certain parties after a
qualified stock purchase).
(iii) Purchase of issuing corporation stock by person related to
issuing corporation. The facts are the same as paragraph (i) of this
Example 4, except that, instead of P redeeming its stock, S buys all of
the P stock received by A in the merger for cash. S is a person related
to P under paragraphs (e)(3)(i)(A) and (B) of this section. The
continuity of interest requirement is not satisfied, because S acquired
P stock issued in the merger, and a substantial part of the value of the
proprietary interest in T is not preserved. See paragraph (e)(2) of this
section.
Example 5. Redemption in substance by issuing corporation. A owns
100 percent of the stock of T and none of the stock of P. T merges into
P. In the merger, A receives P stock. In connection with the merger, B
buys all of the P stock received by A in the merger for cash. Shortly
thereafter, in connection with the merger, P redeems the stock held by B
for cash. Based on all the facts and circumstances, P in substance has
exchanged solely cash for T stock in the merger. The continuity of
interest requirement is not satisfied, because in substance P redeemed
the stock exchanged for a proprietary interest in T, and a substantial
part of the value of the proprietary interest in T is not preserved. See
paragraph (e)(1) of this section.
Example 6. Purchase of issuing corporation stock through
partnership. A owns 100 percent of the stock of T and none of the stock
of P. S is an 85 percent partner in PRS. The other 15 percent of PRS is
owned by unrelated persons. T merges into P. In the merger, A receives P
stock. In connection with the merger, PRS purchases all of the P stock
received by A in the merger for cash. Under paragraph (e)(4) of this
section, S, as an 85 percent partner of PRS, is treated as having
acquired 85 percent of the P stock exchanged for A's T stock in the
merger, and as having furnished 85 percent of the cash paid by PRS to
acquire the P stock. S is a person related to P under paragraphs
(e)(3)(i)(A) and (B) of this section. The continuity of interest
requirement is not satisfied, because S is treated as acquiring 85
percent of the P stock issued in the merger, and a substantial part of
the value of the proprietary interest in T is not preserved. See
paragraph (e)(2) of this section.
Example 7. Exchange by acquiring corporation for direct interest. A
owns 30 percent of the stock of T. P owns 70 percent of the stock of T,
which was not acquired by P in connection with the acquisition of T's
assets. T merges into P. A receives cash in the
[[Page 340]]
merger. The continuity of interest requirement is satisfied, because P's
70 percent proprietary interest in T is exchanged by P for a direct
interest in the assets of the target corporation enterprise.
Example 8. Maintenance of direct or indirect interest in issuing
corporation. X, a corporation, owns all of the stock of each of
corporations P and Z. Z owns all of the stock of T. T merges into P. Z
receives P stock in the merger. Immediately thereafter and in connection
with the merger, Z distributes the P stock received in the merger to X.
X is a person related to P under paragraph (e)(3)(i)(A) of this section.
The continuity of interest requirement is satisfied, because X was an
indirect owner of T prior to the merger who maintains a direct or
indirect proprietary interest in P, preserving a substantial part of the
value of the proprietary interest in T. See paragraph (e)(2) of this
section.
Example 9. Preacquisition redemption by target corporation. T has
two shareholders, A and B. P expresses an interest in acquiring the
stock of T. A does not wish to own P stock. T redeems A's shares in T in
exchange for cash. No funds have been or will be provided by P for this
purpose. P subsequently acquires all the outstanding stock of T from B
solely in exchange for voting stock of P. The cash received by A in the
prereorganization redemption is not treated as other property or money
under section 356, and would not be so treated even if A had received
some stock of P in exchange for his T stock. The prereorganization
redemption by T does not affect continuity of interest, because B's
proprietary interest in T is unaffected, and the value of the
proprietary interest in T is preserved.
(7) Effective date. This paragraph (e) applies to transactions
occurring after January 28, 1998, except that it does not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. Paragraph (e)(1)(ii)
of this section, however, applies to transactions occurring after August
30, 2000, unless the transaction occurs pursuant to a written agreement
that is (subject to customary conditions) binding on that date and at
all times thereafter. Taxpayers who entered into a binding agreement on
or after January 28, 1998, and before August 30, 2000, may request a
private letter ruling permitting them to apply the final regulation to
their transaction. A private letter ruling will not be issued unless the
taxpayer establishes to the satisfaction of the IRS that there is not a
significant risk of different parties to the transaction taking
inconsistent positions, for Federal tax purposes, with respect to the
applicability of the final regulations to the transaction.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7745, 45 FR
86437, Dec. 31, 1980; T.D. 8760, 63 FR 4178, Jan. 28, 1998; T.D. 8783,
63 FR 50758, Sept. 23, 1998; T.D. 8858, 65 FR 1237, Jan. 7, 2000; T.D.
8898, 65 FR 52911, Aug. 31, 2000]
Sec. 1.368-2 Definition of terms.
(a) The application of the term reorganization is to be strictly
limited to the specific transactions set forth in section 368(a). The
term does not embrace the mere purchase by one corporation of the
properties of another corporation. The preceding sentence applies to
transactions occurring after January 28, 1998, except that it does not
apply to any transaction occurring pursuant to a written agreement which
is binding on January 28, 1998, and at all times thereafter. If the
properties are transferred for cash and deferred payment obligations of
the transferee evidenced by short-term notes, the transaction is a sale
and not an exchange in which gain or loss is not recognized.
(b)(1) For rules regarding statutory mergers or consolidations on or
after January 24, 2003, see Sec. 1.368-2T(b)(1). For rules regarding
statutory mergers or consolidations before January 24, 2003, see Sec.
1.368-2(b)(1) as in effect before January 24, 2003 (see 26 CFR part 1,
revised April 1, 2002).
(2) In order for the transaction to qualify under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(D), one
corporation (the acquiring corporation) must acquire substantially all
of the properties of another corporation (the acquired corporation)
partly or entirely in exchange for stock of a corporation which is in
control of the acquiring corporation (the controlling corporation),
provided that (i) the transaction would have qualified under section
368(a)(1)(A) if the merger had been into the controlling corporation,
and (ii) no stock of the acquiring corporation is used in the
transaction. The foregoing test of whether the transaction would have
qualified under section
[[Page 341]]
368(a)(1)(A) if the merger had been into the controlling corporation
means that the general requirements of a reorganization under section
368(a)(1)(A) (such as a business purpose, continuity of business
enterprise, and continuity of interest) must be met in addition to the
special requirements of section 368(a)(2)(D). Under this test, it is not
relevant whether the merger into the controlling corporation could have
been effected pursuant to State or Federal corporation law. The term
substantially all has the same meaning as it has in section
368(a)(1)(C). Although no stock of the acquiring corporation can be used
in the transaction, there is no prohibition (other than the continuity
of interest requirement) against using other property, such as cash or
securities, of either the acquiring corporation or the parent or both.
In addition, the controlling corporation may assume liabilities of the
acquired corporation without disqualifying the transaction under section
368(a)(2(D), and for purposes of section 357(a) the controlling
corporation is considered a party to the exchange. For example, if the
controlling corporation agrees to substitute its stock for stock of the
acquired corporation under an outstanding employee stock option
agreement, this assumption of liability will not prevent the transaction
from qualifying as a reorganization under section 368(a)(2)(D) and the
assumption of liability is not treated as money or other property for
purposes of section 361(b). Section 368(a)(2)(D) applies whether or not
the controlling corporation (or the acquiring corporation) is formed
immediately before the merger, in anticipation of the merger, or after
preliminary steps have been taken to merge directly into the controlling
corporation. Section 368(a)(2)(D) applies only to statutory mergers
occurring after October 22, 1968.
(3) For regulations under section 368(a)(2)(E), see paragraph (j) of
this section.
(c) In order to qualify as a ``reorganization'' under section
368(a)(1)(B), the acquisition by the acquiring corporation of stock of
another corporation must be in exchange solely for all or a part of the
voting stock of the acquiring corporation (or, in the case of
transactions occurring after December 31, 1963, solely for all or a part
of the voting stock of a corporation which is in control of the
acquiring corporation), and the acquiring corporation must be in control
of the other corporation immediately after the transaction. If, for
example, Corporation X in one transaction exchanges nonvoting preferred
stock or bonds in addition to all or a part of its voting stock in the
acquisition of stock of Corporation Y, the transaction is not a
reorganization under section 368(a)(1)(B). Nor is a transaction a
reorganization described in section 368(a)(1)(B) if stock is acquired in
exchange for voting stock both of the acquiring corporation and of a
corporation which is in control of the acquiring corporation. The
acquisition of stock of another corporation by the acquiring corporation
solely for its voting stock (or solely for voting stock of a corporation
which is in control of the acquiring corporation) is permitted tax-free
even though the acquiring corporation already owns some of the stock of
the other corporation. Such an acquisition is permitted tax-free in a
single transaction or in a series of transactions taking place over a
relatively short period of time such as 12 months. For example,
Corporation A purchased 30 percent of the common stock of Corporation W
(the only class of stock outstanding) for cash in 1939. On March 1,
1955, Corporation A offers to exchange its own voting stock for all the
stock of Corporation W tendered within 6 months from the date of the
offer. Within the 6-months' period Corporation A acquires an additional
60 percent of stock of Corporation W solely for its own voting stock, so
that it owns 90 percent of the stock of Corporation W. No gain or loss
is recognized with respect to the exchanges of stock of Corporation A
for stock of Corporation W. For this purpose, it is immaterial whether
such exchanges occurred before Corporation A acquired control (80
percent) of Corporation W or after such control was acquired. If
Corporation A had acquired 80 percent of the stock of Corporation W for
cash in 1939, it could likewise acquire some or all of the remainder of
such stock solely in exchange for its own voting
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stock without recognition of gain or loss.
(d) In order to qualify as a reorganization under section
368(a)(1)(C), the transaction must be one described in subparagraph (1)
or (2) of this paragraph:
(1) One corporation must acquire substantially all the properties of
another corporation solely in exchange for all or a part of its own
voting stock, or solely in exchange for all or a part of the voting
stock of a corporation which is in control of the acquiring corporation.
For example, Corporation P owns all the stock of Corporation A. All the
properties of Corporation W are transferred to Corporation A either
solely in exchange for voting stock of Corporation P or solely in
exchange for less than 80 percent of the voting stock of Corporation A.
Either of such transactions constitutes a reorganization under section
368(a)(1)(C). However, if the properties of Corporation W are acquired
in exchange for voting stock of both Corporation P and Corporation A,
the transaction will not constitute a reorganization under section
368(a)(1)(C). In determining whether the exchange meets the requirement
of ``solely for voting stock'', the assumption by the acquiring
corporation of liabilities of the transferor corporation, or the fact
that property acquired from the transferor corporation is subject to a
liability, shall be disregarded. Though such an assumption does not
prevent an exchange from being solely for voting stock for the purposes
of the definition of a reorganization contained in section 368(a)(1)(C),
it may in some cases, however, so alter the character of the transaction
as to place the transaction outside the purposes and assumptions of the
reorganization provisions. Section 368(a)(1)(C) does not prevent
consideration of the effect of an assumption of liabilities on the
general character of the transaction but merely provides that the
requirement that the exchange be solely for voting stock is satisfied if
the only additional consideration is an assumption of liabilities.
(2) One corporation:
(i) Must acquire substantially all of the properties of another
corporation in such manner that the acquisition would qualify under (1)
above, but for the fact that the acquiring corporation exchanges money,
or other property in addition to such voting stock, and
(ii) Must acquire solely for voting stock (either of the acquiring
corporation or of a corporation which is in control of the acquiring
corporation) properties of the other corporation having a fair market
value which is at least 80 percent of the fair market value of all the
properties of the other corporation.
(3) For the purposes of subparagraph (2)(ii) only, a liability
assumed or to which the properties are subject is considered money paid
for the properties. For example, Corporation A has properties with a
fair market value of $100,000 and liabilities of $10,000. In exchange
for these properties, Corporation Y transfers its own voting stock,
assumes the $10,000 liabilities, and pays $8,000 in cash. The
transaction is a reorganization even though a part of the properties of
Corporation A is acquired for cash. On the other hand, if the properties
of Corporation A worth $100,000, were subject to $50,000 in liabilities,
an acquisition of all the properties, subject to the liabilities, for
any consideration other than solely voting stock would not qualify as a
reorganization under this section since the liabilities alone are in
excess of 20 percent of the fair market value of the properties. If the
transaction would qualify under either subparagraph (1) or (2) of this
paragraph and also under section 368(a)(1)(D), such transaction shall
not be treated as a reorganization under section 368 (a)(1)(C).
(4)(i) For purposes of paragraphs (d)(1) and (2)(ii) of this
section, prior ownership of stock of the target corporation by an
acquiring corporation will not by itself prevent the solely for voting
stock requirement of such paragraphs from being satisfied. In a
transaction in which the acquiring corporation has prior ownership of
stock of the target corporation, the requirement of paragraph (d)(2)(ii)
of this section is satisfied only if the sum of the money or other
property that is distributed in pursuance of the plan of reorganization
to the shareholders of the target corporation other than the acquiring
corporation and to the creditors of the
[[Page 343]]
target corporation pursuant to section 361(b)(3), and all of the
liabilities of the target corporation assumed by the acquiring
corporation (including liabilities to which the properties of the target
corporation are subject), does not exceed 20 percent of the value of all
of the properties of the target corporation. If, in connection with a
potential acquisition by an acquiring corporation of substantially all
of a target corporation's properties, the acquiring corporation acquires
the target corporation's stock for consideration other than the
acquiring corporation's own voting stock (or voting stock of a
corporation in control of the acquiring corporation if such stock is
used in the acquisition of the target corporation's properties), whether
from a shareholder of the target corporation or the target corporation
itself, such consideration is treated, for purposes of paragraphs (d)(1)
and (2) of this section, as money or other property exchanged by the
acquiring corporation for the target corporation's properties.
Accordingly, the transaction will not qualify under section 368(a)(1)(C)
unless, treating such consideration as money or other property, the
requirements of section 368(a)(2)(B) and paragraph (d)(2)(ii) of this
section are met. The determination of whether there has been an
acquisition in connection with a potential reorganization under section
368(a)(1)(C) of a target corporation's stock for consideration other
than an acquiring corporation's own voting stock (or voting stock of a
corporation in control of the acquiring corporation if such stock is
used in the acquisition of the target corporation's properties) will be
made on the basis of all of the facts and circumstances.
(ii) The following examples illustrate the principles of this
paragraph (d)(4):
Example 1. Corporation P (P) holds 60 percent of the Corporation T
(T) stock that P purchased several years ago in an unrelated
transaction. T has 100 shares of stock outstanding. The other 40 percent
of the T stock is owned by Corporation X (X), an unrelated corporation.
T has properties with a fair market value of $110 and liabilities of
$10. T transfers all of its properties to P. In exchange, P assumes the
$10 of liabilities, and transfers to T $30 of P voting stock and $10 of
cash. T distributes the P voting stock and $10 of cash to X and
liquidates. The transaction satisfies the solely for voting stock
requirement of paragraph (d)(2)(ii) of this section because the sum of
$10 of cash paid to X and the assumption by P of $10 of liabilities does
not exceed 20% of the value of the properties of T.
Example 2. The facts are the same as in Example 1 except that P
purchased the 60 shares of T for $60 in cash in connection with the
acquisition of T's assets. The transaction does not satisfy the solely
for voting stock requirement of paragraph (d)(2)(ii) of this section
because P is treated as having acquired all of the T assets for
consideration consisting of $70 of cash, $10 of liability assumption and
$30 of P voting stock, and the sum of $70 of cash and the assumption by
P of $10 of liabilities exceeds 20% of the value of the properties of T.
(iii) This paragraph (d)(4) applies to transactions occurring after
December 31, 1999, unless the transaction occurs pursuant to a written
agreement that is (subject to customary conditions) binding on that date
and at all times thereafter.
(e) A ``recapitalization'', and therefore a reorganization, takes
place if, for example:
(1) A corporation with $200,000 par value of bonds outstanding,
instead of paying them off in cash, discharges them by issuing preferred
shares to the bondholders;
(2) There is surrendered to a corporation for cancellation 25
percent of its preferred stock in exchange for no par value common
stock;
(3) A corporation issues preferred stock, previously authorized but
unissued, for outstanding common stock;
(4) An exchange is made of a corporation's outstanding preferred
stock, having certain priorities with reference to the amount and time
of payment of dividends and the distribution of the corporate assets
upon liquidation, for a new issue of such corporation's common stock
having no such rights;
(5) An exchange is made of an amount of a corporation's outstanding
preferred stock with dividends in arrears for other stock of the
corporation. However, if pursuant to such an exchange there is an
increase in the proportionate interest of the preferred shareholders in
the assets or earnings and profits of the corporation, then under Sec.
1.305-7(c)(2), an amount equal to the lesser of (i) the amount by which
[[Page 344]]
the fair market value or liquidation preference, whichever is greater,
of the stock received in the exchange (determined immediately following
the recapitalization) exceeds the issue price of the preferred stock
surrendered, or (ii) the amount of the dividends in arrears, shall be
treated under section 305(c) as a deemed distribution to which sections
305(b)(4) and 301 apply.
(f) The term a party to a reorganization includes a corporation
resulting from a reorganization, and both corporations, in a transaction
qualifying as a reorganization where one corporation acquires stock or
properties of another corporation. If a transaction otherwise qualifies
as a reorganization, a corporation remains a party to the reorganization
even though stock or assets acquired in the reorganization are
transferred in a transaction described in paragraph (k) of this section.
If a transaction otherwise qualifies as a reorganization, a corporation
shall not cease to be a party to the reorganization solely by reason of
the fact that part or all of the assets acquired in the reorganization
are transferred to a partnership in which the transferor is a partner if
the continuity of business enterprise requirement is satisfied. See
Sec. 1.368-1(d). The preceding three sentences apply to transactions
occurring after January 28, 1998, except that they do not apply to any
transaction occurring pursuant to a written agreement which is binding
on January 28, 1998, and at all times thereafter. A corporation
controlling an acquiring corporation is a party to the reorganization
when the stock of such controlling corporation is used in the
acquisition of properties. Both corporations are parties to the
reorganization if, under statutory authority, Corporation A is merged
into Corporation B. All three of the corporations are parties to the
reorganization if, pursuant to statutory authority, Corporation C and
Corporation D are consolidated into Corporation E. Both corporations are
parties to the reorganization if Corporation F transfers substantially
all its assets to Corporation G in exchange for all or a part of the
voting stock of Corporation G. All three corporations are parties to the
reorganization if Corporation H transfers substantially all its assets
to Corporation K in exchange for all or a part of the voting stock of
Corporation L, which is in control of Corporation K. Both corporations
are parties to the reorganization if Corporation M transfers all or part
of its assets to Corporation N in exchange for all or a part of the
stock and securities of Corporation N, but only if (1) immediately after
such transfer, Corporation M, or one or more of its shareholders
(including persons who were shareholders immediately before such
transfer), or any combination thereof, is in control of Corporation N,
and (2) in pursuance of the plan, the stock and securities of
Corporation N are transferred or distributed by Corporation M in a
transaction in which gain or loss is not recognized under section 354 or
355, or is recognized only to the extent provided in section 356. Both
Corporation O and Corporation P, but not Corporation S, are parties to
the reorganization if Corporation O acquires stock of Corporation P from
Corporation S in exchange solely for a part of the voting stock of
Corporation O, if (1) the stock of Corporation P does not constitute
substantially all of the assets of Corporation S, (2) Corporation S is
not in control of Corporation O immediately after the acquisition, and
(3) Corporation O is in control of Corporation P immediately after the
acquisition.
(g) The term plan of reorganization has reference to a consummated
transaction specifically defined as a reorganization under section
368(a). The term is not to be construed as broadening the definition of
reorganization as set forth in section 368(a), but is to be taken as
limiting the nonrecognition of gain or loss to such exchanges or
distributions as are directly a part of the transaction specifically
described as a reorganization in section 368(a). Moreover, the
transaction, or series of transactions, embraced in a plan of
reorganization must not only come within the specific language of
section 368(a), but the readjustments involved in the exchanges or
distributions effected in the consummation thereof
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must be undertaken for reasons germane to the continuance of the
business of a corporation a party to the reorganization. Section 368(a)
contemplates genuine corporate reorganizations which are designed to
effect a readjustment of continuing interests under modified corporate
forms.
(h) As used in section 368, as well as in other provisions of the
Internal Revenue Code, if the context so requires, the conjunction
``or'' denotes both the conjunctive and the disjunctive, and the
singular includes the plural. For example, the provisions of the statute
are complied with if ``stock and securities'' are received in exchange
as well as if ``stock or securities'' are received.
(i) [Reserved]
(j)(1) This paragraph (j) prescribes rules relating to the
application of section 368 (a)(2)(E).
(2) Section 368(a)(2)(E) does not apply to a consolidation.
(3) A transaction otherwise qualifying under section 368(a)(1)(A) is
not disqualified by reason of the fact that stock of a corporation (the
controlling corporation) which before the merger was in control of the
merged corporation is used in the transaction, if the conditions of
section 368(a)(2)(E) are satisfied. Those conditions are as follows:
(i) In the transaction, shareholders of the surviving corporation
must surrender stock in exchange for voting stock of the controlling
corporation. Further, the stock so surrendered must constitute control
of the surviving corporation. Control is defined in section 368(c). The
amount of stock constituting control is measured immediately before the
transaction. For purposes of this subdivision (i), stock in the
surviving corporation which is surrendered in the transaction (by any
shareholder except the controlling corporation) in exchange for
consideration furnished by the surviving corporation (and not by the
controlling corporation of the merged corporation) is considered not to
be outstanding immediately before the transaction. For effect on
``substantially all'' test of consideration furnished by the surviving
corporation, see paragraph (j)(3)(iii) of this section.
(ii) Except as provided in paragraph (k)(2) of this section, the
controlling corporation must control the surviving corporation
immediately after the transaction.
(iii) After the transaction, except as provided in paragraph (k)(2)
of this section, the surviving corporation must hold substantially all
of its own properties and substantially all of the properties of the
merged corporation (other than stock of the controlling corporation
distributed in the transaction). The term substantially all has the same
meaning as in section 368(a)(1)(C). The ``substantially all'' test
applies separately to the merged corporation and to the surviving
corporation. In applying the ``substantially all'' test to the surviving
corporation, consideration furnished in the transaction by the surviving
corporation in exchange for its stock is property of the surviving
corporation which it does not hold after the transaction. In applying
the ``substantially all'' test to the merged corporation, assets
transferred from the controlling corporation to the merged corporation
in pursuance of the plan of reorganization are not taken into account.
Thus, for example, money transferred from the controlling corporation to
the merged corporation to be used for the following purposes is not
taken into account for purposes of the ``substantially all'' test:
(A) To pay additional consideration to shareholders of the surviving
corporation;
(B) To pay dissenting shareholders of the surviving corporation;
(C) To pay creditors of the surviving corporation;
(D) To pay reorganization expenses; or
(E) To enable the merged corporation to satisfy state minimum
capitalization requirements (where the money is returned to the
controlling corporation as part of the transaction).
(iv) Paragraphs (j)(3)(ii) and (iii) of this section apply to
transactions occurring after January 28, 1998, except that they do not
apply to any transaction occurring pursuant to a written agreement which
is binding on January 28, 1998, and at all times thereafter.
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(4) The controlling corporation may assume liabilities of the
surviving corporation without disqualifying the transaction under
section 368(a)(2)(E). An assumption of liabilities of the surviving
corporation by the controlling corporation is a contribution to capital
by the controlling corporation to the surviving corporation. If, in
pursuance of the plan of reorganization, securities of the surviving
corporation are exchanged for securities of the controlling corporation,
or for other securities of the surviving corporation, see sections 354
and 356.
(5) In applying section 368(a)(2)(E), it makes no difference if the
merged corporation is an existing corporation, or is formed immediately
before the merger, in anticipation of the merger, or after preliminary
steps have been taken to otherwise acquire control of the surviving
corporation.
(6) The following examples illustrate the application of this
paragraph (j). In each of the examples, Corporation P owns all of the
stock of Corporation S and, except as otherwise stated, Corporation T
has outstanding 1,000 shares of common stock and no shares of any other
class. In each of the examples, it is also assumed that the transaction
qualifies under section 368(a)(1)(A) if the conditions of section
368(a)(2)(E) are satisfied.
Example 1. P owns no T stock. On January 1, 1981, S merges into T.
In the merger, T's shareholders surrender 950 shares of common stock in
exchange for P voting stock. The holders of the other 50 shares (who
dissent from the merger) are paid in cash with funds supplied by P.
After the transaction, T holds all of its own assets and all of S's
assets. Based on these facts, the transaction qualifies under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(E). In
the transaction, former shareholders of T surrender, in exchange for P
voting stock, an amount of T stock (950/1,000 shares or 95 percent)
which constitutes control of T.
Example 2. The facts are the same as in Example (1) except that
holders of 100 shares in corporation T, who dissented from the merger,
are paid in cash with funds supplied by T (and not by P or S) and in the
merger, T's remaining shareholders surrender 720 shares of common stock
in exchange for P voting stock and 180 shares of common stock for cash
supplied by P. The requirements of section 368(a)(2)(E)(ii) are
satisfied since, in the transaction, former shareholders of T surrender,
in exchange for P voting stock, an amount of T stock (720/900 shares or
80 percent) which constitutes control of T. The T stock surrendered in
exchange for consideration furnished by T is not considered outstanding
for purposes of determining whether the amount of T stock surrendered by
T shareholders for P stock constitutes control of T.
Example 3. T has outstanding 1,000 shares of common stock, 100
shares of nonvoting preferred stock, and no shares of any other class.
On January 1, 1981, S merges into T. Prior to the merger, as part of the
transaction, T distributes its own cash in redemption of the 100 shares
of preferred stock. In the transaction, T's remaining shareholders
surrender their 1,000 shares of common stock in exchange for P voting
stock. The requirements of section 368(a)(2)(E)(ii) are satisfied since,
in the transaction, former shareholders of T surrender, in exchange for
P voting stock, an amount of T stock (1,000/1,000 shares or 100 percent)
which constitutes control of T. The preferred stock surrendered in
exchange for consideration furnished by T is not considered outstanding
for purposes of determining whether the amount of T stock surrendered by
T shareholders for P stock constitutes control of T. However, the
consideration furnished by T for its stock is property of T which T does
not hold after the transaction for purposes of the substantially all
test in paragraph (j)(3)(iii) of this section.
Example 4. On January 1, 1971, P purchased 201 shares of T's stock.
On January 1, 1981, S merges into T. In the merger, T's shareholders
(other than P) surrender 799 shares of T stock in exchange for P voting
stock. Based on these facts, in the transaction, former shareholders of
T do not surrender, in exchange for P voting stock, an amount of T stock
which constitutes control of T (799/1,000 shares being less than 80
percent). Therefore, the transaction does not qualify under section
368(a)(1)(A). However, if S is a transitory corporation, formed solely
for purposes of effectuating the transaction, the transaction may
qualify as a reorganization described in section 368(a)(1)(B) provided
all of the applicable requirements are satisfied.
Example 5. On January 1, 1971, P purchased 200 shares of T's stock.
On January 1, 1981, S merges into T. Prior to the merger, as part of the
transaction, T distributes its own cash in redemption of 1 share of T
stock from a T shareholder other than P. In the merger, T's remaining
shareholders (other than P) surrender 799 shares of T stock in exchange
for P voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (799/999 shares being
less than 80 percent). Therefore, the transaction does not qualify under
section 368(a)(1)(A). However, if S is a transitory corporation, formed
for purposes of effectuating the transaction, the
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transaction may qualify as a reorganization described in section
368(a)(1)(B) provided all of the applicable requirements are satisfied.
Example 6. The stock of S has a value of $25,000. The stock of T has
a value of $75,000. On January 1, 1984, S merges into T. In the merger,
T's shareholders surrender all of their T stock in exchange for P voting
stock. After the transaction, T holds all of its own assets and all of
S's assets. Based on these facts, the transaction qualifies under
section 368(a)(1)(A) by reason of the application of section
368(a)(2)(E). In the transaction, former shareholders of T surrender, in
exchange for P voting stock, an amount of T stock (1,000/1,000 shares or
100 percent) which constitutes control of T. The stock of T received by
P in exchange for P's prior interest in S is not taken into account for
purposes of section 368(a)(2)(E)(ii) since the amount of T stock
constituting control of T is measured before the transaction.
Example 7. The stock of T has a value of $75,000. On January 1,
1984, S merges into T. In the merger, T's shareholders surrender all of
their T stock in exchange for P voting stock. As part of the
transaction, P contributes $25,000 to T in exchange for new shares of T
stock. None of the cash received by T is distributed or otherwise paid
out to former T shareholders. After the transaction, T holds all of its
own assets and all of S's assets. Based on these facts, the transaction
qualifies under section 368(a)(1)(A) by reason of the application of
section 368(a)(2)(E). In the transaction, former shareholders of T
surrender, in exchange for P voting stock, an amount of T stock (1,000/
1,000 shares or 100 percent) which constitutes control of T. The T stock
received by P in exchange for its contribution to T is not taken into
account for purposes of section 368(a)(2)(E)(ii) since the amount of T
stock constituting control of T is measured before the transaction.
Example 8. The facts are the same as in Example (7) except that, as
part of the transaction, corporation R, instead of P, contributes
$25,000 to T in exchange for T stock. Based on these facts, the
transaction does not qualify under section 368(a)(1)(A) by reason of
section 368(a)(2)(E) since P does not control T immediately after the
transaction.
Example 9. T stock has a value of $75,000. P owns 500 shares (\1/2\)
of that stock with a value of $37,500. The stock of S has a value of
$125,000. On January 1, 1984, S merges into T. In the merger, T's
shareholders (other than P) surrender their T stock in exchange for P
voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (500/1,000 shares being
less than 80 percent). Therefore, the transaction does not qualify under
section 368(a)(1)(A). The stock of T received by P in exchange for P's
prior interest in S does not contribute to satisfaction of the
requirement of section 368(a)(2)(E)(ii).
(k) Transfer of assets or stock in section 368(a)(1)(A), (B), (C),
or (G) reorganizations--(1) General rule for transfers to controlled
corporations. Except as otherwise provided in this section, a
transaction otherwise qualifying under section 368(a)(1)(A), (B), (C),
or (G) (where the requirements of sections 354(b)(1)(A) and (B) are met)
shall not be disqualified by reason of the fact that part or all of the
acquired assets or stock acquired in the transaction are transferred or
successively transferred to one or more corporations controlled in each
transfer by the transferor corporation. Control is defined under section
368(c).
(2) Transfers following a reverse triangular merger. A transaction
qualifying under section 368(a)(1)(A) by reason of the application of
section 368(a)(2)(E) is not disqualified by reason of the fact that part
or all of the stock of the surviving corporation is transferred or
successively transferred to one or more corporations controlled in each
transfer by the transferor corporation, or because part or all of the
assets of the surviving corporation or the merged corporation are
transferred or successively transferred to one or more corporations
controlled in each transfer by the transferor corporation.
(3) Examples. The following examples illustrate the application of
this paragraph (k). P is the issuing corporation and T is the target
corporation. P has only one class of stock outstanding. The examples are
as follows:
Example 1. Transfers of acquired assets to controlled corporations.
(i) Facts. T operates a bakery which supplies delectable pastries and
cookies to local retail stores. The acquiring corporate group produces a
variety of baked goods for nationwide distribution. P owns 80 percent of
the stock of S-1. Pursuant to a plan of reorganization, T transfers all
of its assets to S-1 solely in exchange for P stock, which T distributes
to its shareholders. S-1 owns 80 percent of the stock of S-2; S-2 owns
80 percent of the stock of S-3, which also makes and supplies pastries
and cookies. Pursuant to the plan of reorganization, S-1 transfers the T
assets to S-2; S-2 transfers the T assets to S-3.
(ii) Analysis. Under this paragraph (k), the transaction, otherwise
qualifying as a reorganization under section 368(a)(1)(C), is not
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disqualified by reason of the fact of the successive transfers of all of
the acquired assets from S-1 to S-2, and from S-2 to S-3 because in each
transfer, the transferee corporation is controlled by the transferor
corporation. Control is defined under section 368(c).
Example 2. Transfers of acquired stock to controlled corporations.
(i) Facts. The facts are the same as Example 1 except that S-1 acquires
all of the T stock rather than the T assets, and as part of the plan of
reorganization, S-1 transfers all of the T stock to S-2, and S-2
transfers all of the T stock to S-3.
(ii) Analysis. Under this paragraph (k), the transaction, otherwise
qualifying as a reorganization under section 368(a)(1)(B), is not
disqualified by reason of the fact of the successive transfers of all of
the acquired stock from S-1 to S-2, and from S-2 to S-3 because in each
transfer, the transferee corporation is controlled by the transferor
corporation.
Example 3. Transfers of acquired stock to partnerships. (i) Facts.
The facts are the same as in Example 2. However, as part of the plan of
reorganization, S-2 and S-3 form a new partnership, PRS. Immediately
thereafter, S-3 transfers all of the T stock to PRS in exchange for an
80 percent partnership interest, and S-2 transfers cash to PRS in
exchange for a 20 percent partnership interest.
(ii) Analysis. This paragraph (k) describes the successive transfer
of the T stock to S-3, but does not describe S-3's transfer of the T
stock to PRS. Therefore, the characterization of this transaction must
be determined under the relevant provisions of law, including the step
transaction doctrine. See Sec. 1.368-1(a). The transaction fails to
meet the control requirement of a reorganization described in section
368(a)(1)(B) because immediately after the acquisition of the T stock,
the acquiring corporation does not have control of T.
(4) This paragraph (k) applies to transactions occurring after
January 28, 1998, except that it does not apply to any transaction
occurring pursuant to a written agreement which is binding on January
28, 1998, and at all times thereafter.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7281, 38 FR
18540, July 12, 1973; T.D. 7422, 41 FR 26570, June 28, 1976; T.D. 8059,
50 FR 42689, Oct. 22, 1985; 51 FR 6400, Feb. 24, 1986; T.D. 8760, 63 FR
4182, Jan. 28, 1998; T.D. 8885, 65 FR 31806, May 19, 2000; T.D. 9038,
Jan. 24, 2003]
Sec. 1.368-2T Definition of terms (temporary).
(a) [Reserved]. For further guidance, see Sec. 1.368-2(a).
(b)(1)(i) Definitions. For purposes of this paragraph (b)(1), the
following terms shall have the following meanings:
(A) Disregarded entity. A disregarded entity is a business entity
(as defined in Sec. 301.7701-2(a) of this chapter) that is disregarded
as an entity separate from its owner for Federal tax purposes. Examples
of disregarded entities include a domestic single member limited
liability company that does not elect to be classified as a corporation
for Federal tax purposes, a corporation (as defined in Sec. 301.7701-
2(b) of this chapter) that is a qualified REIT subsidiary (within the
meaning of section 856(i)(2)), and a corporation that is a qualified
subchapter S subsidiary (within the meaning of section 1361(b)(3)(B)).
(B) Combining entity. A combining entity is a business entity that
is a corporation (as defined in Sec. 301.7701-2(b) of this chapter)
that is not a disregarded entity.
(C) Combining unit. A combining unit is composed solely of a
combining entity and all disregarded entities, if any, the assets of
which are treated as owned by such combining entity for Federal tax
purposes.
(ii) Statutory merger or consolidation generally. For purposes of
section 368(a)(1)(A), a statutory merger or consolidation is a
transaction effected pursuant to the laws of the United States or a
State or the District of Columbia, in which, as a result of the
operation of such laws, the following events occur simultaneously at the
effective time of the transaction--
(A) All of the assets (other than those distributed in the
transaction) and liabilities (except to the extent satisfied or
discharged in the transaction) of each member of one or more combining
units (each a transferor unit) become the assets and liabilities of one
or more members of one other combining unit (the transferee unit); and
(B) The combining entity of each transferor unit ceases its separate
legal existence for all purposes; provided, however, that this
requirement will be satisfied even if, pursuant to the laws of the
United States or a State or the District of Columbia, after the
effective time of the transaction, the combining entity of the
transferor unit (or
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its officers, directors, or agents) may act or be acted against, or a
member of the transferee unit (or its officers, directors, or agents)
may act or be acted against in the name of the combining entity of the
transferor unit, provided that such actions relate to assets or
obligations of the combining entity of the transferor unit that arose,
or relate to activities engaged in by such entity, prior to the
effective time of the transaction, and such actions are not inconsistent
with the requirements of paragraph (b)(1)(ii)(A) of this section.
(iii) Statutory merger or consolidation involving disregarded
entities. A transaction effected pursuant to the laws of the United
States or a State or the District of Columbia in which any of the assets
and liabilities of a combining entity of a transferor unit become assets
and liabilities of one or more disregarded entities of the transferee
unit is not a statutory merger or consolidation within the meaning of
section 368(a)(1)(A) and paragraph (b)(1)(ii) of this section unless
such combining entity, the combining entity of the transferee unit, such
disregarded entities other than entities that were disregarded entities
of the transferor unit immediately prior to the transaction, and each
business entity through which the combining entity of the transferee
unit holds its interests in such disregarded entities is organized under
the laws of the United States or a State or the District of Columbia.
(iv) Examples. The following examples illustrate the rules of
paragraph (b)(1) of this section. In each of the examples, except as
otherwise provided, each of V, Y, and Z is a domestic C corporation. X
is a domestic limited liability company. Except as otherwise provided, X
is wholly owned by Y and is disregarded as an entity separate from Y for
Federal tax purposes. The examples are as follows:
Example 1. Divisive transaction pursuant to a merger statute. (i)
Under State W law, Z transfers some of its assets and liabilities to Y,
retains the remainder of its assets and liabilities, and remains in
existence following the transaction. The transaction qualifies as a
merger under State W corporate law. Prior to the transaction, Y is not
treated as owning any assets of an entity that is disregarded as an
entity separate from its owner for Federal tax purposes.
(ii) The transaction does not satisfy the requirements of paragraph
(b)(1)(ii)(A) of this section because all of the assets and liabilities
of Z, the combining entity of the transferor unit, do not become the
assets and liabilities of Y, the combining entity and sole member of the
transferee unit. In addition, the transaction does not satisfy the
requirements of paragraph (b)(1)(ii)(B) of this section because the
separate legal existence of Z does not cease for all purposes.
Accordingly, the transaction does not qualify as a statutory merger or
consolidation under section 368(a)(1)(A).
Example 2. Merger of a target corporation into a disregarded entity
in exchange for stock of the owner. (i) Under State W law, Z merges into
X. Pursuant to such law, the following events occur simultaneously at
the effective time of the transaction: all of the assets and liabilities
of Z become the assets and liabilities of X and Z's separate legal
existence ceases for all purposes. In the merger, the Z shareholders
exchange their stock of Z for stock of Y. Prior to the transaction, Z is
not treated as owning any assets of an entity that is disregarded as an
entity separate from its owner for Federal tax purposes.
(ii) The transaction satisfies the requirements of paragraph
(b)(1)(ii) of this section because the transaction is effected pursuant
to State W law and the following events occur simultaneously at the
effective time of the transaction: all of the assets and liabilities of
Z, the combining entity and sole member of the transferor unit, become
the assets and liabilities of one or more members of the transferee unit
that is comprised of Y, the combining entity of the transferee unit, and
X, a disregarded entity the assets of which Y is treated as owning for
Federal tax purposes, and Z ceases its separate legal existence for all
purposes. Paragraph (b)(1)(iii) of this section does not apply to
prevent the transaction from qualifying as a statutory merger or
consolidation for purposes of section 368(a)(1)(A) because each of Z, Y,
and X is a domestic entity. Accordingly, the transaction qualifies as a
statutory merger or consolidation for purposes of section 368(a)(1)(A).
The result would be the same if Z were treated as owning assets of an
entity that is disregarded as an entity separate from Z, regardless of
whether such disregarded entity became an entity disregarded as an
entity separate from Y as a result of the transaction, or merged into X
or a domestic entity disregarded as an entity separate from Y.
Example 3. Merger of a target S corporation that owns a QSub into a
disregarded entity. (i) The facts are the same as in Example 2, except
that Z is an S corporation and owns all of the stock of U, a QSub.
(ii) The deemed formation by Z of U pursuant to Sec. 1.1361-5(b)(1)
(as a consequence of the
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termination of U's QSub election) is disregarded for Federal income tax
purposes. The transaction is treated as a transfer of the assets of U to
X, followed by X's transfer of these assets to U in exchange for stock
of U. See Sec. 1.1361-5(b)(3), Example 9. The transaction will,
therefore, satisfy the requirements of paragraph (b)(1)(ii) of this
section because the transaction is effected pursuant to State W law and
the following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of Z and U, the sole
members of the transferor unit, become the assets and liabilities of one
or more members of the transferee unit that is comprised of Y, the
combining entity of the transferee unit, and X, a disregarded entity the
assets of which Y is treated as owning for Federal tax purposes, and Z
ceases its separate legal existence for all purposes. Paragraph
(b)(1)(iii) of this section does not apply to prevent the transaction
from qualifying as a statutory merger or consolidation for purposes of
section 368(a)(1)(A) because each of Z, Y, and X is a domestic entity.
Moreover, the deemed transfer of the assets of U in exchange for U stock
does not cause the transaction to fail to qualify as a statutory merger
or consolidation. See Sec. 368(a)(2)(C). Accordingly, the transaction
qualifies as a statutory merger or consolidation for purposes of section
368(a)(1)(A).
Example 4. Triangular merger of a target corporation into a
disregarded entity. (i) The facts are the same as in Example 2, except
that V owns 100 percent of the outstanding stock of Y and, in the merger
of Z into X, the Z shareholders exchange their stock of Z for stock of
V. In the transaction, Z transfers substantially all of its properties
to X.
(ii) The transaction is not prevented from qualifying as a statutory
merger or consolidation under section 368(a)(1)(A), provided the
requirements of section 368(a)(2)(D) are satisfied. Because the assets
of X are treated for Federal tax purposes as the assets of Y, Y will be
treated as acquiring substantially all of the properties of Z in the
merger for purposes of determining whether the merger satisfies the
requirements of section 368(a)(2)(D). As a result, the Z shareholders
that receive stock of V will be treated as receiving stock of a
corporation that is in control of Y, the combining entity of the
transferee unit that is the acquiring corporation for purposes of
section 368(a)(2)(D). Accordingly, the merger will satisfy the
requirements of section 368(a)(2)(D).
Example 5. Merger of a target corporation into a disregarded entity
owned by a partnership. (i) The facts are the same as in Example 2,
except that Y is organized as a partnership under the laws of State W
and is classified as a partnership for Federal tax purposes.
(ii) The transaction does not satisfy the requirements of paragraph
(b)(1)(ii)(A) of this section. All of the assets and liabilities of Z,
the combining entity and sole member of the transferor unit, do not
become the assets and liabilities of one or more members of a transferee
unit because neither X nor Y qualifies as a combining entity.
Accordingly, the transaction cannot qualify as a statutory merger or
consolidation for purposes of section 368(a)(1)(A).
Example 6. Merger of a disregarded entity into a corporation. (i)
Under State W law, X merges into Z. Pursuant to such law, the following
events occur simultaneously at the effective time of the transaction:
all of the assets and liabilities of X (but not the assets and
liabilities of Y other than those of X) become the assets and
liabilities of Z and X's separate legal existence ceases for all
purposes.
(ii) The transaction does not satisfy the requirements of paragraph
(b)(1)(ii)(A) of this section because all of the assets and liabilities
of a transferor unit do not become the assets and liabilities of one or
more members of the transferee unit. The transaction also does not
satisfy the requirements of paragraph (b)(1)(ii)(B) of this section
because X does not qualify as a combining entity. Accordingly, the
transaction cannot qualify as a statutory merger or consolidation for
purposes of section 368(a)(1)(A).
Example 7. Merger of a corporation into a disregarded entity in
exchange for interests in the disregarded entity. (i) Under State W law,
Z merges into X. Pursuant to such law, the following events occur
simultaneously at the effective time of the transaction: all of the
assets and liabilities of Z become the assets and liabilities of X and
Z's separate legal existence ceases for all purposes. In the merger of Z
into X, the Z shareholders exchange their stock of Z for interests in X
so that, immediately after the merger, X is not disregarded as an entity
separate from Y for Federal tax purposes. Following the merger, pursuant
to Sec. 301.7701-3(b)(1)(i) of this chapter, X is classified as a
partnership for Federal tax purposes.
(ii) The transaction does not satisfy the requirements of paragraph
(b)(1)(ii)(A) of this section because immediately after the merger X is
not disregarded as an entity separate from Y and, consequently, all of
the assets and liabilities of Z, the combining entity of the transferor
unit, do not become the assets and liabilities of one or more members of
a transferee unit. Accordingly, the transaction cannot qualify as a
statutory merger or consolidation for purposes of section 368(a)(1)(A).
Example 8. Merger transaction preceded by distribution. (i) Z
operates two unrelated businesses, Business P and Business Q, each of
which represents 50 percent of the value of the assets of Z. Y desires
to acquire and continue operating Business P, but does not want to
acquire Business Q. Pursuant to a
[[Page 351]]
single plan, Z sells Business Q for cash to parties unrelated to Z and Y
in a taxable transaction, and then distributes the proceeds of the sale
pro rata to its shareholders. Then, pursuant to State W law, Z merges
into Y. Pursuant to such law, the following events occur simultaneously
at the effective time of the transaction: all of the assets and
liabilities of Z related to Business P become the assets and liabilities
of Y and Z's separate legal existence ceases for all purposes. In the
merger, the Z shareholders exchange their Z stock for Y stock. Prior to
the transaction, Z is not treated as owning any assets of an entity that
is disregarded as an entity separate from its owner for Federal tax
purposes.
(ii) The transaction satisfies the requirements of paragraph
(b)(1)(ii) of this section because the transaction is effected pursuant
to State W law and the following events occur simultaneously at the
effective time of the transaction: all of the assets and liabilities of
Z, the combining entity and sole member of the transferor unit, become
the assets and liabilities of Y, the combining entity and sole member of
the transferee unit, and Z ceases its separate legal existence for all
purposes. Paragraph (b)(1)(iii) of this section does not apply to
prevent the transaction from qualifying as a statutory merger or
consolidation for purposes of section 368(a)(1)(A) because each of Z and
Y is a domestic entity. Accordingly, the transaction qualifies as a
statutory merger or consolidation for purposes of section 368(a)(1)(A).
(v) Effective dates. This paragraph (b)(1) applies to transactions
occurring on or after January 24, 2003. Taxpayers, however, may apply
these regulations in whole, but not in part, to transactions occurring
before January 24, 2003, provided that, if the taxpayer is the acquiring
corporation (or a shareholder of the acquiring corporation whose tax
treatment of the transaction reflects the tax treatment by the acquiring
corporation, such as a shareholder of an acquiring S corporation), the
target corporation (and the shareholders of the target corporation whose
tax treatment of the transaction reflects the tax treatment by the
target corporation) also applies these regulations in whole, but not in
part, to the transaction, and if the taxpayer is the target corporation
(or a shareholder of the target corporation whose tax treatment of the
transaction reflects the tax treatment by the target corporation), the
acquiring corporation (and the shareholders of the acquiring corporation
whose tax treatment of the transaction reflects the tax treatment by the
acquiring corporation) also applies these regulations in whole, but not
in part, to the transaction. For all other transactions, see Sec.
1.368-2(b)(1) as in effect before January 24, 2003 (see 26 CFR part 1,
revised April 1, 2002).
(b)(2)-(k) [Reserved]. For further guidance, see Sec. 1.368-2(b)(2)
through (k).
[T.D. 9038, 68 FR 3387, Jan. 24, 2003]
Sec. 1.368-3 Records to be kept and information to be filed with returns.
(a) The plan of reorganization must be adopted by each of the
corporations parties thereto; and the adoption must be shown by the acts
of its duly constituted responsible officers, and appear upon the
official records of the corporation. Each corporation, a party to a
reorganization, shall file as a part of its return for its taxable year
within which the reorganization occurred a complete statement of all
facts pertinent to the nonrecognition of gain or loss in connection with
the reorganization, including:
(1) A copy of the plan of reorganization, together with a statement,
executed under the penalties of perjury, showing in full the purposes
thereof and in detail all transactions incident to, or pursuant to, the
plan.
(2) A complete statement of the cost or other basis of all property,
including all stock or securities, transferred incident to the plan.
(3) A statement of the amount of stock or securities and other
property or money received from the exchange, including a statement of
all distributions or other disposition made thereof. The amount of each
kind of stock or securities and other property received shall be stated
on the basis of the fair market value thereof at the date of the
exchange.
(4) A statement of the amount and nature of any liabilities assumed
upon the exchange, and the amount and nature of any liabilities to which
any of the property acquired in the exchange is subject.
(b) Every taxpayer, other than a corporation a party to the
reorganization, who receives stock or securities and other property or
money upon a tax-free exchange in connection with a corporate
reorganization shall incorporate
[[Page 352]]
in his income tax return for the taxable year in which the exchange
takes place a complete statement of all facts pertinent to the
nonrecognition of gain or loss upon such exchange including:
(1) A statement of the cost or other basis of the stock or
securities transferred in the exchange, and
(2) A statement in full of the amount of stock or securities and
other property or money received from the exchange, including any
liabilities assumed upon the exchange, and any liabilities to which
property received is subject. The amount of each kind of stock or
securities and other property (other than liabilities assumed upon the
exchange) received shall be set forth upon the basis of the fair market
value thereof at the date of the exchange.
(c) Permanent records in substantial form shall be kept by every
taxpayer who participates in a tax-free exchange in connection with a
corporate reorganization showing the cost or other basis of the
transferred property and the amount of stock or securities and other
property or money received (including any liabilities assumed on the
exchange, or any liabilities to which any of the properties received
were subject), in order to facilitate the determination of gain or loss
from a subsequent disposition of such stock or securities and other
property received from the exchange.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6622, 27 FR
11918, Dec. 4, 1962]
Insolvency Reorganizations
Sec. 1.371-1 Exchanges by corporations.
(a) Exchange solely for stock or securities. (1) Section 371(a)(1)
provides for the nonrecognition of gain or loss by a corporation upon
certain exchanges made in connection with the reorganization of an
insolvent corporation. The section does not apply to a railroad
corporation as defined in section 77(m) of the Bankruptcy Act (11 U.S.C.
205(m)). In order to qualify as a section 371(a) reorganization, the
transaction must satisfy the express statutory requirements as well as
the underlying assumptions and purposes for which the exchange is
excepted from the general rule requiring the recognition of gain or loss
upon the exchange of property.
(2) Section 371(a)(1) applies only with respect to a reorganization
effected in one of two specified types of court proceedings: (i)
Receivership, foreclosure, or similar proceedings, or (ii) corporate
reorganization proceedings under chapter X of the Bankruptcy Act (11
U.S.C. 10). The specific statutory requirements are the transfer of
property of a corporation, in pursuance of an order of the court having
jurisdiction of the corporation in such proceeding, to another
corporation organized or made use of to effectuate a plan of
reorganization approved by the court in such proceeding, in exchange
solely for stock or securities in such other corporation. If the
consideration for the transfer consists of other property or money as
well as stock and securities, see section 371(a)(2) and (c). As to the
assumption of liabilities in an exchange described in section 371(a),
see section 371(d).
(3) The application of section 371(a)(1) is to be strictly limited
to a transaction of the character set forth in such section. Hence, the
section is inapplicable unless there is a bona fide plan of
reorganization approved by the court having jurisdiction of the
proceeding and the transfer of the property of the insolvent corporation
is made pursuant to such plan. It is unnecessary that the transfer be a
direct transfer from the insolvent corporation; it is sufficient if the
transfer is an integral step in the consummation of the reorganization
plan approved by the court. By its terms, the section has no application
to a reorganization consummated by adjustment of the capital or debt
structure of the insolvent corporation without the transfer of its
assets to another corporation.
(4) As used in section 371(a)(1), the term reorganization is not
controlled by the definition of reorganization contained in section 368.
However, certain basic requirements, implicit in the statute, which are
essential to a reorganization under section 368, are likewise essential
to qualify a transaction as a reorganization under section 371(a)(1).
Among these requirements
[[Page 353]]
are a continuity of the business enterprise under the modified corporate
form and a continuity of interest therein on the part of those persons
who were the owners of the enterprise prior to the reorganization. Thus,
the nonrecognition accorded by section 371(a)(1) applies only to a
genuine reorganization as distinguished from a liquidation and sale of
property to either new or old interests supplying new capital and
discharging the obligations of the old corporation. For the purpose of
determining whether the requisite continuity of interest exists, the
interest of creditors who have, by appropriate legal steps, obtained
effective command of the property of an insolvent corporation is
considered as the equivalent of a proprietary interest. But the mere
possibility of a proprietary interest is not its equivalent. In general,
any transaction will be subject to nonrecognition of gain or loss as
prescribed by section 371(a)(1) where the property is transferred to a
corporation and the stock and securities of such corporation are
transferred to persons who were shareholders or creditors of the
transferor corporation as if such stock or securities had been
transferred to such persons as shareholders pursuant to the
nonrecognition provisions of part III, subchapter C, chapter 1 of the
Code. The determinative and controlling factors are the corporation's
insolvency and the effective command by the creditors over its property.
The term insolvent as used herein refers to insolvency at any time
during the course of the proceeding referred to in section 371(a)(1),
either in the sense of excess of liabilities over assets or in the sense
of inability to meet obligations as they mature.
(5) A short-term purchase money note is not a security within the
meaning of this section, and the transfer of the properties of the
insolvent corporation for cash and deferred payment obligations of the
transferee evidenced by short-term notes is a sale and not an exchange.
(b) Exchange for stock or securities and other property or money. If
an exchange would be within the provisions of section 371(a)(1) if it
were not for the fact that the consideration for the transfer of the
property of the insolvent corporation consists not only of stock or
securities but also of other property or money, then, as provided in
section 371(a)(2), if the other property or money received by the
corporation is distributed by it pursuant to the plan of reorganization,
no gain to the corporation will be recognized. Property is distributed
within the meaning of this section if it is paid over or distributed to
shareholders or creditors who have by appropriate legal steps obtained
effective command of the property of the corporation. If the other
property or money received by the corporation is not distributed by it
pursuant to the plan of reorganization, the gain, if any, to the
corporation from the exchange will be recognized in an amount not in
excess of the sum of money and the fair market value of the other
property so received which is not distributed. In either case no loss
from the exchange will be recognized (see section 371(c)).
(c) Records to be kept and information to be filed. (1) Each
corporation a party to a section 371(a) reorganization shall furnish a
complete statement of all facts pertinent to the nonrecognition of gain
or loss in connection with the exchange, including:
(i) A certified copy of the plan of reorganization approved by the
court in the proceeding, together with a statement showing in full the
purposes thereof and in detail all transactions incident, or pursuant,
to the plan;
(ii) A complete statement of the cost or other basis of all
property, including all stock or securities, transferred incident to the
plan;
(iii) A statement of the amount of stock or securities and other
property or money received in the exchange, including a statement of all
distributions or other disposition made thereof. The amount of each kind
of stock or securities or other property shall be stated on the basis of
the fair market value thereof at the date of the exchange;
(iv) A statement of the amount and nature of any liabilities assumed
upon the exchange.
The information required by this section shall be filed as a part of the
corporation's return for its taxable year within which the
reorganization occurred.
[[Page 354]]
(2) Permanent records in substantial form must be kept by every
taxpayer who participates in a tax-free exchange in connection with a
corporate reorganization showing the cost or other basis of the
transferred property and the amount of stock or securities and other
property or money received (including any liabilities assumed upon the
exchange), in order to facilitate the determination of gain or loss from
a subsequent disposition of such stock or securities and other property
received from th securities and other property or money received
(including any liabilities assumed upon the exchange), in order to
facilitate the determination of gain or loss from a subsequent
disposition of such stock or securities and other property received from
the exchange.
Sec. 1.371-2 Exchanges by security holders.
(a) In general. (1) Section 371(b) prescribes the rules relative to
the recognition of gain or loss upon certain exchanges made by the
holders of stock or securities of an insolvent corporation in connection
with a reorganization described in section 371(a). Under section
371(b)(1), no gain or loss shall be recognized if, pursuant to the plan
of reorganization, stock or securities in the insolvent corporation are
exchanged solely for stock or securities in the corporation organized or
made use of to effectuate such plan. If, in addition to such stock or
securities, other property or money is received upon such exchange, gain
is recognized to the extent of such other property or money (section
371(b)(2)), but no loss is recognized (section 371(c)). As to the basis
of the stock or securities or other property acquired upon an exchange
under section 371(b), see section 358.
(2) By thus characterizing as an exchange, and regarding as a single
taxable event, the event or series of events resulting in the
relinquishment or extinguishment of the stock or securities in the old
corporation and the acquisition in consideration thereof, in whole or in
part, of stock or securities in the new corporation, the Code secures
uniformity of treatment for the participating security holders,
regardless of the particular steps or the procedural devices by which
such exchange is effected. Thus, the transaction which qualified as a
reorganization under section 371(a) may take one of several forms. In a
typical creditors' reorganization there may be a transfer of the
property of the old corporation to its bondholders, or the bondholders'
committee, upon surrender of the bonds, followed by the transfer of such
property to the new corporation in consideration of stock in the latter;
or there may be a transfer of the bonds to the new corporation in
exchange for its stocks or securities, followed by the transfer of the
property of the old corporation in consideration of the surrender of its
bonds. In either event, section 371(b) treats the result to the
participating security holders as an exchange of the securities of the
old corporation for securities of the new corporation. In order,
however, to qualify as an exchange under section 371(b) the various
events resulting in the relinquishment or extinguishment of the old
securities and the acquisition of the new securities must be embraced
within the plan of reorganization and must be undertaken for reasons
germane to the plan. If the event, or series of events, qualifies as an
exchange under section 371(b), no antecedent event necessarily a
component of the relinquishment or extinguishment of the securities of
the old corporation in consideration of the acquisition of the
securities of the new corporation shall be considered a transaction or
event having consequences for income tax purposes.
(b) Exchange solely for stock or securities. Section 371(b)(1)
provides that no gain or loss shall be recognized upon an exchange
consisting of the relinquishment or extinguishment of stock or
securities in an insolvent corporation described in section 371(a), in
consideration of the acquisition solely of stock or securities in a
corporation organized or made use of to effectuate the plan of
reorganization. As used in this section, the term security does not
include a short-term note.
(c) Exchanges for stock or securities and other property or money.
If an exchange would be within section 371(b)(1) if it were not for the
fact that the property received in the exchange consists not
[[Page 355]]
only of stock or securities in the corporation organized or made use of
to effectuate the plan of reorganization, but also of other property or
money, then
(1) As provided in section 371(b)(2), the gain, if any, to the
taxpayer will be recognized in an amount not in excess of the sum of
money and the fair market value of the other property. The gain so
recognized shall be treated as capital gain.
(2) The loss, if any, to the taxpayer from such an exchange is not
to be recognized to any extent (see section 371(c)).
(d) Records to be kept and information to be filed. (1) Every
taxpayer who receives stock or securities and other property or money
upon an exchange described in section 371(b) in connection with a
corporate reorganization, must furnish a complete statement of all facts
pertinent to the recognition or nonrecognition of gain or loss upon such
exchange, including--
(i) A statement of the cost or other basis of the stock or
securities transferred in the exchange, and
(ii) A statement in full of the amount of stock or securities and
other property or money received from the exchange, including any
liability assumed upon the exchange. The amount of each kind of stock or
securities and other property (other than liabilities assumed upon the
exchange) received shall be set forth upon the basis of the fair market
value thereof at the date of the exchange. The statement shall be
incorporated in the taxpayer's income tax return for the taxable year in
which the exchange occurs.
(2) Permanent records in substantial form shall be kept by every
taxpayer who participates in an exchange described in section 371(b),
showing the cost or other basis of the transferred property and the
amount of stock or securities and other property or money received
(including any liabilities assumed upon the exchange), in order to
facilitate the determination of gain or loss from a subsequent
disposition of such stock or securities and other property received from
the exchange.
Sec. 1.372-1 Corporations.
(a) If, as the result of a transaction described in section 371, so
much of section 371(c) as relates to section 371(a), or the
corresponding provisions of prior law, the property of an insolvent
corporation is transferred, in pursuance of a plan of reorganization, to
a corporation organized or made use of to effectuate such plan, the
basis of such property in the hands of the acquiring corporation is the
same as it would be in the hands of the insolvent corporation, increased
in the amount of gain recognized upon such transfer under the law
applicable to the year in which the transfer was made. In any such case,
the adjustments to basis provided by section 270 of the Bankruptcy Act
(11 U.S.C. 670), or section 1017 of the Code, shall not be made in
respect of any indebtedness cancelled pursuant to the plan of
reorganization under which the transfer was made. If the transaction
falls within the provisions of section 372(a), the basis of the property
involved shall be determined pursuant to such provisions,
notwithstanding that the transaction might otherwise fall within another
basis provision.
(b) The provisions of section 372(a) are applicable in the
determination of basis for all taxable years beginning after December
31, 1933, except that the basis so determined shall not be given effect
in the determination of the tax liability for any taxable year beginning
prior to January 1, 1943. With the exception indicated, the basis so
prescribed is applicable from the date of acquisition of such property.
For example, the provisions of section 1016 relating to adjusted basis
shall be applied as if section 372(a) were a part of the Internal
Revenue Code of 1939 and prior internal revenue laws applicable to all
taxable years beginning after December 31, 1933. Hence, in determining
the amount of the adjustments for depreciation, depletion, etc., under
the provisions of section 1016(a)(2), the amount allowable is the amount
computed with reference to the basis provided in section 372(a).
(c) The effect of the application of section 372(a) may be
illustrated by the following examples:
[[Page 356]]
Example (1). On January 1, 1935, the Y Corporation, a taxpayer
making its returns on the calendar year basis, acquired depreciable
property from the X Corporation as the result of a transaction described
in section 372(a). On January 1, 1935, the property had, in the hands of
the X Corporation, a basis of $200,000, an adjusted basis of $150,000, a
fair market value as of January 1, 1935 of $80,000, and an estimated
remaining life of 20 years. The 1935 transaction was treated as a
taxable exchange and, accordingly, the Y Corporation claimed and was
allowed depreciation in the amount of $4,000 for each of the eight
taxable years 1935 through 1942, inclusive. For each of the twelve
taxable years 1943 through 1954, inclusive, the Y Corporation claimed
and was allowed depreciation in the amount of $7,500. On December 31,
1954, the property was sold for $10,000 cash. The amount of the gain
realized upon the sale is computed as follows:
Basis to X Corporation..................................... $200,000
Adjustment for depreciation in the hands of X Corporation 50,000
(sec. 1016)...............................................
-------------
Adjusted basis for depreciation in the hands of both X and 150,000
Y Corporations (sec. 372(b))..............................
Deduct:
Depreciation allowable in amount of $7,500 $60,000
per year (\1/20\ of $150,000) for 8 years,
from Jan. 1, 1935, through Dec. 31, 1942....
Depreciation allowable Jan. 1, 1943, to Dec. 90,000 ...........
31, 1954 (12 years at $7,500)...............
------------
.......... 150,000
------------
Adjusted basis for computing gain or loss.................. 0
Sale price................................................. 10,000
-------------
Gain realized.............................................. 10,000
For the taxable year 1943 and succeeding taxable years, the Y
Corporation is entitled to deductions for depreciation in respect of
such property in the amounts of $7,500 in the determination of its tax
liabilities for such years. But no change in the tax liability is
authorized for preceding taxable years by reason of the difference
between the $7,500 depreciation allowable and the $4,000 deduction
previously allowed.
Example (2). Assume the same facts as in Example (1), except that
the property acquired by the Y Corporation had a fair market value as of
January 1, 1935, of $180,000, instead of $80,000, and the Y Corporation
claimed and was allowed depreciation in the amount of $9,000 for each of
the eight taxable years 1935 to 1942, inclusive, and in the amount of
$6,500 for the taxable years 1943 to 1954, inclusive. In such case, the
amount of the gain realized upon the sale of the property would be
computed as follows:
Adjusted basis for depreciation in the hands of Y $150,000
Corporation as computed in Example (1)....................
Deduct:
Depreciation allowed in the amount of $9,000 $72,000 ...........
per year for 8 years Jan. 1, 1935 to Dec.
31, 1942....................................
Depreciation allowable Jan. 1, 1943, to Dec. 78,000
31, 1954, inclusive (12 times $6,500).......
------------
.......... 150,000
Adjusted basis for computing gain or loss.................. 0
Sale price................................................. $10,000
-------------
Gain realized.............................................. 10,000
No change in the tax liability is authorized for taxable years preceding
1943 by reason of the difference between the $7,500 depreciation
allowable and the $9,000 deduction previously allowed.
Sec. 1.374-1 Exchanges by insolvent railroad corporations.
(a) Exchange solely for stock or securities. (1) Section 374(a)(1)
provides for the nonrecognition of gain or loss by an insolvent railroad
corporation upon certain exchanges made in connection with the
reorganization of the corporation. In order to qualify as a section
374(a) reorganization, the transaction must satisfy the express
statutory requirements as well as the underlying assumptions and
purposes for which the exchange is excepted from the general rule
requiring the recognition of gain or loss upon the exchange of property.
(2) Section 374(a)(1) applies only with respect to a reorganization
effected in one of two specified types of court proceedings: (i)
Receivership proceedings, or (ii) proceedings under section 77 of the
Bankruptcy Act (11 U.S.C. 205). The specific statutory requirements are
the transfer after July 31, 1955, of property of a railroad corporation,
as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205(m)), in
pursuance of an order of the court having jurisdiction of the
corporation in such proceeding, to another railroad corporation, as
defined in section 77(m) of the Bankruptcy Act, organized or made use of
to effectuate a plan of reorganization approved by the court in such
proceeding, in exchange solely for stock or securities in such other
railroad corporation. If the consideration for the transfer consists of
other property or money as well as stock and securities, see section
374(a)(2) and (3) and paragraph (b) of
[[Page 357]]
this section. As to the assumption of liabilities in an exchange
described in section 374(a), see section 357 and paragraph (a)(1) and
(2) of Sec. 1.357-1 and paragraph (a) of Sec. 1.357-2.
(3) The application of section 374(a)(1) is to be strictly limited
to a transaction of the character set forth in such section. Hence, the
section is inapplicable unless there is a bona fide plan of
reorganization approved by the court having jurisdiction of the
proceeding and the transfer of the property of the insolvent railroad
corporation is made pursuant to such plan. It is unnecessary that the
transfer be a direct transfer from the insolvent railroad corporation;
it is sufficient if the transfer is an integral step in the consummation
of the reorganization plan approved by the court. By its terms, the
section has no application to a reorganization consummated by adjustment
of the capital or debt structure of the insolvent railroad corporation
without the transfer of its assets to another railroad corporation.
(4) As used in section 374(a)(1), the term reorganization is not
controlled by the definition of reorganization contained in section 368.
However, certain basic requirements, implicit in the statute, which are
essential to a reorganization under section 368, are likewise essential
to qualify a transaction as a reorganization under section 374(a)(1).
Among these requirements are a continuity of the business enterprise
under the modified corporate form and a continuity of interest therein
on the part of those persons who were the owners of the enterprise prior
to the reorganization. Thus, the nonrecognition accorded by section
374(a)(1) applies only to a genuine reorganization as distinguished from
a liquidation and sale of property to either new or old interests
supplying new capital and discharging the obligations of the old
railroad corporation. For the purpose of determining whether the
requisite continuity of interest exists, the interest of creditors who
have, by appropriate legal steps, obtained effective command of the
property of an insolvent railroad corporation is considered as the
equivalent of a proprietary interest. But the mere possibility of a
proprietary interest is not its equivalent. In general, any transaction
will be subject to nonrecognition of gain or loss as prescribed by
section 374(a)(1) where the property is transferred to a railroad
corporation and the stock and securities of such corporation are
transferred to persons who were shareholders or creditors of the
transferor railroad corporation as if such stock or securities had been
transferred to such persons as shareholders pursuant to the
nonrecognition provisions of part III, subchapter C, chapter 1 of the
Code. The determinative and controlling factors are the railroad
corporation's insolvency and the effective command by the creditors over
its property. The term insolvent as used in this section refers to
insolvency at any time during the course of the proceeding referred to
in section 374(a)(1), either in the sense of excess of liabilities over
assets or in the sense of inability to meet obligations as they mature.
(5) A short-term purchase money note is not a security within the
meaning of this section, and the transfer of the properties of the
insolvent railroad corporation for cash and deferred payment obligations
of the transferee evidenced by short-term notes is a sale and not an
exchange.
(b) Exchange for stock or securities and other property or money. If
an exchange would be within the provisions of section 374(a)(1) if it
were not for the fact that the consideration for the transfer of the
property of the insolvent railroad corporation consists not only of
stock or securities but also of other property or money, then, as
provided in section 374(a)(2), if the other property or money received
by the railroad corporation is distributed by it pursuant to the plan of
reorganization, no gain to the railroad corporation will be recognized.
Property is distributed within the meaning of this section if it is paid
over or distributed to shareholders or creditors who have by appropriate
legal steps obtained effective command of the property of the railroad
corporation. If the other property or money received by the railroad
corporation is not distributed by it pursuant to the plan of
reorganization, the gain, if any, to the railroad corporation from the
exchange will be recognized in an amount not in excess of the sum of
[[Page 358]]
money and the fair market value of the other property so received which
is not distributed. In either case no loss from the exchange will be
recognized (see section 374(a)(3)). See section 354(c) relative to
exchanges by stock or security holders.
[T.D. 6528, 26 FR 400, Jan. 19, 1961]
Sec. 1.374-2 Basis of property acquired after December 31, 1938, by
railroad corporation in a receivership or railroad reorganization
proceeding.
Section 374(b)(1) provides that if property of a railroad
corporation, as defined in section 77(m) of the Bankruptcy Act (11
U.S.C. 205(m)), was acquired after July 31, 1955, in pursuance of an
order of the court having jurisdiction of such corporation in either a
receivership proceeding or a proceeding under section 77 of the
Bankruptcy Act, and the acquiring corporation is also a railroad
corporation as defined in section 77(m) of such Act, organized or
availed of to effectuate a plan of reorganization approved by the court
in such proceeding, the basis shall be the same as it would be in the
hands of the transferor railroad corporation, increased in the amount of
gain recognized to the transferor under section 374(a)(2) and paragraph
(b) of Sec. 1.374-1. For purposes of section 374(b)(1), it is
unnecessary that the acquisition in question be a direct transfer from
the corporation undergoing reorganization or that such reorganization
constitute a reorganization within the meaning of section 368(a) since
that section does not apply to part IV, subchapter C, chapter 1 of the
Code. It is sufficient if the acquisition is in pursuance of an order of
the court and is an integral step in the consummation of a
reorganization plan approved by the court having jurisdiction of the
proceeding. If the transaction falls within the provisions of section
374(b)(1), the basis of the property involved shall be determined
pursuant to such provisions, notwithstanding that the transaction might
also fall within another basis provision.
[T.D. 6528, 26 FR 401, Jan. 19, 1961, as amended by T.D. 7616, 44 FR
26870, May 8, 1979]
Sec. 1.374-3 Records to be kept and information to be filed.
(a) Return information. Each railroad corporation a party to a
section 374(a) reorganization shall furnish a complete statement of all
facts pertinent to the recognition or nonrecognition of gain or loss in
connection with the exchange, including:
(1) A certified copy of the plan of reorganization approved by the
court in the proceeding, together with a statement showing in full the
purposes thereof and in detail all transactions incident, or pursuant,
to the plan;
(2) A complete statement of the cost or other basis of all property,
including all stock or securities, transferred incident to the plan;
(3) A statement of the amount of stock or securities and other
property or money received in the exchange, including a statement of all
distributions or other disposition made thereof. The amount of each kind
of stock or securities or other property shall be stated on the basis of
the fair market value thereof at the date of the exchange;
(4) A statement of the amount and nature of any liabilities assumed
upon the exchange.
The information required by this paragraph shall be filed as a part of
each railroad corporation's return for its taxable year within which the
reorganization occurred.
(b) Permanent records. Permanent records in substantial form must be
kept by every railroad corporation which participates in a tax-free
exchange in connection with a section 374(a) reorganization showing the
cost or other basis of the transferred property and the amount of stock
or securities and other property or money received (including any
liabilities assumed upon the exchange), in order to facilitate the
determination of gain or loss from a subsequent disposition of such
stock or securities and other property received from the exchange.
[T.D. 6528, 26 FR 401, Jan. 19, 1961]
Sec. 1.374-4 Property acquired by electric railway corporation in
corporate reorganizing proceeding.
Subject to the limitations and conditions set forth in section
374(b)(2), if
[[Page 359]]
the reorganization under section 77 of the Bankruptcy Act (11 U.S.C. 501
and following) of an electric railway corporation results in the
acquisition of the property of such corporation by another corporation,
the basis of such property in the hands of the acquiring corporation is
the same as it would be in the hands of the old corporation. It is
requisite to the application of the section that both corporations be
street, suburban, or interurban electric railway corporations engaged in
the transportation of persons or property in interstate commerce, and
that the acquisition is in pursuance of an order of the court and is an
integral step in the consummation of a reorgnizing plan approved by the
court having jurisidiction of the proceeding. If section 374(b)(2)
applies, section 270 of the Bankruptcy Act (11 U.S.C. 670), relating to
the adjustment of basis by reason of the cancellation or reduction of
indebtedness in a corporate reorganization proceeding, is inapplicable.
Moreover, if the transaction is within the provisons of section
374(b)(2) and may also be considered to be within any other basis
provision, then the provisions of section 374(b)(2) only shall apply.
[T.D. 7616, 44 FR 26870, May 8, 1979]
Carryovers
Sec. 1.381(a)-1 General rule relating to carryovers in certain corporate
acquisitions.
(a) Allowance of carryovers. Section 381 provides that a corporation
which acquires the assets of another corporation in certain liquidations
and reorganizations shall succeed to, and take into account, as of the
close of the date of distribution or transfer, the items described in
section 381(c) of the distributor or transferor corporation. These items
shall be taken into account by the acquiring corporation subject to the
conditions and limitations specified in sections 381, 382(b), and 383
and the regulations thereunder.
(b) Determination of transactions and items to which section 381
applies--(1) Qualified transactions. Except to the extent provided in
section 381(c)(20), relating to the carryover of unused pension trust
deductions in certain liquidations, the items described in section
381(c) are required by section 381 to be carried over to the acquiring
corporation (as defined in subparagraph (2) of this paragraph) only in
the following liquidations and reorganizations:
(i) The complete liquidation of a subsidiary corporation upon which
no gain or loss is recognized in accordance with the provisions of
section 332, but only if the basis of the assets distributed to the
acquiring corporation is not required by section 334(b)(2) to be the
adjusted basis of the stock with respect to which the distribution is
made;
(ii) A statutory merger or consolidation qualifying under section
368(a)(1)(A) to which section 361 applies;
(iii) A reorganization qualifying under section 368(a)(1)(C);
(iv) A reorganization qualifying under section 368(a)(1)(D) if the
requirements of section 354(b)(1)(A) and (B) are satisfied; and
(v) A mere change in identity, form, or place of organization
qualifying under section 368(a)(1)(F).
(2) Acquiring corporation defined. (i) Only a single corporation may
be an acquiring corporation for purposes of section 381 and the
regulations thereunder. The corporation which acquires the assets of its
subsidiary corporation in a complete liquidation to which section
381(a)(1) applies is the acquiring corporation for purposes of section
381. Generally, in a transaction to which section 381(a)(2) applies, the
acquiring corporation is that corporation which, pursuant to the plan of
reorganization, ultimately acquires, directly or indirectly, all of the
assets transferred by the transferor corporation. If, in a transaction
qualifying under section 381(a)(2), no one corporation ultimately
acquires all of the assets transferred by the transferor corporation,
that corporation which directly acquires the assets so transferred shall
be the acquiring corporation for purposes of section 381 and the
regulations thereunder, even though such corporation ultimately retains
none of the assets so transferred. Whether a corporation has acquired
all of the assets transferred by the transferor corporation is a
question of fact to be determined on the
[[Page 360]]
basis of all the facts and circumstances.
(ii) The application of this subparagraph may be illustrated by the
following examples:
Example (1). Y Corporation, a wholly-owned subsidiary of X
Corporation, directly acquired all the assets of Z Corporation solely in
exchange for voting stock of X Corporation in a transaction qualifying
under section 368(a)(1)(C). Y Corporation is the acquiring corporation
for purposes of section 381.
Example (2). X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred all the assets so acquired
to Y Corporation, its wholly-owned subsidiary (see section
368(a)(2)(C)). Y Corporation is the acquiring corporation for purposes
of section 381.
Example (3). X Corporation acquired all the assets of Z Corporation
solely in exchange for the voting stock of X Corporation in a
transaction qualifying under section 368(a)(1)(C). Thereafter, pursuant
to the plan of reorganization X Corporation transferred one-half of the
assets so acquired to Y Corporation, its wholly-owned subsidiary, and
retained the other half of such assets. X Corporation is the acquiring
corporation for purposes of section 381.
Example (4). X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred one-half of the assets so
acquired to Y Corporation, its wholly-owned subsidiary, and the other
half of such assets to M Corporation, another wholly-owned subsidiary of
X Corporation. X Corporation is the acquiring corporation for purposes
of section 381.
(3) Transactions and items not covered by section 381. (i) Section
381 does not apply to partial liquidations, divisive reorganizations, or
other transactions not described in subparagraph (1) of this paragraph.
Moreover, section 381 does not apply to the carryover of an item or tax
attribute not specified in subsection (c) thereof. In a case where
section 381 does not apply to a transaction, item, or tax attribute by
reason of either of the preceding sentences, no inference is to be drawn
from the provisions of section 381 as to whether any item or tax
attribute shall be taken into account by the successor corporation.
(ii) If, pursuant to the provisions of subparagraph (2) of this
paragraph, a corporation is considered to be the acquiring corporation
even though a part of the acquired assets is transferred to one or more
corporations controlled by the acquiring corporation, or all the
acquired assets are transferred to two or more corporations controlled
by the acquiring corporation, then the carryover of any item described
in section 381(c) to such controlled corporation or corporations shall
be determined without regard to section 381. Thus, for example, if a
parent corporation is the acquiring corporation for purposes of section
381 notwithstanding the fact that, pursuant to the plan of
reorganization, it transferred to its wholly-owned subsidiary property
acquired from the transferor corporation which the transferor
corporation had elected to inventory under the last-in first-out method,
then the question whether the subsidiary corporation shall continue to
use the same method of inventorying with respect to that property shall
be determined without regard to section 381.
(c) Foreign corporations. A foreign corporation may be a
distributor, transferor, or acquiring corporation for purposes of
section 381. Thus, for example, the net operating loss carryovers of a
foreign corporation, determined under the provisions of section 172 and
subchapter N (section 861 and following), chapter 1 of the Code, may be
carried over to a domestic acquiring corporation if the domestic
corporation acquires the assets of the foreign corporation in a
liquidation or reorganization described in section 381(a) and the
requirements of Sec. 1.367-1, if applicable, have been complied with.
(d) Internal Revenue Code of 1939. Any reference in the regulations
under section 381 to any provision of the Internal Revenue Code of 1954
shall, where appropriate, be deemed also to refer to the corresponding
provision of the Internal Revenue Code of 1939.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7343, 40 FR
1698, Jan. 9, 1975]
[[Page 361]]
Sec. 1.381(b)-1 Operating rules applicable to carryovers in certain
corporate acquisitions.
(a) Closing of taxable year--(1) In general. Except in the case of
certain reorganizations qualifying under section 368(a)(1)(F), the
taxable year of the distributor or transferor corporation shall end with
the close of the date of distribution or transfer. With regard to the
closing of the taxable year of the transferor corporation in certain
reorganizations under section 368(a)(1)(F) involving a foreign
corporation after December 31, 1986, see Sec. Sec. 1.367(a)-1T(e) and
1.367(b)-2(f).
(2) Reorganizations under section 368(a)(1)(F). In the case of a
reorganization qualifying under section 368(a)(1)(F) (whether or not
such reorganization also qualifies under any other provision of section
368(a)(1)), the acquiring corporation shall be treated (for purposes of
section 381) just as the transferor corporation would have been treated
if there had been no reorganization. Thus, the taxable year of the
transferor corporation shall not end on the date of transfer merely
because of the transfer; a net operating loss of the acquiring
corporation for any taxable year ending after the date of transfer shall
be carried back in accordance with section 172(b) in computing the
taxable income of the transferor corporation for a taxable year ending
before the date of transfer; and the tax attributes of the transferor
corporation enumerated in section 381(c) shall be taken into account by
the acquiring corporation as if there had been no reorganization.
(b) Date of distribution or transfer. (1) The date of distribution
or transfer shall be that day on which are distributed or transferred
all those properties of the distributor or transferor corporation which
are to be distributed or transferred pursuant to a liquidation or
reorganization described in paragraph (b)(1) of Sec. 1.381(a)-1. If the
distribution or transfer of all such properties is not made on one day,
then, except as provided in subparagraph (2) of this paragraph, the date
of distribution or transfer shall be that day on which the distribution
or transfer of all such properties is completed.
(2) If the distributor or transferor and acquiring corporations file
the statements described in subparagraph (3) of this paragraph, the date
of distribution or transfer shall be that day as of which (i)
substantially all of the properties to be distributed or transferred
have been distributed or transferred, and (ii) the distributor or
transferor corporation has ceased all operations (other than liquidating
activities). Such day also shall be the date of distribution or transfer
if the completion of the distribution or transfer is unreasonably
postponed beyond the date as of which substantially all the properties
to be distributed or transferred have been distributed or transferred
and the distributor or transferor corporation has ceased all operations
other than liquidating activities. A corporation shall be considered to
have distributed or transferred substantially all of its properties to
be distributed or transferred even though it retains money or other
property in a reasonable amount to pay outstanding debts or preserve the
corporation's legal existence. A corporation shall be considered to have
ceased all operations, other than liquidating activities, when it ceases
to be a going concern and its activities are merely for the purpose of
winding up its affairs, paying its debts, and distributing any remaining
balance of its money or other properties to its shareholders.
(3) The statements referred to in subparagraph (2) of this paragraph
shall specify the day considered to be the date of distribution or
transfer and shall specify, as of such date (i) the nature and amount of
the total assets which were distributed or transferred and the dates so
distributed or transferred, (ii) the nature and amount of the assets not
distributed or transferred and the purpose for which they were retained,
and (iii) the date on which the distributor or transferor corporation
ceased all operations other than liquidating activities. Such statements
shall be attached to the timely filed income tax return of the
distributor or transferor corporation for its taxable year ending with
such date of distribution or transfer and to the timely filed income tax
return of the
[[Page 362]]
acquiring corporation for its first taxable year ending after such date,
except that, with respect to any income tax return filed before October
11, 1960, any such statement shall be filed before October 11, 1960,
with the district director with whom such return is filed.
(4) If--
(i) The last day of the acquiring corporation's taxable year is a
Saturday, Sunday, or legal holiday, and
(ii) The day specified in subparagraph (1) or (2) of this paragraph
as the date of distribution or transfer is the last business day before
such Saturday, Sunday, or holiday,
then the last day of the acquiring corporation's taxable year shall be
the date of distribution or transfer for purposes of section 381(b) and
this section. For purposes of this subparagraph, the term business day
means a day which is not a Saturday, Sunday, or legal holiday, and also
means a Saturday, Sunday, or legal holiday if the date of distribution
or transfer determined under subparagraph (1) or (2) of this paragraph
is such Saturday, Sunday, or holiday.
(c) Return of distributor or transferor corporation. The distributor
or transferor corporation shall file an income tax return for the
taxable year ending with the date of distribution or transfer described
in paragraph (b) of this section. If the distributor or transferor
corporation remains in existence after such date of distribution or
transfer, it shall file an income tax return for the taxable year
beginning on the day following the date of distribution or transfer and
ending with the date on which the distributor or transferor
corporation's taxable year would have ended if there had been no
distribution or transfer.
(d) Carryback of net operating losses. For provisions relating to
the carryback of net operating losses of the acquiring corporation, see
paragraph (b) of Sec. 1.381(c)(1)-1.
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended at T.D. 8280, 55 FR
1417, Jan. 16, 1990; T.D. 8862, 65 FR 3609, Jan. 24, 2000]
Sec. 1.381(c)(1)-1 Net operating loss carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(1) requires the
acquiring corporation to succeed to, and take into account, the net
operating loss carryovers of the distributor or transferor corporation.
To determine the amount of these carryovers as of the close of the date
of distribution or transfer, and to integrate them with any carryovers
and carrybacks of the acquiring corporation for purposes of determining
the taxable income of the acquiring corporation for taxable years ending
after the date of distribution or transfer, it is necessary to apply the
provisions of section 172 in accordance with the conditions and
limitations of section 381(c)(1) and this section. See also section
382(b) and the regulations thereunder.
(2) The net operating loss carryovers and carrybacks of the
acquiring corporation determined as of the close of the date of
distribution or transfer shall be computed without reference to any net
operating loss of a distributor or transferor corporation. The net
operating loss carryovers of a distributor or transferor corporation as
of the close of the date of distribution or transfer shall be determined
without reference to any net operating loss of the acquiring
corporation.
(3) For purposes of the tax imposed under section 56, the acquiring
corporation succeeding to and taking into account any net operating loss
carryovers of the distributor or transferor corporation shall also
succeed to and take into account along with such net operating loss
carryforward any deferred tax liability under section 56(b) and the
regulations thereunder attributable to such net operating loss
carryover.
(b) Carryback of net operating losses. A net operating loss of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer shall not be carried back in computing the
taxable income of a distributor or transferor corporation.
[[Page 363]]
However, a net operating loss of the acquiring corporation for any such
taxable year shall be carried back in accordance with section 172(b) in
computing the taxable income of the acquiring corporation for a taxable
year ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, a net operating loss sustained by it
for any taxable year beginning after such date shall be carried back in
accordance with section 172(b) in computing the taxable income of such
corporation for a taxable year ending on or before that date, but may
not be carried back or over in computing the taxable income of the
acquiring corporation. This paragraph may be illustrated by the
following examples:
Example (1). On December 31, 1954, X Corporation merged into Y
Corporation in a statutory merger to which section 361 applies, and the
charter of Y Corporation continued after the merger. Y Corporation
sustained a net operating loss for the calendar year 1955. Y
Corporation's net operating loss for 1955 may not be carried back in
computing the taxable income of X Corporation but shall be carried back
in computing the taxable income of Y Corporation.
Example (2). On December 31, 1954, X Corporation and Y Corporation
transferred all their assets to Z Corporation in a statutory
consolidation to which section 361 applies. Z Corporation sustained a
net operating loss for the calendar year 1955. Z Corporation's net
operating loss for 1955 may not be carried back in computing the taxable
income of X Corporation or Y Corporation.
Example (3). On December 31, 1954, X Corporation ceased all
operations (other than liquidating activities) and transferred
substantially all its properties to Y Corporation in a reorganization
qualifying under section 368(a)(1)(C). Such properties comprised all of
X Corporation's properties which were to be transferred pursuant to the
reorganization. In the process of liquidating its assets and winding up
its affairs, X Corporation sustained a net operating loss for its
taxable year beginning on January 1, 1955. This net operating loss of X
Corporation shall be carried back in computing the taxable income of
that corporation but may not be carried back or over in computing the
taxable income of Y Corporation.
(c) First taxable year to which carryovers apply. (1) The net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer
shall first be carried to the first taxable year of the acquiring
corporation ending after that date. This rule applies irrespective of
whether the date of distribution or transfer is on the last day, or any
other day, of the acquiring corporation's taxable year. Thus, such net
operating loss carryovers shall first be used by the acquiring
corporation with respect to the computation of its net operating loss
deduction under section 172(a), and its taxable income determined under
the provisions of section 172(b)(2), for such first taxable year.
However, see paragraph (f) of this section.
(2) The net operating loss carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation. Thus, if a parent corporation owning 80 percent of all
classes of stock of its subsidiary corporation were to acquire its share
of the assets of the subsidiary corporation upon a complete liquidation
described in paragraph (b)(1)(i) of Sec. 1.381(a)-1, then, subject to
the conditions and limitations of this section, 100 percent of the net
operating loss carryovers available to the subsidiary corporation as of
the close of the date of distribution would be carried over to the
parent corporation.
(d) Limitation on net operating loss deduction for first taxable
year ending after date of distribution or transfer. (1) That part of the
acquiring corporation's net operating loss deduction, determined in
accordance with sections 172(a) and 381(c)(1), for its first taxable
year ending after the date of distribution or transfer which is
attributable to the net operating loss carryovers of the distributor or
transferor corporation, is limited by section 381(c)(1)(B) and this
paragraph to an amount equal to the acquiring corporation's
postacquisition part year taxable income. Such postacquisition part year
taxable income is the amount which bears the same ratio to the acquiring
corporation's taxable income for the
[[Page 364]]
first taxable year ending after the date of distribution or transfer
(determined under section 63 without regard to any net operating loss
deduction but taking into account other items to which the acquiring
corporation succeeds under section 381) as the number of days in such
first taxable year which follow the date of distribution or transfer
bears to the total number of days in such taxable year. Thus, if the
date of distribution or transfer is the last day of the acquiring
corporation's taxable year, the net operating loss carryovers of the
distributor or transferor are allowed in full in computing under section
172(a) the net operating loss deduction of the acquiring corporation for
its first taxable year ending after that date. In such instance, the
number of days in the first taxable year which follow the date of
distribution or transfer is the total number of days in such taxable
year.
(2) The limitation provided by section 381(c)(1)(B) applies solely
for the purpose of computing the net operating loss deduction of the
acquiring corporation under section 172(a) for the acquiring
corporation's first taxable year ending after the date of distribution
or transfer. The limitation does not apply for purposes of determining
the portion of any net operating loss (whether of the distributor,
transferor, or acquiring corporation) which may be carried to any
taxable year of the acquiring corporation following its first taxable
year ending after the date of distribution or transfer since such
determination is made pursuant to section 172(b) and section
381(c)(1)(C). See paragraphs (e) and (f) of this section.
(3) The limitation provided by section 381(c)(1)(B) shall be applied
to the aggregate of the allowable net operating loss carryovers of the
distributor or transferor corporation without reference to the taxable
years in which the net operating losses were sustained by such
corporation. If the acquiring corporation has acquired the assets of two
or more distributor or transferor corporations on the same date of
distribution or transfer, then the limitation provided by section
381(c)(1)(B) shall be applied to the aggregate of the net operating loss
carryovers from all of such distributor or transferor corporations.
(4) If the acquiring corporation succeeds to the net operating loss
carryovers of two or more distributor or transferor corporations on two
or more different dates of distribution or transfer within one taxable
year of the acquiring corporation, the limitation to be applied under
section 381(c)(1)(B) to the aggregate of such carryovers shall be
governed by the rules prescribed in paragraph (b) of Sec. 1.381(c)(1)-
2.
(5) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example (1). (i) X Corporation and Y Corporation were organized on
January 1, 1956, and make their returns on the calendar year basis. On
December 16, 1957, X Corporation transferred all its assets to Y
Corporation in a statutory merger to which section 361 applies. The net
operating losses and taxable income (computed without the net operating
loss deduction) of the two corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1956......................................... ($35,000) ($5,000)
Ending 12-16-57.............................. (30,000) xxx
1957......................................... xxx 36,500
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year ending December 31, 1957, is $65,000; but pursuant to
section 381(c)(1)(B), only $1,500 of such aggregate amount ($36,500x 15/
365 ) may be used in computing the net operating loss deduction of Y
Corporation for such taxable year under section 172(a). This limitation
applies even though Y Corporation's own net operating loss carryover to
such year is only $5,000, with the result that Y Corporation has taxable
income under section 63 of $30,000 for its taxable year ending December
31, 1957, that is, $36,500 less the sum of $5,000 and $1,500.
(iii) For rules determining the portion of any given loss of X
Corporation or Y Corporation which may be carried to a taxable year of Y
Corporation following its taxable year ending December 31, 1957, see
sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of this section.
Example (2). (i) X Corporation was organized on January 1, 1954, and
Y Corporation was organized on January 1, 1956. Each corporation makes
its return on the basis of the
[[Page 365]]
calendar year. On December 31, 1956, X Corporation transferred all its
assets to Y Corporation in a statutory merger to which section 361
applies. The net operating losses and the taxable income (computed
without any net operating loss deduction) of the two corporations are as
follows, the assumption being made that none of the modifications
specified in section 172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($5,000) xxx
1955......................................... (15,000) xxx
1956......................................... (10,000) $20,000
1957......................................... xxx 40,000
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year 1957 is $30,000, and the full amount of such carryovers is
allowed in such taxable year to Y Corporation as a deduction under
section 172(a), since such amount does not exceed the limitation
($40,000x 365/365 ) for such taxable year under section 381(c)(1)(B).
Example (3). (i) X Corporation, Y Corporation, and Z Corporation
were organized on January 1, 1954, and each corporation makes its return
on the basis of the calendar year. On September 30, 1956, X Corporation
and Y Corporation transferred all their assets to Z Corporation in a
statutory merger to which section 361 applies. The net operating losses
and the taxable income (computed without any net operating loss
deduction) of the three corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y Z
Taxable year Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
------------------------------------------------------------------------
1954........................... ($5,000) ($3,000) ($40,000)
1955........................... (4,000) (2,000) 10,000
Ending 9-30-56................. (1,000) (9,000) xxx
1956........................... xxx xxx 73,200
------------------------------------------------------------------------
(ii) The aggregate of the net operating loss carryovers of X
Corporation and Y Corporation carried under section 381(c)(1)(A) to Z
Corporation's taxable year 1956 is $24,000; but, pursuant to section
381(c)(1)(B), only $18,400 of such aggregate amount ($73,200x 92/366 )
may be used in computing the net operating loss deduction of Z
Corporation for such taxable year under section 172(a). For this
purpose, Z Corporation may not use the total of the aggregate carryovers
($10,000) from X Corporation plus the aggregate carryovers ($14,000)
from Y Corporation, even though each such aggregate of carryovers is
separately less than the limitation ($18,400) applicable under section
381(c)(1)(B) and this section.
(iii) For rules determining the portion of any given loss of X
Corporation, Y Corporation, or Z Corporation which may be carried to a
taxable year of Z Corporation following its taxable year ending December
31, 1956, see sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of
this section.
(e) Computation of carryovers and carrybacks; general rule--(1)
Sequence for applying losses and computation of taxable income. The
portion of any net operating loss which is carried back or carried over
to any taxable year is the excess, if any, of the amount of the loss
over the sum of the taxable income for each of the prior taxable years
to which the loss may be carried under sections 172(b)(1) and 381. In
determining the taxable income for each such prior taxable year for this
purpose, the various net operating loss carryovers and carrybacks to
such prior taxable year are considered to be applied in reduction of the
taxable income in the order of the taxable years in which the net
operating losses are sustained, beginning with the loss for the earliest
taxable year. The application of this rule to the taxable income of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer involves the use of carryovers of the
distributor or transfer corporation, and of carryovers and carrybacks of
the acquiring corporation. In such instance, the sequence for the use of
loss years remains the same, and the requirement is to begin with the
net operating loss of the earliest taxable year, whether or not it is a
loss of the distributor, transferor, or acquiring corporation. The
taxable income of the acquiring corporation for any taxable year ending
after the date of distribution or transfer shall be determined in the
manner prescribed by section 172(b)(2), except that, if the date of
distribution or transfer is on a day other than the last day of a
taxable year of the acquiring corporation, the taxable income of such
corporation for the taxable year which includes such date shall be
computed in the special manner prescribed by section 381(c)(1)(C) and
paragraph (f) of this section.
(2) Loss year of transferor or distributor considered prior taxable
year. Section 381(c)(1)(C) provides that, for the purpose of determining
the net operating
[[Page 366]]
loss carryovers under section 172(b)(2), a net operating loss for a loss
year of a distributor or transferor corporation which ends on or before
the last day of a loss year of the acquiring corporation shall be
considered to be a net operating loss for a year prior to such loss year
of the acquiring corporation. In a case where the acquiring corporation
has acquired the assets of two or more distributor or transferor
corporations on the same date of distribution or transfer, the loss
years of the distributor or transferor corporations shall be taken into
account in the order in which such loss years terminate; if any one of
the loss years of a distributor or transferor corporation ends on the
same day as the loss year of another distributor or transferor
corporation, either loss year may be taken into account before the
other.
(3) Years to which losses may be carried. The taxable years to which
a net operating loss shall be carried back or carried over are
prescribed by section 172(b)(1). Since the taxable year of the
distributor or transferor corporation ends with the close of the date of
distribution or transfer, such taxable year and the first taxable year
of the acquiring corporation which ends after that date shall be
considered two separate taxable years to which a net operating loss of
the distributor or transferor corporation for any taxable year ending
before that date may be carried over. This rule applies even though the
taxable year of the distributor or transferor corporation which ends on
the date of distribution or transfer is a period of less than twelve
months. However, for the purpose of determining under section 172(b)(1)
the taxable years to which a net operating loss of the acquiring
corporation is carried over or carried back, the first taxable year of
the acquiring corporation which ends after the date of distribution or
transfer shall be treated as only one taxable year even though such
taxable year is considered under section 381(c)(1)(C) and paragraph
(f)(2) of this section as two taxable years. The application of this
subparagraph may be illustrated by the following example:
Example. X Corporation was organized on January 1, 1954, and
thereafter it sustained net operating losses in its calendar years 1954,
1955, and 1956. On June 30, 1957, X Corporation transferred all its
assets to Y Corporation, which was organized on January 1, 1955, in a
statutory merger to which section 361 applies. In its taxable year
ending June 30, 1957, X Corporation sustained a net operating loss. Y
Corporation sustained net operating losses in its calendar years 1955,
1956, and 1958, but had taxable income for the year 1957. The years to
which these losses of X Corporation and Y Corporation shall be carried,
and the sequence in which carried, are as follows:
------------------------------------------------------------------------
Loss year
------------------------------------------------------------------------
X 1954.................................. X 1955, X 1956, X 6/30/57, Y
1957, Y 1958.
X 1955.................................. X 1954, X 1956, X 6/30/57, Y
1957, Y 1958, Y 1959.
Y 1955.................................. Y 1956, Y 1957, Y 1958, Y
1959, Y 1960.
X 1956.................................. X 1954, X 1955, X 6/30/57, Y
1957, Y 1958, Y 1959, Y 1960.
Y 1956.................................. Y 1955, Y 1957, Y 1958, Y
1959, Y 1960, Y 1961.
X 6-30-57............................... X 1955, X 1956, Y 1957, Y
1958, Y 1959, Y 1960, Y 1961.
Y 1958.................................. Y 1955, Y 1956, Y 1957, Y
1959, Y 1960, Y 1961, Y 1962,
Y 1963.
------------------------------------------------------------------------
(4) Computation of carryovers in a case where the date of
distribution or transfer occurs on last day of acquiring corporation's
taxable year. The computation of the net operating loss carryovers from
the distributor or transferor corporation and from the acquiring
corporation in a case where the date of distribution or transfer occurs
on the last day of a taxable year of the acquiring corporation may be
illustrated by the following example:
Example. X Corporation and Y Corporation were organized on January
1, 1955, and each corporation makes its return on the basis of the
calendar year. On December 31, 1956, X Corporation transferred all its
assets to Y Corporation in a statutory merger to which section 361
applies. The net operating losses and the taxable income (computed
without any net operating loss deduction) of the two corporations are as
follows, the assumption being made that none of the modifications
specified in section 172(b)(2)(A) apply to any taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1955......................................... ($2,000) ($11,000)
1956......................................... (3,000) 10,000
1957......................................... xxx (15,000)
------------------------------------------------------------------------
The sequence in which the losses of X Corporation and Y Corporation are
applied, and
[[Page 367]]
the computation of the carryovers to Y Corporation's calendar year 1958,
may be illustrated as follows:
(i) X Corporation's 1955 loss. The carryover to 1958 is $2,000,
computed as follows:
Net operating loss.......................................... $2,000
Less:
X's 1956 taxable income........................ 0 ..........
Y's 1957 taxable income........................ 0 ..........
------------
......... 0
-----------
Carryover.................................................. 2,000
(ii) Y Corporation's 1955 loss. The carryover to 1958 is $1,000,
computed as follows:
Net operating loss.......................................... $11,000
Less:
Y's 1956 taxable income....................... $10,000 ..........
Y's 1957 taxable income....................... 0
-------------
.......... 10,000
-----------
Carryover.................................................. 1,000
(iii) X Corporation's 1956 loss. The carryover to 1958 is $3,000,
computed as follows:
Net operating loss........................................... $3,000
Less:
X's 1955 taxable income......................... 0 .........
Y's 1957 taxable income......................... 0 .........
------------
......... 0
----------
Carryover................................................... 3,000
(iv) Y Corporation's 1957 loss. The carryover to 1958 is $15,000,
computed as follows:
Net operating loss.......................................... $15,000
Less:
Y's 1955 taxable income.......................... 0 ..........
Y's 1956 taxable income before net $10,000 ....... ..........
operating loss deduction............
Minus Y's 1956 net operating loss 11,000 0 ..........
deduction (i.e., Y's 1955 carryover)
-------------
.......... 0
----------
Carryover.................................................. 15,000
(v) Summary of carryovers to 1958. The aggregate of the net
operating loss carryovers to 1958 is $21,000, computed as follows:
X's 1955 loss................................................ $2,000
Y's 1955 loss................................................ 1,000
X's 1956 loss................................................ 3,000
Y's 1957 loss................................................ 15,000
----------
Total....................................................... 21,000
(f) Computation of carryovers and carrybacks when date of
distribution or transfer is not on last day of acquiring corporation's
taxable year--(1) General rule. Pursuant to the provisions of section
381(c)(1)(C), the taxable income of the acquiring corporation for its
taxable year which is a prior taxable year for purposes of section
172(b)(2) and paragraph (e) of this section shall be determined in the
manner prescribed in this paragraph, if the date of distribution or
transfer occurs within, but not on the last day of, such taxable year.
(2) Taxable year considered as two taxable years. Such taxable year
of the acquiring corporation shall be considered as though it were two
taxable years, but only for the limited purpose of applying section
172(b)(2). The first of such two taxable years shall be referred to in
this section as the preacquisition part year; the second, as the
postacquisition part year. For purposes of section 172(b)(2), a net
operating loss of the acquiring corporation shall be carried to the
preacquisition part year and then to the postacquisition part year,
whereas a net operating loss of a distributor or transferor corporation
shall be carried to the postacquisition part year and then to the
acquiring corporation's subsequent taxable years. In determining under
section 172(b)(2) and this paragraph the portion of any net operating
loss of a distributor or transferor corporation which is carried to any
taxable year of the acquiring corporation ending after the
postacquisition part year, the taxable income (as determined under this
paragraph) of the postacquisition part year shall be taken into account
but the taxable income of the preacquisition part year (as so
determined) shall not be taken into account. Though considered as two
separate taxable years for purposes of section 172(b)(2), the
preacquisition part year and the postacquisition part year are treated
as one taxable year in determining the years to which a net operating
loss is carried under section 172(b)(1). See paragraph (e)(3) of this
section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
[[Page 368]]
(5) Division of taxable income. The taxable income for such taxable
year (computed with the modifications specified in section 172(b)(2)(A)
but without any net operating loss deduction) of the acquiring
corporation shall be divided between the preacquisition part year and
the postacquisition part year in proportion to the number of days in
each. Thus, if in a statutory merger to which section 361 applies Y
Corporation acquires the assets of X Corporation on June 30, 1960, and Y
Corporation has taxable income (computed in the manner so prescribed) of
$36,600 for its calendar year 1960, then the preacquisition part year
taxable income would be $18,200 ($36,600x 182/366 ) and the
postacquisition part year taxable income would be $18,400 ($36,600x 184/
366 ).
(6) Net operating loss deduction. After obtaining the taxable income
of the preacquisition part year and of the postacquisition part year in
the manner described in subparagraph (5) of this paragraph, it is
necessary to compute the net operating loss deduction for each such part
year. This deduction shall be determined in the manner prescribed by
section 172(b)(2)(B) but subject to the provisions of this subparagraph.
The net operating loss deduction for the preacquisition part year shall,
for purposes of section 172(b)(2) only, be determined in the same manner
as that prescribed by section 172(b)(2)(B) but shall be computed without
taking into account any net operating loss of the distributor or
transferor corporation. Therefore, only net operating loss carryovers
and carrybacks of the acquiring corporation to the preacquisition part
year shall be taken into account in computing the net operating loss
deduction for such part year. The net operating loss deduction for the
post- acquisition part year shall, for purposes of section 172(b)(2)
only, be determined in the same manner as that prescribed by section
172(b)(2)(B) and shall be computed by taking into account all the net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer, as
well as the net operating loss carryovers and carrybacks of the
acquiring corporation to the postacquisition part year. The sequence in
which the net operating losses of the two corporations shall be applied
for purposes of this subparagraph shall be determined in the manner
prescribed in paragraph (e) of this section.
(7) Limitation on taxable income. In no case shall the taxable
income of the preacquisition part year or the postacquisition part year,
as computed under this paragraph, be considered to be less than zero.
(8) Cross reference. If the acquiring corporation succeeds to the
net operating loss carryovers of two or more distributors or transferor
corporations on two or more dates of distribution or transfer during the
same taxable year of the acquiring corporation, the determination of the
taxable income of the acquiring corporation for such year pursuant to
section 381(c)(1)(C) shall be governed by the rules prescribed in
paragraph (c) of Sec. 1.381(c)(1)-2.
(9) Illustration. The application of this paragraph may be
illustrated by the following example:
Example-- (i) Facts. X Corporation was organized on January 1, 1955,
and Y Corporation was organized on January 1, 1954. Each corporation
makes its return on the basis of the calendar year. On June 30, 1956, X
Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income (computed without any net operating loss deduction) of
the two corporations are as follows, the assumption being made that none
of the modifications specified in section 172(b)(2)(A) apply to any
taxable year:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... xxx ($5,000)
1955......................................... ($65,000) (20,000)
Ending June 30, 1956......................... 1,000 xxx
1956......................................... xxx 36,600
------------------------------------------------------------------------
(ii) Y Corporation's 1954 loss. The carryover to 1957 is $0,
computed as follows:
Net operating loss........................................... $5,000
Less:
Y's 1955 taxable income.................................... 0
-------------
Carryover to Y's preacquisition part year................ 5,000
Less:
Y's preacquisition part year taxable income $18,200 .........
computed under subparagraph (5) of this
paragraph ($36,600x 182/366 ).................
[[Page 369]]
Minus Y's net operating loss deduction for xxx 18,200
preacquisition part year......................
-------------
Carryover to Y's postacquisition part year and also to Y 0
1957....................................................
(iii) X Corporation's 1955 loss. The carryover to 1957 is $45,600,
computed as follows:
Net operating loss.......................................... $65,000
Less:
X's 6/30/56 year taxable income........................... 1,000
-------------
Carryover to Y's postacquisition part year.............. 64,000
Less:
Y's postacquisition part year taxable income $18,400 ..........
computed under subparagraph (5) of this
paragraph ($36,600x184/366)..................
Minus Y's net operating loss deduction for .......... $18,400
postacquisition part year (i.e., Y's 1954
carryover of $0 to such part year)...........
-----------
Carryover to Y 1957..................................... 45,600
(iv) Y Corporation's 1955 loss. The carryover to 1957 is $6,800,
computed as follows:
Net operating loss.......................................... $20,000
Less:
Y's 1954 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 20,000
Less:
Y's preacquisition part year taxable income $18,200 ..........
computed under subparagraph (5) of this
paragraph....................................
Minus Y's net operating loss deduction for 5,000 ..........
preacquisition part year (i.e., Y's 1954
carryover to such part year).................
------------
.......... 13,200
-----------
Carryover to Y's postacquisition part year.............. 6,800
Less:
Y's postacquisition part year taxable income $18,400 ..........
computed under subparagraph (5) of this
paragraph....................................
Minus Y's net operating loss deduction for 64,000 ..........
postacquisition part year (i.e., Y's 1954
carryover of $0, and X's 1955 carryover of
$64,000, to such part year)..................
------------
.......... 0
-----------
Carryover to Y 1957..................................... 6,800
(v) Summary of carryovers to 1957. The aggregate of the net
operating loss carryovers to 1957 is $52,400, determined as follows:
Y's 1954 loss............................................... 0
X's 1955 loss............................................... $45,600
Y's 1955 loss............................................... 6,800
-----------
Total...................................................... 52,400
(g) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
subject to the conditions and limitations of sections 172 and 381, the
net operating loss carryovers available to the first acquiring
corporation under sections 172 and 381.
(h) Illustration. The application of this section may be further
illustrated by the following example:
Example-- (1) Facts. X Corporation was organized on January 1, 1954,
and Y Corporation was organized on January 1, 1955. Each corporation
makes its return on the basis of the calendar year. On August 31, 1957,
X Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income of the two corporations for the taxable years involved
are set forth in the tabulation below. The taxable income so shown is
computed without the modifications required by section 172(b)(2)(A) and
without the benefit of any net operating loss deduction. In its calendar
year 1957, Y Corporation had a deduction of $365 which is disallowed by
section 172(b)(2)(A).
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($7,000) xxx
1955......................................... (10,000) ($10,000)
1956......................................... (25,000) (15,000)
Ending 8-31-57............................... 1,000 xxx
1957......................................... xxx 54,750
1958......................................... xxx (5,000)
1959......................................... xxx 50,000
------------------------------------------------------------------------
(2) Computation of carryovers and carrybacks. The sequence in which
the losses of X Corporation and Y Corporation are applied and the
computation of the carryovers to Y Corporation's calendar year 1959 may
be illustrated as follows:
(i) X Corporation's 1954 loss. The carryover to 1958, which is the
last year to which this loss may be carried, is $0, computed as follows:
Net operating loss.......................................... $7,000
Less:
X's 1955 taxable income....................... 0 ..........
X's 1956 taxable income....................... 0 ..........
------------
.......... 0
-----------
Carryover to X's 8/31/57-year........................... 7,000
[[Page 370]]
Less:
X's 8/31/57-year taxable income........................... 1,000
-------------
Carryover to Y's postacquisition part year.............. 6,000
Less:
Y's postacquisition part year taxable income $18,422 ..........
computed under paragraph (f)(5) of this
section (($54,750+$365) x 122/365)...........
Minus Y's net operating loss deduction for xxx ..........
postacquisition part year....................
------------
.......... 18,422
-----------
Carryover to Y 1958..................................... 0
(ii) X Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss.......................................... $10,000
Less:
X's 1954 taxable income....................... 0 ..........
X's 1956 taxable income....................... 0 ..........
------------
.......... 0
-----------
Carryover to X's 8/31/57-year........................... 10,000
Less:
X's 8/31/57-year taxable income before net $1,000 ..........
operating loss deduction.....................
Minus X's net operating loss deduction for 8/ 7,000 ..........
31/57-year (i.e., X's 1954 carryover)........
------------
.......... 0
-----------
Carryover to Y's postacquisition part year.............. 10,000
Less:
Y's postacquisition part year taxable income $18,422 ..........
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 6,000 ..........
postacquisition part year (i.e., X's 1954
carryover to such part year).................
------------
.......... 12,422
-----------
Carryover to Y 1958 and Y 1959.......................... 0
(iii) Y Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss.......................................... $10,000
Less:
Y's 1956 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 10,000
Less:
Y's preacquisition part year taxable income $36,693 ..........
computed under paragraph (f)(5) of this
section (($54,750+$365) x 243/365)...........
Minus Y's net operating loss deduction for xxx ..........
preacquisition part year.....................
------------
.......... 36,693
-----------
Carryover to Y's postacquisition part year, to Y 1958, 0
and to Y 1959..........................................
(iv) X Corporation's 1956 loss. The carryover to 1959 is $22,578,
computed as follows:
Net operating loss......................................... $25,000
Less:
X's 1954 taxable income....................... 0 ...........
X's 1955 taxable income....................... 0 ...........
X's 8/31/57-year taxable income $1,000 ......... ...........
before net operating loss
deduction........................
Minus X's net operating loss $17,000 0 0
deduction for 8/31/57-year (i.e.,
X's 1954 carryover of $7,000 and
X's 1955 carryover of $10,000)...
-------------
Carryover to Y's postacquisition part year............. $25,000
Less:
Y's postacquisition part year taxable income $18,422 ...........
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 16,000 ...........
postacquisition part year (i.e., X's 1954
carryover of $6,000, X's 1955 carryover of
$10,000 and Y's 1955 carryover of $0, to such
part year)...................................
------------
......... 2,422
------------
Carryover to Y 1958.................................... 22,578
Less:
Y's 1958 taxable income.................................. 0
-------------
Carryover to Y 1959.................................... 22,578
(v) Y Corporation's 1956 loss. The carryover to 1959 is $0, computed
as follows:
Net operating loss.......................................... $15,000
Less:
Y's 1955 taxable income................................... 0
-------------
Carryover to Y's preacquisition part year............... 15,000
Less:
Y's preacquisition part year taxable income $36,693 ..........
computed under paragraph (f)(5) of this
section......................................
Minus Y's net operating loss deduction for 10,000 ..........
preacquisition part year (i.e., Y's 1955
carryover to such part year).................
------------
.......... 26,693
-----------
Carryover to Y's postacquisition part year, to Y 1958, 0
and to Y 1959..........................................
(vi) Y Corporation's 1958 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss........................................... $5,000
Less:
Y's 1955 taxable income \1\.................... 0
Y's 1956 taxable income........................ 0 .........
------------
[[Page 371]]
.......... 0
----------
Carryback to Y's preacquisition part year................ $5,000
Less:
Y's preacquisition part year taxable income $36,693 .........
computed under paragraph (f)(5) of this
section.......................................
Minus Y's net operating loss deduction for 25,000 .........
preacquisition part year (i.e., Y's 1955
carryover of $10,000, and Y's 1956 carryover
of $15,000, to such part year)................
-------------
.......... 11,693
Carryback to Y's postacquisition part year and carryover 0
to Y 1959...............................................
\1\ Three-year carryback in case of loss years ending after December 31,
1957.
(vii) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $22,578, computed as follows:
X's 1955 loss............................................... 0
Y's 1955 loss............................................... 0
X's 1956 loss............................................... $22,578
Y's 1956 loss............................................... 0
Y's 1958 loss............................................... 0
-----------
Total...................................................... 22,578
(3) Net operating loss deduction for 1957. (i) The net operating
loss deduction available to Y Corporation under section 172(a) for the
calendar year 1957, determined in accordance with paragraph (d) of this
section, is $48,300, computed as follows:
Aggregate of the net operating loss carryovers ..........
available to the transferor corporation as of
the close of August 31, 1957, but limited by
paragraph (d) of this section to $18,300 (Y's
1957 taxable income of $54,750, computed
without any net operating loss deduction,
multiplied by 122/365)
Carryover of X's 1954 loss.................... $6,000
Carryover of X's 1955 loss.................... 10,000
Carryover of X's 1956 loss.................... 25,000
-------------
$41,000
Aggregate of carryovers, limited as above................... $18,300
Carryover of Y's 1955 loss.................................. 10,000
Carryover of Y's 1956 loss.................................. 15,000
Carryback of Y's 1958 loss.................................. 5,000
-------------
Net operating loss deduction............................... 48,800
(ii) The taxable income under section 63 for 1957 is $6,450,
computed as follows:
Taxable income determined without any net operating loss $54,750
deduction..................................................
Less:
Net operating loss deduction for 1957, as determined under $48,300
subdivision (i) of this subparagraph.....................
-----------
Taxable income under section 63............................ 6,450
(4) Net operating loss deduction for 1959. The taxable income under
section 63 for 1959 is $27,422, computed as follows:
Taxable income determined without any net operating loss $50,000
deduction..................................................
Less:
Net operating loss deduction for 1959 (i.e., the aggregate 22,578
carryovers determined under subparagraph (2)(vii) of this
paragraph)...............................................
-----------
Taxable income under section 63............................ 27,422
(5) Years to which losses may be carried. The taxable years to which
the losses of X Corporation and Y Corporation may be carried, and the
sequence in which carried, are as follows:
------------------------------------------------------------------------
Loss year Carried to
------------------------------------------------------------------------
X 1954............................ X 1955, X 1956, X 8/31/57, Y 1957, Y
1958.
X 1955............................ X 1954, X 1956, X 8/31/57, Y 1957, Y
1958, Y 1959.
Y 1955............................ Y 1956, Y 1957, Y 1958, Y 1959, Y
1960.
X 1956............................ X 1954, X 1955, X 8/31/57, Y 1957, Y
1958, Y 1959, Y 1960.
Y 1956............................ Y 1955, Y 1957, Y 1958, Y 1959, Y
1960, Y 1961.
Y 1958............................ Y 1955, Y 1956, Y 1957, Y 1959, Y
1960, Y 1961, Y 1962, Y 1963.
------------------------------------------------------------------------
[T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7564, 43 FR
40493, Sept. 12, 1978]
Sec. 1.381(c)(1)-2 Net operating loss carryovers; two or more dates
of distribution or transfer in the taxable year.
(a) In general. If the acquiring corporation succeeds to the net
operating loss carryovers of two or more distributor or transferor
corporations on two or more dates of distribution or transfer within one
taxable year of the acquiring corporation, the limitation to be applied
under section 381(c)(1)(B) to the aggregate of the net operating loss
carryovers to that taxable year from all of the distributor or
transferor corporations shall be determined by applying the rules
prescribed in paragraph (b) of this section, and the taxable income of
the acquiring corporation for that taxable year under sections
381(c)(1)(C) and 172(b)(2) shall be determined by applying the rules
prescribed in paragraph (c) of this section. For purposes of this
section, the term postacquisition income means postacquisition part year
taxable income determined under paragraph (d)(1) of Sec. 1.381(c)(1)-1
by treating the first date of distribution or transfer as though it were
the only date of distribution or transfer during the taxable year of the
acquiring corporation.
[[Page 372]]
(b) Determination of limitation under section 381(c)(1)(B)--(1) In
general. If the acquiring corporation succeeds to the net operating loss
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, and if the amount of the net operating
loss carryovers acquired on the first date of distribution or transfer
equals or exceeds the postacquisition income, then the limitation under
section 381(c)(1)(B) shall be an amount equal to such postacquisition
income. If the amount of the net operating loss carryovers acquired on
the first date of distribution or transfer is less than such
postacquisition income, then the limitation under section 381(c)(1)(B)
shall be determined as provided in subparagraphs (2) through (5) of this
paragraph.
(2) Allocation of postacquisition income among partial
postacquisition years. That part of the taxable year of the acquiring
corporation beginning on the day following the first date of
distribution or transfer and ending with the close of the taxable year
of the acquiring corporation shall be divided into the same number of
partial postacquisition years as the number of dates of distribution or
transfer on which the acquiring corporation succeeds to net operating
loss carryovers during its taxable year. The first partial
postacquisition year shall begin with the day following the first date
of distribution or transfer and shall end with the close of the second
date of distribution or transfer. The second and succeeding partial
postacquisition years shall begin with the day following the close of
the preceding such partial year and shall end with the close of the
succeeding date of distribution or transfer, or, if there is no such
succeeding date, then with the close of the taxable year of the
acquiring corporation. The postacquisition income of the acquiring
corporation shall be allocated among the partial postacquisition years
in proportion to the number of days in each such partial year.
(3) Two dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of two
distributor or transferor corporations on two dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first partial postacquisition
year, the limitation provided by section 381(c)(1)(B) shall be the
amount of the postacquisition income. If the income for the first
partial postacquisition year exceeds the net operating loss carryovers
acquired on the first date of distribution or transfer, the limitation
provided by section 381(c)(1)(B) shall be the amount of the
postacquisition income reduced by the amount of such excess. The
application of this subparagraph may be illustrated by the following
example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of Y and Z Corporations
in statutory mergers to each of which section 361 applies, the dates of
transfer being January 1 and December 1, respectively. The net operating
loss carryovers of each transferor corporation and the income for each
partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Corp. Carryovers Income for partial years Reduction
----------------------------------------------------------------------------------------------------------------
Y............................................ $1,000 $33,400 ($36,500x334/365) $32,400
Z............................................ 50,000 3,000 ($36,500x30/365) 0
-------------
51,000 36,400 32,400
----------------------------------------------------------------------------------------------------------------
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by $32,400, the excess of the
income for the first partial year ($33,400) over the net operating loss
carryovers acquired on the first date of transfer ($1,000). Accordingly,
the limitation is $4,000 ($36,400 minus $32,400). Therefore, although X
Corporation acquired carryovers aggregating $51,000 during 1955, it can
utilize only $4,000 of such carryovers in computing its net operating
loss deduction for 1955.
(4) Three dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of three
distributor or transferor corporations on three dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first and second partial
[[Page 373]]
postacquisition years, the limitation provided by section 381(c)(1)(B)
shall be the amount of the postacquisition income. If the amount of the
carryovers acquired on the first date equals or exceeds the income for
the first partial postacquisition year but does not equal or exceed the
income for the first and second partial postacquisition years, the
limitation shall be the amount of the postacquisition income reduced by
the excess of the income for the first and second partial
postacquisition years over the amount of carryovers acquired on the
first and second dates of distribution or transfer. If the income for
the first partial postacquisition year exceeds the carryovers acquired
on the first date, the limitation shall be the postacquisition income
reduced by the sum of the amount of such excess plus the amount, if any,
by which the income for the second partial postacquisition year exceeds
the carryovers acquired on the second date. This subparagraph may be
illustrated by the following examples:
Example (1). (i) X Corporation has taxable income (computed without
any net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of M, N, and Z
Corporations in statutory mergers to each of which section 361 applies,
the dates of transfer being January 1, January 31, and December 1,
respectively. The net operating loss carryovers of each transferor
corporation and the income for each partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Corp. Carryovers Income for partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................ $4,000 $3,000 ($36,500x 30/365) $23,400
N............................................ 6,000 30,400 ($36,500x304/365)
Z............................................ 50,000 3,000 ($36,500x 30/365) 0
-------------
60,000 36,400 23,400
----------------------------------------------------------------------------------------------------------------
(ii) Since the carryovers of $4,000 acquired on the first date of
transfer exceed the income for the first partial year ($3,000), the
limitation provided by section 381(c)(1)(B) is the amount of the
postacquisition income ($36,400) reduced by the excess of the income for
the first and second partial years ($33,400) over the carryovers
acquired on the first and second dates of transfer ($10,000). Therefore,
the limitation is $13,000 ($36,400 less $23,400).
Example (2). (i) Assume the same facts as in Example (1) except that
the amount of the net operating loss carryovers acquired from M
Corporation is $1,000. The net operating loss carryovers of each
transferor corporation and the income for each partial postacquisition
year are:
----------------------------------------------------------------------------------------------------------------
Corp. Carryovers Income for partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................ $1,000 $3,000 ($36,500x30/365) $2,000
N............................................ 6,000 30,400 ($36,500x304/365) 24,400
Z............................................ 50,000 3,000 ($36,500x30/365) 0
-------------
57,000 36,400 26,400
----------------------------------------------------------------------------------------------------------------
(ii) Since the income for the first partial year ($3,000) exceeds
the $1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by such excess and also reduced by the excess
of the income for the second partial year ($30,400) over the carryovers
acquired on the second date of transfer ($6,000). Therefore, the
limitation is $10,000 ($36,400 less the sum of $2,000 and $24,400).
Example (3). (i) Assume the same facts as in Example (2) except that
the carryovers acquired from N Corporation are $75,000. The net
operating loss carryovers of each transferor corporation and the income
for each partial postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Corp. Carryovers Income for partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................ $1,000 $3,000 ($36,500x 30/365) $2,000
N............................................ 75,000 30,400 ($36,500x304/365) 0
Z............................................ 50,000 3,000 ($36,500x 30/365) 0
-------------
126,000 36,400 2,000
----------------------------------------------------------------------------------------------------------------
(ii) Since the income for the first partial year ($3,000) exceeds
the $1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by $2,000, or $34,400. No further reduction is
made since the income for the second partial year ($30,400) does not
exceed the carryovers of $75,000 acquired on the second date of
transfer.
(5) Four or more dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of four or
more distributor or transferor corporations on four or more dates of
distribution or transfer during the same taxable year of the acquiring
corporation, the limitation provided by section 381(c)(1)(B) shall be
determined consistently with the methods prescribed in subparagraphs (3)
and (4) of this paragraph. The application of this subparagraph may be
illustrated by the following example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar
[[Page 374]]
year 1955. During 1955, X Corporation acquired the assets of M, N, O, Y,
and Z Corporations in statutory mergers to each of which section 361
applied, the dates of transfer being, respectively, January 1, January
31, March 3, April 2, and December 1. The net operating loss carryovers
of each transferor corporation and the income for each partial
postacquisition year are:
----------------------------------------------------------------------------------------------------------------
Corp. Carryovers Income for partial years Reduction
----------------------------------------------------------------------------------------------------------------
M............................................ $1,000 $3,000 ($36,500x 30/365) $2,000
N............................................ 4,000 3,100 ($36,500x 31/365) .........
O............................................ 1,000 3,000 ($36,500x 30/365) 1,100
Y............................................ 10,000 24,300 ($36,500x243/365) 14,300
Z............................................ 20,000 3,000 ($36,500x 30/365) 0
-------------
36,000 36,400 17,400
----------------------------------------------------------------------------------------------------------------
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by the sum of (a) the $2,000
excess of the income for the first partial year ($3,000) over the
carryovers acquired from M Corporation ($1,000), (b) the $1,100 excess
of the income for the second and third partial years ($6,100) over the
carryovers acquired from N and O Corporations ($5,000), and (c) the
$14,300 excess of the income for the fourth partial year ($24,300) over
the carryovers acquired from Y Corporation ($10,000). Accordingly, the
limitation is $19,000 ($36,400 minus $17,400). Therefore, although X
Corporation acquired carryovers aggregating $36,000 during 1955, it can
utilize only $19,000 of such carryovers in computing its net operating
loss deduction for 1955.
(c) Determination of taxable income of acquiring corporation under
section 381(c)(1)(C)--(1) In general. If the acquiring corporation
succeeds to the net operating loss carryovers of two or more distributor
or transferor corporations on two or more dates of distribution or
transfer within one taxable year of the acquiring corporation, then
pursuant to section 381(c)(1)(C) the taxable income of the acquiring
corporation for its taxable year which is a prior taxable year for
purposes of section 172(b)(2) and paragraph (e) of Sec. 1.381(c)(1)-1
shall be determined as provided in this paragraph.
(2) Division of taxable income. The taxable income of the acquiring
corporation (computed with the modifications specified in section
172(b)(2)(A) but without any net operating loss deduction) shall be
allocated proportionately on a daily basis among a preacquisition part
year (determined under paragraph (f)(3) of Sec. 1.381(c)(1)-1 by
treating the first date of distribution or transfer as though it were
the only date of distribution or transfer during the taxable year of the
acquiring corporation) and two or more partial postacquisition years
(determined as provided in paragraph (b)(2) of this section). The
preacquisition part year and each partial postacquisition year shall be
considered a separate taxable year, but only for the limited purpose of
applying sections 172(b)(2) and 381(c)(1)(C).
(3) Net operating loss deduction. The net operating loss deduction
of the preacquisition part year and the partial postacquisition years
shall be determined consistently with the manner described in paragraph
(f)(6) of Sec. 1.381(c)(1)-1 but by taking into account, in the case of
any partial postacquisition year, only the net operating loss carryovers
and carrybacks of the acquiring corporation and those net operating loss
carryovers from a distributor or transferor corporation which become
available to the acquiring corporation as of the close of those dates of
distribution or transfer which occur before the beginning of that
specific partial postacquisition year. The sequence in which the net
operating losses of the distributor or transferor and acquiring
corporations shall be applied for this purpose shall be determined in
the manner described in paragraph (e) of Sec. 1.381(c)(1)-1. Subject to
the preceding sentence, the net operating loss carryovers to any
specific partial postacquisition year, whether from a distributor,
transferor, or acquiring corporation, shall be taken into account in the
order of the taxable years in which the net operating losses arose,
beginning with the loss for the earliest taxable year.
(4) Illustration. The application of this paragraph may be
illustrated by the following example:
Example-- (i) Facts. X Corporation, which was organized on January
1, 1957, sustained a net operating loss of $20,000 for its calendar year
1957 and had taxable income (computed without any net operating loss
deduction) of $36,500 for its calendar year 1958. During 1958, X
Corporation acquired the assets of Y and Z Corporations in statutory
mergers to each of which section 361 applied, the dates of transfer
being June 30 and September 30, respectively. None of the modifications
specified in
[[Page 375]]
section 172(b)(2)(A) apply to any of the corporations for any taxable
year. The taxable income (computed without any net operating loss
deduction) and net operating losses of Y and Z Corporations (which were
organized on January 1, 1957, and January 1, 1954, respectively) are set
forth below:
------------------------------------------------------------------------
Acquiring Transferor Transferor
Taxable year corporation corporation corporation
X Y Z
------------------------------------------------------------------------
1954............................. xxx xxx ($30,000)
1955............................. xxx xxx 1,000
1956............................. xxx xxx 1,000
1957............................. ($20,000) ($25,000) 1,000
Ending 6-30-58................... xxx 1,000 xxx
Ending 9-30-58................... xxx xxx 1,000
1958............................. 36,500 xxx xxx
------------------------------------------------------------------------
The sequence in which the losses of the acquiring corporation and the
transferor corporations are applied and the computation of the
carryovers to X Corporation's calendar year 1959 are illustrated in the
following subdivisions of this example.
(ii) Computation of taxable income. X Corporation's taxable income,
determined in the manner described in subparagraph (2) of this
paragraph, for the preacquisition part year and for the partial
postacquisition years is as follows:
------------------------------------------------------------------------
Taxable
Year income Computation
------------------------------------------------------------------------
Preacquisition part year................ $18,100 $36,500x181/365
Partial No. 1........................... 9,200 36,500x92/365
Partial No. 2........................... 9,200 36,500x92/365
------------------------------------------------------------------------
(iii) Z Corporation's 1954 loss. The carryover to 1959 is $0,
computed as follows:
Net operating loss......................................... $30,000
Less:
Z's 1955, 1956, 1957, and 9/30/58-3 year income.......... 4,000
------------
Net operating loss carryover to Partial No. 2 year......... 26,000
Less:
Partial No. 2 year taxable income........................ 9,200
------------
16,800
------------------------------------------------------------------------
The balance of $16,800 is not carried over to 1959 since X Corporation's
taxable year 1958 is the last of the five years to which Z's 1954 loss
may be carried under section 172(b)(1).
(iv) Y Corporation's 1957 loss. The carryover to 1959 is $14,800,
computed as follows:
Net operating loss........................................... $25,000
Less:
Y's 6/30/58-year income.................................... 1,000
------------
Net operating loss carryover to Partial No. 1 year........... 24,000
Less:
Partial No. 1 year taxable income.......................... 9,200
------------
Carryover to Partial No. 2 year.......................... 14,800
Less:
X's Partial No. 2 year taxable income........... $9,200 .........
Minus X's net operating loss deduction for 26,000 .........
Partial No. 2 year (i.e., Z's 1954 carryover of
$26,000 to such partial year)..................
-----------
......... 0
----------
Carryover to 1959........................................ 14,800
(v) X Corporation's 1957 loss. The carryover to 1959 is $1,900,
computed as follows:
Net operating loss........................................... $20,000
Less:
X's preacquisition part year taxable income................ 18,100
------------
Carryover to Partial No. 1 year.......................... 1,900
Less:
Partial No. 1 year taxable income............... $9,200
Minus X's net operating loss deduction for 24,000 .........
Partial No. 1 year (i.e., Y's 1957 carryover of
$24,000 to such partial year)..................
-----------
......... 0
----------
Carryover to Partial No. 2 year.......................... 1,900
Less:
Partial No. 2 year taxable income............... $9,200
Minus X's net operating loss deduction for 40,800 .........
Partial No. 2 year (i.e., Z's 1954 carryover of
$26,000, and Y's 1957 carryover of $14,800, to
such partial year..............................
-----------
......... 0
----------
Carryover to 1959........................................ $1,900
(vi) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $16,700, computed as follows:
Z's 1954 loss............................................... xxx
Y's 1957 loss............................................... $14,800
X's 1957 loss............................................... 91,900
-----------
Total...................................................... 16,700
Sec. 1.381(c)(2)-1 Earnings and profits.
(a) In general. (1) Section 381(c)(2) requires the acquiring
corporation in a transaction to which section 381(a) applies to succeed
to, and take into account, the earnings and profits, or deficit in
earnings and profits, of the distributor or transferor corporation as of
the close of the date of distribution or transfer. In determining the
amount of such earnings and profits, or deficit, to be carried over, and
the manner in which they are to be used by the acquiring corporation
after such date, the provisions of section 381(c)(2) and this section
shall apply. For purposes of section 381(c)(2) and this section, if
[[Page 376]]
the distributor or transferor corporation accumulates earnings and
profits, or incurs a deficit in earnings and profits, after the date of
distribution or transfer and before the completion of the reorganization
or liquidation, such earnings and profits, or deficit, shall be deemed
to have been accumulated or incurred as of the close of the date of
distribution or transfer.
(2) If the distributor or transferor corporation has accumulated
earnings and profits as of the close of the date of distribution or
transfer, such earnings and profits shall (except as hereinafter
provided in this section) be deemed to be received by, and to become a
part of the accumulated earnings and profits of, the acquiring
corporation as of such time. Similarly, if the distributor or transferor
corporation has a deficit in accumulated earnings and profits as of the
close of the date of distribution or transfer, such deficit shall
(except as hereinafter provided in this section) be deemed to be
incurred by the acquiring corporation as of such time. In no event,
however, shall the accumulated earnings and profits, or deficit, of the
distribution or transferor corporation be taken into account in
determining earnings and profits of the acquiring corporation for the
taxable year during which occurs the date of distribution or transfer.
(3) Any part of the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of the distributor or transferor
corporation which consists of earnings and profits, or deficits,
accumulated before March 1, 1913, shall be deemed to become earnings and
profits, or deficits, of the acquiring corporation accumulated before
March 1, 1913, and any part of the accumulated earnings and profits of
the distributor or transferor corporation which consists of increase in
value of property accrued before March 1, 1913, shall be deemed to
become earnings and profits of the acquiring corporation consisting of
increase in value of property accrued before March 1, 1913.
(4) If the acquiring corporation and each distributor or transferor
corporation has accumulated earnings and profits as of the close of the
date of distribution or transfer, or if each of such corporations has a
deficit in accumulated earnings and profits as of such time, then the
accumulated earnings and profits (or deficit) of each such corporation
shall be consolidated as of the close of the date of distribution or
transfer in the accumulated earnings and profits account of the
acquiring corporation. See subparagraph (6) of this paragraph for
determination of the accumulated earnings and profits (or deficit) of
the acquiring corporation as of the close of the date of distribution or
transfer.
(5) If (i) one or more corporations a party to a distribution or
transfer has accumulated earnings and profits as of the close of the
date of distribution or transfer, and (ii) one or more of such
corporations has a deficit in accumulated earnings and profits as of
such time, the total of any such deficits shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer. In such instance, the
acquiring corporation will be considered as maintaining two separate
earnings and profits accounts after the date of distribution or
transfer. The first such account shall contain the total of the
accumulated earnings and profits as of the close of the date of
distribution or transfer of each corporation which has accumulated
earnings and profits as of such time, and the second such account shall
contain the total of the deficits in accumulated earnings and profits of
each corporation which has a deficit as of such time. The total deficit
in the second account may not be used to reduce the accumulated earnings
and profits in the first account (although such earnings and profits may
be offset by deficits incurred, or deemed to have been incurred, after
the date of distribution or transfer) but shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer.
(6) In any case in which it is necessary to compute the accumulated
earnings and profits, or the deficit in
[[Page 377]]
accumulated earnings and profits, of the acquiring corporation as of the
close of the date of distribution or transfer and such date is a day
other than the last day of a taxable year of the acquiring corporation--
(i) If the acquiring corporation has earnings and profits for its
taxable year during which occurs the date of distribution or transfer,
such earnings and profits (a) shall be deemed to have accumulated as of
the close of such date in an amount which bears the same ratio to the
undistributed earnings and profits of such corporation for such year as
the number of days in the taxable year preceding the date following the
date of distribution or transfer bears to the total number of days in
the taxable year, and (b) shall be deemed to have accumulated after the
date of distribution or transfer in an amount which bears the same ratio
to the undistributed earnings and profits of such corporation for such
year as the number of days in the taxable year following such date bears
to the total number of days in such taxable year. For purposes of the
preceding sentence, the undistributed earnings and profits of the
acquiring corporation for such taxable year shall be the earnings and
profits for such taxable year reduced by any distributions made
therefrom during such taxable year.
(ii) If the acquiring corporation has an operating deficit for its
taxable year during which occurs the date of distribution or transfer,
then, unless the actual accumulated earnings and profits, or deficit, as
of such date can be shown, such operating deficit shall be deemed to
have accumulated in a manner similar to that described in subdivision
(i) of this subparagraph.
(7) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example (1). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $150,000
calendar year 1958..........................
Earnings and profits of taxable year ending 15,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, N acquires from M accumulated
earnings and profits of $115,000. Since M and N each has accumulated
earnings and profits as of the close of the date of transfer, M's
accumulated earnings and profits are added to N's accumulated earnings
and profits as of such time. However, no part of M's accumulated
earnings and profits is taken into account in determining N's earnings
and profits for the calendar year 1959. Therefore, N's earnings and
profits for the calendar year 1959 are $36,500.
Example (2). (i) X and Y Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation transfers
all its assets to Y Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
------------------------------------------------------------------------
X Y
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $20,000 $100,000
calendar year 1958..........................
Deficit in earnings and profits for taxable 80,000 ...........
year ending June 30, 1959...................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, Y acquires from X a deficit
in accumulated earnings and profits in the amount of $60,000. This
deficit may be used only to reduce those earnings and profits of Y which
are accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, the accumulated earnings and
profits of Y amount to $118,100; at such time Y also has a separate
deficit in accumulated earnings and profits in the amount of $41,600.
These amounts are determined as follows:
Accumulated earnings and profits of Y as of the close of $100,000
1958.......................................................
Add:
Portion of undistributed earnings and profits of Y for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500x181/365)...................................
-----------
[[Page 378]]
Accumulated earnings and profits of Y as of close of 118,100
June 30, 1959, and also as of Dec. 31, 1959............
===========
Portion of undistributed earnings and profits of Y for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
Less:
Deficit in accumulated earnings and profits acquired by Y 60,000
from X Corporation as of close of June 30, 1959..........
-----------
Separate deficit in accumulated earnings and profits of 41,600
Y as of Dec. 31, 1959..................................
Example (3). Assume the same facts as in Example (2), except that on
September 15, 1959, Y Corporation makes a cash distribution of $96,500.
The entire distribution is a dividend: $36,500 from earnings and profits
for the taxable year 1959 and $60,000 from earnings and profits
accumulated as of December 31, 1958. Accordingly, as of December 31,
1959, Y has accumulated earnings and profits of $40,000, and also has a
separate deficit in accumulated earnings and profits of $60,000. These
amounts are determined as follows:
Earnings and profits of Y for calendar year 1959............. $36,500
Accumulated earnings and profits of Y as of close of 1958.... 100,000
----------
Total....................................................... 136,500
Less:
Distributions during 1959.................................. 96,500
----------
Accumulated earnings and profits of Y as of Dec. 31, 1959 40,000
==========
Deficit in accumulated earnings and profits acquired from X $60,000
as of close of June 30, 1959................................
Less:
Portion of Y's undistributed earnings and profits for 1959 0
deemed to have accumulated after June 30, 1959............
----------
Separate deficit in accumulated earnings and profits of Y 60,000
as of Dec. 31, 1959.....................................
Example (4). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
------------------------------------------------------------------------
M N
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits at close of $100,000 $50,000
calendar year 1958..........................
Earnings and profits for taxable year ending 10,000 ...........
June 30, 1959...............................
Deficit in earnings and profits for calendar ............ 146,000
year 1959...................................
Distributions during calendar year 1959...... 0 0
------------------------------------------------------------------------
(ii) Assuming that N has not shown its actual accumulated earnings
and profits, or deficit, as of the close of June 30, 1959, N has a
deficit in accumulated earnings and profits at such time which amounts
to $22,400, determined as follows:
Accumulated earnings and profits of N as of close of 1958.... $50,000
Less:
Portion of deficit in earnings and profits of N for 1959 72,400
deemed to have accumulated as of close of June 30, 1959
($146,000x181/365)........................................
----------
Deficit in accumulated earnings and profits of N as of 22,400
close of June 30, 1959, and also as of Dec. 31, 1959....
------------------------------------------------------------------------
As of the close of June 30, 1959, N acquires from M accumulated earnings
and profits in the amount of $110,000, no part of which may be offset by
N's own deficit of $22,400; however, such earnings and profits may be
offset by deficits incurred, or deemed incurred, by N after June 30,
1959. Thus, as of December 31, 1959, N has the above-mentioned deficit
of $22,400; at such time N also has accumulated earnings and profits in
the amount of $36,400, determined as follows:
Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Portion of deficit in earnings and profits of N for 1959 73,600
deemed to have accumulated after June 30, 1959
($146,000x184/365).......................................
-----------
Accumulated earnings and profits of N as of Dec. 31, 36,400
1959...................................................
Example (5). Assume the same facts as in Example (4), except that on
September 9, 1959, N Corporation makes a cash distribution of $100,000.
The amount of $82,000 is a dividend from accumulated earnings and
profits, computed as follows:
Accumulated earnings and profits acquired from M as of close $110,000
of June 30, 1959...........................................
Less:
Deficit in earnings and profits of N for 1959 deemed to 28,000
have accumulated from June 30 through Sept. 8, 1959
($146,000x70/365)........................................
-----------
Accumulated earnings and profits as of close of Sept. 8, 82,000
1959...................................................
As of December 31, 1959, N Corporation has a deficit in accumulated
earnings and profits of $68,000, computed as follows:
Deficit in accumulated earnings and profits of N as of close $22,400
of June 30, 1959............................................
Add:
Portion of N's deficit in earnings and profits for 1959 45,600
deemed to have accumulated after Sept. 8, 1959
($146,000x114/365)........................................
----------
Deficit in accumulated earnings and profits of N as of 68,000
Dec. 31, 1959...........................................
Example (6). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation and Y
Corporation transfer all their assets to
[[Page 379]]
Z Corporation in a statutory merger to which section 361 applies. The
books of the three corporations reveal the following information:
----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) at close of calendar year $35,000 ($25,000) ($20,000)
1958..................................................................
Earnings and profits (or deficit) for taxable year ended June 30, 1959. 5,000 (5,000) ...........
Earnings and profits for calendar year 1959............................ ............ ............ 36,500
Distributions during 1959.............................................. 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) As of the close of June 30, 1959, Z acquires from Y a deficit
in accumulated earnings and profits of $30,000. As of such time, Z's own
deficit in accumulated earnings and profits amounts to $1,900,
determined as follows:
Deficit in accumulated earnings and profits of Z as of close $20,000
of 1958....................................................
Less:
Portion of undistributed earnings and profits of Z for 18,100
1959 deemed to have accumulated as of close of June 30,
1959 ($36,500x181/365)...................................
-----------
Deficit in accumulated earnings and profits as of close 1,900
of June 30, 1959.......................................
The total deficit of $31,900 may be used only to offset earnings and
profits of Z accumulated, or deemed to have accumulated, after June 30,
1959; such deficit may not be used to reduce the accumulated earnings
and profits of $40,000 acquired from X as of the close of June 30, 1959.
Thus, as of December 31, 1959, the accumulated earnings and profits of Z
amount to $40,000; at such time Z Corporation also has a separate
deficit in accumulated earnings and profits in the amount of $13,500,
determined as follows:
Deficit in accumulated earnings and profits as of close of $31,900
June 30, 1959..............................................
Less:
Portion of undistributed earnings and profits of Z for 18,400
1959 deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
-----------
Separate deficit in accumulated earnings and profits as 13,500
of Dec. 31, 1959.......................................
Example (7). X and Y Corporations make their returns on the basis of
the calendar year. On December 31, 1954, X transfers all its assets to Y
in a statutory merger to which section 361 applies. The books of the two
corporations reveal the following information:
------------------------------------------------------------------------
X Y
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits (or deficit) ($50,000) $210,000
at close of calendar year 1954..............
Earnings and profits (or deficit) for
calendar year:
1955....................................... ............ 5,000
1956....................................... ............ (20,000)
1957....................................... ............ 70,000
1958....................................... ............ 60,000
1959....................................... ............ 55,000
Cash distributions on:
Sept. 1, 1957.............................. ............ 80,000
Sept. 1, 1958.............................. ............ 40,000
Sept. 1, 1959.............................. ............ 30,000
------------------------------------------------------------------------
The balances in the accumulated earnings and profits account and the
separate deficit account of Y Corporation at the close of the taxable
year involved are as follows:
------------------------------------------------------------------------
Accumulated
Deficit earnings
Year acquired and profits
from X of Y
Corporation Corporation
------------------------------------------------------------------------
1954.......................................... $50,000 $210,000
1955.......................................... 45,000 210,000
1956.......................................... 45,000 190,000
1957.......................................... 45,000 180,000
1958.......................................... 25,000 180,000
1959.......................................... None 180,000
------------------------------------------------------------------------
(b) Successive acquisitions. (1) If, as of the date of distribution
or transfer, either the acquiring corporation, or the distributor or
transferor corporation, or both, is considered under paragraph (a) of
this section to be maintaining separate earnings and profits accounts as
the result of a prior transaction or transactions to which section
381(a) applied, the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of each such corporation shall be
combined with the appropriate earnings and profits account of the other
such corporation. For example, if, as of the date of transfer, the
acquiring corporation and the transferor corporation are each
maintaining separate accounts, one containing accumulated earnings and
profits and the other containing a deficit in accumulated earnings and
profits, the amounts in the two accumulated earnings and profits
accounts shall be combined into one account, and the amounts in the
[[Page 380]]
two deficit accounts shall be combined into a second account, and the
amount in one combined account may not be used to offset the amount in
the other combined account.
(2) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example (1). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1958, X Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
361 applies, and on August 31, 1958, Y Corporation transfers all its
assets to Z Corporation in another statutory merger to which section 361
applies. The books of the three corporations reveal the following
information:
----------------------------------------------------------------------------------------------------------------
X Y Z
Description Corporation Corporation Corporation
(transferor) (transferor) (acquirer)
----------------------------------------------------------------------------------------------------------------
Accumulated earnings and profits (deficit) at close of calendar year ($40,000 $10,000 $60,000
1957..................................................................
Deficit in earnings and profits for taxable year ending June 30, 1958.. (5,000) ............ ...........
Earnings and profits for taxable year ending Aug. 31, 1958............. ............ 2,000 ...........
Earnings and profits of calendar year 1958............................. ............ ............ 36,500
Distributions during calendar year 1958................................ 0 0 0
----------------------------------------------------------------------------------------------------------------
(ii) As of the close of June 30, 1958, Z acquires from X a deficit
in accumulated earnings and profits in the amount of $45,000, which
deficit may be used only to reduce those earnings and profits of Z which
are accumulated, or deemed to have been accumulated, after June 30,
1958. As of the close of August 31, 1958, Z acquires from Y earnings and
profits of $12,000, no portion of which may be reduced by the deficit
acquired by Z from X. Accordingly, as of December 31, 1958, Z has
accumulated earnings and profits of $90,100, and also has a separate
deficit in accumulated earnings and profits of $26,600. These amounts
are determined as follows:
Accumulated earnings and profits of Z as of Dec. 31, 1957... $60,000
Add:
Portion of undistributed earnings and profits of Z for 18,100
1958 deemed to have accumulated as of close of June 30,
1958 ($36,500x181/365)...................................
-----------
Accumulated earnings and profits of Z as of June 30, 1958... 78,100
Add:
Accumulated earnings and profits acquired by Z from Y as 12,000
of close of Aug. 31, 1958................................
-----------
Accumulated earnings and profits of Z as of close of Aug. 90,100
31, 1958, and also as of Dec. 31, 1958.....................
===========
Deficit in accumulated earnings and profits acquired by Z 45,000
from X as of close of June 30, 1958........................
Less:
Portion of undistributed earnings and profits of Z for 6,200
1958 deemed to have accumulated from June 30 through Aug.
31, 1958 ($36,500x62/365)................................
-----------
Separate deficit in accumulated earnings and profits of 38,800
Z as of Aug. 31, 1958..................................
Less:
Portion of undistributed earnings and profits of Z for 12,200
1958 deemed to have accumulated after Aug. 31, 1958
($36,500x122/365)........................................
-----------
Separate deficit in accumulated earnings and profits of 26,600
Z as of Dec. 31, 1958..................................
Example (2). (i) Assume the same facts as in Example (1), plus the
additional fact that on June 30, 1959, Z Corporation transfers all its
assets to M Corporation (which makes its return on the basis of the
calendar year) in a statutory merger to which section 361 applies, and
that as of such time M Corporation is considered to be maintaining
separate earnings and profits accounts as the result of a previous
transaction to which section 381(a) applied. The books of the two
corporations reveal the following information:
------------------------------------------------------------------------
Z M
Description Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
Accumulated earnings and profits as of Dec. $90,100 $50,000
31, 1958....................................
Separate deficit in accumulated earnings and 26,600 30,000
profits as of Dec. 31, 1958.................
Earnings and profits for taxable year ending 5,000 ...........
June 30, 1959...............................
Earnings and profits of calendar year 1959... ............ 36,500
Distributions during 1959.................... 0 0
------------------------------------------------------------------------
(ii) As of June 30, 1959, M acquires from Z accumulated earnings and
profits of $90,100, which amount is combined with M's own accumulated
earnings and profits of $50,000; M also acquires from Z a deficit in
accumulated earnings and profits of $21,600 ($26,600 minus $5,000),
which amount is combined with M's own deficit of $11,900. The total
deficit of
[[Page 381]]
$33,500 may be used only to reduce earnings and profits of M which are
accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, M has accumulated earnings and
profits of $140,100, and also has a separate deficit in accumulated
earnings and profits in the amount of $15,100. These amounts are
determined as follows:
Deficit of M as of Dec. 31, 1958............................ $30,000
Less:
Portion of M's undistributed earnings and profits for 1959 18,100
deemed to have accumulated as of close of June 30, 1959
($36,500x181/365)........................................
-----------
Deficit of M as of June 30, 1959........................ 11,900
Plus:
Deficit of Z as of June 30, 1959.......................... 21,600
-----------
Combined deficit of M as of close of June 30, 1959...... 33,500
Less:
Portion of M's undistributed earnings and profits for 1959 18,400
deemed to have accumulated after June 30, 1959
($36,500x184/365)........................................
-----------
Separate deficit of M as of Dec. 31, 1959............... 15,100
===========
Accumulated earnings and profits of M as of Dec. 31, 1958, 50,000
and also as of June 30, 1959...............................
Accumulated earnings and profits of Z as of Dec. 31, 1958, 90,100
and also as of June 30, 1959...............................
-----------
Combined accumulated earnings and profits of M as of 140,100
close of June 30, 1959, and also as of Dec. 31, 1959...
(c) Distribution of earnings and profits pursuant to reorganization
or liquidation. (1) If, in a reorganization to which section 381(a)(2)
applies, the transferor corporation pursuant to the plan of
reorganization distributes to its stockholders property consisting not
only of property permitted by section 354 to be received without
recognition of gain, but also of other property or money, then the
accumulated earnings and profits of the transferor corporation as of the
close of the date of transfer shall be computed by taking into account
the amount of earnings and profits properly applicable to the
distribution, regardless of whether such distribution occurs before or
after the close of the date of transfer.
(2) If, in a distribution to which section 381(a)(1) (relating to
certain liquidations of subsidiaries) applies, the acquiring corporation
receives less than 100 percent of the assets distributed by the
distributor corporation, then the accumulated earnings and profits of
the distributor corporation as of the close of the date of distribution
shall be computed by taking into account the amount of earnings and
profits properly applicable to the distributions to minority
stockholders, regardless of whether such distributions occur before or
after the close of the date of distribution.
(d) Treatment of earnings and profits where assets are transferred
to a corporation controlled by the acquiring corporation. If, pursuant
to the provisions of paragraph (b)(2) of Sec. 1.381(a)-1, a corporation
is considered to be the acquiring corporation even though a part of the
acquired assets is transferred to one or more corporations controlled by
the acquiring corporation, or all the acquired assets are transferred to
two or more corporations controlled by the acquiring corporation, then
whether any portion of the earnings and profits received by the
acquiring corporation under section 381(c)(2) is allocable to such
controlled corporation or corporations shall be determined without
regard to section 381. See paragraph (a) of Sec. 1.312-11.
[T.D. 6586, 26 FR 12550, Dec. 28, 1961, as amended by T.D. 6692, 28 FR
12817, Dec. 3, 1963]
Sec. 1.381(c)(3)-1 Capital loss carryovers.
(a) Carryover requirement. (1) Section 381(c)(3) requires the
acquiring corporation in a transaction to which section 381(a) applies
to succeed to, and take into account, the capital loss carryovers of the
distributor or transferor corporation. To determine the amount of these
carryovers as of the close of the date of distribution or transfer, and
to integrate them with the capital loss carryovers of the acquiring
corporation for purposes of determining the taxable income of the
acquiring corporation for taxable years ending after the date of
distribution or transfer, it is necessary to apply the provisions of
section 1212 in accordance with the conditions and limitations of
section 381(c)(3) and this section.
(2) The capital loss carryovers of the acquiring corporation as of
the close of the date of distribution or transfer shall be determined
without reference to any capital gains or capital losses of the
distributor or transferor corporation. The capital loss carryovers of a
[[Page 382]]
distributor or transferor corporation as of the close of the date of
distribution or transfer shall be determined without reference to any
capital gains or capital losses of the acquiring corporation.
(3) This section contains rules applicable to capital loss
carryovers determined without reference to the amendment of section
1212(a) made by section 7 of the Act of September 2, 1964 (Public Law
88-571, 78 Stat. 860) in respect of foreign expropriation capital
losses. If the distributor, transferor, or acquiring corporation
sustains a net capital loss in a taxable year ending after December 31,
1958, any portion of which is attributable to a foreign expropriation
capital loss, such portion shall be carried over to each of the ten
succeeding taxable years consistently with the rules prescribed in this
section and paragraph (a)(2) of Sec. 1.1212-1.
(b) First taxable year to which carryovers apply. (1) The capital
loss carryovers available to the distributor or transferor corporation
as of the close of the date of distribution or transfer shall first be
carried to the first taxable year of the acquiring corporation ending
after that date. This rule applies irrespective of whether the date of
distribution or transfer is on the last day, or any other day, of the
acquiring corporation's taxable year.
(2) The capital loss carryovers available to the distributor or
transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(c) Limitation on capital loss carryovers for first taxable year
ending after date of distribution or transfer. (1) Any capital loss
carryover of a distributor or transferor corporation which is available
to the acquiring corporation as of the close of the date of distribution
or transfer shall be a short-term capital loss of the acquiring
corporation in each of the taxable years to which the net capital loss
giving rise to such carryover may be carried to the extent provided in
section 1212 and this section. However, in the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
the total capital loss carryovers of the distributor or transferor
corporation which may be treated in that year as short-term capital
losses of the acquiring corporation is limited by section 381(c)(3)(B)
to an amount which bears the same ratio to the acquiring corporation's
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) for such first taxable year (determined without
regard to any capital loss carryovers) as the number of days in such
first taxable year which follow the date of distribution or transfer
bears to the total number of days in such taxable year. Thus, if the
date of distribution or transfer is the last day of the acquiring
corporation's taxable year, there is no limitation under section
381(c)(3)(B) on the amount of such carryovers which may be treated as
short-term capital losses of the acquiring corporation for its first
taxable year ending after that date.
(2) The limitation provided by section 381(c)(3)(B) shall be applied
to the aggregate of the capital loss carryovers of the distributor or
transferor corporation without reference to the taxable years in which
the net capital losses giving rise to the carryovers were sustained. If
the acquiring corporation has acquired the assets of two or more
distributor or transferor corporations on the same date of distribution
or transfer, then the limitation provided by section 381(c)(3)(B) shall
be applied to the aggregate of the capital loss carryovers from all of
such distributor or transferor corporations.
(3) If the acquiring corporation succeeds to the capital loss
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the limitation to be applied under section
381(c)(3)(B) to the aggregate of such carryovers shall be determined
consistently with the rules prescribed in paragraph (b) of Sec.
1.381(c)(1)-2.
(4) The application of this paragraph may be illustrated by the
following example:
Example. (i) X and Y Corporations are organized on January 1, 1954,
and make their returns on the basis of the calendar year. On
[[Page 383]]
July 4, 1957, X Corporation transfers all its assets to Y Corporation in
a statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after Dec. 31, 1976), (computed without regard to any capital
loss carryovers) of the two corporations are as follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1954......................................... ($5,000) 0
1955......................................... (10,000) $5,000
1956......................................... (25,000) (7,000)
Ending 7-4-57................................ (8,000) ...........
1957......................................... ............ 36,500
------------------------------------------------------------------------
(ii) The capital loss carryovers of X Corporation which are
available to Y Corporation as of the close of July 4, 1957, amount to
$48,000 in the aggregate; but only $18,000 ($36,500 x 180/365 ) of such
amount may be treated as short-term capital losses of Y Corporation for
1957.
(d) Computation of carryovers; general rule--(1) Sequence for
applying losses and determination of capital gain net income. Section
1212 provides that a net capital loss sustained in any taxable year
(hereinafter referred to as the ``loss year'') shall be carried over to
each of the five succeeding taxable years and treated in each of such
succeeding years as a short-term capital loss to the extent not allowed
as a deduction against any capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of any taxable years
intervening between the loss year and the taxable year to which such
loss is carried. For this purpose, the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of any
intervening taxable year is determined without regard to the net capital
loss for the loss year or for any taxable year thereafter, and the
various capital loss carryovers from taxable years preceding the loss
year to any such intervening taxable year are considered to be applied
in reduction of the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) for such year in the
order of the taxable years in which the losses were sustained, beginning
with the loss for the earliest preceding taxable year. The application
of these rules to the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of the acquiring
corporation for any taxable year ending after the date of distribution
or transfer involves the use of carryovers of the distributor or
transferor corporation and of the acquiring corporation. In determining
the order in which the capital loss carryovers of the distributor or
transferor and acquiring corporations from taxable years ending on or
before the date of distribution or transfer are considered to be applied
in reduction of the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of the acquiring
corporation for any intervening taxable year ending after such date, the
following rules shall apply:
(i) Each taxable year of the distributor or transferor and acquiring
corporations which, with respect to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
constitutes a first preceding taxable year, shall be treated as if each
such year ended on the same day, whether or not such taxable years
actually end on the same day. In like manner, each taxable year of the
distributor or transferor and acquiring corporations which, with respect
to such first taxable year of the acquiring corporation ending after the
date of distribution or transfer, constitutes a second preceding taxable
year, shall be treated as if each such year ended on the same day
(whether or not such taxable years actually end on the same day), and a
similar rule shall be applied with respect to those taxable years of the
distributor or transferor and acquiring corporations which constitute
third, fourth, and fifth preceding taxable years;
(ii) If in the same preceding taxable year both the distributor or
transferor and acquiring corporations incurred a net capital loss which
is a carryover to an intervening taxable year of the acquiring
corporation ending after the date of distribution or transfer, then in
applying such losses in reduction of the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) for
such an intervening year, either such loss may be taken into account
before the other; and
[[Page 384]]
(iii) The rules of subdivisions (i) and (ii) of this subparagraph
shall apply regardless of the number of distributor or transferor
corporations the assets of which are acquired by the acquiring
corporation on the same date of distribution or transfer.
(2) Cross reference. If the date of distribution or transfer is a
day other than the last day of a taxable year of the acquiring
corporation, then in determining the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of the
acquiring corporation for its first taxable year ending after the date
of distribution or transfer, section 1212 and this paragraph shall be
applied in the special manner set forth in paragraph (e) of this
section.
(3) Years to which losses may be carried. The taxable years to which
a net capital loss shall be carried are prescribed by section 1212.
Since the taxable year of a distributor or transferor corporation ends
with the close of the date of distribution or transfer, such taxable
year and the first taxable year of the acquiring corporation which ends
after that date are considered two separate taxable years to which a net
capital loss of the distributor or transferor corporation for any
taxable year ending before that date shall be carried. This rule applies
even though the taxable year of the distributor or transferor
corporation which ends on the date of distribution or transfer is a
period of less than twelve months. However, the distribution or transfer
has no effect in determining under section 1212 the taxable years to
which a net capital loss of the acquiring corporation is carried. For
this purpose, the first taxable year of the acquiring corporation which
ends after the date of distribution or transfer constitutes only one
taxable year even though such taxable year is considered under paragraph
(e) of this section as two taxable years for certain purposes. The
application of this subparagraph may be illustrated by the following
example:
Example. R and S Corporations are organized on January 1, 1954, and
both corporations make their returns on the basis of the calendar year.
R Corporation has net capital losses for its years 1954, 1955, and 1957,
and S Corporation has net capital losses for its years 1954 and 1956. On
June 30, 1958, R Corporation transfers all its assets to S Corporation
in a statutory merger to which section 361 applies. The taxable years to
which these losses of R and S Corporations may be carried are as
follows:
------------------------------------------------------------------------
Loss year Carried to
------------------------------------------------------------------------
R1954............................. R1955, R1956, R1957, R6/30/58,
S1958.
S1954............................. S1955, S1956, S1957, S1958, S1959.
R1955............................. R1956, R1957, R6/30/58, S1958,
S1959.
S1956............................. S1957, S1958, S1959, S1960, S1961.
R1957............................. R6/30/58, S1958, S1959, S1960,
S1961.
------------------------------------------------------------------------
(4) Computation of carryovers in case where date of distribution or
transfer occurs on last day of acquiring corporation's taxable year. The
computation of the capital loss carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
Example. X and Y Corporations are organized on January 1, 1955, and
make their returns on the basis of the calendar year. On December 31,
1956, X Corporation transfers all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after December 31, 1976), (computed without regard to any
capital loss carryovers) of the two corporations are as follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1955......................................... ($20,000) ($2,000)
1956......................................... (10,000) (8,000)
1957......................................... ............ 25,000
1958......................................... ............ 10,000
------------------------------------------------------------------------
The sequence in which the net capital losses of X and Y Corporations are
applied, and the computation of the capital loss carryovers to Y
Corporation's taxable year 1959, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the transferor corporation will be applied before the carryover from the
same preceding taxable year of the acquiring corporation):
(i) X Corporation's 1955 loss. The carryover to 1959 is $0, computed
as follows:
Net capital loss............................................ $20,000
Less: Y's 1957 net capital gain (computed without regard to 25,000
any capital loss carryovers)...............................
-----------
Carryover to Y 1958 and Y 1959............................ 0
[[Page 385]]
(ii)Y Corporation's 1955 loss. The carryover to 1959 is $0, computed
as follows:
Net capital loss............................................. $2,000
Less:
Y's 1957 net capital gain (computed without $25,000 .........
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1957 (i.e., 20,000 .........
carryover of $20,000 from X 1955).............
------------
.......... 5,000
----------
Carryover to Y 1958 and Y 1959........................... 0
(iii) X Corporation's 1956 loss. The carryover to 1959 is $0,
computed as follows:
Net capital loss............................................ $10,000
Less:
Y's 1957 net capital gain (computed without $25,000 ..........
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1957 (i.e., 22,000 ..........
carryovers of $20,000 from X 1955 and $2,000
from Y 1955).................................
------------
.......... 3,000
-----------
Carryover to Y 1958..................................... 7,000
Less:
Y's 1958 net capital gain (computed without $10,000 ..........
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1958....... 0 ..........
------------
.......... 10,000
-----------
Carryover to Y 1959..................................... 0
(iv) Y Corporation's 1956 loss. The carryover to 1959 is $5,000,
computed as follows:
Net capital loss............................................. $8,000
Less:
Y's 1957 net capital gain (computed without $25,000 .........
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1957 (i.e., 32,000 .........
carryovers of $20,000 from X 1955, $2,000 from
Y 1955, and $10,000 from X 1956)..............
------------
.......... 0
----------
Carryover to Y 1958...................................... 8,000
Less:
Y's 1958 net capital gain (computed without $10,000 .........
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1958 (i.e., 7,000
carryover of $7,000 from X 1956)..............
------------
.......... 3,000
----------
Carryover to Y 1959...................................... 5,000
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year--(1) General
rule. If, in determining under paragraph (d) of this section the portion
of a net capital loss for any taxable year which is carried over to a
succeeding taxable year, an intervening taxable year is a taxable year
of the acquiring corporation which includes, but does not end on, the
date of distribution or transfer, the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of such
intervening year shall be determined by applying section 1212 in the
special manner provided by this paragraph.
(2) Taxable year considered as two taxable years. Such intervening
taxable year of the acquiring corporation shall be considered as though
it were two taxable years, but only for the limited purpose of computing
capital loss carryovers to subsequent taxable years. The first of such
two taxable years shall be referred to in this paragraph as the
preacquisition part year; the second, as the postacquisition part year.
Though considered as two separate taxable years for purposes of this
paragraph, the preacquisition part year and the postacquisition part
year are treated as one taxable year in determining the years to which a
net capital loss is carried under section 1212. See paragraph (d)(3) of
this section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
(5) Division of capital gain net income. The capital gain net income
(net capital gain for taxable years beginning before January 1, 1977)
for such intervening taxable year (computed without regard to any
capital loss carryovers) of the acquiring corporation shall be divided
between the preacquisition part year and the postacquisition part year
in proportion to the number of days in each. Thus, if in a statutory
merger to which section 361 applies Y Corporation acquires the assets of
X Corporation on June 30, 1956, and Y Corporation has net capital gain
(computed in the manner so prescribed) of
[[Page 386]]
$36,600 for its calendar year 1956, then the preacquisition part year
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) would be $18,200 ($36,600x182/366) and the
postacquisition part year capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) would be $18,400
($36,600x184/366).
(6) Application of capital loss carryovers. After obtaining the
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) of the preacquisition part year and
postacquisition part year in the manner described in subparagraph (5) of
this paragraph, it is necessary to determine the capital loss carryovers
which are taken into account with respect to each such part year. The
carryovers to be taken into account and the sequence in which such
carryovers are applied, shall be determined in accordance with paragraph
(d)(1) of this section but subject to the provisions of this
subparagraph. With respect to the preacquisition part year, no capital
loss carryovers of the distributor or transferor corporation shall be
taken into account; that is, only capital loss carryovers of the
acquiring corporation shall be taken into account. With respect to the
postacquisition part year, capital loss carryovers of both the
distributor or transferor corporation and the acquiring corporation
shall be taken into account.
(7) Cross reference. If an intervening taxable year is a taxable
year of the acquiring corporation during which the acquiring corporation
succeeds to the capital loss carryovers of two or more distributor or
transferor corporations on two or more dates of distribution or
transfer, the capital gain net income (net capital gain for taxable
years beginning before January 1, 1977) of the acquiring corporation for
such intervening taxable year shall be determined consistently with the
rules prescribed in paragraph (c) of Sec. 1.381(c)(1)-2, except that
the sequence in which the capital loss carryovers of the distributor or
transferor and acquiring corporations shall be applied shall be
determined under paragraph (d)(1) of this section.
(8) Illustration. The application of this paragraph may be
illustrated as follows:
Example. X Corporation is organized on April 1, 1959, and makes its
return on the basis of the fiscal year ending March 31. Y Corporation is
organized on January 1, 1959, and makes its return on the basis of the
calendar year. On June 30, 1961, X Corporation transfers all its assets
to Y Corporation in a statutory merger to which section 361 applies. The
net capital losses and the net capital gains (capital gain net income
for taxable years beginning after December 31, 1976) (computed without
regard to any capital loss carryovers) of the two corporations are as
follows:
------------------------------------------------------------------------
X Y
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1959......................................... ............ ($24,000)
Ending 3-31-60............................... ($19,000) ...........
1960......................................... ............ (6,000)
Ending 3-31-61............................... (5,000) ...........
Ending 6-30-61............................... 0 ...........
1961......................................... ............ 36,500
1962......................................... ............ 12,000
------------------------------------------------------------------------
The following table shows those taxable years of the transferor and
acquiring corporations which, with respect to Y Corporation's calendar
year 1961, are first, second, and third preceding taxable years:
------------------------------------------------------------------------
Y
Taxable year X Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
First preceding year............... Ending June 30, 1961.. 1960
Second preceding year.............. Ending March 31, 1961. 1959
Third preceding year............... Ending March 31, 1960. ...........
------------------------------------------------------------------------
The sequence in which the net capital losses of X and Y Corporations are
applied, and the computation of the capital loss carryovers to Y
Corporation's calendar year 1963, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the acquiring corporation will be applied before the carryover from the
same preceding taxable year of the transferor corporation):
(i) X Corporation's 3/31/60 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................ $19,000
Less: Y's postacquisition part year net capital gain 18,400
computed under subparagraph (5) of this paragraph ($36,500x
184/365 )..................................................
-----------
Carryover to Y 1962....................................... 600
Less: Y's 1962 net capital gain (computed without regard to 12,000
any capital loss carryovers)...............................
-----------
Carryover to Y 1963....................................... 0
(ii) Y Corporation's 1959 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................ $24,000
[[Page 387]]
Less: Y's preacquisition part year net capital gain computed 18,100
under subparagraph (5) of this paragraph ($36,500x 181/365
)..........................................................
-------------
Carryover to Y's postacquisition part year................ 5,900
Less:
Y's postacquisition part year net capital gain $18,400 ..........
computed under subparagraph (5) of this
paragraph....................................
Minus capital loss carryovers to 19,000 0
postacquisition part year (i.e., carryover of
$19,000 from X 3/31/60)......................
-------------
Carryover to Y 1962..................................... 5,900
Less:
Y's 1962 net capital gain (computed without $12,000 ..........
regard to any capital loss carryovers).......
Minus capital loss carryovers to Y 1962 (i.e., 600 11,400
carryover of $600 from X 3/31/60)............
-------------
Carryover to Y 1963..................................... 0
(iii) X Corporation's 3/31/61 loss. The carryover to 1963 is $0,
computed as follows:
Net capital loss............................................. $5,000
Less:
Y's postacquisition part year net capital gain $18,400 .........
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to 24,900
postacquisition part year (i.e., carryovers of
$19,000 from X 3/31/60 and $5,900 from Y 1959)
------------
.......... 0
----------
Carryover to Y 1962...................................... 5,000
Less:
Y's 1962 net capital gain (computed without $12,000 .........
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1962 (i.e., 6,500
carryovers of $600 from X 3/31/60 and $5,900
from Y 1959)..................................
------------
.......... 5,500
----------
Carryover to Y 1963...................................... 0
(iv) Y Corporation's 1960 loss. The carryover to 1963 is $5,500,
computed as follows:
Net capital loss............................................. $6,000
Less:
Y's preacquisition part year net capital gain $18,100 .........
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to preacquisition 24,000
part year (i.e., carryover of $24,000 from Y
1959).........................................
------------
.......... 0
----------
Carryover to Y's postacquisition part year............... 6,000
Less:
Y's postacquisition part year net capital gain $18,400 .........
computed under subparagraph (5) of this
paragraph.....................................
Minus capital loss carryovers to 29,900 0
postacquisition part year (i.e., carryovers of
$19,000 from X 3/31/60, $5,900 from Y 1959,
and $5,000 from X 3/31/61)....................
----------
.......... 0
----------
Carryover to Y 1962...................................... 6,000
Less:
Y's 1962 net capital gain (computed without $12,000 .........
regard to any capital loss carryovers)........
Minus capital loss carryovers to Y 1962 (i.e., 11,5000
carryovers of $600 from X 3/31/60, $5,900 from
Y 1959, and $5,000 from X 3/31/61)............
------------
.......... $500
----------
Carryover to Y 1963...................................... 5,500
(f) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a distributor or transferor corporation which previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, shall succeed to and take into account, subject
to the conditions and limitations of sections 1212 and 381, the capital
loss carryovers available to the first acquiring corporation under
sections 1212 and 381.
[T.D. 6552, 26 FR 1985, Mar. 8, 1961, as amended by T.D. 6867, 30 FR
15094, Dec. 12, 1965; T.D. 7728, 45 FR 72650, Nov. 3, 1980]
Sec. 1.381(c)(4)-1 Method of accounting.
(a) Carryover requirement--(1) General rule. (i) Section 381(c)(4)
provides that, in a transaction to which section 381(a) applies, an
acquiring corporation shall use the same method of accounting used by
the distributor or transferor corporation on the date of distribution or
transfer unless different methods of accounting were used on that date
by several distributor or transferor corporations or by a distributor or
transferor corporation and the acquiring corporation. If different
methods of accounting were used, the acquiring corporation shall use the
method or combination of methods of accounting adopted pursuant to this
section.
[[Page 388]]
(ii) The acquiring corporation shall take into its accounts the
dollar balances of those accounts of the distributor or transferor
corporation representing items of income or deduction which, because of
its method of accounting, were not required or permitted to be included
or deducted by the distributor or transferor corporation in computing
taxable income for taxable years ending on or before the date of
distribution or transfer. The acquiring corporation shall similarly take
into its accounts the dollar balances of those accounts of the
distributor or transferor corporation which represents reserves in
respect of which the distributor or transferor corporation has taken a
deduction for taxable years ending on or before the date of distribution
or transfer. The acquiring corporation shall also take into its accounts
the dollar balance of that account of the distributor or transferor
corporation which represents a suspense account established by the
distributor or transferor corporation under section 166(f)(4) in taxable
years ending on or before the date of distribution or transfer. Items of
income and deduction shall have the same character in the hands of the
acquiring corporation as they would have had in the hands of the
distributor or transferor corporation or corporations if no distribution
or transfer had occurred. This section shall have no application to
items of income or deduction, or dollar balances, to the extent they are
attributable to assets or liabilities not distributed or transferred,
and shall have no application to items the tax treatment of which is
specifically provided for in other paragraphs of section 381(c). In the
case of an obligation of the distributor or transferor corporation which
is assumed by the acquiring corporation and which gives rise to a
liability (within the meaning of paragraph (a)(4) of Sec. 1.381(c)(16)-
1) after the date of distribution or transfer, the deductibility of such
an item is determined under this section if it is not deductible under
section 381(c)(16) and the regulations thereunder. The amount of the
adjustments necessary to reflect a change in accounting method pursuant
to this section, the manner in which they are to be taken into account,
and the tax attributable thereto shall be determined and computed under
section 481 and the regulations thereunder, subject to the rules
provided in paragraphs (c) and (d) of this section. Where such change is
a change from the accrual to the installment method by a dealer in
personal property, section 453(c) and the regulations thereunder apply.
(2) Rules of application. For purposes of section 381(c)(4) and this
section, the term method of accounting shall have the same meaning as
that provided under section 446 and the regulations thereunder. This
section shall not be construed as preventing the exercise of any
election which may be made by the acquiring corporation without consent
of the Commissioner, or preventing the application of section 269 or
482, or the regulations thereunder. For provisions defining the date of
distribution or transfer, see paragraph (b) of Sec. 1.381(b)-1. See
other paragraphs of section 381(c) and the regulations thereunder for
other rules regarding the treatment of the carryover of certain items
specifically enumerated therein. See Sec. 1.460-4(k) for rules relating
to transfers of contracts accounted for using a long-term contract
method of accounting in a transaction to which section 381 applies.
(b) Conditions for continuation of methods of accounting--(1) No
differences in methods of accounting. If all the parties to a section
381(a) transaction used the same method of accounting on the date of
distribution or transfer, the acquiring corporation shall continue to
use such method of accounting, unless the acquiring corporation has
obtained the consent of the Commissioner in accordance with paragraph
(e) of Sec. 1.446-1 to use a different method of accounting. This
subparagraph may be illustrated by the following examples:
Example (1). X Corporation and Y Corporation use the accrual method
as their overall method of accounting. Both corporations have
established a reserve for bad debts under section 166(c). Pursuant to
elections made by each corporation, they are amortizing trademark and
trade name expenditures over a 60-month period under section 177,
expensing intangible drilling and development costs under section
263(c), and accruing real property taxes ratably under section 461(c).
It is assumed that there are no other
[[Page 389]]
items to which paragraph (a) of this section might apply. Y Corporation
acquires all of the assets of X Corporation in a transaction to which
section 381(a) applies. On and after the date of distribution or
transfer Y Corporation must continue, without further election, to use
the same overall method of accounting and the same accounting treatment
of the specified items, unless consent of the Commissioner is obtained
in accordance with paragraph (e) of Sec. 1.446-1 to change the methods
of accounting. Thus, Y Corporation shall carry over the balance in X
Corporation's reserve for bad debts account, shall continue to amortize
and deduct over the remaining portion of the 60-month period the
unamortized portion of the trademark and trade name expenditures carried
over from X Corporation, and shall continue the same treatment of
intangible drilling and development costs and of real property taxes.
Example (2). M Corporation and N Corporation use the cash receipts
and disbursements method of accounting. N Corporation acquires all of
the assets and assumes all the obligations of M Corporation in a
transaction to which section 381(a) applies. M Corporation, immediately
prior to the transaction, is entitled to receive $10,000 for unbilled
services performed, and has billed but not received payment for services
performed in an amount of $20,000. It has received but not paid invoices
amounting to $18,000, and has received services in the amount of $5,000
for which no invoices have been received. Since M Corporation and N
Corporation are both on the cash receipts and disbursements method, N
Corporation must continue to use that method, unless consent of the
Commissioner is obtained in accordance with paragraph (e) of Sec.
1.446-1 to change its method of accounting. Accordingly, N Corporation
must include in income when received the unrealized receivables of M
Corporation and may deduct the payment of those obligations of M
Corporation which would have been deductible by such corporation if paid
by it. Thus, N Corporation shall treat as ordinary income the receipt by
it of M Corporation's $30,000 of receivables, and may deduct upon
payment the amount of M Corporation's $23,000 of payables which would
have been deductible by it.
Example (3). S Corporation and T Corporation are both publishers and
use the accrual method as their overall method of accounting. Both
corporations have elected under section 455 to defer prepaid
subscription income to the taxable years during which the liability to
furnish the newspaper, magazine, or other periodical exists. T
Corporation, in a transaction to which section 381(a) applies, acquires
all the assets of S Corporation and assumes the liability of such
corporation to furnish or deliver the newspaper, magazine, or other
periodical. On and after the date of the transfer, T Corporation must
continue, without further election, to use the accrual method as its
over-all method of accounting and to defer prepaid subscription income
under section 455, unless consent of the Commissioner is obtained in
accordance with paragraph (e) of Sec. 1.446-1 to change the method of
accounting. T Corporation shall carry over the closing balance of S
Corporation's prepaid subscription income account. The principles in
this example would be equally applicable if both corporations had been
deferring prepaid subscription income under a method permitted by
subsection (e) of section 455.
(2) Separate businesses. If, after the date of distribution or
transfer, the trades or businesses of the parties to a transaction
described in section 381(a) are operated as separate and distinct trades
or businesses within the meaning of paragraph (d) of Sec. 1.446-1, then
the method of accounting employed by the parties to the transaction on
the date of distribution or transfer with respect to each trade or
business shall be used by the acquiring corporation, unless the
acquiring corporation has obtained the consent of the Commissioner in
accordance with paragraph (e) of Sec. 1.446-1 to use a different method
of accounting, or unless the Commissioner prescribes a different method
of accounting under paragraph (b)(1) of Sec. 1.446-1. However, if only
a single method of accounting may be employed by a taxpayer with respect
to a particular item regardless of the number of separate and distinct
trades or businesses operated by such taxpayer, but different methods
were employed by the several corporations on the date of distribution or
transfer with respect to such item, then the acquiring corporation shall
adopt the principal method of accounting determined under paragraph (c)
of this section (see subparagraph (2)(iv) thereof) for such item, or the
method of accounting determined in accordance with paragraph (d) of this
section, whichever is applicable. This subparagraph may be illustrated
by the following examples:
Example (1). M Corporation is engaged in a personal service business
and uses the cash receipts and disbursements method of accounting. N
Corporation is engaged in a retail furniture business and uses the
accrual method of accounting. N Corporation acquires the assets of M
Corporation in a transaction to which section 381(a) applies. In
accordance with paragraph (d) of Sec. 1.446-1,
[[Page 390]]
N Corporation operates as a separate and distinct trade or business the
personal service business formerly operated by M Corporation. Unless
consent of the Commissioner is obtained in accordance with paragraph (e)
of Sec. 1.446-1 to change the method of accounting, N Corporation shall
continue to use the cash receipts and disbursements method of accounting
with respect to the personal service business formerly operated by M
Corporation, and shall use the accrual method of accounting with respect
to the retail furniture business.
Example (2). Assume the same facts as in Example (1), except that M
Corporation has elected under section 171 to amortize bond premium with
respect to fully taxable bonds. N Corporation has not made the election
to amortize bond premium with respect to such bonds owned by it. N
Corporation may not continue separate accounting methods as to
amortizable bond premium but must consistently apply only a single
method of accounting with respect to such bond premium since the
election to amortize bond premium applies to all fully taxable bonds
held by the taxpayer. N Corporation shall use the principal method of
accounting determined under paragraph (c) of this section for such bond
premium, unless it is determined in accordance with paragraph (d) of
this section that a different method of accounting is to be used.
However, if such principal or different method of accounting is not to
amortize bond premium N Corporation is not precluded from making a new
election to the extent permitted by section 171.
(3) Integrated businesses. (i) If, after the date of distribution or
transfer, any of the trades or business of the parties to a transaction
in section 381(a) are not operated as separate and distinct trades or
businesses within the meaning of paragraph (d) of Sec. 1.446-1, then,
to the extent that the same methods of accounting were employed on the
date of distribution or transfer by the parties to the transaction with
respect to any trades or businesses which are integrated or are required
to be integrated in accordance with section 446(d) and the regulations
thereunder, the acquiring corporation shall continue to employ such
methods of accounting, unless the acquiring corporation has obtained the
consent of the Commissioner in accordance with paragraph (e) of Sec.
1.446-1 to use a different method of accounting, or unless the
Commissioner prescribes a different method of accounting under paragraph
(b)(1) of Sec. 1.446-1.
(ii) If, after the date of distribution or transfer, any of the
trades or businesses of the parties to a transaction described in
section 381(a) are not operated as separate and distinct trades or
businesses within the meaning of paragraph (d) of Sec. 1.446-1, then,
to the extent that different methods of accounting were employed on the
date of distribution or transfer by the parties to the transaction with
respect to any trades or businesses which are integrated or required to
be integrated in accordance with section 446(d) and the regulations
thereunder, this paragraph shall not apply and the acquiring corporation
shall adopt the principal method of accounting determined under
paragraph (c) of this section or the method of accounting determined in
accordance with paragraph (d) of this section, whichever is applicable.
(iii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). M Corporation and N Corporation both use the accrual
method as an overall method of accounting. M Corporation has established
a reserve for bad debts while N Corporation uses the specific charge-off
method with respect to its bad debts. N Corporation acquires all of the
assets of M Corporation in a transaction to which section 381(a) applies
and integrates the business formerly operated by M Corporation into the
business operated by N Corporation before the date of distribution or
transfer. N Corporation shall continue to use the accrual method as its
overall method of accounting, unless consent of the Commissioner is
obtained in accordance with paragraph (e) of Sec. 1.446-1 to change its
method of accounting. N Corporation shall use the principal method of
accounting determined under paragraph (c) of this section with respect
to bad debts, or the method of accounting determined in accordance with
paragraph (d) of this section, whichever is applicable.
Example (2). X Corporation conducts two separate and distinct trades
or businesses, a personal service business with respect to which the
cash receipts and disbursements method of accounting is used and a
manufacturing business with respect to which the accrual method of
accounting is used. Y Corporation conducts a manufacturing business and
uses the accrual method of accounting. Y Corporation acquires all of the
assets of X
[[Page 391]]
Corporation in a transaction to which section 381(a) applies. After the
date of distribution or transfer, Y integrates the manufacturing
business formerly operated by X Corporation into the manufacturing
business operated by it and continues to operate as a separate and
distinct trade or business the personal service business formerly
operated by X Corporation. Unless consent of the Commissioner is
obtained in accordance with paragraph (e) of Sec. 1.446-1 to change the
method of accounting, Y Corporation shall continue to use the accrual
method of accounting with respect to the integrated manufacturing
business and shall continue to use the cash receipts and disbursements
method of accounting with respect to the personal service business.
(4) Rules of application. In any case where the method of accounting
employed on the date of distribution or transfer is continued, it will
be unnecessary for the acquiring corporation to renew any election
previously made by it or by any distributor or transferor corporation
with respect to such method of accounting. Also, the acquiring
corporation is bound by any election previously made by it or by any
distributor or transferor corporation with respect to such method of
accounting which is in effect on the date of distribution or transfer to
the same extent as though the distribution or transfer had not occurred.
If, on the date of distribution or transfer, any party to a section
381(a) transaction had no established method of accounting for any item,
or came into existence as a result of the transaction, such party shall
not be considered to be using a method of accounting for such item or
having an overall method of accounting different from that used by the
other parties to the transaction. Where under other sections of the
Internal Revenue Code or regulations thereunder a taxpayer is permitted
to elect a method of accounting on a project-by-project, job-by-job, or
other similar basis (such as the election to charge taxes and carrying
charges to capital account under Sec. 1.266-1), that method elected
with respect to each project or job shall be deemed to be an established
method of accounting only for the project or job for which it is
elected. Accordingly, unless two or more of the parties were working on
the same project or job and were using different methods of accounting
for such project or job before the date of distribution or transfer, the
method of accounting previously elected for each project or job must be
continued.
(c) Change of method of accounting without consent of Commissioner--
(1) General rule. If the acquiring corporation may not continue to use,
under the provisions of paragraph (b) of this section, the method of
accounting used by it or the distributor or transferor corporation or
corporations on the date of distribution or transfer, the acquiring
corporation shall use the principal method of accounting of such
corporation (as determined under subparagraph (2) of this paragraph),
provided that (i) such method of accounting clearly reflects the income
of the acquiring corporation, and (ii) the use of such method is not
inconsistent with the provisions of any closing agreement entered into
under section 7121 and the regulations thereunder. If the principal
method of accounting does not meet these requirements, or if there is no
principal method of accounting, see subdivision (i) of paragraph (d)(1)
of this section. If the acquiring corporation wishes to use a method of
accounting other than the principal method of accounting, see
subdivision (ii) of paragraph (d)(1) of this section. Whenever this
paragraph applies, the increase or decrease in tax resulting from the
change from the method of accounting previously used by any of the
corporations involved shall be taken into account by the acquiring
corporation. The adjustments necessary to reflect such change and such
increase or decrease in tax shall be determined and computed in the same
manner as if on the date of distribution or transfer each of the several
corporations whose method or methods of accounting are required to be
changed in accordance with this section had initiated a change in
accounting method. In addition, the acquiring corporation shall take
into account the portion of such adjustments which is attributable to
pre-1954 Code years to the extent not taken into account by any of the
other corporations in accordance with the rules provided in section
481(b)(4) and this paragraph. If the principal method of accounting is
adopted under this paragraph, it will be
[[Page 392]]
unnecessary for the acquiring corporation to renew any election
previously made by it or by any distributor or transferor corporation
with respect to such principal method of accounting. Also, in such
event, the acquiring corporation is bound by any election previously
made by it or by any distributor or transferor corporation with respect
to such principal method of accounting which is in effect on the date of
distribution or transfer to the same extent as though the distribution
or transfer had not occurred.
(2) Principal method of accounting. (i) The determination of the
principal method of accounting shall be made with respect to each
integrated trade or business operated by the acquiring corporation
immediately after the date of distribution or transfer, except with
respect to items for which only a single method of accounting may be
used by any one taxpayer. See subdivision (iv) of this subparagraph.
Such determination for an integrated trade or business shall be made by
reference to the methods of accounting used immediately preceding the
date of distribution or transfer by each of the component trades or
businesses which now constitute the integrated trade or business of the
acquiring corporation. The method of accounting for items other than
those for which special methods of accounting are provided under chapter
1 of the Code and the regulations thereunder (see Sec. 1.446-
1(c)(1)(iii)) shall be governed by the principal overall method
determined for such trade or business under subdivision (ii) of this
subparagraph. The method of accounting for items for which special
methods of accounting are provided under chapter 1 of the Code and the
regulations thereunder shall be determined under subdivision (iii) of
this subparagraph.
(ii) The principal overall method of accounting of an integrated
trade or business is determined by making a comparison of--
(a) The total of the adjusted bases of the assets (determined under
section 1011 and the regulations thereunder) immediately preceding the
date of distribution or transfer, and
(b) The gross receipts for a representative period (ordinarily the
most recent period of 12 consecutive calendar months ending on or prior
to the date of distribution or transfer)
of the component trades or businesses which are integrated or are
required to be integrated. If more than one component trade or business
used the same overall method, then such total assets and gross receipts
of each of the component trades or businesses shall be aggregated and
compared with the aggregate of such total assets and gross receipts of
other component trades or businesses which used a different overall
method. If this comparison shows that the one or more component trades
or businesses (using a common overall method of accounting) having the
greatest total of the adjusted bases of assets also has the greatest
amount of gross receipts, then the overall method of accounting of such
one or more component trades or businesses shall be the principal
overall method of accounting. If this comparison shows that the one or
more component trades or businesses (using a common overall method of
accounting) having the greatest total of the adjusted bases of assets
does not also have the greatest amount of gross receipts, then there is
no principal overall method of accounting, and the acquiring corporation
shall request the Commissioner to determine the appropriate overall
method of accounting for such integrated trade or business in accordance
with paragraph (d) of this section.
(iii) The principal method of accounting for an item for which a
special method or methods of accounting are provided under chapter 1 of
the Code and the regulations thereunder is determined by comparing the
amounts of such item and related accounts for the component trades or
businesses in accordance with the principles of subdivision (ii) of this
subparagraph. Thus, for example, in the case of bad debts, trades or
businesses which are components of the integrated trade or business and
which had been using the reserve method of accounting will be compared
with the other component trades or businesses which had been using the
specific charge-off method of accounting. In such a case, the following
factors would ordinarily be used in determining the principal method of
accounting for bad debts: (a) Sales on
[[Page 393]]
account for the most recent period of 12 consecutive calendar months
ending on or prior to the date of distribution or transfer, (b) accounts
receivable immediately before the date of distribution or transfer, and
(c) the amount of debts which became worthless within the meaning of
section 166(a) and the regulations thereunder during the most recent
period of 12 consecutive calendar months ending on or prior to the date
of distribution or transfer. If this comparison shows that the one or
more component trades or businesses using the same method of accounting
with respect to bad debts have the greater amounts of such sales,
accounts receivable, and bad debts, then the method of accounting with
respect to bad debts for such one or more component trades or businesses
shall be the principal method of accounting. If such comparison shows
that the one or more component trades or businesses using the same
method of accounting with respect to bad debts do not have the greater
amounts of all of such items, then there is no principal method of
accounting with respect to bad debts, and the acquiring corporation
shall request the Commissioner to determine the appropriate method of
accounting for bad debts for such integrated trade or business in
accordance with paragraph (d) of this section.
(iv) If a single method of accounting must be employed by a taxpayer
with respect to a particular item regardless of the number of separate
and distinct trades or businesses operated by the taxpayer, the
principal method of accounting for such item shall be determined by
comparing the aggregate amount of the item and related accounts for all
the parties to the transaction using a common method, with the aggregate
amount of the item and related accounts for those parties to the
transaction which use a different common method. The method of
accounting of the party having the greatest aggregate amount of such
item and related accounts shall be the principal method of accounting
for such item.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). M Corporation, which commenced business in 1955, uses
the cash receipts and disbursements method of accounting, while N
Corporation uses the accrual method. On June 30, 1961, N Corporation
acquires all of the assets of M Corporation in a transaction to which
section 381(a) applies. N Corporation then integrates its own business
with that of M Corporation. Immediately prior to the transfer the total
of the adjusted bases of the assets of N Corporation was greater than
that of M Corporation, and for the 12-month period ending on June 30,
1961, the gross receipts of N Corporation were greater than that of M
Corporation. Under such circumstances, the accrual method of accounting
is the principal overall method of accounting and N Corporation shall
use such method for the integrated business, provided it clearly
reflects income, unless consent of the Commissioner is obtained in
accordance with paragraph (d) of this section to use a different method
of accounting. Except as to items for which N Corporation had no
established method of accounting and items for which a special method of
accounting is provided under chapter 1 of the Code and the regulations
thereunder, all adjustments necessary to place the accounts of M
Corporation on the accrual method shall be made in accordance with
section 481. Any increase or decrease in tax resulting from such
adjustments shall be taken into account by N Corporation. Such
adjustments and such increase or decrease in tax shall be determined and
computed in the same manner as if M Corporation had initiated a change
in method of accounting on June 30, 1961.
Example (2). Assume the same facts as in Example (1) except that the
gross receipts of M Corporation were greater than those of N Corporation
for the 12-month period ending on June 30, 1961. N Corporation must,
under such circumstances, request the Commissioner to determine the
appropriate overall method of accounting, in accordance with the
provisions of paragraph (d) of this section. The necessary adjustments
to be made by the corporation whose method of accounting is changed
shall be made in accordance with section 481 to place the integrated
business on the method so adopted. Any increase or decrease in tax
resulting from such adjustments shall be taken into account by N
Corporation. Such adjustments and such increase or decrease in tax shall
be determined and computed in the same manner as if the corporation
whose method is changed had initiated a change in method of accounting
on June 30, 1961.
Example (3). Assume the same facts as in Example (1). Assume further
that M Corporation's deduction for wages and salaries for the 12
calendar months ending on June 30, 1961, is larger than N Corporation's
deduction for wages and salaries for such period. Since wages and
salaries is not an item for
[[Page 394]]
which a special method of accounting is provided under chapter 1 of the
Code or the regulations thereunder, the necessary adjustments shall be
made in accordance with section 481 to place the wages and salary
account of M Corporation on the accrual method of accounting, provided
such accrual method clearly reflects income, unless consent of the
Commissioner is obtained in accordance with paragraph (d) of this
section to use a different method of accounting. Any increase or
decrease in tax resulting from such adjustments shall be taken into
account by N Corporation. Such adjustments and such increase or decrease
in tax shall be determined and computed in the same manner as if M
Corporation had initiated a change in method of accounting on June 30,
1961.
Example (4). Assume the same facts as in Example (1). Assume further
that M Corporation used the specific charge-off method with respect to
bad debts, and that N Corporation has established a reserve for bad
debts. M Corporation's sales on account and bad debts for the 12
calendar months ending June 30, 1961, were larger than those of N
Corporation. Also M Corporation's accounts receivable immediately prior
to June 30, 1961, were larger than those of N Corporation. Since the
method of accounting for bad debts is a special method of accounting
under section 166, M Corporation's method of accounting for bad debts is
the principal method of accounting for such item. Assuming such method
clearly reflects income, appropriate adjustments shall be made in
accordance with section 481 to the accounts of N Corporation to place N
Corporation on the specific charge-off method with respect to all of its
bad debts, as if N Corporation had initiated a change in method of
accounting on June 30, 1961, and N Corporation shall include the amount
of its reserve for bad debts in gross income, unless consent of the
Commissioner is obtained in accordance with paragraph (d) of this
section to use a different method of accounting.
Example (5). Assume the same facts as in Example (1) except that M
Corporation commenced business in 1945. In addition assume that N
Corporation is a calendar-year taxpayer and that of the total amount of
the adjustments required by section 481 to place the accounts of M
Corporation on the accrual method $40,000 is attributable to pre-1954
Code years as described in section 481(b)(4) and the regulations
thereunder. Assume further that M Corporation does not elect, under
section 481(b)(6), to take the $40,000 portion of the adjustments into
account in the manner described in section 481(b)(1) or (2). In
computing the increase in tax of M Corporation attributable to the
$40,000 portion of the adjustment for the fiscal year ended June 30,
1961, only one-tenth, or $4,000, will be taken into account. The
resulting increase in tax shall be taken into account by N Corporation.
The remaining nine-tenths of the $40,000 portion of the adjustments, or
$36,000, shall be taken into account by N Corporation in the amount of
$4,000 in each of the calender years 1962 through 1970.
(d) Change of method of accounting with consent of Commissioner--(1)
General rule. (i) If the acquiring corporation may not continue to use,
under paragraph (b), the method of accounting used by it or the
distributor or transferor corporation or corporations on the date of
distribution or transfer, and may not under paragraph (c) use the
principal method of accounting, or, if there is no principal method of
accounting, then the Commissioner shall determine the appropriate method
or combination of methods of accounting to be used.
(ii) If an acquiring corporation wishes to use a method or
combination of methods of accounting other than the principal method of
accounting which is required to be used by paragraph (c) of this
section, it shall apply to the Commissioner for permission to use such
other method or combination of methods of accounting. Permission to use
such other method or combination of methods of accounting will not be
granted unless the acquiring corporation and the Commissioner agree to
the terms, conditions, and adjustments under which the change to such
method or combination of methods will be effected.
(iii) The increase or decrease in tax resulting from the change from
the method of accounting previously used by any of the corporations
involved shall be taken into account by the acquiring corporation. The
adjustments necessary to reflect such change and such increase or
decrease in tax shall be determined and computed in the same manner as
if, on the date of distribution or transfer, each of the several
corporations that were not using the method or combination of methods of
accounting adopted pursuant to subdivision (i) or (ii) of this
subparagraph had initiated a change in accounting method.
(2) Time and manner of making application. Applications under
subparagraph (1) of this paragraph for permission to use a method of
accounting or requests
[[Page 395]]
for determination of the method of accounting to be used shall be filed
with the Commissioner of Internal Revenue, Attention: T:R, Washington,
DC, 20224, not later than 90 days after the date of distribution or
transfer, except that in cases where the date of distribution or
transfer occurs before August 5, 1964, such applications or requests
shall be filed not later than November 3, 1964. The application shall be
accompanied by a copy of the statement described in paragraph (b)(3) of
Sec. 1.381(b)-1, and by a statement specifying the nature of the
transaction which causes section 381 to apply; the difference in
accounting methods used by the corporations concerned; the method or
methods of accounting proposed to be used by the acquiring corporation;
and the various amounts, if any, of items of income or deduction which
will be duplicated or omitted in the computation of taxable income under
such proposed method or methods. The Commissioner may also require such
other information as may be necessary in order to determine the
appropriate method or combination of methods of accounting to be used by
the acquiring corporation.
(e) Special rules applicable to distributions or transfers before
August 5, 1964--(1) Statute of limitations bars assessment or refund. If
the date of distribution or transfer was before August 5, 1964, and if
the assessment of any deficiency or the refund or credit of any
overpayment for the taxable year of the acquiring corporation which
includes the date of distribution or transfer or any subsequent taxable
year is prevented by the operation of any law or rule of law, then this
section does not authorize the Commissioner or the acquiring corporation
to change any method or methods of accounting in any taxable year of the
acquiring corporation. However, the Commissioner or the acquiring
corporation may change such method or methods of accounting under the
provisions of section 446 and the regulations thereunder or, where
applicable, any section of the Internal Revenue Code (other than section
381(c)(4)), or the regulations thereunder, in accordance with which such
changes may be made without the consent of the Commissioner.
(2) Statute of limitations does not bar assessment and refund.
Except as provided in subparagraph (1) of this paragraph--
(i) If the date of distribution or transfer was before August 5,
1964, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, (a) adopted or continued
a method of accounting consistent with the rules of this section, (b)
been granted permission by the Commissioner in accordance with paragraph
(e) of Sec. 1.446-1 to use a method or combination of methods of
accounting, or (c) adopted a method of accounting that under other
sections of the Internal Revenue Code, or regulations thereunder, may be
adopted without the consent of the Commissioner, then the method or
methods of accounting adopted or continued in the manner described in
(a), (b), and (c) shall not be changed, by reason of the rules contained
in this section, by the Commissioner or the acquiring corporation for
any taxable year ending after the date of distribution or transfer.
However, the Commissioner or the acquiring corporation may change such
methods of accounting for any such taxable year under the provisions of,
and to the extent permitted by, section 446 and the regulations
thereunder or, where applicable, any section of the Internal Revenue
Code (other than section 381(c)(4)), or regulations thereunder, in
accordance with which such change may be made without the consent of the
Commissioner.
(ii) If the date of distribution or transfer was before August 5,
1964, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, adopted or continued a
method or methods of accounting other than in the manner described in
(a), (b), and (c) of subdivision (i) of this subparagraph, then the
acquiring corporation may--
(a) Continue to use the method or methods of accounting so adopted
or continued if such method or methods clearly reflect income and if
proper adjustments were made to reflect the adoption of such method or
methods, or
(b) Adopt the method or methods of accounting prescribed by this
section.
[[Page 396]]
Such method or methods of accounting shall be adopted by filing an
amended return (which includes the proper adjustments required by this
section) for the taxable year of the acquiring corporation which
includes the date of distribution or transfer, and by filing amended
returns for all subsequent taxable years of the acquiring corporation
for which returns have previously been filed. Such amended return or
returns shall be accompanied by a copy of the statement described in
paragraph (b)(3) of Sec. 1.381(b)-1, and by a statement specifying the
nature of the transaction which causes section 381 to apply; the
difference in accounting methods used by the corporations concerned; the
method or methods of accounting originally adopted by the acquiring
corporation; the method or methods of accounting adopted on the amended
return or returns; and the computation of the amount of the adjustments
and the resulting increase or decrease in tax.
[T.D. 6750, 29 FR 11263, Aug. 5, 1964, as amended by T.D. 8071, 51 FR
2481, Jan. 17, 1986; T.D. 8995, 67 FR 34605, May 15, 2002]
Sec. 1.381(c)(5)-1 Inventories.
(a) Carryover requirement--(1) General rule. Section 381(c)(5)
provides that in a transaction to which section 381(a) applies and in
which inventories are received by the acquiring corporation (as defined
in Sec. 1.381(a)-1(b)(2)) such inventories shall be taken by the
acquiring corporation (in determining its income) on the same basis on
which such inventories were taken by the distributor or transferor
corporation on the date of distribution or transfer unless different
inventory methods were used on that date by several distributor or
transferor corporations or by a distributor or transferor corporation
and the acquiring corporation. If different methods were used, the
acquiring corporation shall use the method or combination of methods of
taking inventories adopted pursuant to the provisions of this section.
(2) Rules of application. Reference in this section to a method or
methods of taking inventories are to be construed as referring to both
the method or methods of identifying the goods and the method or methods
of valuing the goods. The method or methods of taking inventories shall
be determined on the date of distribution or transfer, and any
corporation, a party to a section 381(a) transaction whose taxable year
does not end on such date shall be considered as using the method or
methods of taking inventories that it would have employed had its
taxable year ended on such date. The amount of the adjustments necessary
to reflect the change in method of taking inventories pursuant to this
section, the manner in which they are to be taken into account by the
acquiring corporation, and the tax attributable thereto shall be
determined and computed under section 481 and the regulations
thereunder, subject to the rules provided in paragraphs (c) and (d) of
this section. However, in the case of any party to a section 381(a)
transaction which changes its method of taking inventories to the last-
in, first-out method of identification, the adjustments required by
section 472(d) shall be applicable. See paragraph (e) of this section.
This section shall not be construed as preventing any party to a section
381(a) transaction from adopting an inventory method which, under the
provisions of section 471 or 472, and the regulations thereunder, may be
adopted without the consent of the Commissioner. For provisions defining
the date of distribution or transfer, see paragraph (b) of Sec.
1.381(b)-1.
(b) Conditions for continuation of methods of taking inventories--
(1) No difference in method of taking inventories. (i) If all the
parties to a section 381(a) transaction used the same method of taking
inventories on the date of distribution or transfer, the acquiring
corporation, whether or not immediately after the date of distribution
or transfer it operates separate or integrated trades or businesses,
shall continue to use such method of taking inventories, unless the
acquiring corporation has, in accordance with paragraph (e) of Sec.
1.446-1, obtained the consent of the Commissioner to use a different
method of taking inventories. For purposes of this determination, a
corporation shall be deemed to be using the last-in, first-out method of
taking inventories with respect to a particular
[[Page 397]]
type of goods on the date of the distribution or transfer, if such
corporation elects, under the provisions of section 472, to adopt the
last-in, first-out method with respect to such goods for its taxable
year within which or with which the date of distribution or transfer
occurs.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. O and P corporations are manufacturing companies which
compute their entire inventories by the use of the last-in, first-out
method of identification and the cost basis of valuation. In applying
the last-in, first-out method both corporations use the dollar-value
method, use the double-extension method, pool under the natural business
unit method, and value annual inventory increases by reference to the
actual cost of goods most recently purchased. P corporation acquires the
assets of O corporation in a transaction to which section 381(a)
applies. Under the provisions of this subparagraph, on and after the
date of distribution or transfer P corporation must continue to use the
last-in, first-out method of identification, the cost basis of
valuation, and, in applying the last-in, first-out method, must continue
to use the dollar-value method, use the double-extension method, pool
under the natural business unit method, and value annual inventory
increases by reference to the actual cost of goods most recently
purchased, unless, in accordance with paragraph (e) of Sec. 1.446-1,
consent of the Commissioner is obtained to change the method of taking
inventories.
(2) Separate businesses. (i) If, immediately after the date of
distribution or transfer, any of the trades or businesses of the parties
to a section 381(a) transaction are operated as separate and distinct
trades or businesses within the meaning of paragraph (d) of Sec. 1.446-
1, then the method or methods of taking inventories employed by such
parties to the transaction on the date of distribution or transfer with
respect to such trades or businesses shall be used by the acquiring
corporation, unless the acquiring corporation has, in accordance with
paragraph (e) of Sec. 1.446-1, obtained the consent of the Commissioner
to use a different method of taking inventories. This subparagraph shall
not be construed as precluding the Commissioner under section 471 or
472, and the regulations thereunder, from requiring that the method of
taking inventories used in a particular trade or business be used in
another trade or business with respect to similar types of goods, if, in
the opinion of the Commissioner, the use of such method of taking
inventories is necessary for a clear reflection of income.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. R Corporation is engaged in the production of radios and
television sets and S Corporation is engaged in the production of
washers and driers. In computing their inventories both corporations use
the cost basis of valuation. R corporation uses the last-in, first-out
method of identification, whereas S corporation uses the first-in,
first-out method. T corporation acquires the assets of R corporation and
S corporation in a transaction to which section 381(a) applies. T
corporation operates as a separate and distinct trade or business,
within the meaning of paragraph (d) of Sec. 1.446-1, each of the
businesses formerly operated by R corporation and S corporation. Under
the provisions of this subparagraph, T corporation is required to
continue to use the method of taking inventories previously used by R
corporation and S corporation, respectively, with respect to each trade
or business, unless, in accordance with paragraph (e) of Sec. 1.446-1,
consent of the Commissioner is obtained to change the methods of taking
inventories, on and after the dates of transfer. However, the
Commissioner may require T corporation, in accordance with Sec. 1.472-
2, to use the last-in, first-out method with respect to that portion of
the goods in the trades or businesses formerly operated by S corporation
and T corporation which are similar to goods in the trade or business
formerly operated by R corporation, if, in his opinion, the use of the
last-in, first-out method with respect to such similar goods is
necessary for a clear reflection of income.
(3) Integrated businesses--(i) Same inventory method. If,
immediately after the date of distribution or transfer, any of the
trades or businesses of the parties to a section 381(a) transaction are
not operated as separate and distinct trades or businesses within the
meaning of paragraph (d) of Sec. 1.446-1, then, to the extent that the
same methods of taking inventories for particular types of goods were
employed on the date of distribution or transfer by the parties to the
transaction with respect to any trades or businesses which are
integrated or are required to
[[Page 398]]
be integrated in accordance with paragraph (d) of Sec. 1.446-1, the
acquiring corporation shall continue to employ such methods of taking
inventories for such types of goods, unless, in accordance with
paragraph (e) of Sec. 1.446-1, the acquiring corporation has obtained
the consent of the Commissioner to use a different method of taking
inventories. This subdivision shall not be construed as precluding the
Commissioner under section 471 or 472, and the regulations thereunder,
from requiring that the method of taking inventories used with respect
to particular types of goods in a particular trade or business operated
by the acquiring corporation after the date of distribution or transfer
be used with respect to similar types of goods in another trade or
business operated by it after such date if, in the opinion of the
Commissioner, the use of such method of taking inventories is necessary
for a clear reflection of income.
(ii) Different inventory methods. If, immediately after the date of
distribution or transfer, any of the trades or businesses of the parties
to a section 381(a) transaction are not operated as separate and
distinct trades or businesses within the meaning of paragraph (d) of
Sec. 1.446-1, then, to the extent that different methods of taking
inventories for particular types of goods were employed on the date of
distribution or transfer by the parties to the transaction with respect
to any trades or businesses which are integrated or required to be
integrated in accordance with paragraph (d) of Sec. 1.446-1, the
acquiring corporation shall not be permitted to continue to use such
different methods of taking inventories, and shall adopt the method of
taking inventories described in paragraph (c) of this section for such
types of goods unless, in accordance with paragraph (d) of this section,
consent of the Commissioner is obtained to use a different method of
taking inventories.
(iii) Examples. The provisions of this subparagraph may be
illustrated by the following examples:
Example (1). O and P corporations are manufacturing companies which
compute their entire inventories by the use of the last-in, first-out
method of identification and the cost basis of valuation. In applying
the last-in, first-out method both corporations use the dollar-value
method and the double-extension method. However, O corporation pools
under the natural business unit method while P corporation pools under
the multiple pool method. In addition, O corporation determines the cost
of its annual inventory increase by reference to the actual cost of
goods most recently purchased, whereas P corporation determines the cost
of such increase by reference to the actual cost of the goods purchased
during the taxable year in the order of acquisition. P corporation
acquires the assets of O corporation in a transaction to which section
381(a) applies and integrates the business formerly operated by O
corporation into the business which was operated by P corporation before
the date of distribution or transfer. Under the provisions of
subdivision (i) of this subparagraph (relating to the same inventory
methods in an integrated trade or business), P corporation shall
continue to use the last-in, first-out method of identification, the
cost basis of valuation, and in applying the last-in, first-out method,
shall continue to use the dollar-value method and the double-extension
method, unless, in accordance with paragraph (e) of Sec. 1.446-1,
consent of the Commissioner is obtained to change the method of taking
inventories. However, under the provisions of subdivision (ii) of this
subparagraph (relating to different inventory methods in an integrated
trade or business), P corporation shall use the method of taking
inventories described in paragraph (c) of this section with respect to
the method of pooling and the method of determining the cost of annual
inventory increases, unless, in accordance with paragraph (d) of this
section, consent of the Commissioner is obtained to use a different
method of taking inventories.
Example (2). Y and Z corporations are engaged in the manufacture of
cereal products. Y corporation uses the first-in, first-out method of
identification and the cost or market, whichever is lower, method of
valuing its inventories, including oats. Z corporation uses the first-
in, first-out method of identification and the cost or market, whichever
is lower, method of valuing its inventories, except oats which are
valued on the cost method. Y corporation acquires all of the assets of Z
corporation in a transaction to which section 381(a) applies and
integrates the business formerly operated by Z corporation into the
business which was operated by Y corporation before the date of
distribution or transfer. Under the provisions of subdivision (i) of
this subparagraph (relating to the same inventory methods in an
integrated trade or business), Y corporation must continue to use the
first-in, first-out method with respect to all of its inventories and
must continue to use the cost or market, whichever is
[[Page 399]]
lower, method of valuing all inventories except oats, unless, in
accordance with paragraph (e) of Sec. 1.446-1, consent of the
Commissioner is obtained to change the method of taking inventories. In
addition, under the provisions of subdivision (ii) of this subparagraph
(relating to different inventory methods in an integrated trade or
business), Y corporation shall use the method described in paragraph (c)
of this section in valuing its inventory of oats, unless, in accordance
with paragraph (d) of this section, consent of the Commissioner is
obtained to use a different method of valuing its oats.
(4) Rules of application. (i) In any case where the method of taking
inventories employed on the date of distribution or transfer is
continued, it will be unnecessary for the acquiring corporation to renew
any election previously made by it or by any distributor or transferor
corporation with respect to such method of taking inventories, and the
acquiring corporation is bound by any such elections. If, on the date of
distribution or transfer, any party to a section 381(a) transaction had
no inventories of a particular type of goods, or such party came into
existence as a result of the transaction, such party shall not be
considered to be using a method of taking inventories for the particular
type of goods different from that used by the other parties to the
transaction. If, on the date of distribution or transfer, any one of the
parties to the transaction is using the cash receipts and disbursements
method of accounting and is not required to take inventories, the
determination as to whether such method of accounting is to be continued
by the acquiring corporation shall be made in accordance with section
381(c)(4) and the regulations thereunder.
(ii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). M corporation is engaged in manufacturing and computes
its inventories under the first-in, first-out method of identification
and the cost or market, whichever is lower, method of valuation. N
corporation is also engaged in manufacturing and computes its
inventories under the first-in, first-out method of identification and
the cost method of valuation. M corporation acquires the assets of N
corporation in a transaction to which section 381(a) applies and M
corporation integrates the business formerly operated by N corporation
into the business which was operated by M corporation before the date of
distribution or transfer. On the date of distribution or transfer, N
corporation has inventories of sheet steel while M corporation has no
inventories of this particular type of goods. In all other respects the
inventories of the two corporations consist of similar types of goods.
Under the provisions of this subparagraph, M corporation must use the
first-in, first-out method of identification and the cost method of
valuation of inventories of sheet steel, unless, in accordance with
paragraph (e) of Sec. 1.446-1, consent of the Commissioner is obtained
to change the method of taking such inventories. For other goods in its
inventories M corporation must use the first-in, first-out method of
identification (as required by subparagraph (3)(i) of this paragraph),
and with respect to the method of valuation, must use the method of
taking inventories described in paragraph (c) of this section, unless,
in accordance with paragraph (d) of this section, consent of the
Commissioner is obtained to use a different method of taking
inventories.
Example (2). W corporation is engaged in the business of raising
cattle and uses the cash receipts and disbursements method of computing
taxable income. Inventories, therefore, are not required. X corporation
is also engaged in the business of raising cattle and uses the accrual
method of computing taxable income under which it has elected to use the
``farm-price method'' of valuing inventories. The assets of W
corporation are acquired by X corporation in a transaction to which
section 381(a) applies and X corporation integrates the business
formerly operated by W corporation into the business which was operated
by X corporation before the date of distribution or transfer. Under the
provisions of this subparagraph, whether X corporation is required to
take inventories will depend upon which method of accounting is used by
X corporation after the date of distribution or transfer, in accordance
with the provisions of section 381(c)(4) and the regulations thereunder.
Therefore, if X corporation uses the cash receipts and disbursements
method, it will not be required to take inventories into account in
computing its taxable income. However, if X corporation uses the accrual
method, it must use the ``farm-price method'' of taking inventories,
unless, in accordance with paragraph (d) of this section, consent of the
Commissioner is obtained to use a different method of taking
inventories.
(c) Change of method of taking inventories without consent of
Commissioner--(1) General rule. If, under the provisions of paragraph
(b) of this section, the acquiring corporation is not permitted to
continue to use the method of taking
[[Page 400]]
inventories used by it or by the distributor or transferor corporation
or corporations on the date of distribution or transfer, the acquiring
corporation shall use the principal method of taking inventories for
each particular type of goods of such corporations, as determined under
subparagraph (2) of this paragraph: Provided, That:
(i) Such method clearly reflects the income of the acquiring
corporation after the distribution or transfer as provided by sections
446(a) and 471 and the regulations thereunder, and
(ii) The use of such method is not inconsistent with the provisions
of any closing agreement entered into under section 7121 and the
regulations thereunder.
If the principal method does not satisfy the requirements of
subdivisions (i) and (ii) of this subparagraph, or if the acquiring
corporation wishes to use a method other than the principal method, see
paragraph (d)(1) of this section. If the principal method of taking
inventories is adopted under this paragraph, it will not be necessary
for the acquiring corporation or corporations to renew any election
previously made by it or by the distributor or transferor corporation
with respect to such principal method of taking inventories, and the
acquiring corporation is bound by any such election.
(2) Principal method of taking inventories. The determination of the
principal method of taking inventories shall be made with respect to
each particular type of goods of each integrated trade or business
operated by the acquiring corporation immediately after the date of
distribution or transfer. Such determination for each integrated trade
or business shall be made by reference to the methods of taking
inventories previously used in the component trades or businesses for
such types of goods which constitute the subsequent integrated trade or
business of the acquiring corporation. For purposes of this
determination, a corporation shall be deemed to be using the last-in,
first-out method of taking inventories with respect to a particular type
of goods on the date of the distribution or transfer, if such
corporation elects, under the provisions of section 472, to adopt the
last-in, first-out method with respect to such goods for its taxable
year within which or with which the date of distribution or transfer
occurs. The fair market value of the particular types of goods of each
group of component trades or businesses with respect to which one method
of taking inventories common to all was employed shall be compared with
the fair market value of comparable types of goods of other groups of
component trades or businesses with respect to which another method of
taking inventories common to all was employed. For purposes of the above
comparison and to the extent that particular types of goods are included
in inventory by grouping or pooling, then such group or pool shall be
considered as a single unit. The total fair market value of such group
or pool shall be the basis for comparison in determining the principal
method of taking inventories. The method of taking inventories of the
group of component trades or businesses having the largest fair market
value of such inventories shall be the principal method of taking
inventories. For purposes of this subparagraph, the fair market value of
the inventories of a component trade or business shall be determined
immediately after the date of distribution or transfer.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). (i) X, Y, and Z corporations are all engaged in the
manufacture of sheet metal. In addition, Y and Z corporations are
engaged in the manufacture of paper containers. X and Y corporations use
the first-in, first-out method of identifying goods and the cost method
of valuing all inventories, while Z corporation uses the first-in,
first-out method of identifying goods and the cost or market, whichever
is lower, method of valuing all inventories. X, Y, and Z corporations
enter into a transaction to which section 381(a) applies, and the
acquiring corporation integrates the sheet metal businesses formerly
operated by X, Y, and Z corporations and also integrates the paper
container businesses formerly operated by Y and Z corporations. Each
corporation has the same types of goods in the inventories of its sheet
metal business and Y and Z corporations have the same types of goods in
the inventories of their paper container businesses. Immediately after
the date of distribution or transfer the fair market values of the
respective inventories are as follows:
[[Page 401]]
------------------------------------------------------------------------
X Y Z
------------------------------------------------------------------------
Sheet metal.......................... $10,000 $7,000 $15,000
Paper container...................... .......... 6,000 7,000
------------------------------------------------------------------------
(ii) Since X, Y, and Z corporations all used the first-in, first-out
method of identifying their inventories as of the date of distribution
or transfer, then, under the provisions of paragraph (b)(3)(i) of this
section, the acquiring corporation shall continue to use the first-in,
first-out method of identifying all goods unless, in accordance with
paragraph (e) of Sec. 1.446-1, consent of the Commissioner is obtained
to change the method of accounting.
(iii) Since the acquired corporations used different methods of
valuing inventories in their sheet metal business and their paper
container business, when the businesses were integrated the acquiring
corporation must, under the provisions of this paragraph, determine
which method of inventory valuation used by the acquired corporations on
the date of distribution or transfer is the principal method of
inventory valuation for each of such businesses.
(a) In determining which is the principal method of valuing
inventories for the sheet metal business pursuant to subparagraph (2) of
this paragraph, the total fair market value of the sheet metal
inventories of X and Y corporations, $17,000 (i.e., $10,000
+$7,000=$17,000), is compared with the fair market value of the sheet
metal inventory of Z corporation, $15,000. Since the total fair market
value of the sheet metal inventories of X and Y corporations ($17,000)
exceeds the fair market value of the sheet metal inventory of Z
corporation ($15,000), the cost method of valuation used by X and Y
corporations is the principal method of taking such inventories, and
must be used by the acquiring corporation in valuing such inventories,
if the conditions set forth in subparagraph (1) of this paragraph are
satisfied.
(b) In determining which is the principal method of valuing
inventories for the paper container business pursuant to subparagraph
(2) of this paragraph, the fair market value of the paper container
inventory of Y corporation ($6,000) is compared with the fair market
value of the paper container inventory of Z corporation ($7,000). Since
the fair market value of the paper container inventory of Z corporation
($7,000) exceeds the fair market value of the paper container inventory
of Y corporation ($6,000), the cost or market, whichever is lower,
method of valuation used by Z corporation is the principal method of
taking such inventories, and must be used by the acquiring corporation
in valuing such inventories, if the conditions set forth in subparagraph
(1) of this paragraph are satisfied.
Example (2). (i) X, Y, and Z corporations are all engaged in the
manufacture of electrical appliances. In addition, X and Z corporations
are engaged in the manufacture of plastic containers. X corporation uses
the first-in, first-out method of identifying goods and the cost method
of valuing all inventories. Y and Z corporations use the last-in, first-
out method of identifying goods and the cost method of valuing all
inventories. In applying the last-in, first-out method, Y corporation
uses the dollar value method, the double-extension method, and pools
under the natural business unit method, while Z corporation uses the
dollar value method, the double-extension method, and pools under the
multiple pooling method for all inventories. X, Y, and Z corporations
enter into a transaction to which section 381(a) applies, and the
acquiring corporation integrates the electric appliance businesses
formerly operated by X, Y, and Z corporations and also integrates the
plastic container businesses formerly operated by X and Z corporations.
Each corporation has the same types of goods in the inventories of its
electric appliance business and X and Z corporations have the same types
of goods in the inventories of their plastic container businesses.
Immediately after the date of distribution or transfer, the fair market
values of the respective inventories are as follows:
------------------------------------------------------------------------
X Y Z
------------------------------------------------------------------------
Electric appliance..................... $13,000 $10,000 $5,000
Plastic container...................... 7,000 .......... 6,000
------------------------------------------------------------------------
(ii) Since X, Y, and Z corporations all used the cost method of
valuing their inventories as of the date of distribution or transfer,
then, under the provisions of paragraph (b)(3)(i) of this section, the
acquiring corporation shall continue to use the cost method of valuing
all goods unless, in accordance with paragraph (e) of Sec. 1.446-1,
consent of the Commissioner is obtained to change the method of
accounting.
(iii) Since the acquired corporations used different methods of
identifying inventories in their electric appliance business and their
plastic container business, when the businesses were integrated the
acquiring corporation must, under the provisions of this paragraph,
determine which method of inventory identification used by the acquired
corporations on the date of distribution or transfer is the principal
method of inventory identification for each of such businesses.
(a)(1) In determining which is the principal method of identifying
inventories for the electric appliance business pursuant to subparagraph
(2) of this paragraph, the fair market value of the electric appliance
inventory of X corporation, $13,000, is compared with the total fair
market value of the electric appliance inventories of Y and Z
corporations, $15,000 (i.e., $10,000+$5,000 =$15,000).
[[Page 402]]
Since the total fair market value of the electric appliance inventories
of Y and Z corporations ($15,000) exceeds the fair market value of the
electric appliance inventory of X corporation ($13,000), the last-in,
first-out method of identification is the principal method of taking the
electric appliance inventories and must be used by the acquiring
corporation, if the conditions set forth in subparagraph (1) of this
paragraph are satisfied.
(2) Since Y and Z corporations used different pooling methods, in
applying the last-in, first-out method, the acquiring corporation must,
under the provisions of this paragraph, determine which pooling method
as used by Y and Z corporations on the date of distribution or transfer
is the principal method. In making such determination pursuant to
subparagraph (2) of this paragraph, the fair market value of the
electric appliance inventory of Y corporation ($10,000) is compared with
the fair market value of the electric appliance inventory of Z
corporation ($5,000). Since the fair market value of the electric
appliance inventory of Y corporation ($10,000) exceeds the fair market
value of the electric appliance inventory of Z corporation ($5,000), the
natural business unit method is the principal method of pooling and must
be used by the acquiring corporation in applying the last-in, first-out
method with respect to the electric appliance business, if the
conditions set forth in subparagraph (1) of this paragraph are
satisfied.
In addition, under the provisions of paragraph (b)(3)(i) of this
section, the acquiring corporation must use the dollar value method and
the double-extension method for valuing goods in its electric appliance
inventory since Y and Z corporations both used such methods in valuing
their electric appliance inventories as of the date of distribution or
transfer, unless, in accordance with paragraph (e) of Sec. 1.446-1,
consent of the Commissioner is obtained to change the method of
accounting.
(b) In determining which is the principal method of identifying
inventories for the plastic container business pursuant to subparagraph
(2) of this paragraph, the fair market value of the plastic container
inventory of X corporation ($7,000) is compared with the fair market
value of the plastic container inventory of Z corporation ($6,000).
Since the fair market value of the plastic container inventory of X
corporation. ($7,000) exceeds the fair market value of the plastic
container inventory of Z corporation ($6,000) the first-in, first-out
method of identification, as used by X corporation, is the principal
method of taking the plastic container inventories and must be used by
the acquiring corporation, if the conditions set forth in subparagraph
(1) of this paragraph are satisfied.
(d) Change of method of taking inventories with consent of the
Commissioner--(1) General rule--(i) Carryover and principal method not
permitted. If the acquiring corporation is not permitted, under
paragraph (b) of this section, to continue to use the method of taking
inventories used by it or the distributor or transferor corporation or
corporations on the date of distribution or transfer, and is not
permitted, under paragraph (c) of this section, to use the principal
method of taking inventories, then such acquiring corporation must
request the Commissioner to determine the appropriate method of taking
inventories.
(ii) Principal method required. If the acquiring corporation wishes
to use a method of taking inventories other than the principal method of
taking inventories which is required to be used under paragraph (c) of
this section, it shall apply to the Commissioner for permission to use
such other method of taking inventories. Permission to use such other
method of taking inventories will not be granted unless the acquiring
corporation and the Commissioner agree to the terms, conditions, and
adjustments under which the change to such method will be effected.
(2) Time and manner of making application. Request for a
determination of the method of taking inventories to be used under
subparagraph (1)(i) of this paragraph or applications for permission to
use a method of taking inventories under subparagraph (1)(ii) of this
paragraph shall be filed with the Commissioner of Internal Revenue,
Attention: T:I:C, Washington, DC 20224, not later than 90 days after the
date of distribution or transfer, except that in cases where the date of
distribution or transfer occurs before January 15, 1975, such
applications or requests shall be filed not later than 90 days after
such date. The application shall be accompanied by a copy of the
statement described in paragraph (b)(3) of Sec. 1.381(b)-1, and by a
statement specifying the nature of the transaction which causes section
381 to apply; the differences in methods of taking inventories used by
the corporations concerned; the method of taking inventories proposed to
be used by the acquiring corporations; and the amount of adjustments
necessary
[[Page 403]]
to prevent duplication or omission of items in the computation of
taxable income under such proposed method. The Commissioner may also
require such other information as may be necessary in order to determine
the proper method of taking inventories to be used by the acquiring
corporation.
(e) Treatment of layers of inventories by the acquiring corporation
and rules for making adjustments--(1) In general. This paragraph
provides rules for treating layers of inventories by the acquiring
corporation and rules for making adjustments, once the acquiring
corporation's method of taking inventories for its taxable year
including the date of distribution or transfer has been determined in
accordance with the rules set forth in paragraphs (a) through (d) of
this section. Thus, for example, if the acquiring corporation uses the
last-in, first-out method of taking inventories for its taxable year
including the date of distribution or transfer, either because such
corporation elects the last-in, first-out method of taking inventories
under the provisions of section 472 for such year or because such method
is otherwise determined to be the principal method of taking inventories
under paragraph (c)(2) of this section, then such corporation shall
integrate its layers of inventories and make the necessary adjustments
in accordance with the rules under paragraph (e)(2) of this section.
(2) Acquiring corporation uses last-in, first-out method--(i)
Dollar-value method--(a) Distributor or transferor corporation using
last-in, first-out method. In any case where the acquiring corporation
is required or permitted to use the dollar value method of pricing
inventories on the last-in, first-out method for its taxable year
including the date of distribution or transfer, the inventories of each
distributor or transferor corporation which used the last-in, first-out
method for its taxable year in which the distribution or transfer
occurred shall be placed on the dollar value method pursuant to the
rules contained in paragraph (f) of Sec. 1.472-8, and then such
inventories shall be integrated with the inventories of the acquiring
corporation. If pools of each corporation are permitted or required to
be combined, they shall be combined in accordance with the principles
set forth in paragraph (g)(2) of Sec. 1.472-8. For purposes of
combining pools, all base-year inventories or layers of increment which
occur in taxable years including the same December 31 shall be combined.
A base-year inventory or layer of increment occurring in any short
taxable year not including a December 31 or in the final taxable year of
a distributor or transferor corporation shall be merged with and
considered a layer of increment of its immediately preceding taxable
year.
(b) Distributor or transferor corporation not using last-in, first-
out method. In any case where the acquiring corporation is required or
permitted to use the last-in, first-out method of taking inventories for
its taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which did not
use the last-in, first-out method for its taxable year in which the
distribution or transfer occurred shall be treated by the acquiring
corporation as having been acquired at their average unit cost in a
single transaction on the date of distribution or transfer. Thus, where
the acquiring corporation is required or permitted to use the dollar
value method of pricing inventories, if an item of inventory is to be
combined in an existing dollar value pool, such item shall be treated as
if it were purchased at its average unit cost on the date of
distribution or transfer with respect to such pool. On the other hand,
if such item is not to be combined in an existing pool and the taxpayer
otherwise uses LIFO with respect to such item, such item will be treated
as if it were purchased at its average unit cost on the date of
distribution or transfer with respect to a new pool (if any), with the
base-year being the year of distribution or transfer. Adjustments
resulting from a restoration to cost of any write-down to market value
of such inventories of a distributor or transferor corporation shall be
taken into account by such corporation in its final taxable year (where
such year is closed by reason of section 381(b)). See section 472(d).
(ii) Specific goods method--(a) Distributor or transferor
corporation using last-in, first-out method. In any case
[[Page 404]]
where the acquiring corporation is required or permitted to use the
specific goods method of pricing inventories on the last-in, first-out
method for its taxable year including the date of distribution or
transfer, the inventories of each distributor or transferor corporation
which used the last-in, first-out method for its taxable year in which
the distribution or transfer occurred shall be treated by the acquiring
corporation as having the acquisition dates and costs of the distributor
or transferor corporation.
(b) Distributor or transferor not using last-in, first-out method.
See paragraph (e)(1)(i)(b) of this section.
(3) Acquiring corporation uses first-in, first-out method--(i)
Distributor or transferor corporations not using first-in, first-out
method. In any case where the acquiring corporation is permitted or
required to use the first-in, first-out method of taking inventories for
its taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which did not
use the first-in, first-out method shall be treated by the acquiring
corporation as having the same acquisition dates and costs which such
inventory would have had if the distributor or transferor corporation
had been using the first-in, first-out method for its taxable year in
which the distribution or transfer occurred. However, if the acquiring
corporation values its inventories at cost or market, whichever is
lower, then the acquired inventories shall be treated as having been
acquired at cost or market, whichever is lower.
(ii) Distributor or transferor corporation using first-in, first-out
method. In any case where the acquiring corporation is required or
permitted to use the first-in, first-out method of taking inventories
for its taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which used
such method for its taxable year in which the distribution or transfer
occurred shall be treated by the acquiring corporation as having the
same acquisition dates and costs as the distributor or transferor
corporations. However, where the acquiring corporation values its
inventories at cost or market, whichever is lower, then the acquiring
corporation shall treat the acquired inventories as having been acquired
at cost or market, whichever is lower.
(4) Adjustments. Except as provided in paragraph (e)(1) of this
section with respect to any adjustments under section 472(d), the
adjustments necessary to reflect the change from the method of taking
inventories previously used by any of the corporations involved
(including any adjustments required by section 481), shall be determined
and computed in the same manner as if on the date of distribution or
transfer, each of the several corporations that were not using the
method of taking inventories used by the acquiring corporation for its
taxable year including the date of distribution or transfer had
initiated a change in the method of taking inventories. However, such
adjustments (as an item of income or deduction, as the case may be)
shall be taken into account solely by the acquiring corporation in
computing its taxable income.
(f) Basis of inventories received. The basis of inventories received
by the acquiring corporation from a distributor or transferor
corporation shall be determined in accordance with section 334(b)(1) or
362(b), and the regulations thereunder. See also section 1013, and the
regulations thereunder.
(g) Additional rules applicable to distributions or transfers before
January 15, 1975--(1) Statute of limitations bars assessment or refund.
If the date of distribution or transfer was before January 15, 1975, and
if the assessment of any deficiency or the refund or credit of any
overpayment for the taxable year of the acquiring corporation which
includes the date of distribution or transfer or any subsequent taxable
year is prevented by the operation of any law or rule of law, then this
section does not authorize the Commissioner or the acquiring corporation
to change any method or methods of computing inventories in any taxable
year of the acquiring corporation. However, the Commissioner or the
acquiring corporation may change such method or methods of computing
inventories under the provisions of section 446, 471, or 472 and the
regulations thereunder.
[[Page 405]]
(2) Statute of limitations does not bar assessment and refund.
Except as provided in subparagraph (1) of this paragraph--
(i) If the date of distribution or transfer was before January 15,
1975, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer:
(a) Adopted or continued a method or methods of taking inventories
consistent with the rules of this section,
(b) Been granted permission by the Commissioner, in accordance with
section 446, 471, or 472 and the regulations thereunder, to use a method
or methods of taking inventories, or
(c) Adopted a method or methods of taking inventories that, under
section 446, 471, or 472 and the regulations thereunder may be adopted
without the consent of the Commissioner,
then the method or methods of taking inventories adopted or continued in
the manner described in (a), (b), or (c) of this subdivision, shall not
be changed, by reason of the rules contained in this section, by the
Commissioner or by the acquiring corporation for any taxable year ending
after the date of distribution or transfer. However, the Commissioner or
the acquiring corporation may change such method or methods of taking
inventories for any such taxable year under the provisions of, and to
the extent permitted by, section 446, 471, or 472 and the regulations
thereunder.
(ii) If the date of distribution or transfer was before January 15,
1975, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, adopted or continued a
method or methods of taking inventories other than in the manner
described in (a), (b), or (c) of subdivision (i) of this subparagraph,
then the acquiring corporation may--
(a) Continue to use the method or methods of taking inventories so
adopted or continued if such method or methods clearly reflect income
and if proper adjustments were made to reflect the adoption of such
method or methods, or
(b) Adopt the method or methods of taking inventories prescribed by
this section.
Such method or methods of taking inventories shall be adopted by filing
an amended return (which includes the proper adjustments required by
this section) for the taxable year of the acquiring corporation which
includes the date of distribution or transfer, and by filing amended
returns for all subsequent taxable years of the acquiring corporation
for which returns have previously been filed. Such amended return or
returns shall be accompanied by a copy of the statement described in
paragraph (b)(3) of Sec. 1.381(b)-1, and by a statement specifying the
nature of the transaction which causes section 381 to apply; the
difference in methods of taking inventories used by the corporation
concerned; the method or methods of taking inventories originally
adopted by the acquiring corporation; the method or methods of taking
inventories adopted on the amended return or returns; and the
computation of the amount of the adjustments and the resulting increase
or decrease in tax.
(h) Effective date. This section is applicable with respect to
taxable years beginning after January 15, 1975. However, if a taxpayer
wishes to rely on the rules stated in this section for taxable years
beginning before January 15, 1975 it may do so, subject to the
provisions of paragraph (g) of this section.
(Sec. 381(c)(5) and 7805 of the Internal Revenue Code of 1954 (68A Stat.
917; 26 U.S.C. 381(c)(5) and 7805))
[T.D. 7344, 40 FR 2684, Jan. 15, 1975]
Sec. 1.381(c)(6)-1 Depreciation method.
(a) Carryover requirement--(1) Distributions in taxable years ending
before July 25, 1969. (i) Section 381(c)(6) provides that if, in a
transaction in a taxable year which ends before July 25, 1969, to which
section 381(a) applies, an acquiring corporation acquires depreciable
property from a distributor or transferor corporation which computes its
allowance for the depreciation of the property under section 167(b)(2),
(3), or (4), the acquiring corporation shall compute its depreciation
allowance by the same method used by the distributor or transferor
corporation with respect to such property. Thus, if the distributor or
transferor corporation used the sum of the years-digits method under
section 167(b)(3) with respect to an asset distributed or transferred
[[Page 406]]
to an acquiring corporation, the acquiring corporation will be required
to use the sum of the years-digits method with respect to such asset
acquired. The computation of the depreciation allowance with respect to
the property acquired shall be made under the provisions of section 167
and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph will apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or other
disposition of such property. For provisions defining the date of
distribution or transfer see Sec. 1.381(b)-1(b).
(2) Distributions in taxable years ending after July 24, 1969. (i)
Section 381(c)(6) provides that if, in a transaction in a taxable year
ending after July 24, 1969, to which section 381(a) applies, an
acquiring corporation acquires depreciable property from a distributor
or transferor corporation which computes its allowances for the
depreciation of the property under subsection (b), (j), or (k) of
section 167, the acquiring corporation shall compute its depreciation
allowance by the same method used by the distributor or transferor
corporation with respect to such property. Thus, if the distributor or
transferor corporation used the straight line method under section
167(b)(1) with respect to an asset distributed or transferred to an
acquiring corporation, the acquiring corporation will be required to use
the straight line method with respect to such asset. Similarly, if the
distributor or transferor corporation elected to compute depreciation
under section 167(k) with respect to property attributable to
rehabilitation expenditures, and such property is transferred to an
acquiring corporation, the acquiring corporation will be required to
compute depreciation under section 167(k) with respect to the property
acquired. The computation of the depreciation allowance with respect to
the property acquired shall be made under the provisions of section 167
and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph shall apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or other
disposition of such property. For provisions defining the date of
distribution or transfer see Sec. 1.38(b)-1(b).
(b) Portion in excess of distributor or transferor corporation's
basis--(1) General rule. With respect to that part of the basis of the
depreciable property (other than certain section 1250 property described
in subparagraph (2) of this paragraph) which in the hands of the
acquiring corporation exceeds the adjusted basis to the distributor or
transferor corporation, the acquiring corporation may use any reasonable
method of computing depreciation, other than the methods provided in
section 167(b)(2), (3), or (4). See paragraph (b) of Sec. 1.167(b)-0
for methods which are acceptable under section 167(a) with respect to
such property. See also sections 334(b)(1) and 362(b) for the
determination of basis of property in the hands of the acquiring
corporation in connection with a transaction to which section 381(a)
applies.
(2) Section 1250 property. With respect to that part of the basis of
section 1250 property acquired after July 24, 1969, which in the hands
of the acquiring corporation exceeds the adjusted basis to the
distributor or transferor corporation, the acquiring corporation shall
be subject to the limitations contained in section 167(j)(4) (relating
to used section 1250 property) or 167(j)(5) (relating to used
residential rental property). Thus, for example, if section
[[Page 407]]
1250 property which is not residential rental property is acquired in a
section 381(a) transaction after July 24, 1969, the straight line method
of depreciation (or other method allowable under section 167(j)(4)(B))
is the only acceptable method with respect to that portion of the basis
of the property which, in the hands of the acquiring corporation,
exceeds the adjusted basis to the transferor or distributor corporation.
(c) Records required. Records shall be maintained in sufficient
detail to identify any depreciable property to which this section
applies, and to establish the basis thereof.
(d) Agreement under section 167(d). To the extent not inconsistent
with paragraph (b) of this section, an acquiring corporation shall be
treated as the distributor or transferor corporation in the case of an
agreement between the distributor or transferor corporation and the
district director under section 167(d) and Sec. 1.167(d)-1 with respect
to property to which section 381(c)(6) and this section apply. Thus, in
the case where the basis of an asset in the hands of an acquiring
corporation exceeds the basis of such asset in the hands of the
distributor or the transferor corporation, such an agreement will not
have the effect of permitting the acquiring corporation to compute its
depreciation allowance with respect to such excess basis under the
methods provided in section 167(b)(2), (3), or (4). However, the
provisions of the agreement will continue to apply with respect to the
useful life of the asset.
(e) Change of method of depreciation. Although the acquiring
corporation is required to use the method of computing depreciation used
by the distributor or transferor with respect to depreciable property to
which this section applies, such acquiring corporation may use another
method with respect to such property if consent of the Commissioner is
obtained in accordance with paragraph (e) of Sec. 1.446-1. Further,
subject to the provisions of paragraph (b) of Sec. 1.167(e)-1 the
acquiring corporation may change from the declining balance method
described in section 167(b)(2) to the straight line method without
consent of the Commissioner.
(f) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, for example, if X
Corporation, a transferor corporation, used the sum of the years-digits
method under section 167(b)(3) with respect to an asset transferred to Y
Corporation, an acquiring corporation, in a transaction to which section
381(a) applies, and subsequently Y Corporation, using the same method,
transfers such asset to Z Corporation in a transaction to which section
381(a) also applies, then Z Corporation shall be required to use the sum
of the years-digits method with respect to such asset.
(g) Illustration. The application of this section may be illustrated
by the following example:
Example. M and N Corporations compute their taxable incomes on the
basis of the calendar year. On December 31, 1959, M Corporation
transfers all of its assets to N Corporation in a transaction to which
section 381(a) applies. Included among these assets is an item of
depreciable property which on that date has an adjusted basis (for
determining gain) of $800,000 after M Corporation takes into account for
1959 its allowance for depreciation under section 167(b)(2). The basis
attributable to the asset under section 362(b) is determined to be
$900,000 in the hands of N Corporation. Under the provisions of section
381(c)(6) and paragraph (a) of this section, N Corporation is required
to compute its allowance for the depreciation of the asset under section
167(b)(2) for 1960 and subsequent years but only in respect of $800,000
of its basis. N Corporation may use any reasonable method other than the
methods provided in section 167(b)(2), (3), or (4) in computing its
depreciation allowance of the remaining $100,000.
[T.D. 6559, 26 FR 2983, Apr. 7, 1961, as amended by T.D. 7166, 37 FR
5246, Mar. 11, 1972; 37 FR 6400, Mar. 29, 1972]
Sec. 1.381(c)(8)-1 Installment method.
(a) Carryover requirement. (1) Section 381(c)(8) provides that if,
in a transaction to which section 381(a) applies, an acquiring
corporation acquires installment obligations, the income from which the
distributor or transferor corporation has elected under section 453 and
the regulations thereunder to report on the installment method, then the
acquiring corporation shall be treated as the distributor or transferor
[[Page 408]]
corporation would have been treated under section 453 had it not
transferred the installment obligations. Thus, if the distributor or
transferor corporation had properly elected to return income from the
sale or other disposition of property giving rise to the obligations on
the installment method, then the acquiring corporation shall be required
to return the income from all such installment obligations in the same
manner and to the same extent as the distributor or transferor
corporation, unless consent of the Commissioner to use another method is
obtained in accordance with paragraph (e) of Sec. 1.446-1. Amounts
received by the acquiring corporation on or after the date of
distribution or transfer with respect to an installment sale made by the
distributor or transferor corporation will not be taken into account in
applying the limitation under section 453(b)(2) with respect to the
amount of payments received in the year of sale or other disposition.
(2) Section 381(c)(8) and this section have no application to sales
or other dispositions of property made by the acquiring corporation on
or after the date of distribution or transfer. For provisions defining
the date of distribution or transfer, see Sec. 1.381(b)-1(b). See
section 381(c)(4) and the regulations thereunder for rules relating to
the proper method or combination of methods of accounting to be used by
the acquiring corporation.
(b) Basis of obligations. The basis in the hands of an acquiring
corporation of installment obligations described in section 381(c)(8)
and paragraph (a) of this section shall be the same as in the hands of
the distributor or transferor corporation.
(c) Repossession of property sold in prior years. If the acquiring
corporation repossesses property, previously sold by the distributor or
transferor corporation, by reason of default by the purchaser in payment
of the acquired installment obligations, then the acquiring corporation
shall be treated as though it were the vendor corporation for purposes
of determining, under section 453 and the regulations thereunder, the
gain, loss, income, or deduction with respect to the property
repossessed.
[T.D. 6559, 26 FR 2983, Apr. 7, 1961]
Sec. 1.381(c)(9)-1 Amortization of bond discount or premium.
(a) Carryover requirement. If, in a transaction to which section
381(a) applies, the acquiring corporation assumes liability for the
payment of bonds of a distributor or transferor corporation which were
issued at a discount or premium, then under the provisions of section
381(c)(9) the acquiring corporation is to be treated as the distributor
or transferor corporation after the date of distribution or transfer for
purposes of determining the amount of amortization allowable, or
includible, with respect to such discount or premium in computing
taxable income. Thus, if subsequent to February 28, 1913, a distributor
or transferor corporation issues bonds at a premium and the liability
for them is assumed by the acquiring corporation in a transaction to
which section 381(a) applies, then the net amount of the premium is
income which should be prorated or amortized over the life of the bonds,
including the period during which the acquiring corporation is liable
upon the obligations assumed. On the other hand, if a distributor or
transferor corporation issues bonds at a discount and the liability for
them is assumed by the acquiring corporation in a transaction to which
section 381(a) applies, then the net amount of the discount is
deductible in computing taxable income but should be prorated or
amortized over the life of the bonds, including the period during which
the acquiring corporation is liable upon the obligations assumed.
(b) Expense incurred upon issuance of bonds. If, in a transaction to
which section 381(a) applies, the acquiring corporation assumes
liability for bonds of a distributor or transferor corporation which
were issued at a discount or premium, the acquiring corporation shall be
treated as the distributor or transferor corporation after the date of
distribution or transfer with respect to the expense incurred upon the
issuance of such bonds.
(c) Purchase of bonds. If, in a transaction to which section 381(a)
applies,
[[Page 409]]
the acquiring corporation assumes liability for bonds of a distributor
or transferor corporation which were issued at a discount or premium and
if the acquiring corporation subsequently purchases such bonds, then the
acquiring corporation shall be treated as the distributor or transferor
corporation for the purpose of determining the amount of any income or
deduction resulting from the purchase. See paragraph (c) of Sec. 1.61-
12. For rules relating to the exchange or substitution of bonds issued
by the acquiring corporation for bonds of a distributor or transferor
corporation, see paragraph (d) of this section.
(d) Exchange of new for old bonds. Notwithstanding any other
provision of this section, if--
(1) In a transaction to which section 381(a) applies, bonds of the
acquiring corporation are exchanged or substituted for bonds of a
distributor or transferor corporation which were issued at a discount or
premium, or
(2) Bonds of the acquiring corporation are exchanged or substituted
for bonds of a distributor or transferor corporation which were issued
at a discount or premium and in respect of which the acquiring
corporation has assumed the liability in a transaction to which section
381(a) applies,
then, with respect to any unamortized discount, premium, or expense of
issuance attributable to such bonds of the distributor or transferor
corporation, the acquiring corporation shall be treated as the
distributor or transferor corporation.
(e) Bonds of a distributor or transferor corporation. For purposes
of applying section 381(c)(9), the term bonds of a distributor or
transferor corporation includes not only bonds issued by the distributor
or transferor corporation but also bonds for which the distributor or
transferor corporation has assumed liability. Thus, if the distributor
or transferor corporation has assumed liability for bonds in a
transaction in which any unamortized discount or premium attributable to
such bonds carried over to such corporation, then the acquiring
corporation assuming liability for the bonds shall be treated as the
distributor or transferor corporation after the date of distribution or
transfer for purposes of determining the amount of amortization
allowable, or includible, with respect to such discount or premium. On
the other hand, if the distributor or transferor corporation has assumed
liability for bonds in a transaction in which any unamortized discount
or premium attributable to such bonds did not carry over to such
corporation, then there can be no carryover to the acquiring corporation
under this section.
[T.D. 6532, 26 FR 405, Jan. 19, 1961]
Sec. 1.381(c)(10)-1 Deferred exploration and development expenditures.
(a) Carryover requirement. (1) If for any taxable year a distributor
or transferor corporation has elected under section 615 or section 616
(or corresponding provisions of prior law) to defer and deduct on a
ratable basis any exploration or development expenditures made in
connection with any ore, mineral, mine, or other natural deposit
transferred to the acquiring corporation in a transaction described in
section 381(a), then under the provisions of section 381(c)(10) the
acquiring corporation shall be entitled to deduct such expenditures on a
ratable basis in the same manner, and to the same extent, as they would
have been deductible by the distributor or transferor corporation in the
absence of the distribution or transfer. For this purpose, the acquiring
corporation shall be treated as though it were the distributor or
transferor corporation. The principles set forth in paragraph (e) of
Sec. 1.615-3 and paragraph (f) of Sec. 1.616-2 are applicable in
computing the amount of the deduction allowable to the acquiring
corporation in respect of expenditures deferred by a distributor or
transferor corporation.
Example. X and Y Corporations are both organized on January 1, 1955,
and both corporations compute their taxable income on the basis of the
calendar year. During 1955, X Corporation purchases a mineral property
which it begins to develop in 1956. During 1956, X Corporation incurs
development expenditures of $500,000 in respect of such property which
it elects to defer under section 616(b). On December 31, 1956, Y
Corporation acquires all of the assets of X Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to X Corporation on the transfer. In 1957, Y Corporation
[[Page 410]]
sells 150,000 units of produced ore benefited by the development
expenditures incurred and deferred by X Corporation, and the number of
units remaining as of the end of 1957, plus the number of units sold
during that year, is estimated to be 1,000,000. In addition to its
deduction for depletion, Y Corporation is, in 1957, entitled to a
deduction under sections 616(b) and 381(c)(10) of $75,000 of the
development expenditures previously deferred by X Corporation, that is,
$500,000 x 150,000/1,000,000.
(2) If a distributor or transferor corporation has elected under
section 615 or section 616 (or corresponding provisions of prior law) to
defer exploration or development expenditures in respect of a mine or
other natural deposit which it subsequently disposes of except for a
retained economic interest therein, such as the right to royalty income
or in-ore payments, and such retained economic interest is transferred
to the acquiring corporation in a transaction to which section 381(a)
applies, then the acquiring corporation shall be entitled to deduct such
deferred expenditures attributable to the economic interest retained on
a ratable basis to the same extent they would have been deductible by
the distributor or transferor corporation in the absence of the
distribution or transfer. See paragraph (c) of Sec. 1.615-3 and
paragraph (c) of Sec. 1.616-2.
(3) For purposes of this section, the terms exploration expenditures
and development expenditures shall have the same meaning as that
ascribed to them in the regulations under sections 615 and 616 of the
Internal Revenue Code of 1954, or under sections 23(cc) and 23(ff) of
the Internal Revenue Code of 1939, whichever applies. See, for example,
paragraph (a) of Sec. 1.615-1 and paragraph (a) of Sec. 1.616-1.
(b) Effect and identification of election previously made. (1) The
election made by a distributor or transferor corporation under the
provisions of section 615 or section 616 (or corresponding provisions of
prior law) to defer exploration or development expenditures in respect
of any taxable year may not be revoked by the acquiring corporation for
any reason whatsoever.
(2) When filing its return for the first taxable year for which it
deducts exploration or development expenditures which were deferred
under section 615 or section 616 (or corresponding provisions of prior
law) by a distributor or transferor corporation, the acquiring
corporation shall attach thereto a statement properly identifying the
taxable year for which the election to defer was made by the distributor
or transferor corporation, the name of the corporation which made the
election, and the district director with whom the election was filed.
(3) It is unnecessary for an acquiring corporation to renew an
election to defer exploration or development expenditures which was made
by a distributor or transferor corporation.
(c) Successive transactions to which section 381(a) applies. If, by
virtue of section 381(c)(10), the acquiring corporation is entitled to
deduct exploration or development expenditures deferred by a distributor
or transferor corporation, then such acquiring corporation shall be
deemed to have made the election to defer such expenditures for purposes
of applying section 381(c)(10) to any subsequent transaction in which
such acquiring corporation is a distributor or transferor corporation.
(d) Carryover of limitation requirements. (1) If a distributor or
transferor corporation transfers any mineral property to the acquiring
corporation in a transaction described in section 381(a) and the
acquiring corporation pays or incurs exploration expenditures in a
taxable year ending after the date of the distribution or transfer, then
in applying the 4-year or $400,000 limitations described in section
615(c) and paragraphs (a) and (b) of Sec. 1.615-4, whichever is
applicable, the acquiring corporation shall be deemed to have been
allowed any deduction which, for any taxable year ending on or before
the date of distribution or transfer, was allowed to the distributor or
transferor corporation under section 615(a), or under section 23(ff)(1)
of the Internal Revenue Code of 1939, or to have made any election
which, for any such preceding year, was made by the distributor or
transferor corporation under section 615(b), or under section 23(ff)(2)
of the Internal Revenue Code of 1939. Thus, in such instance, the
acquiring corporation shall take into account the years in which the
distributor or transferor corporation exercised the
[[Page 411]]
election to deduct or defer exploration expenditures and any amounts so
deducted or deferred. For this purpose, it is immaterial whether the
deduction has been allowed to, or the election has been made by, the
distributor or transferor corporation with respect to the specific
mineral property transferred by that corporation to the acquiring
corporation.
(2) Generally, for purposes of applying the 4-year limitation
described in paragraph (a) of Sec. 1.615-4, if there are two or more
distributor or transferor corporations that transfer any mineral
property to the acquiring corporation, each taxable year of any such
corporation ending on or before the date of distribution or transfer in
which exploration expenditures were deducted or deferred shall be
treated as a separate taxable year regardless of the fact that the
taxable years of two or more such corporations normally end on the same
date. However, if the date of distribution or transfer is the same with
respect to more than one distributor or transferor corporation, then the
taxable years of such corporations ending on the same date of
distribution or transfer shall be considered as one taxable year for
purposes of applying the 4-year limitation even though more than one
such corporation deducted or deferred exploration expenditures for such
taxable years.
(3) For purposes of applying the $400,000 limitation described in
paragraph (b) of Sec. 1.615-4, if there are two or more distributor or
transferor corporations that transfer any mineral property to the
acquiring corporation, any exploration expenditures which were deducted
or treated as deferred expenses by such corporations for taxable years
ending after December 31, 1950, shall be taken into account by the
acquiring corporation.
(4) If a distributor or transferor corporation that transfers any
mineral property to the acquiring corporation was required to take into
account any taxable years or amounts of its transferor, as provided by
paragraph (e) of Sec. 1.615-4, for purposes of either the 4-year
limitation described in paragraph (a) of Sec. 1.615-4 or the $400,000
limitation described in paragraph (b) of Sec. 1.615-4, then the
acquiring corporation shall also take these taxable years and amounts
into account in applying the same limitations.
(5) The provisions of this paragraph may be illustrated by the
following examples:
Example (1). M and N Corporations were organized on January 1, 1956,
and each corporation computes its taxable income on the basis of the
calendar year. For each of its taxable years 1956 and 1957, M
Corporation expended $60,000 for exploration expenditures and exercised
the option to deduct such amounts under section 615(a). N Corporation
made no exploration expenditures during its taxable years 1956 and 1957.
On December 31, 1957, M Corporation transferred all of its assets to N
Corporation in a transaction to which section 381(a) applies, no gain
being recognized to the transferor corporation on the transfer. N
Corporation made exploration expenditures of $100,000, $120,000,
$110,000, and $100,000 for the years 1958, 1959, 1960, and 1961,
respectively, which expenditures it desired to deduct under section
615(a) to the extent allowable. On the basis of these facts, N
Corporation may deduct up to $100,000 for each of the years 1958 and
1959. No deduction or deferral is allowable for 1960 since the benefits
of section 615(c) were previously availed of for 4 taxable years.
However, N Corporation may deduct $80,000 for 1961 (the 4-year
limitation not applying to such year) but, if such deduction is made, N
Corporation will not be allowed any further deductions or deferrals
since the $400,000 limitation of paragraph (b) of Sec. 1.615-4 will
have been reached.
Example (2). R and S Corporations were organized on January 1, 1955,
and each corporation computes its income on the basis of the calendar
year. For the 1955 taxable year neither corporation made any exploration
expenditures under section 615(a). On June 30, 1956, R Corporation
transferred all its assets to S Corporation in a transaction to which
section 381(a) applies, no gain being recognized to the transferor
corporation on the transfer. During its short taxable year ending June
30, 1956, R Corporation made exploration expenditures of $60,000 which
it elected to deduct under section 615. For its taxable year ending
December 31, 1956, S Corporation may deduct or defer exploration
expenditures up to $100,000 since this is a separate election for
purposes of utilizing section 615 and is not affected by the $60,000
previously deducted by R Corporation. Assuming S Corporation exercises
an election under section 615 for its taxable year ending December 31,
1956, S Corporation may elect to apply the benefits of section 615 to
exploration expenditures for two more taxable years. However, for
taxable years beginning after July 6, 1960 (the 4-year limitation not
[[Page 412]]
applying), S Corporation is entitled under section 615 to deduct or
defer exploration expenditures made in such years to the extent that the
combined deductions and deferrals by R and S Corporations in prior years
did not exceed $400,000.
Example (3). O and P Corporations were organized on January 1, 1955,
and each corporation computes its taxable income on the basis of the
calendar year. For their taxable years 1955, 1956, and 1957, each
corporation deducted exploration expenditures made in such years under
section 615(a). On June 30, 1958, O Corporation transferred all its
assets to P Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporation on the
transfer. If, during its short taxable year ending June 30, 1958, O
Corporation made additional exploration expenditures, it may deduct or
defer such expenditures (up to $100,000) under section 615 since O
Corporation has utilized section 615 in only three previous taxable
years. For its taxable years ending after June 30, 1958, and beginning
before July 7, 1960, P Corporation may not deduct or defer exploration
expenditures under section 615, since the benefits of that section were
utilized by O and P Corporations for 4 taxable years. However, for
taxable years beginning after July 6, 1960 (the 4-year limitation not
applying), P is entitled under section 615 to deduct or defer
exploration expenditures made in such years to the extent that the
combined deductions and deferrals by O and P Corporations in prior years
do not exceed $400,000. See paragraph (b) of Sec. 1.615-4.
Example (4). X, Y, and Z Corporations were organized on January 1,
1955, and each corporation computes its taxable income on the basis of
the calendar year. For their taxable years ending December 31, 1955, X
and Y Corporations each deferred $100,000 for exploration expenditures
made in such taxable years under section 615(b). Z Corporation made no
exploration expenditures during its taxable year ending December 31,
1955. On March 31, 1956, X and Y Corporations transferred all their
assets to Z Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporations on the
transfer. X and Y Corporations each made exploration expenditures of
$75,000 during their short taxable years ending March 31, 1956, which
they deducted under section 615(a). For purposes of taxable years
beginning before July 7, 1960, Z Corporation must take into account the
taxable years in which X and Y Corporations deducted or deferred
exploration expenditures. In so doing, each taxable year in which
exploration expenditures were deducted or deferred must be taken into
account except that the taxable years of X and Y Corporations ending on
March 31, 1956, shall be considered as one taxable year. Therefore, Z
Corporation may deduct or defer exploration expenditures in accordance
with section 615 for any one taxable year ending after March 31, 1956,
and beginning before July 7, 1960. However, for taxable years beginning
after July 6, 1960 (the 4-year limitation not applying), Z Corporation
must take into account for purposes of the $400,000 limitation all of
the $350,000 of exploration expenditures deducted or deferred by X, Y,
and Z Corporations during taxable years ending after December 31, 1950.
Therefore, Z Corporation, assuming it has not deducted or deferred any
exploration expenditures, is entitled under section 615 to deduct or
defer in taxable years beginning after July 6, 1960, up to $50,000 for
exploration expenditures made in such years.
Example (5). For purposes of this example, assumethat each taxpayer
computes taxable income on the basis of the calendar year. Taxpayer A,
an individual who has deducted exploration expenditures of $75,000 under
section 23(ff) of the Internal Revenue Code of 1939 for each of his
taxable years 1952 and 1953, transferred a mineral property to K
Corporation on January 1, 1954, in a transaction in which the basis of
the mineral property in the hands of K Corporation is determined under
section 362(a). For its taxable year 1954 and pursuant to section
615(a)., K Corporation deducted exploration expenditures of $100,000
which it made in such year. K Corporation had made no exploration
expenditures in any preceding taxable year. On December 31, 1954, K
Corporation transferred all its assets to L Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to the transferor corporation on the transfer. Assuming that L
Corporation has not deducted or deferred exploration expenditures in any
preceding taxable year, L Corporation may deduct or defer exploration
expenditures (up to $100,000) in accordance with section 615 for any one
taxable year ending after December 31, 1954, and beginning before July
7, 1960, in view of the 4-year limitation. However, if L Corporation
does not deduct or defer exploration expenditures in that period, then
for taxable years beginning after July 6, 1960 (the 4-year limitation
not applying), L Corporation is entitled to deduct or defer up to
$150,000 (but not to exceed $100,000 per year) for exploration
expenditures made in such years. See paragraph (b) of Sec. 1.615-4.
[T.D. 6552, 26 FR 1988, Mar. 8, 1961, as amended by T.D. 6685, 28 FR
11406, Oct. 24, 1963]
Sec. 1.381(c)(11)-1 Contributions to pension plan, employees' annuity
plans, and stock bonus and profit-sharing plans.
(a) Carryover requirement. Section 381(c)(11) provides that, for
purposes of
[[Page 413]]
determining amounts deductible under section 404 for any taxable year,
the acquiring corporation shall be considered after the date of
distribution or transfer to be the distributor or transferor corporation
in respect of any pension, annuity, stock bonus, or profit-sharing plan.
(b) Nature of carryover. (1) Primarily, section 381(c)(11) and this
section apply to the amount of any unused deductions or excess
contributions carryovers which, in the absence of the transaction
causing section 381 to apply, would have been available to the
distributor or transferor corporation under section 404. Thus, for
example, this section applies to unused deductions under a profit-
sharing or stock bonus trust which, in accordance with the second
sentence of section 404(a)(3)(A) and Sec. 1.404(a)-9, would have been
available in succeeding taxable years to the transferor corporation if
the transfer of assets to the acquiring corporation had not occurred.
(2) Section 381(c)(11) also permits or requires the acquiring
corporation to be treated as though it were the distributor or
transferor corporation for the purpose of satisfying any conditions
which would have been required of the distributor or transferor
corporation in the absence of the distribution or transfer, so that it
may be determined whether the distributor or transferor corporation, or
the acquiring corporation, is entitled to take a deduction under section
404 in respect of a trust or plan established by the distributor or
transferor corporation. Thus, for example, in a case when the taxable
year of the transferor corporation ends on the date of transfer pursuant
to section 381(b)(1), that corporation is entitled, pursuant to the
provisions of section 404(a)(6) and paragraph (c) of Sec. 1.404(a)-1,
to a deduction in such taxable year for a payment to a qualified trust
of that corporation made by the acquiring corporation after the close of
such taxable year but within the time specified in section 404(a)(6). In
further illustration, if the transferor corporation were to establish a
qualified plan, and if the plan were maintained as a qualified plan by
the acquiring corporation, then any contributions paid under the plan by
the acquiring corporation (other than those which are deductible by the
transferor corporation by reason of section 404(a)(6)) would be
deductible under section 404 by the acquiring corporation even though
the plan were exclusively for the benefit of former employees of the
transferor corporation. Also, for example, if the transferor corporation
were to adopt an annuity plan during its taxable year ending on the date
of transfer, the acquiring corporation would be entitled, subject to the
provisions of section 401(b) and Sec. 1.401-5, to amend the plan so as
to make it retroactively satisfy the requirements of section 401(a)(3),
(4), (5), and (6) for the period beginning with the date on which the
plan was put into effect.
(c) Taxable year of deduction. The first taxable year of the
acquiring corporation in which any amount shall be allowed as a
deduction to that corporation by reason of section 381(c)(11) and this
section shall be its first taxable year ending after the date of
distribution or transfer.
(d) Requirements for deductions. (1) In order for any amount paid by
the acquiring corporation (other than amounts deductible under section
404(a)(5)) to be deductible by the acquiring corporation by reason of
this section in respect of a trust or nontrusteed annuity plan which is
established by a distributor or transferor corporation and maintained by
the acquiring corporation, the contributions must be paid (or deemed to
have been paid under section 404(a)(6)) by the acquiring corporation in
a taxable year of that corporation which ends with or within a year of
the trust for which it is exempt under section 501(a), or, in the case
of a nontrusteed annuity plan, for which it meets the requirements of
section 404(a)(2). See, however, section 404(a)(4) and Sec. 1.404(a)-11
for rules relating to deductions for contributions to foreign-situs
trusts. The trust or plan which is established by the distributor or
transferor corporation and maintained by the acquiring corporation may
separately satisfy the requirements of section 401(a) or section
404(a)(2) or may, together with other trusts or plans of the acquiring
corporation, constitute a single plan which qualifies under section
401(a) or
[[Page 414]]
meets the requirements of section 404(a)(2).
(2) Excess contributions paid under a qualified trust or plan
established by the transferor or distributor corporation may be carried
over and, subject to the applicable limitations, deducted by the
acquiring corporation in a taxable year ending after the date of
distribution or transfer regardless of whether the trust is exempt, or
the plan meets the requirements of section 404(a)(2), during such
taxable year. There are, however, special rules for computing the
limitations on the amount of excess contributions which are deductible
in a taxable year ending after the trust or plan has terminated (see
Sec. 1.404(a)-7, paragraph (e) of Sec. 1.404(a)-9, and paragraph (a)
of Sec. 1.404(a)-13). For this purpose, the pension, annuity, stock
bonus, or profit-sharing plan of the distributor or transferor
corporation under which the excess contributions were made shall be
considered continued (and not terminated) by the acquiring corporation
if, after the date of distribution or transfer, the acquiring
corporation continues the plan as a separate and distinct plan of its
own which continues to qualify under section 401(a), or to meet the
requirements of section 404(a)(2), or consolidates or replaces that plan
with a comparable plan. See subparagraph (4) of this paragraph for rules
relating to what constitutes a ``comparable'' plan.
(3) In order for any amount paid by the acquiring corporation to be
deductible by the acquiring corporation as an unused deduction carried
over from a qualified profit-sharing or stock bonus trust established by
a distributor or transferor corporation, the acquiring corporation must
continue such trust established by the distributor or transferor
corporation as a separate and distinct trust of its own which continues
to qualify under section 401(a), or must consolidate or replace that
trust with a comparable trust. In addition, the amount paid by the
acquiring corporation will be deductible as an unused deduction carried
over from the transferor or distributor corporation only if it is paid
into the profit-sharing or stock bonus trust established by the
transferor or distributor corporation, or the comparable trust, in a
taxable year of the acquiring corporation which ends with or within a
year of such trust (or such comparable trust) for which it meets the
requirements of section 401(a) and is exempt under section 501(a). See
subparagraph (4) of this paragraph for rules relating to what
constitutes a ``comparable'' trust.
(4) For purposes of subparagraphs (2) and (3) of this paragraph, a
plan under which deductions are determined pursuant to paragraph (1) or
(2) of section 404(a) shall be considered comparable to another plan
under which deductions are determined pursuant to either of those
paragraphs, and a plan under which deductions are determined pursuant to
paragraph (3) of section 404(a) shall be considered comparable to
another plan under which deductions are determined pursuant to such
paragraph (3). Thus, a profit-sharing plan (which qualifies under
section 401(a)) established by the transferor or distributor corporation
shall, for purposes of subparagraphs (2) and (3) of this paragraph, be
considered terminated if, after the date of distribution or transfer,
the acquiring corporation transfers the funds accumulated under the
profit-sharing plan into a pension plan covering the same employees. In
such a case, excess contributions paid under the profit-sharing plan by
the distributor or transferor corporation may be carried over and
deducted by the acquiring corporation in a taxable year ending after the
date of distribution or transfer subject to the limitations in section
404(a)(3)(A) computed in accordance with the rules in paragraph (e)(2)
of Sec. 1.404(a)-9 for computing limitations when a profit-sharing plan
has terminated. On the other hand, unused deductions attributable to the
profit sharing plan may not be carried over and used by the acquiring
corporation as a basis for deducting amounts contributed by it to the
pension plan.
(e) Effect of consolidation or replacement of plan on prior
contributions. If a pension, annuity, stock bonus, or profit-sharing
plan which was established
[[Page 415]]
by a distributor or transferor corporation is terminated after the date
of distribution or transfer because of consolidation or replacement with
a comparable plan of the acquiring corporation, then the contributions
paid to or under its plan by the distributor or transferor corporation
on or before the date of distribution or transfer shall not be
disallowed under section 404 merely because of the termination of the
plan which was established by that corporation, provided that the
termination does not cause the plan to fail to qualify under section
401(a).
(f) Amounts deductible under section 404. Section 381(c)(11) and
this section apply only to amounts which are otherwise deductible under
section 404 and the regulations thereunder. See Sec. Sec. 1.404(a)-1
through 1.404(d)-1. Thus, to be deductible by reason of this section,
contributions paid by the acquiring corporation must be expenses which
otherwise satisfy the conditions of section 162 (relating to trade or
business expenses). No deduction shall be allowed by reason of section
381(c)(11) and this section for a contribution which is allowable under
section 162 but is not allowable under section 404. Thus, the acquiring
corporation shall not be allowed a deduction by reason of this section
in respect of a plan established by a distributor or transferor
corporation if the contribution would not otherwise be deductible under
section 404 by reason of section 404(c) and Sec. 1.404(c)-1. On the
other hand, any unused deductions or excess contributions of a
distributor or transferor corporation which are carried over from 1939
Code years shall be deductible by the acquiring corporation if the
requirements of this section, section 404(d), and Sec. 1.404(d)-1 are
satisfied.
(g) Cost of past service credits. In computing the cost of past
service credits under a plan with respect to employees of the
distributor or transferor corporation, the acquiring corporation may
include the cost of credits for periods during which the employees were
in the service of the distributor or transferor corporation.
(h) Separate carryovers required. The excess contributions which are
available to a distributor or transferor corporation under the
provisions of section 404(a)(1)(D) and section 404(a)(3)(A) at the close
of the date of distribution or transfer and are carried over to the
acquiring corporation under this section shall be kept separate and
distinct from each other and from any excess contributions which are
available to the distributor or transferor corporation at that time
under the provisions of section 404(a)(7) and are carried over to the
acquiring corporation under this section. If there are excess
contributions carried over to the acquiring corporation from more than
one transferor or distributor corporation, the excess contributions of
each transferor or distributor corporation shall be kept separate and
distinct from those of the other transferor or distributor corporations
and, with respect to each such transferor or distributor corporation,
shall be kept separate and distinct as provided in the preceding
sentence. See, however, paragraph (i) of this section for rules for
applying the provisions of section 404(a)(3)(A) when the acquiring
corporation maintains two or more profit-sharing or stock bonus trusts,
one or more of which was established by a distributor or transferor
corporation. The requirements in this paragraph shall apply with respect
to any excess contributions which are carried over to the acquiring
corporation from a distributor or transferor corporation under the
provisions of section 404(d) and this section.
(i) Limitations applicable to profit-sharing or stock bonus trusts.
When contributions are paid by the acquiring corporation after the date
of distribution or transfer to two or more profit-sharing or stock bonus
trusts, and one or more of such trusts was established by a distributor
or transferor corporation, such trusts shall be considered as a single
trust in applying the provisions of section 404(a)(3)(A) under this
section. Accordingly, in determining its secondary limitation, and its
excess contributions carryover, under section 404(a)(3)(A) and Sec.
1.404(a)-9 in any taxable year ending after the date of distribution or
transfer, the acquiring corporation shall take into accounts its primary
limitations, and the deductions allowed or allowable to it, for all
prior years under the limitations provided in those sections, and also
the
[[Page 416]]
primary limitations of, and deductions allowed or allowable to, the
distributor or transferor corporation or corporations for all prior
years under the limitations provided in those sections.
(j) Successive carryovers. The provisions of section 381(c)(11) and
this section shall apply to an acquiring corporation which, in a
distribution or transfer to which section 381(a) applies acquires the
assets of a distributor or transferor corporation which has previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, even though, in computing an unused deductions
or excess contributions carryover to the second acquiring corporation,
it is necessary to take into account contributions paid by, and
limitations applicable to, the first distributor or transferor
corporation.
(k) Information to be furnished by acquiring corporation. The
acquiring corporation shall furnish such information with respect to a
plan established by a distributor or transferor corporation as will,
consistently with the principles of section 404, establish that the
provisions of such section and this section apply. For purposes of this
section, the district director may require any other information that he
considers necessary to determine deductions allowable under section 404
and this section or qualification under section 401. Any unused
deductions or excess contributions carried over from a distributor or
transferor corporation pursuant to this section shall be properly
identified with the corporation which would have been permitted to use
those deductions or contributions in the absence of the transaction
causing section 381 to apply.
(l) Illustration. The application of this section may be illustrated
by the following example:
Example. In 1955, X Corporation, which makes its return on the basis
of the calendar year, paid $400,000 to completely fund past service
credits under a qualified pension plan and deducted 10 percent ($40,000)
of that cost in each of the taxable years 1955, 1956, and 1957. The
pension plan established by X Corporation had an anniversary date of
January 1. On December 31, 1957, on which date the undeducted part of
the cost amounted to $280,000, X Corporation transferred all its assets
to Y Corporation in a statutory merger to which section 361 applies. Y
Corporation, which also makes its return on the basis of the calendar
year, had a qualified pension plan and trust which also had an
anniversary date of January 1. Since Y Corporation had many more
employees than X Corporation on the date of transfer, it covered the
former employees of X Corporation under its own plan. Y Corporation is
entitled to deductions under section 404(a)(1)(D) and this section in
1958 and succeeding taxable years, in order of time, with respect to the
undeducted balance of $280,000, to the extent of the difference between
the amount paid and deductible by that corporation in each such taxable
year and the maximum amount deductible by that corporation for such
taxable year in accordance with the applicable limitations of section
404(a)(1). In computing the maximum amount deductible by Y Corporation
for 1958 and 1959 under section 404(a)(1)(C), that corporation may
include $40,000 for each year, the amount that X Corporation could have
included for each of those years in computing the maximum amount that
would have been deductible by X Corporation under section 404(a)(1)(C)
if the merger had not occurred. Thus, assuming that Y Corporation's
appropriate limitation so computed under section 404(a)(1)(C) is
$1,000,000 (including the $40,000 carried over from X Corporation under
this section) for each of those taxable years, and that Y Corporation
contributed $925,000 to its trust in 1958 and $975,000 in 1959, then Y
Corporation is entitled under section 404(a)(1)(D) and this section to
deduct in 1958 $75,000, and in 1959 $25,000, of the amount ($280,000)
carried over from X Corporation. The undeducted balance of such amount
($180,000) available to Y Corporation on December 31, 1959, would be
deductible by that corporation in succeeding taxable years in accordance
with section 404(a)(1)(D) and this section.
[T.D. 6556, 26 FR 2405, Mar. 22, 1961, as amended by T.D. 7168, 37 FR
5024, Mar. 9, 1972]
Sec. 1.381(c)(12)-1 Recovery of bad debts, prior taxes, or delinquency
amounts.
(a) Carryover requirement. (1) If, as a result of a distribution or
transfer to which section 381(a) applies, the acquiring corporation is
entitled to the recovery of a bad debt, prior tax, or delinquency amount
on account of which a deduction or credit was allowed to a distributor
or transferor corporation for a prior taxable year, and such debt, tax,
or amount is recovered by the acquiring corporation after the date of
distribution or transfer, then under the
[[Page 417]]
provisions of section 381(c)(12) the acquiring corporation is required
to include in its gross income for the taxable year of recovery the same
amount of income attributable to the recovery as the distributor or
transferor corporation would have been required to include under section
111 and the regulations thereunder had the distribution or transfer not
occurred.
(2) The rule prescribed by paragraph (a)(1) of this section and by
section 381(c)(12) with respect to bad debts, prior taxes, and
delinquency amounts applies equally with respect to the recovery by the
acquiring corporation of all other losses, expenditures, and accruals
made on the basis of deductions from the gross income of a distributor
or transferor corporation for prior taxable years, including war losses
referred to in section 127 of the Internal Revenue Code of 1939, but not
including deductions with respect to depreciation, depletion,
amortization, or amortizable bond premiums. An item which is not a
``section 111 item'' for purposes of the regulations under section 111
is not subject to the provisions of section 381(c)(12). The provisions
of section 111(c) shall be applied with respect to a recovery by the
acquiring corporation in the same manner as they would have been applied
by the distributor or transferor corporation.
(b) Amount of recovery exclusion allowable for year of recovery. For
the year of any recovery by the acquiring corporation, the amount of the
recovery exclusion for the original taxable year shall be determined in
accordance with paragraph (b) of Sec. 1.111-1. For the purpose of this
paragraph and section 381(c)(12), the recovery exclusion for any year
with respect to section 111 items of the acquiring corporation shall be
kept separate from the recovery exclusion for any year with respect to
section 111 items of each distributor or transferor corporation. The
recovery by the acquiring corporation of any section 111 item of such
corporation after the date of the distribution or transfer shall be
considered separately from recoveries by the acquiring corporation of
any such item which was deducted or credited by a distributor or
transferor corporation. Any recovery by the acquiring corporation of a
section 111 item shall be excluded from the gross income of the
acquiring corporation to the extent of the recovery exclusion (1)
determined for the original year for which that item was deducted or
credited by the specific corporation which claimed the deduction or
credit and (2) reduced by the excludable recoveries (whether made by the
acquiring corporation, or by the distributor or transferor corporation)
in intervening years with respect to the recovery exclusion of such
corporation for such original year. There shall be taken into account
the effect of net operating loss carryovers and carrybacks or capital
loss carryovers.
(c) Illustration of carryover of recovery exclusion--(1) Facts. (i)
The application of section 381(c)(12) may be illustrated by the
following example. M and N Corporations are both organized on January 1,
1957, and both corporations compute their taxable income on the basis of
the calendar year. On December 31, 1959, M Corporation transfers all its
assets to N Corporation in a reorganization to which section 381(a)
applies.
(ii) The section 111 items of the two corporations for the following
taxable years are as follows, identification of such items being made by
an appropriate letter:
------------------------------------------------------------------------
M N
Taxable year of deduction or credit Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1957......................................... $500(g) $200(h)
1958......................................... 300(i) 400(j)
1959......................................... 600(k) 100(m)
------------------------------------------------------------------------
(iii) The recovery exclusions in respect of such taxable years,
computed in accordance with Sec. 1.111-1(b)(2), are assumed to be as
follows:
------------------------------------------------------------------------
M N
Taxable year Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1957......................................... $400 $150
1958......................................... 200 300
1959......................................... 500 75
------------------------------------------------------------------------
(iv) The recoveries of the above-mentioned section 111 items by the
two corporations are as follows:
------------------------------------------------------------------------
M N
Taxable year of recovery Corporation Corporation
(transferor) (acquirer)
------------------------------------------------------------------------
1958......................................... $25 (g) $50 (h)
[[Page 418]]
1959......................................... 50 (g) 20 (h)
30 (i) 15 (j)
1960......................................... ............ 350 (g)
225 (i)
550 (k)
100 (h)
350 (j)
85 (m)
------------------------------------------------------------------------
(2) M Corporation's 1958 recovery.
Total recovery of section 111 items for 1957..................... $25
Less: Recovery exclusion for 1957.............................. 400
------
Amount included in gross income of M Corporation for 1958.... 0
------
(3) M Corporation's 1959 recoveries.
(i) Total recovery of section 111 items for 1957................. $50
Less: Recovery exclusion for 1957....................... $400 .....
Minus excludable recovery............................... 25 .....
-------
..... 375
Amount included in gross income of M Corporation for 1959.... 0
(ii) Total recovery of section 111 items for 1958................ 30
Less: Recovery exclusion for 1958.............................. 200
--------
Amount included in gross income of M Corporation for 1959.... 0
(4) N Corporation's 1958 recovery.
Total recovery of section 111 items for 1957..................... $50
Less: Recovery exclusion for 1957.............................. 150
------
Amount included in gross income of N Corporation for 1958.... 0
(5) N Corporation's 1959 recoveries.
(i) Total recovery of section 111 items for 1957................. $20
Less: Recovery exclusion for 1957....................... $150 .....
Minus excludable recovery in 1958....................... 50 .....
-------
..... 100
Amount included in gross income of N Corporation for 1959.... 0
(ii) Total recovery of section 111 items for 1958................ 15
Less: Recovery exclusion for 1958.............................. 300
--------
Amount included in gross income of N Corporation for 1959.... 0
(6) N Corporation's 1960 recoveries.
(i) Total recovery of section 111 items of M Corporation for 1957 $350
Less: Recovery exclusion of M Corporation for 1957............. $400
Minus:
Excludable recovery in 1959.................. $50
Excludable recovery in 1958.................. 25 ..... .....
-------
..... 75
..... ..... 325
Amount included in gross income of N Corporation for 1960.. 25
(ii) Total recovery of section 111 items of M Corporation for 225
1958............................................................
Less: Recovery exclusion of M Corporation for 1958...... $200 .....
Minus excludable recovery in 1959..................... 30 .....
-------
..... 170
Amount included in gross income of N Corporation for 1960.. 55
(iii) Total recovery of section 111 items of M Corporation for 550
1959............................................................
Less: Recovery exclusion of M Corporation for 1959............. 500
--------
Amount included in gross income of N Corporation for 1960.. 50
(iv) Total recovery of section 111 items of N Corporation for 100
1957............................................................
Less: Recovery exclusion of N Corporation for 1957...... $150
Minus:
Excludable recovery in 1959.................. $20 .....
Excludable recovery in 1958.................. 50 ..... .....
-------
..... 70
..... ..... 80
Amount included in gross income of N Corporation for 1960 20
(v) Total recovery of section 111 items of N Corporation for 1958 $350
Less: Recovery exclusion of N Corporation for 1958...... $300
Minus excludable recovery in 1959....................... 15 .....
-------
..... 285
Amount included in gross income of N Corporation for 1960.... 65
(vi) Total recovery of section 111 items of N Corporation for 85
1959............................................................
Less: Recovery exclusion of N Corporation for 1959............. 75
--------
Amount included in gross income of N Corporation for 1960.... 10
(7) Summary of recoveries included in gross income of N Corporation
for 1960.
(i) Recovery of M Corporation items for:
1957.................................................... $25 .....
1958.................................................... 55 .....
1959.................................................... 50
--------
..... $130
------
(ii) Recovery of N corporation items for:
1957.................................................... 20 .....
1958.................................................... 65 .....
1959.................................................... 10
--------
..... 95
------
Total amount included in gross income........................ 225
[T.D. 6559, 26 FR 2984, Apr. 7, 1961]
Sec. 1.381(c)(13)-1 Involuntary conversions.
(a) Carryover requirement--(1) General rule. Section 381(c)(13)
requires that after the date of distribution or transfer the acquiring
corporation, in a transaction to which section 381(a) applies, shall be
treated as the distributor or transferor corporation for
[[Page 419]]
purposes of applying section 1033, relating to involuntary conversions.
This rule shall apply even though the property similar or related in
service or use to the property converted, or the stock of a corporation
owning such similar property, is purchased by the acquiring corporation
after the date of distribution or transfer and is not received from the
distributor or transferor corporation in the transaction to which
section 381(a) applies. Accordingly, if any factor essential to the
application of section 1033 occurs on or before the date of distribution
or transfer and any other such factor also occurs after that date, then,
in accordance with section 381(c)(13) and this section, the provisions
of section 1033 shall apply to the acquiring corporation in the same
manner that they would have applied to the distributor or transferor
corporation in the absence of the distribution or transfer. For purposes
of this section, the terms involuntary conversion and disposition of the
converted property shall have the meaning ascribed to them by the
regulations under section 1033.
(2) Application to other transactions. The provisions of this
section shall apply to any transaction which, under provisions of the
Internal Revenue Code of 1954, is treated as though it were an
involuntary conversion within the meaning of section 1033. See, for
example, section 1071, relating to gain from a sale or exchange to
effectuate the policies of the Federal Communications Commission; and
sections 1332(b)(3) and 1333(3), relating to war loss recoveries.
(b) Conversion into similar property. Section 1033(a)(1) provides
that no gain shall be recognized if property is involuntarily converted
only into property which is similar or related in service or use to the
property so converted. If there is a disposition of property of a
distributor or transferor corporation and, subsequent to the date of
distribution or transfer, property similar or related in service or use
to the property disposed of is received by the acquiring corporation as
compensation for the property so disposed of, then no gain shall be
recognized to the acquiring corporation, provided that no gain would
have been recognized under section 1033(a)(1) if the similar property
had been received directly by the distributor or transferor corporation.
Example. Property of S Corporation with an adjusted basis of $100 is
condemned by the local government. Shortly after the property is so
condemned, S Corporation liquidates and distributes its assets to P
Corporation in a distribution to which section 381(a) applies.
Subsequent to the date of distribution, P Corporation receives from the
government (in settlement of the condemnation proceedings) property with
a market value of $500 which is similar or related in service or use to
the property so condemned. No gain is recognized to either corporation
upon P Corporation's receipt of the similar property, and the property
so received has a basis of $100 in the hands of P Corporation on the
date of its acquisition.
(c) Conversion into money or dissimilar property when disposition
occurs after December 31, 1950--(1) General rule. Section 1033(a)(3) and
Sec. 1.1033(a)-2 provide rules for involuntary conversions of property
into money or dissimilar property where the disposition of the converted
property occurs after December 31, 1950. In such a case, the gain on the
conversion, if any, shall be recognized, at the election of the
taxpayer, only to the extent that the amount realized on the conversion
exceeds the cost of other property purchased by the taxpayer which is
similar or related in service or use to the property so converted, or
exceeds the cost of stock purchased by the taxpayer in the acquisition
of control of a corporation owning such other property, provided (i) the
taxpayer purchases such other property or stock for the purpose of
replacing the property so converted and (ii) the purchase occurs during
the period of time specified in section 1033(a)(3)(B). The provisions of
this paragraph shall apply to involuntary conversions where the
disposition of the property occurs after December 31, 1950, and where
the election to have section 1033(a)(3) apply to the treatment of the
gain upon the conversion is contingent upon activities of both the
distributor or transferor corporation and the acquiring corporation. For
purposes of section 381(c)(13), the period of time specified in section
1033(a)(3)(B) shall be determined by taking into account taxable years
of, and extensions of time granted to, both
[[Page 420]]
the distributor or transferor corporation and the acquiring corporation.
(2) Replacement period. The period during which the purchase of
similar property or stock must be made in order to prevent the
recognition of gain on the involuntary conversion terminates 2 years
(or, in the case of a disposition occurring before Dec. 31, 1969, 1
year) after the close of the first taxable year in which any part of the
gain upon the conversion is realized, or at the close of such later date
as may be designated pursuant to an application of the taxpayer. See
paragraph (c)(3) of Sec. 1.1033(a)-2. Therefore, if, in a case to which
this subparagraph applies, the first taxable year in which gain is
realized is the taxable year of the distributor or transferor
corporation ending with the close of the date of distribution or
transfer, the acquiring corporation will have a maximum of only 2 years
(or, in the case of a disposition occurring before Dec. 31, 1969, 1
year) after that date in which to purchase the similar property or
stock, unless an extension of time has been granted upon application by
the distributor, transferor, or acquiring corporation within the time
prescribed. See paragraph (a) of Sec. 1.381(b)-1 as to the termination
of the taxable year of the distributor or transferor corporation. See
paragraph (c)(3) of Sec. 1.1033(a)-2 as to applications to extend the
period within which to replace the converted property. In addition to
the information otherwise required under paragraph (c)(3) of Sec.
1.1033(a)-2, the application shall contain sufficient detail in
connection with the distribution or transfer to establish that section
381(c)(13) applies to the involuntary conversion involved.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). A and B Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970 property of A Corporation is destroyed
by fire, and in January 1971, A Corporation receives $15,000 from an
insurance company as compensation for its loss of property. The adjusted
basis of the property on the date of destruction is $10,000; as a
consequence, A Corporation realizes a gain of $5,000 on the involuntary
conversion. On June 30, 1971, B Corporation acquires all of the assets
of A Corporation in a reorganization to which section 381(a) applies. In
accordance with paragraph (c)(2) of Sec. 1.1033(a)-2, A Corporation
reports in its return for the short taxable year ending June 30, 1971,
all the details in connection with the involuntary conversion but does
not include the realized gain in gross income, thereby electing to have
the gain recognized only to the extent provided in section 1033(a)(3).
On June 15, 1973, B Corporation purchases for $20,000 property which is
similar or related in service or use to the property previously
destroyed. In its return for 1973, B Corporation reports all of the
details in connection with its replacement of the property, as required
by paragraph (c)(2) of Sec. 1.1033(a)-2. As a result of this
replacement by B Corporation, none of the gain realized by A Corporation
is recognized. The replacement property which is purchased by B
Corporation has a basis to that corporation of $15,000 on the date of
its purchase, that is, the cost of such property ($20,000) decreased by
the amount of gain not recognized to A Corporation on the involuntary
conversion ($5,000).
Example (2). Assume the same facts as in Example (1), except that B
Corporation does not purchase similar property on or before June 30,
1973, and does not apply on or before that date (in accordance with
paragraph (c)(3) of Sec. 1.1033(a)-2) for an extension of time in which
to make a replacement. In such event, the gain realized by A Corporation
is recognized to that corporation for its taxable year ending June 30,
1971. A Corporation's tax liability for such taxable year must be
recomputed in accordance with paragraph (c)(2) of Sec. 1.1033(a)-2 in
order to reflect this additional income.
Example (3). Assume the same facts as in Example (1), except that
the property of A Corporation is destroyed in 1968, A Corporation
receives the $15,000 from an insurance company in January 1969, B
Corporation acquires all of the assets of A Corporation on June 30,
1969, and A Corporation's return is filed for the short taxable year
ending June 30, 1969. B Corporation would have to purchase property
which is similar or related in service or use to the property previously
destroyed by June 30, 1970, in order to take advantage of the provisions
of section 1033.
Example (4). M and N Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970, property of M Corporation is
destroyed by fire. The adjusted basis of the property on the date of
destruction is $10,000. The property is insured against loss by fire,
but the insurance claim is not satisfied on or before June 30, 1971, the
date on which N Corporation acquires all of the assets (including the
insurance claim) of M Corporation in a reorganization to which section
381(a) applies. On
[[Page 421]]
September 1, 1972, N Corporation receives $15,000 from the insurance
company as compensation for the fire loss suffered by M Corporation.
Upon receipt of the insurance proceeds, N Corporation realizes a gain of
$5,000 upon the involuntary conversion; however, in its return for 1972,
N Corporation elects under the provisions of paragraph (c)(2) of Sec.
1.1033(a)-2 to have the gain recognized only to the extent provided by
section 1033(a)(3). On December 30, 1974, N Corporation purchases for
$20,000 property which is similar or related in service or use to the
property previously destroyed in the hands of M Corporation. As a result
of this replacement by N Corporation, none of the gain realized by N
Corporation in 1972 is recognized. The replacement property which is
purchased by N Corporation has a basis to that corporation of $15,000 on
the date of its purchase, that is, the cost of such property ($20,000)
decreased by the amount of gain not recognized to N Corporation on the
involuntary conversion ($5,000).
Example (5). R and S Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970 property of R Corporation is destroyed
by fire. The adjusted basis of the property on the date of destruction
is $10,000. In anticipation of taking the benefit of section 1033(a)(3),
R Corporation purchases for $20,000 on June 1, 1971, property which is
similar or related in service or use to the destroyed property. In its
return for 1971, R Corporation reports all of the details in connection
with the replacement of the property, as required by paragraph (c)(2) of
Sec. 1.1033(a)-2. The property destroyed in 1970 is insured against
loss by fire, but the insurance claim is not satisfied on or before
March 1, 1972, the date on which S Corporation acquires all of the
assets (including the insurance claim) of R Corporation in a
reorganization to which section 381(a) applies. On October 1, 1972, S
Corporation receives $12,000 from the insurance company as compensation
for the fire loss suffered by R Corporation. Upon receipt of the
insurance proceeds, S Corporation realizes a gain of $2,000 upon the
involuntary conversion; however, in its return for 1972, S Corporation
elects under the provisions of paragraph (c)(2) of Sec. 1.1033(a)-2 to
have the gain recognized only to the extent provided by section
1033(a)(3). As a result of the replacement by R Corporation, none of the
gain realized by S Corporation in 1972 is recognized. Assuming there are
no adjustments for depreciation, the replacement property has a basis on
October 1, 1972, of $18,000, that is, the cost of such property
($20,000) decreased by the amount of gain not recognized to S
Corporation on the involuntary conversion ($2,000)
(d) Conversion into money when disposition occurs before January 1,
1951. Section 1033(a)(2) provides that, if property is disposed of in an
involuntary conversion before January 1, 1951, and money is received as
compensation for the conversion, no gain shall be recognized if such
money is forthwith expended in the acquisition of other property similar
or related in service or use to the property so converted, or in the
acquisition of control of a corporation owning such other property, or
in the establishment of a replacement fund. That section also provides
that, if any part of the money is not so expended, the gain, if any,
shall be recognized to the extent of the money which is not so expended.
For example, if, pursuant to section 381(c)(13) and section 1033(a)(2),
property of a distributor or transferor corporation is disposed of
before January 1, 1951, in an involuntary conversion, and the proceeds
from the conversion are received by the acquiring corporation so that
the gain on the conversion is realized by that corporation, the
acquiring corporation may avoid recognition of the gain if it complies
with the provisions of section 1033(a)(2) for nonrecognition of gain.
Thus, the acquiring corporation must forthwith expend the proceeds in
the acquisition of similar property or stock, or in the establishment of
a replacement fund, in order to avoid recognition of the gain, if the
disposition occurred before January 1, 1951. See the provisions of
Sec. Sec. 1.1033(a)-3 and 1.1033(a)-4 relating to involuntary
conversions and replacement funds when disposition of the converted
property occurred before January 1, 1951.
(e) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall be
treated as such other corporation for purposes of applying sections
381(c)(13) and 1033 (relating to involuntary conversions). Thus, for
example, if any factor essential to the application of section 1033
occurs on or before the date of distribution or transfer in one
transaction to which section 381(a) applies, and any other such factor
occurs
[[Page 422]]
after the date of distribution or transfer in a subsequent transaction
to which section 381(a) applies, then the acquiring corporation in such
subsequent transaction shall be treated as the first distributor or
transferor corporation subject to the rules and limitations of this
section for purposes of sections 381(c)(13) and 1033.
[T.D. 6552, 26 FR 1989, Mar. 8, 1961, as amended by T.D. 7075, 35 FR
17995, Nov. 24, 1970]
Sec. 1.381(c)(14)-1 Dividend carryover to personal holding company.
(a) Carryover requirement. Section 381(c)(14) provides that an
acquiring corporation shall succeed to and take into account the
dividend carryover (described in section 564) of a distributor or
transferor corporation in computing its dividends paid deduction under
section 561 for taxable years ending after the date of distribution or
transfer for which the acquiring corporation is a personal holding
company under section 542. To determine the amount of such dividend
carryover and to integrate it with the dividend carryover of the
acquiring corporation in computing the dividends paid deduction for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of section 564 and Sec. 1.564-1 in
accordance with this section.
(b) Manner of computing dividend carryover--(1) Preceding taxable
years. If the acquiring corporation is a personal holding company under
section 542 for its first taxable year ending after the date of
distribution or transfer, the taxable year of the distributor or
transferor corporation ending with such date is a first preceding
taxable year for purposes of section 564, and the taxable year of the
distributor or transferor corporation immediately preceding such first
preceding year is a second preceding taxable year for purposes of
section 564. If the acquiring corporation is a personal holding company
for its second taxable year ending after the date of distribution or
transfer, the taxable year of the distributor or transferor corporation
ending with such date is a second preceding taxable year for purposes of
section 564.
(2) Determination of dividends paid deduction and taxable income.
The dividends paid deduction of any distributor or transferor
corporation (determined under section 561 but without regard to any
dividend carryover) and the taxable income of any such corporation
(adjusted as provided in section 545(b)) for any taxable year ending on
or before the date of distribution or transfer shall be determined
without reference to any dividends paid deduction, or taxable income, of
the acquiring corporation or any other distributor or transferor
corporation; in like manner, the dividends paid deduction and the
taxable income of the acquiring corporation for any such taxable year
shall be determined without reference to any dividends paid deduction,
or taxable income, of a distributor or transferor corporation.
(3) Computation of dividend carryover. (i) For the purpose of
determining the dividend carryover to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
the amount of the dividend carryover from the distributor or transferor
corporation shall be determined under section 564 without reference to
the dividends paid deduction or taxable income of the acquiring
corporation or any other corporation. If two or more transactions to
which section 381(a) applies have the same date of distribution or
transfer, or if a particular taxable year of the acquiring corporation
is the first taxable year ending after the dates of distribution or
transfer of two or more such transactions occurring on different dates,
the amount of the dividend carryover from each distributor or transferor
corporation shall be determined separately as provided in the preceding
sentence. Except as provided in subdivision (iii) of this subparagraph,
the aggregate of the dividend carryovers from each distributor or
transferor corporation and the dividend carryover of the acquiring
corporation (computed without regard to this section) shall constitute
the dividend carryover under section 561(a)(3) of the acquiring
corporation for its first taxable year ending after the date (or dates)
of distribution or transfer.
(ii) For the purpose of determining the dividend carryover to the
second
[[Page 423]]
taxable year of the acquiring corporation ending after the date (or
dates) of distribution or transfer, the excess, if any, of the dividends
paid deduction (determined under section 561 without regard to any
dividend carryover) over the taxable income (adjusted as provided in
section 545(b)) for the taxable year of each distributor or transferor
corporation and the acquiring corporation referred to as a second
preceding taxable year shall be determined separately without reference
to the dividends paid deduction or taxable income of any other of such
corporations. The excesses thus determined shall be aggregated, and such
aggregate shall be--
(a) Increased by the excess of the dividends paid deduction
(determined without regard to any dividend carryover) over the taxable
income (adjusted as provided in section 545(b)), or
(b) Reduced by the excess of the taxable income (adjusted as
provided in section 545(b)) over the dividends paid deduction
(determined without regard to any dividend carryover),
for the first preceding taxable year of the acquiring corporation.
Except as provided in subdivision (iii) of this subparagraph, the amount
thus determined shall constitute the dividend carryover under section
561(a)(3) of the acquiring corporation for its second taxable year
ending after the date (or dates) of distribution or transfer.
(iii) If a particular taxable year of the acquiring corporation is
its first taxable year ending after the date (or dates) of distribution
or transfer of one or more transactions to which section 381(a) applies,
and if the same taxable year of the acquiring corporation is also its
second taxable year ending after the date (or dates) of distribution or
transfer of one or more other transactions to which section 381(a)
applies, then, for the purpose of determining the dividend carryover to
such taxable year of the acquiring corporation, the rules contained in
both subdivisions (i) and (ii) of this subparagraph shall be applied.
Insofar as such taxable year constitutes the first taxable year ending
after the date (or dates) of distribution or transfer of any
transaction, the amount of the dividend carryover from any distributor
or transferor corporation involved in such transaction shall be
determined separately as provided in subdivision (i) of this
subparagraph. Insofar as such taxable year constitutes the second
taxable year ending after the date (or dates) of distribution or
transfer of any transaction, the amount of the dividend carryover from
any distributor or transferor corporation involved in the transaction
and the acquiring corporation shall be determined as provided in
subdivision (ii) of this subparagraph. The aggregate of the dividend
carryovers thus determined shall constitute the dividend carryover under
section 561(a)(3) of the acquiring corporation for such taxable year.
See Example (4) in paragraph (c) of this section.
(c) Illustrations. The rules set forth in paragraphs (a) and (b) of
this section may be illustrated by the following examples:
Example (1). (i) Facts. N Corporation acquired on June 30, 1960, all
the assets of M Corporation in a reorganization to which section 381(a)
applies. Both corporations compute taxable income on the basis of the
calendar year. N Corporation is a personal holding company for its
taxable years ending December 31, 1960, and December 31, 1961.
(ii) Dividend carryover to N Corporation's taxable year ending
December 31, 1960. With respect to N Corporation's taxable year ending
December 31, 1960, the taxable years referred to as first preceding
taxable years and second preceding taxable years are--
(a) M Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
(b) N Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to N Corporation's taxable year ending December
31, 1960, is $22,000 computed as follows, assuming the dividends paid
deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
M Corporation N Corporation
Second preceding taxable year: ...........
Dividends paid deduction.................................. $25,000 ........... $12,000 ...........
Taxable income............................................ 15,000 ........... 13,000 ...........
============= -------------
Excess dividends paid deduction........................................ $10,000 ........... ...........
[[Page 424]]
First preceding taxable year:
Dividends paid deduction.................................. 23,000 ........... 20,000 ...........
Taxable income............................................ 21,000 ........... 10,000 ...........
============= -------------
Excess dividends paid deduction........................... 2,000 ........... $10,000
Separate dividend carryovers................................ 12,000 ........... 10,000
----------------------------------------------------------------------------------------------------------------
The aggregate dividend carryover of $22,000 is the sum of $12,000 (the
separate dividend carryover from M Corporation) and $10,000 (the
separate dividend carryover from N Corporation's own preceding taxable
years).
(iii) Dividend carryover to N Corporation's taxable year ending
December 31, 1961. With respect to N Corporation's taxable year ending
December 31, 1961, the first preceding taxable year is N Corporation's
taxable year ending December 31, 1960; and the taxable years referred to
as second preceding taxable years are M Corporation's taxable year
ending June 30, 1960, and N Corporation's taxable year ending December
31, 1959. The dividend carryover to N Corporation's taxable year ending
December 31, 1961, is $17,000 computed as follows, assuming the
dividends paid deduction before dividend carryovers, and the taxable
income after section 545(b) adjustments, to be as stated in the
computation:
------------------------------------------------------------------------
M N
Second preceding taxable year Corporation Corporation
------------------------------------------------------------------------
Dividends paid deduction...................... $23,000 $20,000
Taxable income................................ 21,000 10,000
--------------
Separate excess of dividends paid deduction 2,000 10,000
over taxable income..........................
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $12,000, the sum of $2,000
(separate excess from N Corporation) and $10,000 (separate excess from N
Corporation). Such aggregate excess is increased by the excess dividends
paid deduction, or is reduced by the excess of taxable income, for the
first preceding taxable year as follows:
Aggregate excess of dividends paid deduction for .......... $12,000
second preceding taxable year..................
Dividends paid deduction of N Corporation for $50,000 ..........
first preceding taxable year...................
Taxable income of N Corporation for first 45,000 ..........
preceding taxable year.........................
------------
.......... $5,000
Dividend carryover to N Corporation's taxable .......... 17,000
year ending December 31, 1961..................
------------------------------------------------------------------------
Example (2). (i) Facts. X Corporation is organized on May 1, 1956,
and computes its taxable income on the basis of the fiscal year ending
April 30. Y Corporation and Z Corporation are both organized on January
1, 1955, and both compute their taxable income on the basis of the
calendar year. On July 31, 1957, X Corporation and Y Corporation
transfer all their assets to Z Corporation in a statutory merger to
which section 381(a) applies. For its taxable years ending December 31,
1957, and December 31, 1958, Z Corporation is a personal holding
company.
(ii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1957. With respect to Z Corporation's taxable year ending
December 31, 1957, the taxable years referred to as first preceding
taxable years and second preceding taxable years are--
(a) X Corporation's taxable years ending July 31, 1957, and April
30, 1957, respectively;
(b) Y Corporation's taxable years ending July 31, 1957, and December
31, 1956, respectively; and
(c) Z Corporation's taxable years ending December 31, 1956, and
December 31, 1955, respectively.
The dividend carryover to Z Corporation's taxable year ending December
31, 1957, is $40,000 computed as follows, assuming the dividends paid
deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
X Corporation Y Corporation Z Corporation
Second preceding taxable year:
Dividends paid deduction........ $56,000 ........... $19,000 ........... $6,000 ...........
Taxable income.................. 24,000 ........... 17,000 ........... 5,000 ...........
------------- ------------- -------------
Excess..................................... $32,000 ........... $2,000 ........... $1,000
First preceding taxable year:
Dividends paid deduction........ 9,000 ........... 4,000 ........... 10,000 ...........
Taxable income.................. 7,000 ........... 8,000 ........... 5,000 ...........
------------- ------------- -------------
Excess..................................... 2,000 ........... (4,000) ........... 5,000
------------- ------------- --------------
Separate dividend carryovers................... 34,000 ........... 0 ........... 6,000
----------------------------------------------------------------------------------------------------------------
The aggregate dividend carryover of $40,000 is the sum of $34,000 (the separate dividend carryover from X
Corporation) and $6,000 (the separate dividend carryover from Z Corporation's own preceding taxable years).
[[Page 425]]
(iii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1958. With respect to Z Corporation's taxable year ending
December 31, 1958, the first preceding taxable year is Z Corporation's
taxable year ending December 31, 1957; and the taxable years referred to
as second preceding taxable years are X Corporation's taxable year
ending July 31, 1957, Y Corporation's taxable year ending July 31, 1957,
and Z Corporation's taxable year ending December 31, 1956. The dividend
carryover to Z Corporation's taxable year ending December 31, 1958, is
$1,000 computed as follows, assuming the dividends paid deduction before
dividend carryovers, and the taxable income after section 545(b)
adjustments, to be as stated in the computation:
------------------------------------------------------------------------
X Y Z
Corporation Corporation Corporation
------------------------------------------------------------------------
Second preceding taxable year:
Dividends paid deduction....... $9,000 $4,000 $10,000
Taxable income................. 7,000 8,000 5,000
--------------
Separate excess of dividends paid 2,000 0 5,000
deduction over taxable income...
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $7,000, the sum of $2,000 (separate
excess from X Corporation) and $5,000 (separate excess from Z
Corporation). Such aggregate excess is increased by the excess dividends
paid deduction, or is reduced by the excess of taxable income, for the
first preceding taxable year as follows:
Aggregate excess of dividends paid deduction for .......... $7,000
second preceding taxable year.....................
Dividends paid deduction of Z Corporation for first $102,000 .......
preceding taxable year............................
Taxable income of Z Corporation for first preceding 108,000 (6,000)
taxable year......................................
-------------
Dividend carryover to Z Corporation's taxable year .......... 1,000
ending December 31, 1958..........................
Example (3). Assume the facts stated in Example (2), except that Y
Corporation transferred all its assets to Z Corporation on May 31, 1957.
Assume also that the facts for Y Corporation's taxable year ending May
31, 1957, are otherwise the same as those stated for its taxable year in
Example (2) ending July 31, 1957. In such case, the dividend carryovers
to Z Corporation's taxable years ending on December 31, 1957, and
December 31, 1958, are the same as in Example (2) notwithstanding the
fact that the transfers from X Corporation and Y Corporation occurred on
the different dates.
Example (4). (i) Facts. T Corporation acquired on June 30, 1960, all
the assets of U Corporation in a statutory merger to which section
381(a) applies, and in a like transaction acquired on June 30, 1961, all
the assets of V Corporation. Such corporations all compute taxable
income on the basis of the calendar year. T Corporation is a personal
holding company for its taxable years 1960 and 1961.
(ii) Dividend carryover to T Corporation's taxable year 1960. With
respect to T Corporation's taxable year ending December 31, 1960, the
taxable years referred to as first preceding taxable years and second
preceding taxable years are--
(a) U Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
(b) T Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to T Corporation's taxable year ending December
31, 1960, is $7,000 computed as follows, assuming the dividends paid
deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
U Corporation T Corporation
Second preceding taxable year:
Dividends paid deduction.................................. $16,000 ........... $10,000 ...........
Taxable income............................................ 12,000 ........... 13,000 ...........
------------- -------------
Excess............................................................... $4,000 ........... 0
First preceding taxable year:
Dividends paid deduction.................................. 7,000 ........... 17,000 ...........
Taxable income............................................ 5,000 ........... 16,000 ...........
------------- -------------
Excess............................................................... 2,000 ........... $1,000
------------- --------------
Separate dividend carryovers............................................. 6,000 ........... 1,000
----------------------------------------------------------------------------------------------------------------
[[Page 426]]
The aggregate dividend carryover of $7,000 is the sum of $6,000 (the
separate dividend carryover from U Corporation) and $1,000 (the separate
dividend carryover from T Corporation's own first preceding taxable
year).
(iii) Dividend carryover to T Corporation's taxable year 1961.
Inasmuch as T Corporation's taxable year 1961 is the second taxable year
ending after the date of distribution or transfer from U Corporation,
paragraph (b)(3)(ii) of this section governs the determination of the
dividend carryover from taxable years of T Corporation and U
Corporation. On the other hand, inasmuch as T Corporation's taxable year
1961 is the first taxable year ending after the date of distribution or
transfer from V Corporation, paragraph (b)(3)(i) governs the
determination of the dividend carryover from taxable years of V
Corporation.
(a) Application of paragraph (b)(3)(ii) of this section. With
respect to T Corporation's taxable year 1961, the first preceding
taxable year is T Corporation's taxable year ending December 31, 1960;
and the taxable years referred to as second preceding taxable year are T
Corporation's taxable year ending December 31, 1959, and U Corporation's
taxable year ending June 30, 1960. The dividend carryover from taxable
years of T Corporation and U Corporation is $1,500 computed as follows,
assuming the dividends paid deduction before dividend carryovers, and
the taxable income after section 545(b) adjustments, to be as stated in
the computation:
------------------------------------------------------------------------
U T
Second preceding taxable year Corporation Corporation
------------------------------------------------------------------------
Dividends paid deduction...................... $7,000 $17,000
Taxable income................................ 5,000 16,000
--------------
Separate excess of dividends paid deduction 2,000 1,000
over taxable income..........................
------------------------------------------------------------------------
The aggregate excess of dividends paid deduction over taxable income for
the second preceding taxable year is $3,000, the sum of $2,000 (separate
excess from U Corporation) and $1,000 (separate excess from T
Corporation). Such aggregate is increased by the excess dividends paid
deduction, or is reduced by the excess of taxable income, for the first
preceding taxable year as follows:
T
Corporation
Aggregate excess of dividends paid deduction for second $3,000
preceding taxable year....................................
First preceding taxable year:
Dividends paid deduction of T Corporation.... $21,000 ...........
Taxable income of T Corporation.............. 22,500 ...........
Excess taxable income.................................... (1,500)
-------------
Separate dividend carryover (without regard to V 1,500
Corporation)..............................................
(b) Application of paragraph (b)(3)(i) of this section. With respect
to T Corporation's taxable year 1961, V Corporation's taxable year
ending June 30, 1961, is a first preceding taxable year, and its taxable
year ending December 31, 1960, is a second preceding taxable year. The
separate dividend carryover from V Corporation is $8,000 computed as
follows, assuming the dividends paid deduction before dividend
carryovers, and the taxable income after section 545(b) adjustments, to
be as stated in the computation:
V Corporation
Second preceding taxable year
Dividends paid deduction......................... $11,000 .........
Taxable income................................... 6,000 .........
Excess......................................... .......... $5,000
First preceding taxable year:
Dividends paid deduction....................... $9,000 .........
Taxable income................................. 6,000 .........
------------
Excess......................................... 3,000
----------
Separate dividend carryover from V Corporation... .......... 8,000
(c) Dividend carryover. The dividend carryover to T Corporation's
taxable year 1961 is $9,500, the sum of $8,000 (the separate dividend
carryover from V Corporation) and $1,500 (the aggregate dividend
carryover from T Corporation and U Corporation).
(d) Successive carryovers. The provisions of this section shall
apply for the purpose of determining a dividend carryover to an
acquiring corporation which, in a distribution or transfer to which
section 381(a) applies, acquires the assets of a distributor or
transferor corporation which has previously acquired the assets of
another corporation in a transaction to which section 381(a) applies;
even though, in computing the dividend carryover to such second
acquiring corporation, it is necessary to take into account the
deduction for dividends paid, and the adjusted taxable income, of the
first distributor or transferor corporation.
(e) Acquiring corporation not receiving all the assets. The dividend
carryover acquired from a distributor or transferor corporation by an
acquiring corporation in a transaction to which section 381(a) applies
is not reduced by reason of the fact that the acquiring corporation does
not acquire 100 percent of the assets of the distributor or transferor
corporation.
(f) Dividends paid after the close of taxable year. A transaction to
which section 381(a) applies does not prevent the
[[Page 427]]
application of section 563(b) to a dividend paid by a distributor or
transferor corporation after the close of its taxable year ending with
the date of distribution or transfer but on or before the 15th day of
the third month following the close of such taxable year. However,
dividends paid by the acquiring corporation may not be taken into
account under section 563(b) for the purpose of determining the
dividends paid deduction of the distributor or transferor corporation
for its taxable year ending with the date of distribution or transfer.
[T.D. 6532, 26 FR 406, Jan. 19, 1961]
Sec. 1.381(c)(15)-1 Indebtedness of certain personal holding companies.
(a) Qualified indebtedness--(1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness which was qualified indebtedness
(as defined in section 545(c) and Sec. 1.545-3) in the hands of the
distributor or transferor corporation immediately before the assumption
of such indebtedness, then, under section 381(c)(15), in computing its
undistributed personal holding company income for any taxable year
beginning after December 31, 1963, and ending after the date of
distribution or transfer, the acquiring corporation shall be considered
the distributor or transferor corporation for purposes of computing the
deduction under section 545(c) and Sec. 1.545-3. Such deduction shall
be allowed to the acquiring corporation in accordance with section
545(c) and Sec. 1.545-3.
(2) Successive transactions to which section 381(a) applies. If in a
transaction to which section 381(a) applies, an acquiring corporation
assumes liability for qualified indebtedness, such acquiring corporation
shall be deemed to have incurred such qualified indebtedness for the
purpose of applying section 381(c)(15) to any subsequent transaction in
which such acquiring corporation is the distributor or transferor
corporation.
(b) Pre-1934 indebtedness--(1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness incurred, or assumed, before
January 1, 1934, by a distributor or transferor corporation, then under
section 381(c)(15) the acquiring corporation shall be allowed, in
computing its undistributed personal holding company income for any
taxable year ending after the date of distribution or transfer, a
deduction under section 545(b)(7) for amounts used or irrevocably set
aside to pay or to retire such indebtedness. Such deduction shall be
allowed to the acquiring corporation in accordance with section
545(b)(7) and paragraph (g) of Sec. 1.545-2 as though the indebtedness
had been incurred, or assumed, by the acquiring corporation before
January 1, 1934.
(2) Successive transactions to which section 381(a) applies. If, in
a transaction to which section 381(a) applies, an acquiring corporation
assumes liability for indebtedness described in subparagraph (1) of this
paragraph, such acquiring corporation shall be deemed to have incurred
the indebtedness before January 1, 1934, for the purpose of applying
section 381(c)(15) to any subsequent transaction in which such acquiring
corporation is the distributor or transferor corporation.
(c) Special rule. For purposes of this section, if, in a transaction
otherwise described in this section, an acquiring corporation acquires
real estate--(1) of which the distributor or transferor corporation is
the legal or equitable owner immediately before the acquisition, and (2)
which is subject to indebtedness that, with respect to the distributor
or transferor corporation, is indebtedness described in this section
immediately before the acquisition, then the acquiring corporation will
be treated as having assumed such indebtedness, provided it shows to the
satisfaction of the Commissioner that under all the facts and
circumstances it bears the burden of discharging such indebtedness.
[T.D. 6949, 33 FR 5524, Apr. 9, 1968; 33 FR 6091, Apr. 20, 1968]
Sec. 1.381(c)(16)-1 Obligations of distributor or transferor corporation.
(a) Deduction allowed to acquiring corporation. (1) If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes an obligation of a distributor or transferor corporation which
gives rise to a liability after the date of distribution or transfer and
[[Page 428]]
if the distributor or transferor corporation would be entitled to deduct
such liability in computing taxable income were it paid or accrued after
that date by such corporation, then, under the provisions of section
381(c)(16) and this section, the acquiring corporation shall be entitled
to deduct such liability as if it were the distributor or transferor
corporation. However, in the case of a transaction to which section
381(a)(2) applies, section 381(c)(16) shall not apply to an obligation
which is reflected in the amount of consideration, that is, the stock,
securities, or other property, transferred by the acquiring corporation
to a transferor corporation or its shareholders in exchange for the
property of that transferor corporation. An obligation which is so
reflected in the amount of consideration will be treated as an item or
tax attribute not specified in section 381(c)(16). Such an obligation is
subject to section 381(c)(4). See subparagraph (2) of this paragraph.
Any deduction allowed under section 381(c)(16) to the acquiring
corporation shall be taken by that corporation in the taxable year
ending after the date of distribution or transfer in which the liability
is paid or accrued by that corporation, as the case may be.
(2) In order to determine whether, in the case of obligations of a
distributor or transferor corporation assumed by an acquiring
corporation, section 381(c)(16) and this section, or section 381(c)(4)
and the regulations thereunder, apply, the following rules shall govern:
(i) If the obligation gave rise to a liability before the date of
distribution or transfer, see section 381(c)(4) and the regulations
thereunder.
(ii) If the obligation gives rise to a liability after the date of
distribution or transfer, and the obligation was not reflected in the
amount of consideration transferred by the acquiring corporation to the
distributor or transferor corporation or its shareholders in exchange
for the property of the distributor or transferor corporation, then
section 381(c)(16) and this section shall apply.
(iii) In the case of a transaction to which section 381(a)(1)
applies, if the obligation gives rise to a liability after the date of a
distribution, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the
distributor corporation or its shareholders in exchange for the property
of the distributor corporation, then section 381(c)(16) and this section
shall apply.
(iv) In the case of a transaction to which section 381(a)(2)
applies, if the obligation gives rise to a liability after the date of a
transfer, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the transferor
corporation or its shareholders in exchange for the property of the
transferor corporation, then see section 381(c)(4) and the regulations
thereunder.
(3) The rules of this section apply to obligations assumed by
agreement of the parties as well as by operation of law.
(4) For purposes of this section, an obligation of a distributor or
transferor corporation gives rise to a liability when the liability
would be accruable by a taxpayer using the accrual method of accounting
notwithstanding the fact that the distributor or transferor corporation
is not using the accrual method of accounting. See paragraph (a)(2) of
Sec. 1.461-1.
(5) In the case of a transaction to which section 381(a)(2) applies,
the determination as to whether or not an obligation was reflected in
the amount of consideration transferred by the acquiring corporation to
the transferor corporation or its shareholders in exchange for the
property of the transferor corporation shall be made on the basis of all
the facts of each particular transfer. Where, on the date of
distribution or transfer, the parties were aware of the existence of a
specific obligation and reduced the amount of consideration to be
transferred by the acquiring corporation by a specific amount because of
the existence of such obligation, then such obligation shall be
considered to have been reflected in the amount of consideration
transferred. In the absence of such facts, it shall be presumed that the
obligation was not reflected in the amount of consideration transferred.
[[Page 429]]
(b) Distribution or transfer occurring under the Internal Revenue
Code of 1939. Subject to the provisions of section 381(c)(16) and this
section, a corporation which would have been an acquiring corporation
(under the provisions of paragraph (b) of Sec. 1.381(a)-1) in a
transaction to which section 381(a) applies if the date of distribution
or transfer had occurred on or after the effective date of the
provisions of subchapter C, chapter 1 of the Internal Revenue Code of
1954, applicable to a liquidation or reorganization, as the case may be,
shall be entitled to take a deduction for amounts paid or accrued in any
taxable year beginning after December 31, 1953, in respect of any
obligation which it has assumed from a corporation which would have been
a distributor or transferor corporation in such transaction. However,
this paragraph shall have no application to a situation described in
paragraph (a)(2)(iv) of this section.
(c) Examples. The application of the foregoing rules may be
illustrated by the following examples:
Example (1). X Corporation and Y Corporation compute their taxable
income on the basis of the calendar year, and both corporations use an
accrual method of accounting. On December 31, 1954, Y Corporation
acquires the assets of X Corporation in a transfer to which section
381(a)(2) applies. By reason of State law, Y Corporation assumes
responsibility for all of the obligations for which X Corporation is
then, or may become, liable. The parties have no knowledge of any
specific obligations of X Corporation which are not yet fixed and
ascertainable, but it is agreed to reduce the amount of consideration
that Y Corporation is to transfer in exchange for the assets of X
Corporation by $5,000 to reflect any unforeseen contingent liabilities
of X Corporation for which Y Corporation might subsequently become
liable. After the date of the transfer, a claim for damages on account
of the alleged negligence of an alleged agent of X Corporation is filed.
After commencement of legal action by the claimant and in order to
eliminate the possibility of injury to its business, Y Corporation
settles the claim in 1955 by paying the claimant the amount of $3,000.
Assuming that such sum would have been deductible under section 162 if
paid by X Corporation, Y Corporation is entitled to deduct such sum in
accordance with the provisions of section 381(c)(16) and this section in
computing its taxable income for 1955, since the claim gave rise to a
liability after the date of transfer, the parties were not aware of a
specific obligation, and the specific obligation was not reflected in
the consideration transferred by Y Corporation in exchange for the
assets of X Corporation.
Example (2). Assume the same facts as in Example (1), except that
the claim for damages was filed prior to the transfer of X Corporation's
assets to Y Corporation, but the parties considered the chances for
recovery by the claimant so remote that no specific amount other than
the $5,000 reduction in consideration for all contingent liabilities as
a whole is reflected in the consideration transferred by Y Corporation
in exchange for the assets of X Corporation. Assuming that such sum
would have been deductible under section 162 if paid by X Corporation,
the $3,000 paid by Y Corporation in 1955 is deductible in accordance
with the provisions of section 381(c)(16) and this section in 1955.
Example (3). Assume the same facts as in Example (1), except that
the parties consider the chances of recovery by the claimant of
sufficient probability that Y Corporation reduces the amount of
consideration it transfers in exchange for the assets of X Corporation
by $1,000 in addition to the $5,000 reduction for all other contingent
liabilities. The $3,000 paid by Y Corporation in 1955 is not deductible
under section 381(c)(16) and this section, since the specific obligation
was reflected in the consideration transferred by Y Corporation in
exchange for the assets of X Corporation. The deductibility of the
payment is accordingly governed by the provisions of section 381(c)(4)
and the regulations thereunder. Similarly, if in this case Y Corporation
had transferred $10,000 less in consideration for the assets of X
Corporation because of this particular claim, Y Corporation would not be
entitled to any deduction for the $3,000 paid in 1955 under section
381(c)(16) and this section, and the deductibility of the payment would
be governed by the provisions of section 381(c)(4) and the regulations
thereunder. If the date of transfer of X Corporation's assets had
occurred prior to the effective date of subchapter C, chapter 1 of the
Internal Revenue Code of 1954, applicable to a reorganization, no
deduction would be allowed to Y Corporation under that section.
[T.D. 6750, 29 FR 11267, Aug. 5, 1964]
Sec. 1.381(c)(17)-1 Deficiency dividend of personal holding company.
(a) Carryover requirement. If a determination (as defined in section
547(c)) establishes that a distributor or transferor corporation in a
transaction to which section 381(a) applies is liable for personal
holding company tax imposed by section 541 (or by a corresponding
provision of prior income tax law) for any taxable year ending on or
before the date of distribution or transfer,
[[Page 430]]
then in computing such tax the deduction described in section 547 shall
be allowed pursuant to section 381(c)(17) to such corporation for the
amount of deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. Except as
otherwise provided in this section, the provisions of section 547 and
the regulations thereunder apply with respect to a deficiency dividend
deduction allowable pursuant to section 381(c)(17).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation is a distribution that would
satisfy the definition of a deficiency dividend under section 547(d)(1)
if paid by the distributor or transferor corporation to its own
shareholders except that it shall be paid by the acquiring corporation
to its own shareholders and shall be paid after the date of distribution
or transfer and on, or within 90 days after, the date of the
determination but before the acquiring corporation files claim under
paragraph (c) of this section.
(c) Claim for deduction. A claim for a deduction under this section
shall be made by the acquiring corporation on Form 976, and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
paragraph (b)(2) of Sec. 1.547-2 in sufficient detail to properly
identify the facts with the distributor or transferor corporation and
the acquiring corporation. The statement required with respect to the
shareholders on the date of payment of the deficiency dividend shall
relate to the shareholders of the acquiring corporation, and the
required certified copy of the resolution authorizing the payment of the
dividend shall be that of the board of directors, or other authority, of
the acquiring corporation. Necessary changes may be made in Form 976 in
order to carry out the provisions of this paragraph. The claim shall be
filed with the district director for the internal revenue district in
which the return of the distributor or transferor corporation to which
such claim relates was filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation, which is allowable as a deduction to a
distributor or transferor corporation pursuant to section 381(c)(17),
shall not become a part of the dividends paid deduction of the acquiring
corporation under section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X Corporation
transfers its assets to Y Corporation in a transaction to which section
381(a) applies and if Y Corporation transfers its assets to Z
Corporation in a subsequent transaction to which section 381(a) applies,
then, subject to the provisions of this section, X Corporation may take
a deficiency dividend deduction for the amount of deficiency dividends
paid by Z Corporation with respect to X Corporation.
(f) Example. The provisions of this section may be illustrated by
the following example:
Example. M Corporation, a personal holding company, computes its
taxable income on the basis of the calendar year. On December 31, 1956,
N Corporation acquires the assets of M Corporation in a transaction to
which section 381(a) applies. On July 31, 1958, a determination (as
defined in section 547(c)) establishes that M Corporation is liable for
the taxable year 1955 for personal holding company tax in the amount of
$35,500 based on undistributed personal holding company income of
$42,000 for such taxable year. N Corporation complies with the
provisions of this section and on September 30, 1958, distributes
$42,000 to its shareholders as deficiency dividends with respect to M
Corporation's taxable year 1955. The distribution of $42,000 by N
Corporation is a taxable dividend under section 316(b)(2) regardless of
whether N Corporation is a personal holding company for the taxable year
1958 or whether it had any current or accumulated earnings and profits.
See Example (3) in paragraph (e) of Sec. 1.316-1. Because N Corporation
has paid deficiency dividends of $42,000 in accordance with this
section, M Corporation is entitled to a deficiency dividend deduction of
$42,000 for the taxable year 1955 and is thus relieved of its liability
for personal holding company tax of $35,500 for such taxable year. To
prevent a duplication of deductions, the amount distributed by N
Corporation in 1958 does not
[[Page 431]]
become a part of N Corporation's dividends paid deduction under section
561 for any taxable year.
[T.D. 6532, 26 FR 409, Jan. 19, 1961, as amended by T.D. 7604, 44 FR
18661, Mar. 29, 1979; T.D. 7767, 45 FR 11264, Feb. 6, 1981]
Sec. 1.381(c)(18)-1 Depletion on extraction of ores or minerals from
the waste or residue of prior mining.
(a) Carryover requirement. Section 381(c)(18) provides that the
acquiring corporation in a transaction described in section 381(a) shall
be considered as though it were the distributor or transferor
corporation after the date of distribution or transfer for the purpose
of determining the applicability of section 613(c)(3) (relating to
extraction of ores or minerals from the ground). Thus, an acquiring
corporation which has acquired the waste or residue of prior mining from
a distributor or transferor corporation in a transaction described in
section 381(a) shall be entitled, after the date of distribution or
transfer, to an allowance for depletion under section 611 in respect of
ores or minerals extracted from such waste or residue if the distributor
or transferor corporation would have been entitled to such an allowance
for depletion in the absence of the distribution or transfer. See
paragraph (f) of Sec. 1.613-4 to determine whether a distributor or
transferor corporation is entitled to an allowance for depletion with
respect to the waste or residue of prior mining.
(b) Application of section 614 to waste or residue of prior mining.
If, in a transaction described in section 381(a), the acquiring
corporation acquires waste or residue of prior mining from a distributor
or transferor corporation, then the acquiring corporation shall be
considered as though it were the distributor or transferor corporation
for the purpose of applying section 614 and the regulations thereunder
to the waste or residue so acquired. Thus, if the distributor or
transferor corporation was required under paragraph (c) of Sec. 1.614-1
to treat the waste or residue as part of the mineral deposit from which
it was extracted and if the acquiring corporation acquires both the
waste or residue and the mineral deposit from which it was extracted in
a transaction described in section 381(a), then such waste or residue
shall be treated as a part of such mineral deposit in the hands of the
acquiring corporation. On the other hand, if the waste or residue was
required to be treated as a separate mineral deposit in the hands of the
distributor or transferor corporation, such waste or residue shall be
treated as a separate mineral deposit in the hands of the acquiring
corporation.
[T.D. 6552, 26 FR 1991, Mar. 8, 1961, as amended by T.D. 7170, 37 FR
5373, Mar. 15, 1972]
Sec. 1.381(c)(19)-1 Charitable contribution carryovers in certain
acquisitions.
(a) Carryover requirement. Section 381(c)(19) provides that, in
computing taxable income for its taxable years which begin after the
date of distribution or transfer to which section 381(a) applies, the
acquiring corporation shall take into account any charitable
contributions made by a distributor or transferor corporation during the
taxable year ending on the date of distribution or transfer, and in
certain immediately preceding taxable years, which are in excess of the
maximum amount deductible for those taxable years under section
170(b)(2) in the following manner:
(1) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins before January 1,
1962, the acquiring corporation shall, in computing taxable income for
its first 2 taxable years which begin after the date of such
distribution or transfer, take into account the excess contributions
made by the distributor or transferor corporation in the taxable year
ending on the date of distribution or transfer and in the immediately
preceding taxable year;
(2) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins after December 31,
1961, the acquiring corporation shall, in computing taxable income for
certain taxable years which begin after the date of distribution or
transfer, take into account the excess contributions made by the
distributor or transferor corporation in the taxable year ending on such
date of distribution or transfer and in
[[Page 432]]
any of the four taxable years immediately preceding such taxable year
but excluding any taxable year beginning before January 1, 1962 (see
paragraph (c)(3) of this section). Notwithstanding the preceding
sentence, if the taxable year of the distributor or transferor
corporation ending on the date of distribution or transfer begins after
December 31, 1961, and before January 1, 1963, the acquiring corporation
shall, in computing taxable income for its first taxable year which
begins after the date of distribution or transfer, also take into
account the excess contributions made by the distributor or transferor
corporation in the taxable year immediately preceding the taxable year
of the distributor or transferor corporation ending on the date of
distribution or transfer (see paragraph (c)(2) of this section).
To determine the amount of excess contributions made by a distributor or
transferor corporation and to integrate them with contributions made by
the acquiring corporation for the purpose of determining the charitable
contributions deductible by the acquiring corporation for its taxable
years beginning immediately after the date of distribution or transfer,
it is necessary to apply the provisions of section 170(b)(2) and Sec.
1.170-3 (or, if applicable, section 170(b)(2) and (d)(2) and Sec.
1.170A-11) in accordance with the conditions and limitations of section
381(c)(19) and this section. For taxable years beginning before January
1, 1970, see section 170 for provisions of section 170(b)(2) as referred
to in this section. For taxable years beginning after December 31, 1969,
see section 170A for provisions of section 170(b)(2) or (d)(2) as
referred to in this section. For special rules for applying section
170(d)(2) with respect to contributions paid, or treated as paid, in
taxable years beginning before January 1, 1970, see paragraph (d) of
Sec. 1.170A-11.
(b) Manner of computing excess charitable contribution carryovers.
(1) The amount of any charitable contribution made by a distributor or
transferor corporation in any taxable year ending on or before the date
of distribution or transfer, or made by the acquiring corporation in any
taxable year before its taxable year beginning after the date of
distribution or transfer, in excess of the amount allowable as a
deduction to such corporation for such taxable year under section
170(b)(2) shall be determined by taking into account the taxable income
of, and the contributions made by, that corporation only.
(2) An acquiring corporation which, in a distribution or transfer to
which section 381(a) applies, acquires the assets of a distributor or
transferor corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall
succeed to and take into account, subject to the conditions and
limitations of sections 170 and 381, the charitable contribution
carryovers available to the first acquiring corporation under sections
170 and 381, including those derived by such first acquiring corporation
from its distributor or transferor corporation.
(3) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and in certain immediately preceding taxable
years (see paragraph (c) of this section) which are not deductible by
the distributor or transferor corporation because of the 5-percent
limitation of section 170(b)(2) shall be available to the acquiring
corporation without diminution by reason of the fact that the acquiring
corporation does not acquire 100 percent of the assets of the
distributor or transferor corporation. Thus, if a parent corporation
owning 80 percent of all classes of stock of its subsidiary corporation
were to acquire its share of the assets of the subsidiary corporation
upon a complete liquidation described in paragraph (b)(1)(i) of Sec.
1.381(a)-1, then, subject to the conditions and limitations of this
section, 100 percent of the excess contributions made by the subsidiary
corporation would be available to the acquiring corporation.
(c) Taxable years to which carryovers apply and amount deductible--
(1) Taxable years beginning before January 1, 1962. If the taxable year
of the distributor or transferor corporation ending on the date of
distribution or transfer begins before January 1, 1962:
[[Page 433]]
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first taxable year shall not be deducted
by that corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second taxable year beginning after that date. Any portion of such
excess which is not deductible under this section by the acquiring
corporation in such first and second taxable years shall not be deducted
by that corporation in any other taxable year.
(2) Taxable years beginning in 1962. If the taxable year of the
distributor or transferor corporation ending on the date of distribution
or transfer begins after December 31, 1961, and before January 1, 1963:
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first year shall not be deducted by that
corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and beginning after December 31, 1961, and
before January 1, 1963, shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second, third, fourth, and fifth taxable year, in order of time,
beginning after that date. Any portion of such excess which is not
deductible under this section by the acquiring corporation in such 5
taxable years shall not be deducted by that corporation in any other
taxable year.
(3) Taxable years beginning after December 31, 1962. (i) If the
taxable year of the distributor or transferor corporation ending on the
date of distribution or transfer begins after December 31, 1962, the
excess charitable contributions made by a distributor or transferor
corporation in its taxable year ending on the date of distribution or
transfer and in each of its four immediately preceding taxable years
(excluding any taxable year beginning before January 1, 1962), to the
extent not deductible by it because of the limitations of section
170(b)(2) in its taxable year ending on the date of distribution or
transfer or its prior taxable years, shall be deductible by the
acquiring corporation to the extent prescribed by section 170(b)(2) (or,
if applicable, section 170(d)(2)) and subdivision (ii) of this
subparagraph, in its taxable years which begin after the date of
distribution or transfer. However, any portion of the excess charitable
contributions made by a distributor or transferor corporation in a
particular taxable year, to which this subparagraph is applicable, which
is not deductible under this section within the 5 taxable years
immediately following the taxable year in which the contribution was
paid by the distributor or transferor corporation shall not be
deductible by the acquiring corporation in any other taxable year.
[[Page 434]]
(ii) For purposes of determining the 5 taxable years in which the
excess contributions may be deducted, all taxable years of the
distributor or transferor corporation subsequent to the taxable year in
which the excess contribution was made, including the taxable year
ending on the date of distribution or transfer shall be treated as
taxable years of the acquiring corporation.
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation both compute taxable income
on the calendar year basis. X Corporation has excess charitable
contributions for 1962 and 1964. On December 31, 1966, X Corporation
distributes all its assets to Y Corporation in a complete liquidation to
which section 381(a) applies. The excess 1962 charitable contributions
of X Corporation (to the extent not deductible by X because of the
limitations of section 170(b)(2) in its taxable years 1963 through 1966)
may be deducted by Y Corporation only in 1967. Y Corporation's taxable
year 1967 is the fifth taxable year succeeding the taxable year 1962
(the year in which the excess contributions were made), and the portion
of such excess contributions which is not deductible in the 5 taxable
years immediately succeeding 1962 (1963 through 1967) is not deductible
by Y Corporation in any other taxable year. Any excess charitable
contributions for 1964 to which Y Corporation may be entitled must be
deducted by Y Corporation (if deductible at all) in 1967, 1968, and 1969
since such years are the third, fourth, and fifth taxable years
succeeding the taxable year 1964 (the year in which the excess
contributions were paid).
(4) General rules. No excess charitable contributions made by a
distributor or transferor corporation shall be deductible by the
acquiring corporation in its taxable year which includes the date of
distribution or transfer. In addition, an excess charitable contribution
made by a distributor or transferor corporation in a taxable year prior
to the taxable year of the transfer is only deductible by the
distributor or transferor corporation, subject to the limitations of
section 170(b)(2) (or, if applicable, section 170(d)(2)), in its
subsequent taxable years which begin on or before the date of
distribution or transfer, and by the acquiring corporation in its
taxable year or years beginning after the date of distribution or
transfer.
(d) Rules governing amounts deductible by acquiring corporations.
(1) In applying the provisions of section 170(b)(2) (or, if applicable,
section 170(d)(2)) for the purpose of determining the amount of excess
charitable contributions which are deductible by the acquiring
corporation in its taxable years beginning after the date of
distribution or transfer, all taxable years of the distributor or
tranferor and acquiring corporations which, with respect to a particular
taxable year beginning after the date of distribution or transfer,
constitute the same numbered preceding taxable year shall together be
considered as a 1 taxable year even though the taxable years involved
may not end on the same date. Thus, for example, all taxable years of
the distributor or transferor and acquiring corporations which, with
respect to the first taxable year of the acquiring corporation beginning
after the date of distribution or transfer, constitutes the second
preceding taxable year shall together be considered as 1 taxable year
even though the taxable years involved may not end on the same date. Any
excess charitable contributions carried over from preceding taxable
years which are considered as 1 taxable year shall be taken into account
by the acquiring corporation as one amount, without regard to the extent
to which the contributions were made by a distributor or transferor
corporation or the acquiring corporation.
(2) For purposes of this paragraph, each taxable year of the
distributor or transferor corporation beginning on or before the date of
distribution or transfer shall be treated as a preceding taxable year
with reference to the acquiring corporation's taxable years beginning
after such date. For example, the taxable year of a distributor or
transferor corporation which ends on the date of distribution or
transfer shall be considered a first preceding taxable year with
reference to the acquiring corporation's first taxable year beginning
after that date, a second preceding taxable year with reference to the
acquiring corporation's second taxable year beginning after that date,
and so forth with respect to succeeding taxable years of the acquiring
corporation. Also, for example, the taxable
[[Page 435]]
year of a distributor or transferor corporation which immediately
precedes its taxable year ending on the date of distribution or transfer
shall be considered a second preceding taxable year with reference to
the acquiring corporation's first taxable year beginning after that
date.
(e) Illustration. The application of this section may be illustrated
by the following example:
Example. (i) X Corporation is organized on April 1, 1956, and
computes its taxable income on the basis of the fiscal year ending March
31. Y Corporation is organized on July 1, 1955, and computes its taxable
income on the basis of the fiscal year ending June 30. Z Corporation is
organized on January 1, 1956, and computes its taxable income on the
basis of the calendar year. On June 30, 1957, X Corporation distributes
all its assets to Y Corporation in a complete liquidation to which
section 381(a) applies. On November 30, 1957, Y Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
381(a) applies.
(ii) The 5-percent limitation (computed in the manner prescribed by
section 170(b)(2)), the charitable contributions actually paid, and the
excess contributions with respect to each such corporation during the
taxable years involved are as follows:
Name of corporation X X .........
Taxable year ending 3-31-57 6-30-57 .........
5-percent limitation................... $20,000 $9,000 .........
Current contributions.................. 32,000 15,000 .........
----------------------
(Excess contributions)............... (12,000) (6,000) .........
----------------------------------------
Name of corporation Y Y Y
Taxable year ending 6-30-56 6-30-57 11-30-57
5-percent limitation................... $15,000 $10,000 $18,000
Current contributions.................. 29,000 0 17,000
-----------
(Excess contributions)............... (14,000) ......... .........
------------
Balance of 5-percent limitation...... ......... 10,000 1,000
----------------------------------------
Name of corporation Z Z Z
Taxable year ending 12-31-56 12-31-57 12-31-58
5-percent limitation................... $10,000 $30,000 $58,000
Current contributions.................. 40,000 28,000 92,000
-----------
(Excess contributions)............... (30,000) ......... .........
------------
Balance of 5-percent limitation...... ......... 2,000 56,000
(iii) X Corporation was in existence for two taxable years, in each
of which it made charitable contributions in excess of the maximum
amount deductible for those years under section 170(b)(2). The excess
contributions made in the year ending March 31, 1957, of $12,000, are
deductible by X Corporation in its short taxable year ending June 30,
1957, and then by Y Corporation in its short taxable year ending
November 30, 1957, in each instance in the manner and to the extent
prescribed by section 170(b)(2) and this section. The excess
contributions made by X Corporation in the year ending June 30, 1957, of
$6,000, are deductible by Y Corporation in its short taxable year ending
November 30, 1957, and then by Z Corporation in its taxable year 1958,
in each instance in the manner and to the extent prescribed by section
170(b)(2) and this section.
(iv) Y Corporation was in existence for three taxable years. In the
year ended June 30, 1956, its contributions in excess of the amount
deductible for that year under section 170(b)(2) amounted to $14,000.
Such excess is deductible by Y Corporation in its taxable year ending
June 30, 1957, and, together with X Corporation's excess contributions
of $18,000, in its short taxable year ending November 30, 1957, in each
instance in the manner and to the extent prescribed by section 170(b)(2)
and this section. Accordingly, since Y Corporation made no contributions
in its taxable year ending June 30, 1957, its deduction for that year on
account of excess contributions carried over is $10,000, an amount equal
to the 5-percent limitation of section 170(b)(2). The deduction is
attributable to excess contributions made by Y Corporation in the
taxable year ended June 30, 1956; thus, the excess of those
contributions over $10,000, namely, $4,000, is deductible by Y
Corporation in its short taxable year ending November 30, 1957, in the
manner and to the extent prescribed by section 170(b)(2) and this
section. With respect to the short taxable year ending November 30,
1957, the excess contributions of the second preceding year are X
Corporation's excess contributions of $12,000 made in the year ending
March 31, 1957, and Y Corporation's excess contributions of $4,000 made
in the year ending June 30, 1956, which were not deductible by Y
Corporation in the taxable year ending June 30, 1957, because of the 5-
percent limitation prescribed by section 170(b)(2), an aggregate of
$16,000. Inasmuch as Y Corporation's limitation for the short taxable
year ended November 30, 1957, exceeds the contributions made in that
year by $1,000, the excess contributions of the second preceding taxable
year are deductible in the taxable year ending November 30, 1957, to the
extent of $1,000 and the remainder ($15,000) is not deductible by any
corporation in any taxable year. The excess contributions of the first
preceding taxable year, namely, X Corporation's excess contributions
made in the short taxable year ending June 30, 1957, are deductible by Z
Corporation in its taxable year 1958, in the manner and to the extent
prescribed in section 170(b)(2) and this section.
(v) Z Corporation has been in existence for 3 taxable years. The
contributions made in 1956 in excess of the amount deductible for that
year under section 170(b)(2) amounted to
[[Page 436]]
$30,000. Such excess is deductible by Z Corporation in its taxable year
1957 and, together with X Corporation's excess contributions of $6,000
(derived through Y Corporation) made in the taxable year ending June 30,
1957, in the taxable year 1958, in each instance in the manner and to
the extent prescribed by section 170(b)(2) and this section. Thus,
$2,000 of the $30,000 excess contributions made in the year 1956 are
deducted in 1957 and the remainder ($28,000), together with X
Corporation's excess contributions of $6,000 made in the short taxable
year ending June 30, 1957, are deducted in 1958 since the aggregate of
such amounts plus the contributions actually made in that year does not
exceed the 5-percent limitation prescribed by section 170(b)(2).
[T.D. 6552, 26 FR 1992, Mar. 8, 1961, as amended by T.D. 6900, 31 FR
14642, Nov. 17, 1966; T.D. 7207, 37 FR 20795, Oct. 5, 1972]
Sec. 1.381(c)(21)-1 Pre-1954 adjustments resulting from change in
method of accounting.
(a) Carryover requirement. Section 381(c)(21) provides that, in a
transaction to which section 381(a) applies, an acquiring corporation
shall take into account the net amount of any adjustments described in
section 481(b)(4) (relating to adjustments arising from changes in
accounting methods initiated by the taxpayer attributable to pre-1954
Code years) of the distributor or transferor corporation to the extent
that such net amount of such adjustments has not been taken into account
in any taxable year, including a short taxable year, by the distributor
or transferor corporation. The acquiring corporation shall take into
account in each taxable year beginning with the taxable year ending
after the date of distribution or transfer the net amount of such
adjustments in the same manner and at the same time as such net amount
would have been taken into account by the distributor or transferor
corporation. Thus, the amount of any such adjustment which the acquiring
corporation shall take into account in each taxable year shall be the
same amount that would have been taken into account in each taxable year
by the distributor or transferor corporation.
(b) This section may be illustrated by the following example:
Example. On January 1, 1960, X Corporation, a calendar year
taxpayer, voluntarily changed its method of accounting giving rise to a
$50,000 adjustment under section 481(a), of which $20,000 is
attributable to pre-1954 Code years. Under section 481(b)(4) the $20,000
adjustment is to be spread over 1960 and the following 9 years at the
rate of $2,000 each year. On November 1, 1963, all the assets of X
Corporation are acquired by Y Corporation in a transaction to which
section 381(a) applies. Y Corporation reports its income on a fiscal
year ending June 30. X and Y Corporations must take into account the
$20,000 adjustment at the rate of $2,000 in each taxable year in the
following time and manner:
X Corporation
Calendar years 1960-62 ($2,000x3)................. $6,000
Short taxable year ending Nov. 1, 1963 ($2,000x1). 2,000 $8,000
-----------
Y Corporation
Fiscal years ending:
June 30, 1964 ($2,000x1)........................ 2,000
June 30, 1965-69 ($2,000x5)..................... 10,000 12,000
------------
......... 20,000
(c) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if R Corporation,
which was taking into account adjustments described in section
481(b)(4), distributes or transfers its assets to S Corporation in a
transaction to which section 381(a) applies, and S Corporation was
required to take into account any remaining portion of such adjustments
under section 381(c)(21) and this section, and if subsequently S
Corporation distributes or transfers its assets to T Corporation in a
transaction to which section 381(a) applies, then T Corporation, under
section 381(c)(21) and this section, shall take into account any
remaining portion of such adjustments not previously taken into account
by R and S Corporations.
(d) Acquiring corporation not receiving all the assets. The
adjustments described in this section acquired from a distributor or
transferor corporation by an acquiring corporation in a transaction to
which section 381(a) applies is not reduced by reason of the fact that
the acquiring corporation does not acquire 100 percent of the assets of
the distributor or transferor corporation.
[T.D. 6553, 26 FR 2171, Mar. 15, 1961]
[[Page 437]]
Sec. 1.381(c)(22)-1 Successor life insurance company.
(a) Carryover requirement. If in a taxable year beginning after
December 31, 1957, a distributor or transferor corporation which is a
life insurance company (as defined in section 801(a)) is acquired by a
corporation which is a life insurance company (as defined in section
801(a)), in a transaction to which section 381(a) applies, section
381(c)(22) provides that the acquiring corporation shall take into
account the appropriate items which the distributor or transferor
corporation was required to take into account for purposes of part I,
subchapter L, chapter 1 of the Code. Furthermore, except as otherwise
provided by this section, the acquiring corporation shall take into
account the items described in paragraphs (2) through (21), other than
paragraphs (14), (15), and (17), of section 381(c) and the regulations
thereunder. For example, the acquiring corporation shall take into
account the reserves described in section 810(c) distributed or
transferred to it as of the close of the date of distribution or
transfer by the distributor or transferor corporation in accordance with
the provisions of section 381(c)(4) and the regulations thereunder. For
provisions defining the date of distribution or transfer, see paragraph
(b) of Sec. 1.381(b)-1.
(b) Items required to be taken into account by acquiring
corporation. If a transaction meets the requirements of paragraph (a) of
this section, the acquiring corporation shall, except as otherwise
provided, take into account as of the close of the date of distribution
or transfer the following items of the distributor or transferor
corporation:
(1) The operations loss carryovers (as determined under section
812), subject to conditions and limitations consistent with the
conditions and limitations prescribed in section 381(c)(1) and the
regulations thereunder. For example, a loss from operations for a loss
year of a distributor or transferor corporation which ends on or before
the last day of a loss year of the acquiring corporation shall be
considered to be a loss from operations for a year prior to such loss
year of the acquiring corporation. All references in section 381(c)(1)
and the regulations thereunder to section 172 shall be construed as
referring to the appropriate corresponding provisions of section 812.
Thus, a reference to section 172(b) shall be construed as referring to
section 812 (b) and (d). In determining the span of years for which a
loss from operations may be carried, the number of taxable years for
which the distributor or transferor corporation was authorized to do
business as an insurance company shall be taken into account. For
purposes of this determination, the taxable year of the distributor or
transferor corporation which ends on the date of distribution or
transfer shall be taken into account even though such taxable year is a
period of less than 12 months.
(2)(i) The investment yield and the beginning of the year asset
balance for the distributor or transferor corporation's taxable year
ending with the close of the date of distribution or transfer. Such
items shall be integrated with the investment yield and beginning of the
year asset balance of the acquiring corporation for its first taxable
year ending after such date of distribution or transfer for purposes of
determining the current earnings rate of the acquiring corporation for
such taxable year. Furthermore, for purposes of determining the average
earnings rate of the acquiring corporation, the investment yield and
mean of the assets of the distributor or transferor corporation for its
4 taxable years immediately preceding its taxable year which closes with
the date of distribution or transfer shall be integrated with the
investment yield and mean of the assets of the acquiring corporation for
such corresponding taxable years.
(ii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). X qualified as a life insurance company in 1949. Y
qualified as a life insurance company in 1951. On June 30, 1961, at
which time both X and Y were life insurance companies (as defined in
section 801(a)), X transferred all its assets to Y in a statutory merger
to which section 361 applies. For its taxable year ending on June 30,
1961, X had investment yield of $15 and assets at the beginning of such
taxable year of $450. For purposes of determining its current earnings
rate for its taxable year ending on December
[[Page 438]]
31, 1961, Y had investment yield of $45 (including the $15 of investment
yield of X), assets at the beginning of such taxable year of $1,250
(including the $450 of X's assets at the beginning of its taxable year
1961), and assets at the end of such taxable year of $1,750 (after the
application of section 806(a)). Under the provisions of subdivision (i)
of this subparagraph, the current earnings rate of Y for the taxable
year 1961 would be 3 percent, determined by dividing the investment
yield of Y, $45, by the mean of the assets of Y, $1,500 ($1,250+$1,750/
2). In order to determine its average earnings rate and adjusted
reserves rate for the taxable year 1961, Y would make up the following
schedule:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Investment yield Mean of assets Current
-------------------------------------------------------------------------------------------------------------------------------------------- earnings
Column 3 Column 6 rate of Y
(Col. 1 + (Col. 4 + ------------
Col. 2) Col. 5)
Taxable year Column 1--X Column 2--Y integrated Column 4--X Column 5--Y integrated Column 7
investment means of (Col. 3 /
yield assets Col. 6)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1960......................................................... $16 $26 $42 $400 $800 $1,200 3.5
1959......................................................... 16 24 40 500 750 1,250 3.2
1958......................................................... 17 22 39 650 650 1,300 3.0
1957......................................................... 19 21 40 700 500 1,200 3.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
For the taxable year 1961, Y would have an average earnings rate of 3.2
percent, computed by taking into account the current earnings rates for
the taxable year 1961 and each of the 4 taxable years immediately
preceding such taxable year. The adjusted reserves rate for such taxable
year would be 3 percent since the current earnings rate of 3 percent for
1961 is lower than the average earnings rate of 3.2 percent.
Example (2). The facts are the same as in Example (1), except that
the taxable year in issue is 1962, and the current earnings rate of Y
for such taxable year was 3.8 percent. For the taxable year 1962, Y
would have an average earnings rate of 3.3 percent, computed by taking
into account only the current earnings rates for the taxable year 1962
and each of the 4 taxable years immediately preceding such taxable year.
The adjusted reserves rate for such taxable year would be 3.3 percent
since the average earnings rate of 3.3 percent is lower than the 1962
current earnings rate of 3.8 percent.
(3) To the extent there are any amounts accrued for discounts in the
nature of interest which have not been included as interest paid under
section 805(e)(3), the acquiring corporation shall be treated as the
distributor or transferor corporation for purposes of including such
amounts as interest paid.
(4) Any adjustment required by section 806(b) with respect to an
item described in section 810(c) shall be made by the acquiring
corporation in its first taxable year which begins after the date of
distribution or transfer.
(5) The amount of the deduction provided by section 809(d)(6), as
limited by section 809(f), for all taxable years of the distributor or
transferor corporation which end on and before the date of distribution
or transfer (irrespective of whether or not the distributor or
transferor corporation claimed this deduction for such taxable years)
for the purpose of determining the limitation under section 809(d)(6).
(6)(i) To the extent there are any remaining net increases or net
decreases in reserves required to be taken into account by the
distributor or transferor corporation under section 810(d)(1), the
acquiring corporation shall be treated as the distributor or transferor
corporation as of its first taxable year which begins after the date of
distribution or transfer.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. Assume that the amount of an item described in section
810(c) of X, a life insurance company, at the beginning of the taxable
year 1959 is $100. Assume that at the end of the taxable year 1959, as a
result of a change in the basis used in computing such item during the
taxable year, the amount of the item (computed on the new basis) is $200
but computed on the old basis would have been $150. Since the amount of
the item at the end of the taxable year computed on the new basis, $200,
exceeds the amount of the item at the end of the taxable year computed
on the old basis, $150, by $50, section 810(d)(1) provides that one-
tenth of the amount of such excess, or $5, shall be taken into account
by X as a net increase referred to in section 809(d)(2) and paragraph
(a)(2) of
[[Page 439]]
Sec. 1.809-5 in determining gain or loss from operations for each of
the 10 taxable years immediately following the taxable year 1959. Assume
further that on June 30, 1961, X transferred all its assets to Y, a life
insurance company, in a statutory merger to which section 361 applies.
Under the provisions of section 810(d)(1), X would include $5 as a net
increase under section 809(d)(2) and paragraph (a)(2) of Sec. 1.809-5
in determining gain or loss from operations for its taxable years 1960
and 1961. Thus, the remaining net increase to be taken into account by X
under section 810(d)(1) is $40 (eight-tenths of $50). Accordingly, Y
shall take into account $5 as a net increase referred to in section
809(d)(2) and paragraph (a)(2) of Sec. 1.809-5 in determining gain or
loss from operations for each of its 8 taxable years beginning in 1962
($5x8=$40).
(7)(i) The dollar balances in the shareholders surplus account,
policyholders surplus account, and other accounts provided, however,
that the acquiring corporation is a stock life insurance company. The
dollar balance in the policyholders surplus account shall reflect the
amount (if any) treated as a subtraction from such account by reason of
the application of the limitation provided under section 815(d)(4)
immediately prior to the close of the date of distribution or transfer.
To the extent that any amount must be added to the shareholders surplus
account as a result of the application of the limitation provided under
section 815(d)(4), the acquiring corporation shall be treated as the
distributor or transferor corporation as of its first taxable year which
begins after the date of distribution or transfer.
(ii) If the acquiring corporation is a mutual life insurance
company, the dollar balances in the shareholders surplus account,
policyholders surplus account, and other accounts shall not be taken
into account by such acquiring corporation and the distributor or
transferor corporation shall be subject to the provisions of section
815(d)(2)(A) as of the close of the date of distribution or transfer.
(8) To the extent that any amount must be added to the shareholders
surplus account as a result of an election made under section 815(d)(1)
by the distributor or transferor corporation, the acquiring corporation
shall be treated as the distributor or transferor corporation as of its
first taxable year which begins after the date of distribution or
transfer.
(9) The amount of the life insurance reserves at the end of 1958,
but only for the purpose of applying the limitation provided under
section 815(d)(4)(B).
(10) To the extent there are amounts subject to the provisions of
section 817(d), the acquiring corporation shall be treated as the
distributor or transferor corporation.
(11) To the extent there are any installments of tax imposed by
section 818(e)(3)(A) remaining to be paid, the acquiring corporation
shall be treated as the distributor or transferor corporation for the
purpose of paying such installments.
(12) The capital loss carryovers, subject to conditions and
limitations consistent with the conditions and limitations prescribed in
section 381(c)(3) and the regulations thereunder, except that any net
capital loss of the distributor or transferor corporation for a taxable
year beginning before January 1, 1959, shall not be taken into account.
See section 817(c).
[T.D. 6625, 27 FR 12541, Dec. 19, 1962]
Sec. 1.381(c)(23)-1 Investment credit carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(23) requires the
acquiring corporation in a transaction to which section 381 applies to
succeed to and take into account under such regulations as may be
prescribed by the Secretary or his delegate, the investment credit
carryovers of the distributor or transferor corporation. To determine
the amount of these carryovers as of the close of the date of
distribution or transfer, and to integrate them with any carryovers and
carrybacks of the acquiring corporation for purposes of determining the
amount of credit allowed by section 38 to the acquiring corporation for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of sections 46, 47, and 48 in
accordance with the conditions and limitations of this section.
(2) The investment credit carryovers and carrybacks of the acquiring
corporation determined as of the close of the date of distribution or
transfer
[[Page 440]]
shall be computed without reference to any unused credit of a
distributor or transferor corporation. The investment credit carryovers
of a distributor or transferor corporation as of the close of the date
of distribution or transfer shall be determined without reference to any
unused credit of the acquiring corporation.
(b) Carryback of unused credits. An unused credit of the acquiring
corporation for any taxable year ending after the date of distribution
or transfer shall not be carried back in computing the credit allowed by
section 38 to a distributor or transferor corporation. However, an
unused credit of the acquiring corporation for any such taxable year
shall be carried back in accordance with section 46(b)(1) in computing
the credit allowed to the acquiring corporation for a taxable year
ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, an unused credit sustained by it for
any taxable year beginning after such date shall be carried back in
accordance with section 46(b)(1) in computing the credit allowed by
section 38 to such corporation for a taxable year ending on or before
that date, but may not be carried back or over in computing the credit
allowed by section 38 to the acquiring corporation.
(c) Computation of carryovers and carrybacks. (1) Subject to the
modifications set forth in this paragraph, the provisions of Sec. 1.46-
2 shall apply in computing carryovers and carrybacks of unused credits
to taxable years of the acquiring corporation.
(2)(i) The investment credit carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall first be carried to the first taxable year of the
acquiring corporation ending after that date. This rule applies whether
the date of distribution or transfer is on the last day, or any other
day, of the acquiring corporation's taxable year.
(ii) The investment credit carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(3) An unused credit of a distributor or transferor corporation for
a taxable year which ends on or before the last day of a taxable year of
the acquiring corporation shall be considered to be an unused credit for
a year prior to such taxable year of the acquiring corporation. If the
acquiring corporation has acquired the assets of two or more distributor
or transferor corporations on the same date of distribution or transfer,
the unused credit years of the distributor or transferor corporations
shall be taken into account in the order in which such years terminate.
If any one of the unused credit years of a distributor or transferor
corporation ends on the same day as the unused credit year of another
distributor or transferor corporation, either unused credit year may be
taken into account before the other.
(4) The extent to which an investment credit carryover of a
distributor or transferor corporation or of an acquiring corporation
from an unused credit year ending before January 1, 1971, may be taken
into account by the acquiring corporation for a taxable year beginning
after December 31, 1970, shall be determined without regard to the
credit earned by the acquiring corporation for such year. Thus, in such
a case, the amount of unused credit from such unused credit years which
may be taken into account in a taxable year of the acquiring corporation
beginning after December 31, 1970, shall be determined solely with
reference to the limitation based on amount of tax for such taxable year
(without reduction for the credit earned for such year).
(d) Computation of carryovers when date of distribution or transfer
occurs on last day of acquiring corporation's taxable year. The
computation of the investment credit carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
[[Page 441]]
Example. X Corporation and Y Corporation were organized on January
1, 1971, and each corporation files its return on the calendar year
basis. On December 31, 1972, X transfers all its assets to Y in a
statutory merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1971 and 1972
are as follows:
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $10,000 $5,000
1972.................................. 5,000 3,000
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 through 1973 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $6,000 $5,000
1972.................................. 5,000 3,000
1973.................................. 3,000 10,000
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation, and the computation of the carryovers to Y Corporation's
calendar year 1974, may be illustrated as follows:
(1) X Corporation's 1971 unused credit.-- The carryover to Y 1974 is
$0, computed as follows:
Unused credit................................................ $5,000
Excess of X's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's year 1973................................... 5,000
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
----------
Carryover to Y's year 1974................................... 0
(2) Y Corporation's 1971 unused credit.-- The carryover to Y 1974 is
$0, computed as follows:
Unused credit................................................ $1,000
Excess of Y's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's year 1973................................... 1,000
==========
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
Less: X's $5,000 carryover from 1971....................... 5,000
----------
2,000
==========
Carryover to Y's year 1974................................... 0
(3) X Corporation's 1972 unused credit.-- The carryover to Y 1974 is
$1,000, computed as follows:
Unused credit................................................ $2,000
==========
Excess of Y's 1973 limitation based on tax over credit 7,000
earned....................................................
Less: X's $5,000 carryover from 1971 and Y's $1,000 6,000
carryover from 1971.......................................
----------
1,000
==========
Carryover to Y's year 1974................................. 1,000
(4) Y Corporation's 1972 unused credit.-- The carryover to Y 1974 is
$2,000, computed as follows:
Unused credit................................................ $2,000
==========
Excess of Y's 1973 limitation based on tax over credit earned 7,000
Less: X's $5,000 carryover from 1971 Y's $1,000 carryover 7,000
from 1971 and X's $1,000 carryover from 1972................
----------
0
==========
Carryover to Y's year 1974................................... 2,000
(5) The aggregate of the investment credit carryovers to Y's year
1974 is $3,000, computed as follows:
X's 1972 unused credit....................................... $1,000
Y's 1972 unused credit....................................... 2,000
----------
Total.................................................... 3,000
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year. (1) If the
date of distribution or transfer occurs on any day other than the last
day of a taxable year of the acquiring corporation, the amount which may
be added to the amount allowable as a credit by section 38 for the first
taxable year of the acquiring corporation ending after the date of
distribution or transfer (hereinafter called the ``year of
acquisition'') shall be determined in the following manner. The year of
acquisition shall be considered as though it were 2 taxable years. The
first of such 2 taxable years shall be referred to in this paragraph as
the preacquisition part year and shall begin with the beginning of the
year of acquisition and end with the close of the date of distribution
or transfer. The second of such 2 taxable years shall be referred to in
this paragraph as the postacquisition part year and shall begin with the
day following the date of distribution or transfer and shall end with
the close of the year of acquisition.
(2) The excess limitation for the year of acquisition (i.e., the
excess of the limitation based on the amount of tax for such year over
the amount of credit earned for such year) shall be divided between the
preacquisition part year and the postacquisition part year in proportion
to the number of days in each. Thus, if in a statutory merger to
[[Page 442]]
which section 361 applies Y Corporation, a calendar year taxpayer,
acquires the assets of X Corporation on June 30, 1975, and Y Corporation
has an excess limitation of $36,500 for its calendar year 1975, then the
excess limitation for the preacquisition part year would be $18,100
($36,500x181/365) and the excess limitation for the postacquisition part
year would be $18,400 ($36,500x184/365).
(3) An unused credit of the acquiring corporation shall be carried
to and applied against the excess limitation for the preacquisition part
year and then carried to and applied against the excess limitation for
the postacquisition part year, whereas an unused credit of the
distributor or transferor corporation shall not be carried to the
preacquisition part year but shall only be carried to and applied
against the excess limitation for the postacquisition part year. For
special rule relating to carryovers from taxable years ending before
January 1, 1971, to taxable years beginning after December 31, 1970, see
subparagraph (6) of this paragraph.
(4) Though considered as two separate taxable years for purposes of
this paragraph, the preacquisition part year and the postacquisition
part year are treated as one taxable year in determining the years to
which an unused credit is carried under section 46(b)(1).
(5) The preceding subparagraphs may be illustrated by the following
example:
Example. X Corporation and Y Corporation were organized on January
1, 1971, and each corporation files its return on the calendar year
basis. On May 1, 1972, X transfers all its assets to Y in a statutory
merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1971 and ending
May 1, 1972, are as follows:
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $11,000 $5,000
Ending 5-1-72......................... 3,000 6,000
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 and 1972 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1971.................................. $7,000 $3,000
1972.................................. 3,000 9,000
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation, and the computation of carryovers to Y Corporation's
calendar year 1973, may be illustrated as follows:
(i) X Corporation's 1971 unused credit. The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $6,000
Excess of X's 5-1-72 limitation based on tax over credit 3,000
earned....................................................
----------
Carryover to Y's postacquisition part year 1972.............. 3,000
Excess limitation for Y's postacquisition part year 4,000
($6,000x 244/366).........................................
==========
Carryover to Y's year 1973................................... 0
(ii) Y Corporation's 1971 unused credit. The carryover to Y 1973 is
$1,000, computed as follows:
Unused credit................................................ $4,000
Excess limitation for Y's preacquisition part year 2,000
($6,000x122/ 366).........................................
----------
Carryover to Y's postacquisition part year................... 2,000
==========
Excess limitation for Y's postacquisition part year 4,000
($6,000x 244/366).........................................
Less: X's $3,000 carryover from 1971....................... 3,000
----------
1,000
==========
Carryover to Y's year 1973................................. 1,000
(iii) The aggregate of the investment credit carryovers to Y's year
1973 is $1,000, computed as follows:
X's 1971 unused credit....................................... 0
Y's 1971 unused credit....................................... $1,000
----------
Total.................................................... 1,000
(6) If the year of acquisition is a taxable year beginning after
December 31, 1970, and if there is an unused credit of the distributor
or transferor corporation or of the acquiring corporation arising in an
unused credit year ending before January 1, 1971, which may be carried
to such year of acquisition (see paragraph (c)(4) of this section), then
in applying subparagraphs (1), (2), and (3) of this paragraph, in lieu
of dividing the excess limitation for the year of acquisition between
the preacquisition and postacquisition part years, only the limitation
based on the amount of tax for such year (i.e., without reduction for
the credit earned) shall be divided between the preacquisition and
postacquisition part years. If there is
[[Page 443]]
also an unused credit arising in an unused credit year ending after
December 31, 1970, which may be carried to the year of acquisition, then
for the purpose of determining the amount of such unused credit which
may be taken into account for such year of acquisition, the credit
earned for the year of acquisition shall first be applied against the
limitation based on amount of tax for the preacquisition part year
(reduced by any investment credit carryovers to such part year from
unused credit years ending before January 1, 1971) and the excess, if
any, shall then be applied against the limitation based on amount of tax
for the postacquisition part year (also reduced by any investment credit
carryovers to such part year from unused credit years ending before
January 1, 1971).
(7) Subparagraph (6) of this paragraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation were organized on January
1, 1970, and each corporation files its return on the calendar year
basis. On May 1, 1972, X transfers all its assets to Y in a statutory
merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1970, 1971, and
ending May 1, 1972, are as follows:
------------------------------------------------------------------------
Limitation
X Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1970.................................. $300 ...............
1971.................................. 100 ...............
Ending 5-1-72......................... 200 ...............
------------------------------------------------------------------------
Y's credit earned and its limitation based on amount of tax for its
taxable years 1970 through 1972 are as follows:
------------------------------------------------------------------------
Limitation
Y Corporation's taxable year Credit earned based on amount
of tax
------------------------------------------------------------------------
1970.................................. $100 ...............
1971.................................. 200
1972.................................. 300 $900
------------------------------------------------------------------------
The sequence for the allowance of unused credits of X Corporation and Y
Corporation, and the computation of carryovers to Y Corporation's
calendar year 1973, may be illustrated as follows:
(i) X Corporation's 1970 unused credit.-- The carryover to Y 1973 is
$0, computed as follows:
Unused credit................................................ $300
==========
X Corporation's 1971 limitation based on tax............... 0
X Corporation's 5-1-72 limitation based on tax............. 0
----------
Carryover to Y's postacquisition part year 1972............ 300
==========
Limitation based on tax for Y's postacquisition part year 600
1972 ($900x244/366).......................................
==========
Carryover to Y's year 1973................................... 0
(ii) Y Corporation's 1970 unused credit.-- The carryover to Y 1973
is $0, computed as follows:
Unused credit................................................ $100
Y Corporation's 1971 limitation based on tax............... 0
----------
Carryover to Y's preacquisition part year 1972............... 100
==========
Limitation based on tax for Y's preacquisition part year 300
1972 ($900x122/366).......................................
==========
Carryover to Y's postacquisition part year 1972.............. 0
(iii) Y Corporation's credit earned for 1972.-- The carryover to Y
1973 is $0, computed as follows:
Credit earned................................................ $300
==========
Limitation based on tax for preacquisition part year 1972 300
($900x122/366)............................................
Less: Y's $100 carryover from 1970......................... 100
----------
$200
==========
Carryover to Y's postacquisition part year 1972.............. 100
==========
Limitation based on tax for postacquisition part year 1972 600
($900x244/366)............................................
Less: X's $300 carryover from 1970......................... $300
----------
300
==========
Carryover to Y's year 1973................................... 0
(iv) X Corporation's 1971 unused credit.-- The carryover to Y 1973
is $0, computed as follows:
Unused credit................................................ $100
Excess of X's 1972 limitation based on tax over credit 0
earned....................................................
----------
Carryover to Y's postacquisition part year 1972.............. 100
Limitation based on tax for postacquisition part year 1972 600
($900x244/366)............................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year..... 100
----------
400
==========
200
==========
Carryover to Y's year 1973................................... 0
(v) Y Corporation's 1971 unused credit.-- The carryover to Y 1973 is
$100, computed as follows:
Unused credit................................................ $200
==========
Limitation based on tax for preacquisition part year 1972 300
($900x122/366)............................................
==========
[[Page 444]]
Less:
Y's $100 carryover from 1970............................. 100
----------
Y's 1972 credit earned for preacquisition part year 1972. 200
----------
300
==========
0
==========
Carryover to Y's postacquisition part year................... 200
==========
Limitation based on tax for postacquisition part year 1972 600
($900x244/366)............................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year 1972 100
X's $100 carryover from 1971............................. 100
----------
500
==========
100
==========
Carryover to Y's year 1973................................... 100
(vi) X Corporation's 5-1-72 unused credit.-- The carryover to Y 1973
is $200, computed as follows:
Unused credit................................................ $200
==========
Limitation based on tax for postacquisition part year 1972 600
($900x244/366)............................................
==========
Less:
X's $300 carryover from 1970............................. 300
Y's 1972 credit earned for postacquisition part year 1972 100
X's $100 carryover from 1971, and Y's $100 carryover from 200
1971....................................................
----------
600
==========
0
==========
Carryover to Y's year 1973................................... 200
(vii) The aggregate of the investment credit carryovers to Y 1973 is
$300, computed as follows:
Y's 1971 unused credit....................................... $100
X's 1972 unused credit....................................... 200
----------
Total.................................................... 300
(8) If the year of acquisition is a taxable year to which the
limitation provided in Sec. 1.46-2(b)(2) (relating to 20- percent
limitation on carryovers and carrybacks to certain taxable years)
applies, then for purposes of applying such limitation the
preacquisition part year and the postacquisition part year shall each be
considered a fractional part of a year, but, if the date of distribution
or transfer is not on the last day of a month, the entire month in which
the date of distribution or transfer occurs shall be considered as
included in the preacquisition part year and no portion thereof shall be
considered as included in the postacquisition part year.
(9) If the acquiring corporation succeeds to the investment credit
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the manner in which the unused credits of
the distributor or transferor corporations shall be applied shall be
determined consistently with the rules prescribed in paragraph (c) of
Sec. 1.381(c)(1)-2.
(f) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
subject to the conditions and limitations of Sec. 1.46-2 and this
section, the investment credit carryovers available to the first
acquiring corporation under Sec. 1.46-2 and this section.
(g) Recomputation of credit allowed by section 38 on certain
property of acquiring corporation. If section 38 property acquired by an
acquiring corporation in a transaction to which section 381(a) applies
is disposed of, or otherwise ceases to be section 38 property (or
becomes public utility property) with respect to the acquiring
corporation, before the close of the estimated useful life which was
taken into account in computing the distributor or transferor
corporation's qualified investment, see paragraph (e) of Sec. 1.47-3.
(h) Electing small business corporation. An unused credit of a
distributor or transferor corporation arising in an unused credit year
for which such corporation is not an electing small business corporation
(as defined in section 1371(b)) may not be carried over in a transaction
to which section 381 applies to a taxable year of the acquiring
corporation for which such corporation is an electing small business
corporation and may not be added to the amount allowable as a credit
under section 38 to the shareholders of the acquiring corporation for
such taxable
[[Page 445]]
year. However, in such a case, a taxable year for which the acquiring
corporation is an electing small business corporation shall be counted
as a taxable year for purposes of determining the taxable years to which
such unused credit may be carried.
(i) [Reserved]
(j) Carryover of operating capacity for qualified intercity bus. For
rules for determining an acquiring corporation's qualified investment
for the energy credit for a qualified intercity bus, see Sec. 1.48-
9(q)(11).
(Sec. 38(b) (76 Stat. 963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat. 264, 26
U.S.C. 48(l)(16)), and 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7289, 38 FR 30554, Nov. 6, 1973, as amended by T.D. 7982, 49 FR
39544, Oct. 9, 1984; 49 FR 41246, Oct. 22, 1984]
Sec. 1.381(c)(24)-1 Work incentive program credit carryovers in certain
corporate acquisitions.
The computation of carryovers and carrybacks of unused WIN credits
in a transaction to which section 381 applies shall be made under the
principles of Sec. 1.381(c)(23)-1 (relating to the computation of
carryovers and carrybacks of unused investment credits), except that the
provisions of paragraph (c)(4) and paragraph (e)(6), (7), and (8) of
such section shall not apply.
(Secs. 381(c)(23), 76 Stat. 971 (26 U.S.C. 381(c)(23), 381(c)(24)) 85
Stat. 557 (26 U.S.C. 381(c)(24)), 7805, 68A Stat. 917 (26 U.S.C. 7805))
[T.D. 7289, 38 FR 30557, Nov. 6, 1973]
Sec. 1.381(c)(25)-1 Deficiency dividend of a qualified investment entity.
(a) Carryover requirement. If a distributor or transferor
corporation in a transaction to which section 381(a) applies--
(1) Was a qualified investment entity (within the meaning of section
860(b)) for any taxable year ending on or before the date of
distribution or transfer, and
(2) A determination (as defined in section 860(e)) establishes that
the transferor or distributor corporation is liable for the tax imposed
by section 11(a), 56(a), 852(b), 857(b)(1), 857(b)(3)(A), or 1201(a) for
such taxable year,then in determining the liability for such tax the
deduction described in section 860 shall be allowed pursuant to section
381(c)(25) to such corporation for the amount of deficiency dividends
paid by the acquiring corporation with respect to the distributor or
transferor corporation. Except as otherwise provided in this section,
the provisions of section 860 and the regulations thereunder apply with
respect to a deficiency dividend deduction allowable pursuant to section
381(c)(25).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation must be a distribution that would
satisfy the definition of a deficiency dividend under section 860(f) if
paid by the distributor or transferor corporation to its own
shareholders. The distribution, however, shall be paid by the acquiring
corporation to its own shareholders. The distribution also shall be paid
after the date of distribution or transfer and on, or within 90 days
after, the date of the determination but before the acquiring
corporation files a claim under paragraph (c) of this section.
(c) Claim for deduction. A claim for deduction under this section
shall be made by the acquiring corporation on Form 976 and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
Sec. 1.860-2(b)(2) in sufficient detail to properly identify the facts
with respect to the distributor or transferor corporation and the
acquiring corporation. The required certified copy of the resolution
authorizing the payment of the dividend shall be that of the trustees,
board of directors, or other authority, of the acquiring corporation.
Necessary changes may be made in Form 976 in order to carry out the
provisions of this paragraph. The claim shall be filed with the district
director, or director of the internal revenue service center, with whom
the return of the distributor or transferor corporation to which the
claim relates was filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation that is allowable as a deduction to a
distributor or
[[Page 446]]
transferor corporation pursuant to section 381(c)(25) shall not become a
part of the dividends paid deduction of the acquiring corporation under
section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X corporation
transfers its assets to Y corporation in a transaction to which section
381(a) applies and if Y corporation transfers its assets to Z
corporation in a subsequent transaction to which section 381(a) applies,
then, subject to the provisions of this section, X corporation may take
a deficiency dividend deduction for the amount of deficiency dividends
paid by Z corporation with respect to X corporation.
(Sec. 860(l) (92 Stat. 2849, 26 U.S.C. 860(l)); sec. 860(g) (92 Stat.
2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7767, 46 FR 11264, Feb. 6, 1981, as amended by T.D. 7936, 49 FR
2106, Jan. 18, 1984]
Sec. 1.381(c)(26)-1 Credit for employment of certain new employees.
(a) Carryovers and carrybacks. For taxable years beginning before
January 1, 1984, the computation of carryovers and carrybacks of unused
targeted jobs credit (new jobs credit in the case of wages paid before
1979) under section 44B (as in effect prior to enactment of the Tax
Reform Act of 1984) in a transaction to which section 381(a) applies
shall be made under the principles of Sec. 1.381(c)(23)-1 (relating to
the computation of carryovers and carrybacks of unused investment
credit), except that the provisions of paragraph (c)(4) and paragraph
(e)(6), (7) and (8) of such section shall not apply.
(b) Other items. See Sec. 1.51-1(h) for a rule that applies to
certain transfers of a trade or business in which a member of a targeted
group is employed.
[T.D. 8062, 50 FR 46003, Nov. 6, 1985]
Sec. 1.381(d)-1 Operations loss carryovers of life insurance companies.
For the application of part V, subchapter C, chapter 1 of the Code
to operations loss carryovers of life insurance companies, see section
812(f) and Sec. 1.812-7 and section 381(c)(22) and Sec. 1.381(c)(22)-
1.
[T.D. 6625, 27 FR 12543, Dec. 19, 1962]
Sec. 1.382-1 Table of contents.
This section lists the captions that appear in the regulations for
Sec. Sec. 1.382-1T, 1.382-2, 1.382-2T, and 1.382-3 through 1.382-11.
Sec. 1.382-1T [Reserved]
Sec. 1.382-2 General rules for ownership change.
(a) Certain definitions for purposes of sections 382 and 383 and the
regulations thereunder.
(1) Loss corporation.
(i) In general.
(ii) Distributor of transferor loss corporation in a transaction
under section 381.
(iii) Separate accounting required for losses and credits of an
acquiring corporation and a distributor or transferor loss corporation.
(iv) End of separate accounting for losses and credits of
distributor or transferor corporation.
(v) Application to other successor corporations.
(2) Pre-change loss.
(3) Stock.
(i) In general.
(ii) Convertible stock.
(4) Testing date.
(i) In general.
(ii) Exceptions.
(5) Successor corporation.
(6) Predecessor corporation.
(b) Effective dates.
(1) In general. [Reserved]
(2) Rules provided in paragraph (a)(3)(ii) of this section.
(i) In general.
(ii) Certain convertible preferred stock.
(3) Rules provided in paragraph (a)(4) of this section.
Sec. 1.382-2T Definition of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).
(a) Ownership change. (1) In general.
(2) Events requiring a determination of whether an ownership change
has occurred.
(i) Testing dates prior to November 5, 1992.
(ii) Information statement required.
(iii) Records to be maintained by loss corporation.
(A) Exception.
(B) Statement with respect to prior periods.
(b) Nomenclature and assumptions.
(c) Computing the amount of increases in percentage ownership. (1)
In general.
(2) Example.
[[Page 447]]
(3) Related and unrelated increases in percentage stock ownership.
(4) Example.
(d) Testing period. (1) In general.
(2) Effect of a prior ownership change.
(3) Commencement of the testing period.
(i) In general.
(ii) Exception for corporations with net unrealized built-in loss.
(4) Disregarding testing dates.
(5) Example.
(e) Owner shift and equity structure shift.
(1) Owner shift.
(i) Defined.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded.
(iii) Examples.
(2) Equity structure shift.
(i) Tax-free reorganizations.
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts.
(iii) Overlap of owner shift and equity structure shift.
(iv) Examples.
(f) Definitions. (1) Loss corporation.
(2) Old loss corporation.
(3) New loss corporation.
(4) Successor corporation.
(5) Predecessor corporation.
(6) Shift.
(7) Entity.
(8) Director ownership interest.
(9) First tier entity.
(10) 5-percent owner.
(11) Public shareholder.
(12) Public owner.
(13) Public group.
(14) Higher tier entity.
(15) Indirect ownership interest.
(16) Highest tier entity.
(17) Next lower tier entity.
(18) Stock.
(i) In general.
(ii) Treating stock as not stock.
(iii) Treating interests not constituting stock as stock.
(iv) Stock of the loss corporation.
(19) Change date.
(20) Year.
(21) Old section 382.
(22) Pre-change loss.
(23) Unrelated.
(24) Percentage ownership interest.
(g) 5-percent shareholder. (1) In general.
(2) Determination of whether a person is a 5-percent shareholder.
(3) Determination of the percentage stock ownership interest of a 5-
percent shareholder.
(4) Examples.
(5) Stock ownership presumptions in connection with certain
acquisitions and dispositions of loss corporation stock.
(i) In general.
(ii) Example.
(h) Constructive ownership of stock. (1) In general.
(2) Attribution from corporations, partnerships, estates and trusts.
(i) In general.
(ii) Limitation on attribution from entities with respect to certain
interests.
(iii) Limitation on attribution from certain entities.
(iv) Examples.
(3) Attribution to corporations, partnerships, estates and trusts.
(4) Option attribution.
(i) In general.
(ii) Examples.
(iii) Contingencies.
(iv) Series of options.
(v) Interests that are similar to options.
(vi) Actual exercise of options.
(A) In general.
(B) Actual exercise within 120 days of deemed exercise.
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation.
(A) Right of obligation to issue stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation.
(C) Effect on value of old loss corporation.
(viii) Options that lapse or are forfeited.
(ix) Option rule inapplicable if pre-change losses are de minimis.
(x) Options not subject to attribution
(A) Long-held options with respect to actively traded stock.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt.
(C) Right or obligation to redeem stock of the loss corporation.
(D) Options exercisable only upon death, disability or mental
incompetency.
(E) Right to receive or obligation to issue stock as interest or
dividends.
(F) Options outstanding following an ownership change.
(1) In general.
(2) Example.
(G) Right to acquire loss corporation stock pursuant to a default
under loan agreement.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement.
(I) [Reserved]
(J) Title 11 of similar case.
(K)-(Y) [Reserved]
(xi) Certain transfers of options disregarded.
(xii) Exercise of an option that has not been treated as stock.
(xiii) Effective date.
(5) Stock transferred under certain agreements.
(6) Family attribution.
(i) [Reserved]
[[Page 448]]
(j) Aggregation and segregation rules. (1) Aggregation of public
shareholders and public owners into public groups.
(i) Public group.
(ii) Treatment of public group that is a 5-percent shareholder.
(iii) Presumption of no cross-ownership.
(iv) Identification of the public groups treated as 5-percent
shareholders.
(A) Analysis of highest tier entities.
(B) Analysis of other higher tier entities and first tier entities.
(C) Aggregation of the public shareholders.
(v) Appropriate adjustments.
(vi) Examples.
(2) Segregation rules applicable to transactions involving the loss
corporation.
(i) In general.
(ii) Direct public group.
(iii) Transactions to which segregation rules apply.
(A) In general.
(B) Certain equity structure shifts and transactions to which
section 1032 applies.
(1) In general.
(2) Examples.
(C) Redemption-type transactions.
(1) In general.
(2) Examples.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock.
(1) In general.
(2) Example.
(E) Transactions identified in the Internal Revenue Bulletin.
(F) Issuance of rights to acquire loss corporation stock.
(1) In general.
(2) Example.
(iv) Combination of de minimis public groups.
(A) In general.
(B) Example.
(v) Multiple transactions.
(A) In general.
(B) Example.
(vi) Acquistions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules.
(3) Segregation rules applicable to transactions involving first
tier entities or higher tier entities.
(i) Dispositions.
(ii) Example.
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity.
(iv) Examples.
(v) Acquistions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules.
(k) Operating rules. (1) Presumptions regarding stock ownership.
(i) Stock subject to regulation by the Securities and Exchange
Commission.
(ii) Statements under penalties of perjury.
(2) Actual knowledge regarding stock ownership.
(3) Duty to inquire as to actual stock ownership in the loss
corporation.
(4) Ownership interests structured to avoid the section 382
limitation.
(5) Example.
(6) First tier entity or higher tier entity that is a foreign
corporation or entity. [Reserved.]
(l) Changes in percentage ownership which are attributable to
fluctuations in value. [Reserved]
(m) Effective date. (1) In general.
(2) Plan of reorganization.
(3) Earliest commencement of the testing period.
(4) Transitional rules.
(i) Rules provided in paragraph (j) of this section for testing
dates before September 4, 1987.
(ii) Example.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987.
(iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this
section.
(v) Rules provided in paragraph (a)(2)(ii) of this section.
(vi) Rules provided in paragraph (h)(4) of this section.
(vii) Rules provided in paragraph (a)(2)(i) of this section.
(5) Bankruptcy proceedings.
(i) In general.
(ii) Example.
(6) Transactions of domestic building and loan associations.
(7) Transactions not subject to section 382.
(i) Application of old section 382.
(ii) Effect on testing period.
(iii) Termination of old section 382. [Reserved]
(8) Options issued or transferred before January 1, 1987.
(i) Options issued before May 6, 1986.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987.
(9) Examples.
Sec. 1.382-3 Definitions and rules relating to a 5-percent shareholder.
(a) Definitions.
(1) Entity.
(i) In general.
(ii) Examples.
(iii) Effective date.
(A) In general
(B) Special rule.
(C) Example.
(2) [Reserved]
(b)-(i) [Reserved]
[[Page 449]]
(j) Modification of the segregation rules of Sec. 1.382-
2T(j)(2)(iii) in the case of certain issuances of stock.
(1) Introduction.
(2) Small issuance exception.
(i) In general.
(ii) Small issuance defined.
(iii) Small issuance limitation.
(A) In general.
(B) Class of stock defined.
(C) Adjustments for stock splits and similar transactions.
(D) Exception.
(iv) Short taxable years.
(3) Other issuances of stock for cash.
(i) In general.
(ii) Solely for cash.
(A) In general.
(B) Related issuances.
(iii) Coordination with paragraph (j)(2) of this section.
(4) Limitation on exempted stock.
(5) Proportionate acquisition of exempted stock.
(i) In general.
(ii) Actual knowledge of greater overlapping ownership.
(6) Exception for equity structure shifts.
(7) Transitory ownership by underwriter disregarded.
(8) Certain related issuances.
(9) Application to options.
(10) Issuance of stock pursuant to the exercise of certain options.
(11) Application to first tier and higher tier entities.
(12) Certain non-stock ownership interests.
(13) Examples.
(14) Effective date.
(i) In general.
(ii) Effective date for paragraph (j)(10) of this section.
(iii) Election to apply this paragraph (j) retroactively.
(A) Election.
(B) Amended returns.
(C) Revised information statements.
(k) Special rules for certain regulated investment companies.
(1) In general.
(2) Effective date.
(i) General rule.
(ii) Election to apply prospectively.
Sec. 1.382-4 Constructive ownership of stock.
(a) In general. [Reserved]
(b) Attribution from corporations, partnerships, estates and trusts.
(1) [Reserved]
(2) Limitation.
(c) Attribution to corporations, partnerships, estates and trusts.
[Reserved]
(d) Treatment of options as exercised.
(1) General rule.
(2) Options treated as exercised.
(i) Issuance or transfer.
(ii) Subsequent testing dates.
(3) The ownership test.
(4) The control test.
(i) In general.
(ii) Operating rules.
(A) Person and related persons.
(B) Indirect ownership interest.
(5) The income test.
(6) Application of the ownership, control, and income tests.
(i) In general.
(ii) Application of ownership test.
(iii) Application of control test.
(iv) Application of income test.
(7) Safe harbors.
(i) Contracts to acquire stock.
(ii) Escrow, pledge, or other security agreements.
(iii) Compensatory options.
(iv) Options exercisable only upon death, disability, mental
incompetency or retirement.
(v) Rights of first refusal.
(vi) Options designated in the Internal Revenue Bulletin.
(8) Additional rules.
(i) Contracts to acquire stock.
(ii) Indirect transfer of an option.
(iii) Options related to interests in non-corporate entities.
(iv) Puts.
(9) Definition of option.
(i) In general.
(ii) Convertible stock.
(iii) Series of options.
(iv) General principles of tax law.
(10) Subsequent treatment of options treated as exercised on a
change date.
(i) In general.
(ii) Alternative look-back rule for options exercised within 3 years
after change date.
(11) Transfers not subject to deemed exercise.
(12) Certain rules regarding non-stock interests as stock.
(e) Stock transferred under certain agreements. [Reserved]
(f) Family attribution. [Reserved]
(g) Definitions.
(h) Effective date.
(1) In general. [Reserved]
(2) Option attribution rules.
(i) General rule.
(ii) Special rule for control test.
(iii) Convertible stock issued prior to July 20, 1988.
(A) In general.
(B) Exceptions.
(1) Nonvoting convertible preferred stock.
(2) Other convertible stock.
(iv) Convertible stock issued on or after July 20, 1988, and before
November 5, 1992.
(v) Certain options in existence immediately before and after an
ownership change.
(vi) Election to apply Sec. 1.382-2T(h)(4).
(A) In general.
(B) Additional consequences of election.
[[Page 450]]
(C) Time and manner of making the election.
(D) Amended returns.
(3) Special rule for options subject to attribution under Sec.
1.382-2T(h)(4).
Sec. 1.382-5 Section 382 limitation.
(a) Scope.
(b) Computation of value.
(c) Short taxable year.
(d) Successive ownership changes and absorption of a section 382
limitation.
(1) In general.
(2) Recognized built-in gains and losses.
(3) Effective date.
(e) Controlled groups.
(f) Effective date.
Sec. 1.382-6 Allocation of income and loss to periods before and after
the change date for purposes of section 382.
(a) General rule.
(b) Closing-of-the-books election.
(1) In general.
(2) Making the closing-of-the-books election.
(i) Time and manner.
(ii) Election irrevocable.
(3) Special rules relating to consolidated and controlled groups.
(i) Consolidated groups.
(ii) Controlled groups.
(c) Operating rules for determining net operating loss, taxable income,
net capital loss, modified capital gain net income, and
special allocations.
(1) In general.
(2) Adjustment to net operating loss.
(i) Determination of remaining capital gain.
(ii) Reduction of net operating loss by remaining capital gain.
(d) Coordination with rules relating to the allocation of income under
Sec. 1.1502-76(b).
(e) Allocation of certain credits.
(f) Examples.
(g) Definitions and nomenclature.
(1) Change year.
(2) Pre-change period.
(3) Post-change period.
(4) Modified capital gain net income.
(h) Effective date.
Sec. 1.382-7 Built-in gains and losses. [Reserved]
Sec. 1.382-8 Controlled groups.
(a) Introduction.
(b) Controlled group loss and controlled group with respect to a
controlled group loss.
(1) In general.
(2) Presumption regarding net unrealized built-in loss.
(c) Computation of value.
(1) Reduction in value by the amount restored.
(2) Restoration of value.
(3) Reduction in value by the amount restored.
(4) Appropriate adjustments.
(5) Certain reductions in the value of members of a controlled
group.
(d) No double reduction.
(e) Definitions and nomenclature.
(1) Definitions in Section 382 and the regulations thereunder.
(2) Controlled group.
(3) Component member.
(4) Predecessor and successor corporation.
(f) Coordination between consolidated groups and controlled groups.
(g) Examples.
(h) Time and manner of filing election to restore.
(1) Statement required.
(2) Revocation of election.
(3) Filing by component member.
(i) [Reserved]
(j) Effective date.
(1) In general.
(2) Transition rule.
(i) In general.
(ii) Special transition rules for controlled groups that had
ownership changes before January 29, 1991.
(3) Amended returns.
Sec. 1.382-9 Special rules under section 382 for corporations under the
jurisdiction of a court in a title 11 or similar case.
(a) Introduction.
(b) Application of section 382(1)(5).
(c) [Reserved]
(d) Rules for determining whether stock of the loss corporation is
owned as a result of being a qualified creditor.
(1) Qualified creditor.
(2) General rules for determining whether indebtedness is qualified
indebtedness.
(i) Definition.
(ii) Determination of beneficial ownership.
(iii) Duty of inquiry.
(iv) Ordinary course indebtedness.
(3) Treatment of certain indebtedness as continuously owned by the
same owner.
(i) In general.
(ii) Operating rules.
(iii) Indebtedness owned by beneficial owner who becomes a 5-percent
shareholder or 5-percent entity.
(iv) Example.
(4) Special rule if indebtedness is a large portion of creditor's
assets.
(i) In general.
(ii) Applicable period.
(iii) Determination of ownership change.
(iv) Reliance on statement.
(5) Tacking of ownership periods.
(i) Transferee treated as owning indebtedness for period owned by
transferor.
(ii) Qualified transfer.
(iii) Exception.
(iv) Debt-for-debt exchanges.
[[Page 451]]
(6) Effective date.
(i) In general.
(ii) Elections and amended returns.
(A) Election to apply this paragraph (d) retroactively.
(B) Election to revoke section 382(l)(5)(H) election.
(C) Amended returns.
(e) Option attribution for purposes of determining stock ownership
under section 382(1)(5)(A)(ii).
(1) In general.
(2) Special rules.
(i) Lapse or forfeiture of options deemed exercised.
(ii) Actual exercise of options not deemed exercised.
(iii) Amended returns.
(3) Examples.
(4) Effective dates.
(i) In general.
(ii) Special rule for interest or dividends.
(f)-(h) [Reserved]
(i) Election not to apply section 382(l)(5).
(j) Value of the loss corporation in an ownership change to which
section 382(l)(6) applies.
(k) Rules for determining the value of the stock of the loss
corporation.
(1) Certain ownership interests treated as stock.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(6) Special rule for stock not subject to the risk of corporate
business operations.
(i) In general.
(ii) Coordination of special rule and other rules affecting value.
(7) Limitation on value of stock.
(l) Rules for determining the value of the loss corporation's pre-
change assets.
(1) In general.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(m) Continuity of business requirement.
(1) Under section 382(1)(5).
(2) Under section 382(l)(6).
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years.
(1) Section 382(l)(5) applies to the first ownership change.
(2) Section 382(l)(6) applies to the first ownership change.
(o) Options not subject to attribution.
(p) Effective date for rules relating to section 382(l)(6).
(1) In general.
(2) Ownership change to which section 382(l)(6) applies occurring
before March 17, 1994.
Sec. 1.382-10 [Reserved]
Sec. 1.382-10T Special rules for determining time and manner of
acquisition of an interest in a loss corporation (temporary).
Sec. 1.382-11 Effective dates. [Reserved]
[T.D. 8149, 52 FR 29674, Aug. 11, 1987, as amended by T.D. 8264, 54 FR
38666, Sept. 20, 1989; T.D. 8352, 56 FR 29434, June 27, 1991.
Redesignated by T.D. 8440, 57 FR 45711, Oct. 5, 1992; T.D. 8490, 58 FR
51573, Oct. 4, 1993; T.D. 8531, 59 FR 12835, Mar. 18, 1994; T.D. 8530,
59 FR 12842, Mar. 18, 1994; T.D. 8529, 59 FR 12846, Mar. 18, 1994; T.D.
8546, 59 FR 32080, June 22, 1994; T.D. 8679, 61 FR 33314, June 27, 1996;
T.D. 8825, 64 FR 36177, July 2, 1999; T.D. 9063, 68 FR 38177, June 27,
2003; T.D. 9063, 68 FR 53219, Sept. 9, 2003]
Sec. 1.382-1T [Reserved]
Sec. 1.382-2 General rules for ownership change.
(a) Certain definitions for purposes of sections 382 and 383 and the
regulations thereunder. The following definitions apply for purposes of
sections 382 and 383 and the regulations thereunder.
(1) Loss corporation--(i) In general. The term loss corporation
means a corporation which--
(A) Is entitled to use a net operating loss carryforward, a capital
loss carryover, a carryover of excess foreign taxes under section
904(c), a carryforward of a general business credit under section 39, or
a carryover of a minimum tax credit under section 53,
(B) For the taxable year that includes a testing date, as defined in
paragraph (a)(4) of this section or Sec. 1.382-2T(a)(2)(i), whichever
is applicable (determined for purposes of this paragraph (a)(1) without
regard to whether the corporation is a loss corporation), has a net
operating loss, a net capital loss, excess foreign taxes under section
904(c), unused general business credits under section 38, or an unused
minimum tax credit under section 53, or
(C) Has a net unrealized built-in loss (determined for purposes of
this paragraph (a)(1) by treating the date on which such determination
is made as the change date). See section 382(h)(3) for the definition of
net unrealized built-in loss.
[[Page 452]]
See section 383 and Sec. 1.383-1 for rules relating to a loss
corporation that has an ownership change and has capital losses, excess
foreign taxes, general business credits or minimum tax credits. Any
predecessor or successor to a loss corporation described in this
paragraph (a)(1) is also a loss corporation.
(ii) Distributor or transferor loss corporation in a transaction
under section 381. Notwithstanding that a loss corporation ceases to
exist under state law, if its net operating loss carryforwards, excess
foreign taxes, or other items described in section 381(c) are succeeded
to and taken into account by an acquiring corporation in a transaction
described in section 381(a), such loss corporation shall be treated as
continuing in existence until--
(A) Any pre-change losses (excluding pre-change credits described in
Sec. 1.383-1(c)(3)), determined as if the date of such transaction were
the change date, are fully utilized or expire under either section 172
or section 1212,
(B) Any net unrealized built-in losses, determined as if the date of
such transaction were the change date, may no longer be treated as pre-
change losses, and
(C) Any pre-change credits (described in Sec. 1.383-1(c)(3)),
determined as if the date of such transaction were the change date, are
fully utilized or expire under sections 39, 53, or 904(c).
Following a transaction described in the preceding sentence, the stock
of the acquiring corporation shall be treated as the stock of the loss
corporation for purposes of determining whether an ownership change
occurs with respect to the pre-change losses and net unrealized built-in
losses that may be treated as pre-change losses of the distributor or
transferor corporation.
(iii) Separate accounting required for losses and credits of an
acquiring corporation and a distributor or transferor loss corporation.
Except as provided in paragraph (a)(1)(iv) of this section, pre-change
losses (determined as if the testing date were the change date and
treating the amount of any net unrealized built-in loss as a pre-change
loss), that are succeeded to and taken into account by an acquiring
corporation in a transaction to which section 381(a) applies must be
accounted for separately from losses and credits of the acquiring
corporation for purposes of applying this section. See Example (2) of
Sec. 1.382-2T(e)(2)(iv) of this section.
(iv) End of separate accounting for losses and credits of
distributor or transferor loss corporation. The separate tracking of
owner shifts of the stock of an acquiring corporation required by
paragraph (a)(1)(iii) of this section with respect to the net operating
loss carryovers and other attributes described in paragraph (a)(1)(ii)
of this section ends when a fold-in event occurs. A fold-in event is
either an ownership change of the distributor or transferor corporation
in connection with, or after, the transaction to which section 381(a)
applies, or a period of 5 consecutive years following the section 381(a)
transaction during which the distributor or transferor corporation has
not had an ownership change. Starting on the day after the earlier of
the change date (but not earlier than the day of the section 381(a)
transaction) or the last day of the 5 consecutive year period, the
losses and other attributes of the distributor or transferor corporation
are treated as losses and attributes of the acquiring corporation for
purposes of determining whether an ownership change occurs with respect
to such losses. Also, for purposes of determining the beginning of the
acquiring corporation's testing period, such losses are considered to
arise either in a taxable year that begins not earlier than the later of
the day following the change date or the day of the section 381(a)
transaction, or in a taxable year that begins 3 years before the end of
the 5 consecutive year period. Pre-change losses of a distributor or
transferor corporation that are subject to a limitation under section
382 continue to be subject to the limitation notwithstanding the
occurrence of a fold-in event. Any ownership change that occurs in
connection with, or subsequent to, the section 381 transaction may
result in an additional, lesser limitation with respect to such pre-
change losses. This paragraph (a)(1)(iv) applies to any testing date
occurring on or after January 29, 1991.
[[Page 453]]
(v) Application to other successor corporations. This paragraph
(a)(1) also applies, as the context may require, to successor
corporations other than successors in section 381(a) transactions. For
example, if a corporation receives assets from the loss corporation that
have basis in excess of value, the recipient corporation's basis for the
assets is determined, directly or indirectly, in whole or in part, by
reference to the loss corporation's basis, and the amount by which basis
exceeds value is material, the recipient corporation is a successor
corporation subject to this paragraph (a)(1). This paragraph (a)(1)(v)
applies to any testing date occurring on or after January 1, 1997.
(2) Pre-change loss. The term pre-change loss means--
(i) Any net operating loss carryforward of the old loss corporation
to the taxable year ending on the change date or in which the change
date occurs,
(ii) Any net operating loss of the old loss corporation for the
taxable year in which the ownership change occurs to the extent such
loss is allocable to the period in such year on or before the change
date.
(iii) Any recognized built-in loss for any recognition period
taxable year (within the meaning of 382(h)),
(iv) Any pre-change capital losses described in Sec. 1.383-
1T(c)(2)(i) and (ii), and
(v) Any pre-change credits described in 1.383-1T(c)(3).
(3) Stock--(i) In general. Except as provided in this paragraph
(a)(3)(i) and Sec. 1.382-2T(f)(18)(ii) and (iii), the term stock means
stock other than stock described in section 1504(a)(4). Notwithstanding
the preceding sentence, stock that is not described in section
1504(a)(4) solely because it is entitled to vote as a result of dividend
arrearages shall be treated as so described and thus shall not be
considered stock. Stock described in section 1504(a)(4), however, is not
excluded for purposes of determining the value of the loss corporation
under section 382(e). The determination of the percentage of stock of
any corporation owned by any person shall be made on the basis of the
relative fair market value of the stock owned by such person to the
total fair market value of the outstanding stock of the corporation.
Solely for purposes of determining the percentage of stock owned by a
person, each share of all the outstanding shares of stock that have the
same material terms is treated as having the same value. Thus, for
example, a control premium or blockage discount is disregarded in
determining the percentage of stock owned by any person. The previous
two sentences of this paragraph (a)(3)(i) apply to any testing date
occurring on or after January 29, 1991.
(ii) Convertible stock. The term stock includes any convertible
stock. For rules regarding the treatment of certain convertible stock as
an option, see Sec. 1.382-4(d)(9)(ii).
(4) Testing date--(i) In general. Except as provided in paragraph
(a)(4)(ii) of this section, a loss corporation is required to determine
whether an ownership change has occurred immediately after any owner
shift, or issuance or transfer (including an issuance or transfer
described in Sec. 1.382-4(d)(8)(i) or (ii)) of an option with respect
to stock of the loss corporation that is treated as exercised under
Sec. 1.382-4(d)(2). Each date on which a loss corporation is required
to make a determination of whether an ownership change has occurred is
referred to as a testing date. All computations of increases in
percentage ownership are to be made as of the close of the testing date
and any transactions described in this paragraph (a)(4) that occur on
that date are treated as occurring simultaneously at the close of the
testing date. See Sec. 1.382-2T(e)(1) for the definition of owner
shift. The term option, as used in this paragraph (a)(4), includes
interests that are treated as options under Sec. 1.382-4(d)(9). For
rules regarding the determination of whether dates prior to November 5,
1992, are testing dates, see Sec. 1.382-2T(a)(2)(i).
(ii) Exceptions. A loss corporation is not required to determine
whether an ownership change has occurred immediately after--
(A) Any transfer of stock, or an option with respect to stock, of
the loss corporation in any of the circumstances described in section
382(l)(3)(B) (death, gift, divorce, etc.); or
[[Page 454]]
(B) The transfer of an option described in Sec. 1.382-4(d)(11)(i)
or (ii) (relating to transfers between persons who are not 5-percent
shareholders or between members of certain public groups).
(5) Successor corporation. A successor corporation is a distributee
or transferee corporation that succeeds to and takes into account items
described in section 381(c) from a corporation as the result of an
acquisition of assets described in section 381(a). A successor
corporation also includes, as the context may require, a corporation
which receives an asset or assets from another corporation if the
corporation's basis for the asset(s) is determined, directly or
indirectly, in whole or in part, by reference to the other corporation's
basis and the amount by which basis differs from value is, in the
aggregate, material. The previous sentence of this paragraph (a)(5)
applies to any testing date occurring on or after January 1, 1997.
(6) Predecessor corporation. A predecessor corporation is a
distributor or transferor corporation that distributes or transfers its
assets to an acquiring corporation in a transaction described in section
381(a). A predecessor corporation also includes, as the context may
require, a corporation which transfers an asset or assets to another
corporation if the transferee's basis for the asset(s) is determined,
directly or indirectly, in whole or in part, by reference to the
corporation's basis and the amount by which basis differs from value is,
in the aggregate, material. The previous sentence of this paragraph
(a)(6) applies to any testing date occurring on or after January 1,
1997.
(b) Effective dates--(1) In general. [Reserved]
(2) Rules provided in paragraph (a)(3)(ii) of this section--(i) In
general. Except as provided in paragraph (b)(2)(ii) of this section, the
rules provided in paragraph (a)(3)(ii) of this section apply with
respect to any convertible stock.
(ii) Certain convertible preferred stock. Convertible stock that,
when issued, would be described in section 1504(a)(4) by disregarding
subparagraph (D) thereof and by ignoring the potential participation in
corporate growth that the conversion feature may offer is treated as
stock described in that section (and thus is not treated as stock for
the purpose of determining whether an ownership change occurs, but is
taken into account for the purpose of determining the value of the loss
corporation immediately before an ownership change; see sections
382(e)(1) and 382(k)(6)(A)) if--
(A) The stock was issued on or after July 20, 1988, and prior to
November 5, 1992; or
(B) The stock was issued prior to July 20, 1988, and the loss
corporation makes the election described in Notice 88-67, 1988-1 C.B.
555, (see Sec. 601.601(d)(2)(ii)(b) of this chapter for availability of
Cumulative Bulletins (C.B.)) on or before the earlier of the date
prescribed in the Notice or December 7, 1992.
(3) Rules provided in paragraph (a)(4) of this section. The rules
provided in paragraph (a)(4) of this section apply to determine whether
dates on or after November 5, 1992, are testing dates.
[T.D. 8352, 56 FR 29434, June 27, 1991, as amended by T.D. 8405, 57 FR
10740, Mar. 30, 1992; 57 FR 24188, June 8, 1992; T.D. 8531, 59 FR 12836,
Mar. 18, 1994; T.D. 8679, 61 FR 33315, June 27, 1996; T.D. 8825, 64 FR
36177, 36178, July 2, 1999]
Sec. 1.382-2T Definition of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).
(a) Ownership change--(1) In general. A corporation is a new loss
corporation and thus subject to limitation under section 382 only if an
ownership change has occurred with respect to such corporation. An
ownership change occurs with respect to a corporation if it is a loss
corporation on a testing date and, immediately after the close of the
testing date, the percentage of stock of the corporation owned by one or
more 5-percent shareholders has increased by more than 50 percentage
points over the lowest percentage of stock of such corporation owned by
such shareholders at any time during the testing period. See paragraph
(a)(2)(i) of this section for the definition of testing date. See
paragraph (d) of this section for the definition of testing period. See
Sec. 1.382-2(a)(1) and paragraph (f)(3) of
[[Page 455]]
this section for the respective definition of loss corporation and new
loss corporation. See paragraph (g) of this section for the definition
of 5-percent shareholder. See section 383 and Sec. 1.383-1 for rules
relating to loss corporations that have an ownership change and have
capital loss carryovers, excess foreign taxes carried over under section
904(c), carryovers of general business credits under section 39, or
unused minimum tax credits under section 53.
(2) Events requiring a determination of whether an ownership change
has occurred--(i) Testing dates prior to November 5, 1992. Except as
otherwise provided in this paragraph (a)(2)(i), a loss corporation is
required to determine whether an ownership change has occurred
immediately after any owner shift, any equity structure shift, or any
transaction in which an option with respect to stock of the loss
corporation is--
(A) Transferred to (or by) a 5-percent shareholder (or a person who
would be 5-percent shareholder if the option were treated as exercised),
or
(B) Issued by the loss corporation, a first tier entity, or a higher
tier entity that owns five percent or more of the loss corporation
(determined without regard to the application of paragraph (h)(2)(i)(A)
of this section). Notwithstanding the preceding sentence, any transfer
of stock of the loss corporation (or an option with respect to such
stock) in any of the circumstances described in section 382(l)(3)(B), or
any equity structure shift that is not also an owner shift, is not an
event that requires the loss corporation to make a determination of
whether an ownership change has occurred. For purposes of this section,
each date on which a loss corporation is required to make a
determination of whether an ownership change has occurred is referred to
as a testing date, all computations of increases in percentage ownership
are to be made as of the close of the testing date, and any transactions
described in this paragraph (a)(2)(i) that occur on that date are
treated as occurring simultaneously at the close of the testing date.
See paragraphs (e)(1) and (2) of this section for the respective
definitions of owner shift and equity structure shift. See paragraphs
(f)(9) and (14) of this section for the respective definitions of first
tier entity and higher tier entity. See paragraph (m)(4)(vii) of this
section for special rules regarding the effective date of the provisions
of this paragraph (a)(2)(i).
(ii) Information statement required. A loss corporation must file a
statement with its income tax return for each taxable year that it is a
loss corporation in which an owner shift, equity structure shift or
other transaction described in paragraph (a)(2)(i) of this section
occurs. The statement must--
(A) Indicate whether any testing dates occurred during the taxable
year;
(B) Identify each testing date, if any, on which an ownership change
occurred;
(C) Identify the testing date, if any, that occurred during and
closest to the end of each of the three month periods ending on March
31, June 30, September 30 and December 31 during the taxable year,
regardless of whether an ownership change occurred on the testing date,
(D) Identify each 5-percent shareholder on each such testing date;
(E) State the percentage ownership of the stock of the loss
corporation for each 5-percent shareholder as of each such testing date
and the increase, if any, in such ownership during the testing period;
and
(F) Disclose the extent to which the loss corporation relied upon
the presumptions regarding stock ownership under paragraph (k)(i) of
this section to determine whether an ownership change occurred on any
identified testing date.
See Sec. 1.383-1(k) and paragraph (m)(4)(v) of this section for
transitional rules regarding the filing of information statements.
(iii) Records to be maintained by loss corporation. A loss
corporation shall keep such records as are necessary to determine: (A)
The identity of its 5-percent shareholders, (B) the percentage of its
stock owned by each such 5-percent shareholder, and (C) whether the
section 382 limitation is applicable. Such records shall be retained so
long as they may be material in the administration of any internal
revenue law.
[[Page 456]]
(b) Nomenclature and assumptions. For purposes of the example in
this section--
(1) L is a loss corporation, and, if there is more than one loss
corporation, they are designated as L1, L2,
L3, etc.
(2) P is a corporation that is not a loss corporation, and, if there
is more than one such corporation, they are designated as P1,
P2, P3, etc.
(3) HC is a corporation whose assets consist solely of the stock of
other corporations.
(4) E is an entity other than a corporation (e.g., a partnership),
and, if there is more than one such entity, they are designated as
E1, E2, E3, etc.
(5) Unless otherwise stated--
(i) A, B, C, D, AA, BB, CC, and DD are unrelated individuals who own
interests in corporations or other entities only to the extent expressly
stated,
(ii) All corporations have one class of stock outstanding and each
share of stock has the same fair market value as each other share,
(iii) The capital structure of the loss corporation and its business
do not change over time, and
(iv) The rules of paragraphs (k)(2) and (4) of this section are not
applicable.
(6) Public L represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
loss corporation L, each of whom owns less than five percent of the
stock of the loss corporation, and, if there is more than one loss
corporation, such groups are designated as Public L1, Public
L2, Public L3, etc.
(7) Public P represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
corporation P, each of whom owns less than five percent of the stock of
the corporation, and, if there is more than one corporation, such groups
are designated as Public P1, P2, P3,
etc.
(8) Public E represents a group of unrelated individuals and
entities that own direct (and not indirect) ownership interests in
entity E, each of whom owns less than five percent of the entity, and,
if there is more than one entity, such groups are designated as Public
E1, Public E2, Public E3, etc.
(c) Computing the amount of increases in percentage ownership--(1)
In general. In order to determine whether an ownership change has
occurred on a testing date, the loss corporation must identify each 5-
percent shareholder whose percentage of stock ownership in the loss
corporation immediately after the close of the testing date has
increased, compared to such shareholder's lowest percentage of stock
ownership in such corporation at any time during the testing period. The
amount of the increase in the percentage of stock ownership in the loss
corporation of each 5-percent shareholder must be computed separately by
comparing the percentage ownership of each such 5-percent shareholder
immediately after the close of the testing date to such shareholder's
lowest percentage ownership at any time during the testing period. Each
such increase in the percentage ownership of a 5-percent shareholder is
then added together with any other such increases of other 5-percent
shareholders to determine whether an ownership change has occurred.
Because only those 5-percent shareholders whose percentages of stock
ownership have increased are taken into account, a 5-percent shareholder
is disregarded if his percentage of stock ownership, immediately after
the close of the testing date, has decreased (or has remained the same),
compared to his lowest percentage ownership interest on any previous
date during the testing period.
(2) Example.
Example. (i) A and B each own 40 percent of the outstanding L stock.
The remaining 20 percent of the L stock is owned by 100 unrelated
individuals, none of whom own as much as five percent of L stock
(``Public L''). C negotiates with A and B to purchase all their stock in
L.
(ii) The acquisitions from both A and B are completed on September
13, 1990. C's acquisition of 80 percent of L stock results in an
ownership change because C's percentage ownership has increased by 80
percentage points as of the testing date, compared to his lowest
percentage ownership in L at any time during the testing period (0
percent).
(3) Related and unrelated increases in percentage stock ownership.
The determination whether an ownership change has occurred is made
without regard to
[[Page 457]]
whether the changes in stock ownership of the loss corporation (by one
or more 5-percent shareholders) result from related or unrelated events.
(4) Example.
Example. (i) L has outstanding 200 shares of common stock. A, B and
C respectively own 100, 50 and 50 shares of the L stock. On January 2,
1988, A sells 60 shares of L stock to B. Thus, B's percentage ownership
interest in L increases by 30 percentage points, from 50 shares to 110
shares. On January 1, 1989, A purchases C's entire interest in L. Thus,
A's percentage ownership interest in L increases by 25 percentage
points, compared to his lowest percentage ownership interest in L, from
40 shares immediately following the January 2, 1988 sale to B to 90
shares. Even though A's ownership interest in L as of January 1, 1989
has decreased, compared to his 50 percent ownership interest at the
beginning of the testing period, A is a 5-percent shareholder who must
be taken into account for purposes of the computation required under
paragraph (c)(1) of this section because his interest in L on that
testing date (45 percent) has increased, compared to his lowest
percentage ownership interest in L at any time during the testing period
(20 percent following the sale to B).
(ii) Accordingly, although A and B jointly have increased their
aggregate total ownership interest in L between January 2, 1988 and
January 1, 1989 by only 25 percentage points (i.e., the total ownership
interest in L held by A and B at all times is not less than a 75 percent
interest), the total of their separate increases in the percentage stock
ownership of L, compared to their respective lowest percentage ownership
interests at any time during the testing period, is 55 percentage
points. Thus, an ownership change occurs as a result of A's acquisition
of L stock on January 1, 1989.
(d) Testing period--(1) In general. Except as otherwise provided in
paragraphs (d) and (m) of this section, the testing period for any
testing date is the three-year period ending on the testing date. See
paragraph (a)(2)(i) of this section for the definition of testing date.
(2) Effect of a prior ownership change. Following an ownership
change, the testing period for determining whether a subsequent
ownership change has occurred shall begin no earlier than the first day
following the change date of the most recent ownership change. See
paragraph (f)(19) of this section for the definition of change date.
(3) Commencement of the testing period--(i) In general. Except as
otherwise provided in paragraph (d)(3)(ii) of this section, the testing
period for any loss corporation shall not begin before the earlier of
the first day of either--
(A) The first taxable year from which there is a loss or excess
credit carryforward to the first taxable year ending after the testing
date, or
(B) The taxable year in which the testing date occurs.
(ii) Exception for corporations with net unrealized built-in loss.
Paragraph (d)(3)(i) of this section shall not apply if the corporation
has a net unrealized built-in loss (determined after application of
section 382(h)(3)(B)) on the testing date, unless the loss corporation
establishes the taxable year in which the net unrealized built-in loss
first accrued.
In that event, the testing period shall not begin before the earlier
of--
(A) The first day of the taxable year in which the net unrealized
built-in loss first accrued, or
(B) The day described in paragraph (d)(3)(i) of this section. See
section 382(h) for the definition of net unrealized built-in loss.
(4) Disregarding testing dates. Any testing date that occurs before
the beginning of the testing period shall be disregarded for purposes of
this section.
(5) Example.
Example. (i) A owns all 100 outstanding shares of L stock. A sells
40 shares to B on January 1, 1988. C purchases 20 shares of L stock from
A on July 1, 1991. In determining if an ownership change occurs on the
July 1, 1991 testing date, B's acquisition of L stock is disregarded
because it occurred before the testing period that ends on such testing
date. Thus, B's ownership interest in L does not increase during the
testing period, and no ownership change results from C's acquisition.
(ii) The facts are the same as in (i), except that throughout the
period during which B negotiated his stock purchase transaction with A,
B knew that C intended to attempt to acquire a significant stock
interest in L. Also, B and C have been partners in a number of
significant business ventures. The result is the same as in (i).
(e) Owner shift and equity structure shift--(1) Owner shift--(i)
Defined. For purposes of this section, an owner shift is any change in
the ownership of the stock of a loss corporation that affects
[[Page 458]]
the percentage of such stock owned by any 5-percent shareholder. See
paragraph (g) of this section for the definition of a 5-percent
shareholder. An owner shift includes, but is not limited to, the
following transactions:
(A) A purchase of disposition of loss corporation stock by a 5-
percent shareholder,
(B) A section 351 exchange that affects the percentage of stock
owned by a 5-percent shareholder,
(C) A redemption or a recapitalization that affects the percentage
of stock owned by a 5-percent shareholder,
(D) An issuance of loss corporation stock that affects the
percentage of stock owned by a 5-percent shareholder, and
(E) An equity structure shift that affects the percentage of stock
owned by a 5-percent shareholder.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded. Transfers of loss corporation stock between persons who are
not 5-percent shareholders of such corporation (and between members of
separate public groups resulting from the application of the segregation
rules of paragraphs (j)(2) and (3)(iii) of this section) are not owner
shifts and thus are not taken into account. See paragraph (h)(4)(xi) of
this section for a similar rule applicable to transfers of options.
(iii) Examples.
Example (1). A has owned all 1000 shares of outstanding L stock for
more than three years. On June 15, 1988, A sells 300 of his L shares to
B. This transaction is an owner shift. No other 5-percent shareholder
has increased his percentage ownership of L stock during the testing
period. Thus, the owner shift resulting from B's acquisition does not
result in an ownership change, because B has increased his stock
ownership in L by only 30 percentage points.
Example (2). The facts are the same as in Example (1). In addition,
on June 15, 1989, L issues 100 shares to each of C, D and AA. The stock
issuance is an owner shift. The transaction, however, does not result in
an ownership change, because B, C, D and AA (the 5-percent shareholders
whose stock ownership has increased as of the testing date, compared to
any other time during the testing period) have increased their
percentage of stock ownership in L by a total of only 46.2 percentage
points during the testing period (by 23.1 percentage points [300 shares/
1300 shares] for B, and 7.7 percentage points [100 shares/1300 shares]
for each of C, D and AA).
Example (3). All 1000 shares of L stock are owned by a group of 100
unrelated individuals, none of whom own as much as five percent of L
stock (``Public L''). Several of the members of Public L sell their L
stock, amounting to a 30 percent ownership interest in L, to B on June
15, 1988. The sale of stock to B is an owner shift. Between June 16,
1988 and June 15, 1989, each of the remaining individuals in Public L
sells his stock to another person who is not a 5-percent shareholder.
Under paragraph (e)(1)(ii) of this section, trading activity among the
members of Public L is disregarded and does not result in an owner
shift. On June 15, 1989, L issues 100 shares to each of C, D and AA. The
only sale transactions by members of Public L that are taken into
account in determining whether an ownership change occurs on June 15,
1989 are the sales to B on June 15, 1988. Because B, C, D and AA
together have increased their percentage ownership of L stock as a
result of B's purchase and the stock issuance by an amount not in excess
of 50 percentage points during the testing period ending on June 15,
1988, an ownership change does not occur on that date.
Example (4). The facts are the same as in Example (2). In addition,
on December 15, 1989, L redeems 200 of the L shares from A. The
redemption is an owner shift that results in an ownership change,
because B, C, D and AA are 5-percent shareholders whose percentage
ownership of L increase by a total of 54.6 percentage points during the
testing period (by 27.3 percentage points [300 shares/1100 shares] for B
and 9.1 percentage points [100 shares/1100 shares] for each of C, D and
AA).
Example (5). L is owned entirely by 10,000 unrelated shareholders,
none of whom owns as much as five percent of the stock of L (``Public
L''). Accordingly, Public L is L's only 5-percent shareholder. See
paragraph (j)(1) of this section. There are one million shares of common
stock outstanding. On December 1, 1988, L issues two million new shares
of its common stock to members of the public, none of whom owned any L
stock prior to the issuance. Following the public offering, no
shareholder of L owns, directly or indirectly, five percent or more of L
stock. Under paragraph (j)(2) of this section, however, all of the newly
issued stock is treated as acquired by a 5-percent shareholder (``Public
NL'') that is unrelated to Public L. Therefore, the public offering
constitutes an owner shift that results in an ownership change because
Public NL's percentage of stock ownership in L increased by 66\2/3\
percentage points (two million shares acquired in the public offering/
three million shares outstanding following the offering) over its lowest
percentage ownership during
[[Page 459]]
the testing period (0 percent prior to the offering).
Example (6). The facts are the same as in Example (5), except that L
issues only 500,000 new shares of L stock on December 1, 1988, and
Public NL's percentage ownership interest in L increases by only 33\1/3\
percentage points (500,000 shares acquired in the public offering/1.5
million shares outstanding following the offering). During the two years
following December 2, 1988, 14 percent of the stock outstanding on that
date is sold over a public stock exchange. On December 3, 1990, A
purchases five percent of L stock (75,000 shares) over a public stock
exchange. The purchase of five percent of L stock by A is an owner shift
and is presumed to have been made proportionately from Public L and
Public NL under paragraph (j)(1)(vi) of this section. Under paragraph
(e)(1)(ii) of this section, transfers of L stock in transactions not
involving A (i.e., in transactions among or between members of separate
public groups resulting from the application of paragraphs (j)(2) and
(3) of this section) are not taken into account, and do not constitute
owner shifts. (Transfers between members of Public NL and Public L,
which are treated as separate 5-percent shareholders solely by virtue of
paragraph (j)(2) of this section, are disregarded even if L has actual
knowledge of any such transfers.) A and Public NL, the only 5-percent
shareholders whose interests in L have increased during the testing
period, have increased their respective stock ownership by only 36\2/3\
percentage points--five percentage points for A [75,000 shares/1.5
million shares outstanding] and 31\2/3\ percentage points for Public NL
[((500,000 shares issued in the public offering)--(5 percent x 500,000
shares presumed to have been acquired by A)) /1.5 million shares
outstanding]. Accordingly, there is no ownership change with respect to
L notwithstanding that, taking into account the public trading, a change
of more than 50 percentage points in the ultimate beneficial ownership
of L stock occurred during the three-year period ending on the December
3, 1990 testing date.
Example 7. The facts are the same as in Example 6, except that five
percent of the L stock has always been owned by P which, in turn, has
always been owned by Public P. On December 6, 1990, P sells all of its L
stock over a public stock exchange. Although the trading of P stock
among persons that are not 5-percent share-holders (without regard to
the segregation rules of paragraph (j) of this section) are disregarded
under paragraph (e)(1)(ii) of this section, the disposition of the L
stock by P is not disregarded because the L stock is transferred in a
transaction that is subject to paragraph (j)(3)(i) of this section.
(2) Equity structure shift--(i) Tax-free reorganizations. An equity
structure shift is any reorganization within the meaning of section 368
with respect to which the loss corporation is a party to the
reorganization, except that such term does not include a reorganization
described in--
(A) Section 368(a)(1)(D) or (G) unless the requirements of section
354(b)(1) are met, or
(B) Section 368(a)(1)(F).
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts. [Reserved]
(iii) Overlap of owner shift and equity structure shift. Any equity
structure shift that affects the percentage of loss corporation stock
owned by a 5-percent shareholder also constitutes an owner shift. See
paragraph (e)(i)(E) of this section
(iv) Examples.
Example (1). A owns all of the stock of L and B owns all of the
stock of P. On October 13, 1988, L merges into P in a reorganization
described in section 368a(1)(A). As a result of the merger, A and B own
25 and 75 percent, respectively, of the stock of P. The merger is an
equity structure shift (and, because it affects the percentage of L
stock owned by 5-percent shareholders, it also constitutes an owner
shift). On the October 13, 1988 testing date, B is a 5-percent
shareholder whose stock ownership in the loss corporation following the
merger has increased by 75 percentage points over his lowest percentage
of stock ownership in L at any time during the testing period (0 percent
prior to the merger). Accordingly, an ownership change occurs as a
result of the merger. P is thus a new loss corporation and L's pre-
change losses are subject to limitation under section 382.
Example (2). (i) A owns 100 percent of L1 stock and B
owns 100 percent of L2 stock. On January 1, 1988,
L1 merges into L2 in a reorganization described in
section 368(a)(1)(A). Immediately after the merger, A and B own 40
percent and 60 percent, respectively, of the L2 stock. There
is an equity structure shift (as well as an owner shift) with respect to
both L1 and L2 on January 1, 1988.
(ii) Because the percentage of L2 stock owned by B
immediately after the merger (60 percent) increases by more than 50
percentage points over the lowest percentage of the stock of
L1 owned by B during the testing period (0 percent prior to
the merger), there is an ownership change with respect to L1.
L2 is a new loss corporation and thus, under Sec. 1.382-
2(a)(1)(iii) of this section, the pre-change losses of L1
must be accounted for
[[Page 460]]
separately by L2 from the losses of L2
(immediately before the ownership change) and are subject to limitation
under section 382. See Sec. 1.382-2(a)(1)(iv) of this section for rules
that end separate accounting for L1's pre-change losses on
any testing date occurring on or after January 29, 1991.
(iii) L2 is a new loss corporation because it is a
successor corporation to L1. There is no ownership change
with respect to L2, however, because A's stock ownership in
L2 increased by only 40 percentage points (to 40 percent)
over the amount owned by A prior to the merger (0 percent). Therefore,
the pre-change losses of L2 are not limited under section 382
as a result of the merger.
Example (3). The result in Example (2) would be the same if
L1 had survived the merger (i.e., L2 merged into
L1) with A and B owning 40 and 60 percent, respectively, of
L1 stock. L1's pre-change losses would be
accounted for separately and limited under section 382 and the pre-
change losses of 2 would be accounted for separately under
Sec. 1.382-2(a)(1)(iii) of this section, but would not be limited under
section 382. See Sec. 1.382-2(a)(1)(ii) for the treatment of
2 following the transaction.
Example (4). The facts are the same as Example (2), except, instead
of acquiring 1 in a merger, 2 acquires all of the
1 stock from A on January 1, 1988, solely in exchange for
stock representing a 40 percent interest in 2, in a
reorganization described in section 368(a)(1)(B). The acquisition of
stock by 2 is an equity structure shift (as well as an owner
shift) with respect to 1 that results in an ownership change
with respect to 1 because the percentage of 1
stock owned by B immediately after the reorganization (60 percent, by
virtue of B's ownership of 2, through the operation of the
constructive ownership rules of paragraph (h) of this section) increases
by more than 50 percentage points over the lowest percentage of
1 stock owned by B at any time during the testing period (0
percent prior to the reorganization). The acquisition also results in an
equity structure shift and an owner shift with respect to 2,
but 2 incurs no ownership change, because A's stock ownership
in 2 increased by only 40 percentage points over the
percentage of 2 stock owned by A prior to the reorganization
(0 percent).
(f) Definitions. For purposes of this section--
(1) Loss corporation. See section 382 and Sec. 1.382-2(a)(1) for
the definition of a loss corporation.
(2) Old loss corporation. The term old loss corporation means any
corporation with respect to which there is an ownership change and that
was a loss corporation immediately before the ownership change.
(3) New loss corporation. The term new loss corporation means a
corporation with respect to which there is an ownership change if,
immediately after such change, it is a loss corporation. A successor
corporation to the corporation described in the preceding sentence also
is a new loss corporation.
(4) Successor corporation. See Sec. 1.382-2(a)(5) for the
definition of successor corporation.
(5) Predecessor corporation. See Sec. 1.382-2(a)(6) for the
definitions of predecessor corporation.
(6) Shift. As the context may require, a shift means an equity
structure shift, an owner shift or both.
(7) Entity. See Sec. 1.382-3(a)(1) for the definition of an entity.
(8) Direct ownership interest. A direct ownership interest means the
interest a person owns in an entity, including a loss corporation,
without regard to the constructive ownership rules of paragraph (h) of
this section.
(9) First tier entity. A first tier entity is an entity that, at any
time during the testing period, owns a five percent or more direct
ownership interest in the loss corporation.
(10) 5-percent owner. A 5-percent owner is any individual that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or a higher tier entity. See
paragraph (g) of this section for rules to determine whether, as a
result of the constructive ownership rules of paragraph (h) of this
section, a 5-percent owner is a 5-percent shareholder.
(11) Public shareholder. A public shareholder is any individual,
entity, or other person with a direct ownership interest in a loss
corporation of less than five percent at all times during the testing
period.
(12) Public owner. A public owner is any individual, entity, or
other person that, at all times during the testing period, owns less
than a five percent direct ownership interest in a first tier entity or
any higher tier entity.
(13) Public group. A public group is a group of individuals,
entities, or other persons each of whom owns, directly or
constructively, less than five percent of the loss corporation. See
paragraphs (g) and (j) of this section for the rules
[[Page 461]]
applicable to identify public groups and to determine whether a public
group is a 5-percent shareholder.
(14) Higher tier entity. A higher tier entity is any entity that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or in any higher tier entity.
(15) Indirect ownership interest. An indirect ownership is an
interest a person owns in an entity determined solely as a result of the
application of the constructive ownership rules of paragraph (h) of this
section and without regard to any direct ownership interest (or other
beneficial ownership interest) in the entity.
(16) Highest tier entity. A highest tier entity is a first tier
entity or a higher tier entity that is not owned, in whole or in part,
at any time during the testing period by a higher tier entity.
(17) Next lower tier entity. The next lower tier entity with respect
to a first tier entity is the loss corporation. The next lower tier
entity with respect to a higher tier entity is any first tier entity or
other higher tier entity in which the higher tier entity owns, at any
time during the testing period, a five percent or more direct ownership
interest.
(18) Stock--(i) In general. For further guidance, see Sec. 1.382-
2(a)(3)(i).
(ii) Treating stock as not stock. Any ownership interest that
otherwise would be treated as stock under paragraph (f)(18)(i) of this
section shall not be treated as stock if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder, the likely participation of such interest in future
corporate growth is disproportionately small when compared to the value
of such stock as a proportion of the total value of the outstanding
stock of the corporation,
(B) Treating the interest as not constituting stock would result in
an ownership change, and
(C) The amount of the pre-change loss (determined as if the testing
date were the change and treating the amount of any net unrealized
built-in loss as a pre-change loss) is more than twice the amount
determined by multiplying
(1) the value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) the long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
Stock that is not treated as stock under this paragraph (f)(18)(ii),
however, is taken into account for purposes of determining the value of
the loss corporation under section 382(e).
(iii) Treating interests not constituting stock as stock. Any
ownership interest that would not be treated as stock under paragraph
(f)(18)(i) of this section (other than an option that is subject to
paragraph (h)(4) of this section) shall be treated as constituting stock
if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder (or a person who would be a 5-percent shareholder if
the interest not constituting stock were treated as stock), such
interest offers a potential significant participation in the growth of
the corporation,
(B) Treating the interest as constituting stock would result in an
ownership change, and
(C) The amount of the pre-change losses (determined as if the
testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is more than twice the
amount determined by multiplying
(1) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
An ownership interest is that treated as stock under this paragraph
(f)(18)(iii) is taken into account for purposes of determining the value
of the loss corporation under section 382(e). See Sec. 1.382-4(d)(12)
for rules that apply with respect to options and this paragraph
(f)(18)(iii).
(iv) Stock of the loss corporation. The stock of the loss
corporation means stock of such corporation within the meaning of this
paragraph (f)(18) and, as the
[[Page 462]]
context may require, includes any indirect ownership interest in the
loss corporation.
(19) Change date. The change date means the date on which a shift
(or any other transaction described in paragraph (a)(2)(i) of this
section) that is the last component of an ownership change occurs.
(20) Year. A year, or any multiple thereof, means a 365-day period
(or a 366-day period in the case of a leap year), or any multiple
thereof, unless the year is specifically identified as a taxable year.
(21) Old section 382. ``Old section 382'' means section 382, as in
effect prior to the effective date of section 382 in the Tax Reform Act
of 1986 (the ``Act''), but taking into account section 621(f)(2) of the
Act.
(22) Pre-change loss. See section 382 and Sec. 1.382-2(a)(2) for
the definition of pre-change loss.
(23) Unrelated. Any two persons are unrelated if the constructive
ownership rules of paragraph (h) of this section do not apply to treat
either person as owning stock that is owned, directly or constructively,
by the other person.
(24) Percentage ownership interest. A person's percentage ownership
interest in--
(i) A corporation shall be determined under the rules of this
section that are applicable to the determination of a shareholder's
percentage stock ownership interest in a loss corporation (see
paragraphs (f)(18)(i) through (iii) of this section),
(ii) A partnership shall be equal to the relative fair market value
of such person's partnership interest to the total fair market value of
all outstanding partnership interests, determined without regard to any
limited and preferred partnership interest that is described in
paragraph (h)(2)(ii)(C) of this section,
(iii) A trust shall be determined in accordance with the principles
of section 318(a)(2)(B) for determining the constructive ownership of
stock,
(iv) An estate shall be determined in accordance with the principles
of section 318(a)(2)(A) for determining the constructive ownership of
stock, and
(v) All other entities shall be determined by reference to the
person's relative economic interest in the entity, taking into account
all of the relevant facts and circumstances.
(g) 5-percent shareholder--(1) In general. Subject to the rules of
paragraphs (k)(2) and (4) of this section, the term 5-percent
shareholder means--
(i) An individual that owns, at any time during the testing period,
(A) A direct ownership interest in the stock of the loss corporation
of five percent or more or
(B) An indirect ownership interest in the stock of the loss
corporation of five percent or more by virtue of an ownership interest
in any one first tier entity or higher tier entity,
(ii) A public group, of either a first tier entity or a higher tier
entity, identified as a 5-percent shareholder under paragraph
(j)(1)(iv)(A) or (B) of this section,
(iii) A public group of the loss corporation identified as a 5-
percent shareholder under paragraph (j)(1)(iv)(C) of this section, and
(iv) A public group, of the loss corporation, a first tier entity or
a higher tier entity, identified as a 5-percent shareholder under
paragraph (j)(2) or (3) of this section. An individual owning five
percent or more of the stock of the loss corporation at any time during
the testing period is a 5-percent shareholder notwithstanding that the
individual may own less than five percent of the stock of the loss
corporation on the testing date. See paragraph (g)(5)(i)(B) of this
section for rules permitting a loss corporation to make an adjustment in
cases described in the preceding sentence.
(2) Determination of whether a person is a 5-percent shareholder.
Except as provided in paragraphs (k)(2) and (4) of this section, a
person shall be treated as constructively owning stock of the loss
corporation pursuant to paragraph (h)(2) of this section only if the
loss corporation stock is attributed to such person in the person's
capacity as a higher tier entity or a 5-percent owner of the first tier
entity or higher tier entity from which such stock is attributed. See
paragraph (k)(3) of this section for rules explaining the extent of the
obligation of the loss corporation to determine the identity of its 5-
percent shareholders. Nothing in this
[[Page 463]]
paragraph (g)(2), however, shall limit the attribution of loss
corporation stock under section 318(a)(2) and paragraph (h) of this
section to a public owner.
(3) Determination of the percentage stock ownership interest of a 5-
percent shareholder. Subject to the rules of paragraphs (k)(2) and (4)
of this section, in determining a 5-percent shareholder's percentage
ownership interest in the loss corporation, the shareholder's direct
ownership interest, if any, and each indirect ownership interest that he
may have in the loss corporation in his capacity as a 5-percent owner of
any one first tier entity or higher tier entity, if any, are required to
be added together and taken into account with respect to such
shareholder only to the extent that each such direct or indirect
ownership interest constitutes five percent or more of the stock of the
loss corporation.
(4) Examples.
Example (1) (i) Twenty percent of L stock is owned by A, 10 percent
is owned by P1, 20 percent is owned by E, a joint venture,
and the remaining 50 percent of L stock is owned by Public L.
P1 is owned 15 percent by B and 85 percent by Public
P1. E is owned 30 percent by P2 and 70 percent by
P3, which, in turn, are owned by Public P2 and
Public P3, respectively.
(ii) The ownership structure of L is illustrated by the following
chart:
[GRAPHIC] [TIFF OMITTED] TC17OC91.002
(iii) P1 and E, each of which has a direct ownership
interest in L of five percent or more, are first tier entities. The
shareholders with direct ownership interests in L who individually own
less than five percent of L are public shareholders (Public L). B, who
has a direct ownership interest of five percent or more in
P1, is a 5-percent owner of
[[Page 464]]
P. P2 and P3, and P3, each of which has
a direct ownership interest in a first tier entity (E) of five percent
or more, are higher tier entities with respect to L and, because neither
entity is owned at any time during the testing period by a higher tier
entity, they also are highest tier entities. The shareholders of
P2 and P3 (Public P2 and Public
P3, respectively) are public owners of such entities, because
none of those shareholders own five percent or more of either entity at
any time during the testing period.
(iv) A, who has a 20 percent direct ownership interest in L, is a 5-
percent shareholder of L. Because, by application of the constructive
ownership rules of paragraph (h) of this section, B owns only 1.5
percent of L stock in his capacity as a 5-percent owner of P1
(15 percent ownership of P1 x 10 percent ownership of L), B
is not a 5-percent shareholder of L, even though he is a 5-percent owner
of P1. Under the rules of paragraph (j) of this section,
therefore, B is treated as a member of Public P1. See Example
(3) of paragraph (j)(1)(vi) of this section for a determination of which
public owners and public shareholders constitute public groups that are
treated as 5-percent shareholders of L.
Example (2) (i) The facts are the same as in Example (1), except
that P3 is owned 60 percent by C, 30 percent by
P4, and 10 percent by Public P3. The stock of
P4 is owned by a group of persons (Public P4),
none of whom own five percent or more of the stock of P4.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 465]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.003
(iii) The defined terms are the same as in Example (1), except that
P3 is a higher tier entity, not a highest tier entity,
because five percent or more of P3 is, in turn, owned by
another entity (P4 ). P4, which owns five percent
or more of a higher tier entity (P3), also is a higher tier
entity and, because it is not owned at any time during any testing
period by any entity that is also a higher tier entity, P4 is
a highest tier entity. All of the shareholders of P4, none of
which own a direct ownership interest of five percent or more in
P4, are public owners of P4.
(iv) C is a 5-percent owner of P3 and, under the
constructive ownership rules of paragraph (h) of this section, C
indirectly owns 8.4 percent of L ([60 percent ownership of
P3] x [70 percent ownership of E] x [20 percent ownership of
L]), in his capacity as a 5-percent owner of P3. B is a 5-
percent owner of P1 and, under the constructive ownership
rules of paragraph (h) of his section, B owns 1.5 percent of L ([15
percent ownership of P1] x [10 percent ownership of L]) in
his capacity as a 5-percent owner of P1. Therefore, C is a 5-
percent shareholder of L, but B is not a 5-percent shareholder of L,
even though he is a 5-percent owner of P1. See Example (4) of
[[Page 466]]
paragraph (j)(1)(vi) of this section for a determination of which public
owners and public shareholders constitute public groups that are treated
as separate 5-percent shareholders of L.
Example (3) (i) L is owned 30 percent by A and 70 percent by P. A
owns six percent of P stock and the balance (94 percent) is owned
equally by 500 unrelated shareholders (``Public P'').
(ii) A is a 5-percent shareholder because he directly owns 30
percent of L. Even though A is a 5-percent owner of P, A's 4.2 percent
indirect ownership interest in L (six percent ownership interest in P x
P's 70 percent ownership of L) is generally not taken into account in
determining A's ownership interest, because such indirect ownership
interest is less than five percent. Instead, A's 4.2 percent indirect
interest is treated under paragraph (j)(1)(iv) of this section as owned
by Public P. If, however, L has actual knowledge of A's less-than-five-
percent indirect ownership interest in L and is thus subject to
paragraph (k)(2) of this section, or paragraph (k)(4) of this section
otherwise applies, L must take A's total 34.2 percent ownership interest
into account in determining A's percentage ownership in L.
Example (4). The facts are the same as in Example (3), except that A
owns ten percent of P's stock. Because A's indirect ownership interest
in L in his capacity as a 5-percent owner of P is five percent or more,
both A's 30 percent direct ownership interest in L and his seven percent
indirect ownership interest in L (10 percent ownership interest in P x
P's 70 percent ownership of L) are taken into account in determining his
ownership interest in L, without regard to L's actual knowledge or
whether paragraph (k)(4) of this section applies.
Example 5 See Sec. 1.382-3(a)(1)(ii) for additional examples with
respect to the definition of an entity.
(5) Stock ownership presumptions in connection with certain
acquisitions, and dispositions of loss corporation stock--(i) In
general. For purposes of this section--
(A) If an individual owns less than five percent of the stock of a
loss corporation during the testing period (excluding the testing date)
and acquires an amount of such stock so that the individual becomes a 5-
percent shareholder on the testing date, the loss corporation may treat
any interest in the loss corporation owned by such individual prior to
that acquisition as owned by a public group during the period of such
individual's ownership of that interest and as not owned by the 5-
percent shareholder during the same period, and
(B) If a 5-percent shareholder's percentage ownership interest in
the loss corporation is reduced to less than five percent, the loss
corporation may presume that the remaining stock owned by such 5-percent
shareholder immediately after such reduction is the stock owned by such
shareholder for each subsequent testing date having a testing period
that includes the date on which the reduction occurred as long as such
shareholder continues to own less than five percent of the stock of the
loss corporation. In that event, such ownership interest shall be
treated as owned by a separate public group for purposes of the rules of
paragraph (j)(2)(vi) of this section.
(ii) Example.
standing. All of the L stock is owned equally by 40 unrelated,
individual shareholders, including A (who owns 2.5 percent of L stock).
Because no person owns as much as five percent of L stock, Public L is
the only 5-percent shareholder of L. See paragraph (j)(1) of this
section. A purchases 5,000 shares of L stock over a public stock
exchange on June 8, 1989. The purchase is an owner shift. When added to
his ownership interest before that date (the testing date), A owns 7,500
shares of L stock (7.5 percent). Under paragraph (g)(5)(i)(A) of this
section, L may treat A and Public L as having owned 0 percent and 100
percent, respectively, at all times prior to June 8, 1989 (rather than
having owned 2.5 percent by A and 97.5 percent by Public L, even if L
has actual knowledge of A's less than five percent ownership interest).
The increase in A's stock ownership of L as of June 8, 1989 thus would
be 7.5 percentage points, rather than 5.0 percentage points, for
purposes of determining whether an ownership change occurs on that
testing date and any subsequent testing date.
(h) Constructive ownership of stock--(1) In general. Subject to
certain modifications set forth in this section and section 382(l)(3),
the constructive ownership rules of section 318(a) generally apply for
purposes of determining ownership of loss corporation stock.
(2) Attribution from corporations, partnerships, estates and
trusts--(i) In general. Stock owned (directly or indirectly) by an
entity shall be attributed to its owners--
[[Page 467]]
(A) Except as otherwise provided in this section, by treating the
stock attributed pursuant to section 318(a)(2) as no longer being owned
by the entity from which it is attributed, and
(B) If attribution is from a corporation, without regard to the 50
percent stock ownership limitation contained in section 318(a)(2)(C).
(ii) Limitation on attribution from entities with respect to certain
interests. Section 318(a)(2) shall not apply to treat the stock of the
loss corporation that is owned directly by a first tier entity (or
indirectly by any higher tier entity) as being indirectly owned by any
person that has an ownership interest in the first tier entity (or any
higher tier entity) to the extent that such interest is (or is
attributable to)--
(A) Stock of any such entity that is described in section
1504(a)(4),
(B) Any ownership interest in any such entity that does not
constitute stock under paragraph (f)(18)(ii) of this section, or
(C) If the entity is not a corporation, any ownership interest in
any such entity that has characteristics similar to the interests
described in paragraph (h)(2)(ii)(A) or (B) of this section.
The ownership interests described in this paragraph (h)(2)(ii) shall not
be taken into account in determining a person's percentage ownership
interest in an entity under paragraph (f)(24) of this section.
(iii) Limitation on attribution from certain entities. For purposes
of this section, except as provided in paragraphs (k)(2) and (4) of this
section, each of the following shall be treated as an individual who is
unrelated to any other owner (direct or indirect) of the loss
corporation--
(A) Any entity other than a higher tier entity that owns five
percent or more of the loss corporation stock (determined without regard
to paragraph (h)(2)(i)(A) of this section) on a testing date, a first
tier entity or the loss corporation,
(B) A qualified trust described in section 401(a),
(C) Any State, any possession of the United States, the District of
Columbia, the United States (or any agency or instrumentality thereof),
any foreign government, or any political subdivision of any of the
foregoing, and
(D) Any other person designated by the Internal Revenue Service in
the Internal Revenue Bulletin.
Stock of a loss corporation that is owned by any such person shall thus
not be attributed to any other person for purposes of this section. See
paragraph (g)(2) of this section limiting attribution from a first tier
entity or a higher tier entity to any person that is not a 5-percent
owner or a higher tier entity.
(iv) Examples.
Example (1). All the stock of L is owned by A. B and C respectively
own 70 and 30 percent of the outstanding P stock. P acquires 60 percent
of the outstanding L stock from A on July 1, 1988 (a testing date).
After the acquisition, P is a first tier entity and a higher tier entity
of L. B and C are each 5-percent owners of P and also are 5-percent
shareholders of L having a 42 percent and 18 percent stock ownership
interest in L, respectively, through the operation of the constructive
ownership rules of paragraph (h) of this section. Because B and C
together have increased their ownership in L by more than 50 percentage
points during the testing period ending on the testing date (60 percent
on the testing date and 0 percent prior thereto), an ownership change
occurs with respect to L on July 1, 1988.
Example (2). The facts are the same as in Example (1), except that B
and C are not shareholders in a corporation, but instead are partners in
a general partnership, E. B and C respectively own 70 percent and 30
percent of E. E acquires 60 percent of the L stock on July 1, 1988. The
results are the same as in Example (1).
Example (3). The facts are the same as in Example (1), except that
the acquisition is accomplished in a transaction that qualifies under
section 351(a). In that transaction, HC is formed through (i) a
contribution of money by P in exchange for 60 shares of HC common stock
and (ii) a contribution of all the outstanding shares of L stock plus
cash by A in exchange for 40 shares of HC common stock and 30 shares of
HC preferred stock that is described in section 1504(a)(4). The
respective values of each share of HC stock, common and preferred, are
equal. The stock of L is attributed to A through his interest in HC
common stock, but not through his interest in HC preferred stock (see
paragraph (h)(2)(ii)(A) of this section). Thus, A is treated as owning
indirectly only 40 percent of L. B and C are 5-percent shareholders of L
having indirect ownership interests in L of 42 percent and 18 percent,
respectively, through their ownership of HC common stock. The
[[Page 468]]
results are therefore the same as in Example (1).
(3) Attribution to corporations, partnerships, estates and trusts.
Except as otherwise provided by regulation under section 382 or by the
Internal Revenue Service in the Internal Revenue Bulletin, the rules of
section 318(a)(3) shall not apply in determining the ownership of stock
under this section.
(4) Option attribution--(i) In general. Solely for the purpose of
determining whether there is an ownership change on any testing date,
stock of the loss corporation that is subject to an option shall be
treated as acquired on any such date, pursuant to an exercise of the
option by its owner on that date, if such deemed exercise would result
in an ownership change. The preceding sentence shall be applied
separately with respect to--
(A) Each class of options (i.e., options with terms that are
identical, issued by the same issuer, and issued on the same date) owned
by each 5-percent shareholder (or person who would be a 5-percent
shareholder if the option were treated as exercised), and
(B) Each 5-percent shareholder, each owner of an option who would be
a 5-percent shareholder if the option were treated as exercised, and
each combination of such persons.
(ii) Examples.
Example (1). (i) A owns all of the 100 shares of outstanding L
stock. A grants options for the purchase of his L stock, exercisable for
10 years from the date of issuance, in the following transactions: An
option to B for four shares (issued January 1, 1988), an option to C for
six shares (issued June 1, 1989), and an option to D for 15 shares
(issued July 30, 1989). On July 30, 1990, A sells 41 shares of his L
stock to BB.
(ii) Pursuant to paragraph (a)(2)(i) of this section, the date on
which each option is acquired is a testing date. The issuance of options
to acquire L stock to each of B, C, and D is not treated as an
acquisition of the underlying stock on any such testing date since such
treatment with respect to any one of the option owners (or any
combination thereof) would not have resulted in an ownership change on
any of those testing dates.
(iii) The date on which BB acquires 41 shares also is a testing
date. BB's acquisition of 41 percent of the L stock, taken together with
the shift in ownership that would result if the options held by B, C and
D were exercised, would result in an ownership change, because the stock
owned or treated as owned by Public L (a group including only B, the
sole shareholder who owns less than five percent of L stock), C, D and
BB would have increased by 66 percentage points (four, six, 15, and 41
percentage points, respectively) during the testing period. Subject to
paragraph (h)(4)(ix) of this section, the options are treated as
exercised and an ownership change occurs on July 30, 1990, pursuant to
paragraph (h)(4)(i) of this section. Accordingly, no new testing period
can begin before July 31, 1990. Under paragraph (h)(4)(x)(F) of this
section, the option attribution rules of paragraph (h)(4)(i) of this
section shall not be applicable with respect to any of the options owned
by B, C, and D immediately before the ownership change until such time,
if any, that such options are transferred to (or by) 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised). In addition, the subsequent exercise of any of
those options by A, B, or C (the persons owning such options immediately
before the ownership change) is disregarded. See paragraph (h)(4)(vi) of
this section. Also see paragraph (h)(4)(viii) of this section for the
treatment of options that lapse or are forfeited.
(iv) The facts are the same as in (i), except that the sale of A's
41 shares of L stock to BB occurs on July 30, 1995. Because the options
are treated as exercised and the related stock is treated as acquired on
the July 30, 1995 testing date, the results are the same as described in
(iii).
Example (2) (i) A owns all of the outstanding 100 shares of the
stock of L. On July 22, 1988, the value of A's stock in L is $500 and
the following agreements are entered into: (i) A sells 40 shares of his
L stock to B for $200, (ii) in exchange for $10, A grants B an option to
acquire the balance of his L stock for $305 at any time before July 22,
1992, and (iii) L grants A an option to acquire 100 shares of L stock at
a price of $600 exercisable until such time as B's option is no longer
outstanding.
(ii) If the stock subject to the options owned by both A and B were
treated as acquired on the July 22, 1988 testing date, B would have
increased his ownership interest in L by only 50 percentage points to 50
percent ([40 shares purchased + 60 shares acquired pursuant to the
option]/200 outstanding shares of L stock, including 100 shares deemed
outstanding pursuant to the option issued to A by L) as compared with 0
percent prior to July 22, 1988. In determining whether the options with
respect to the stock of L would, if exercised, result in an ownership
change, paragraph (h)(4)(i)(B) of this section requires that such
options be treated as exercised separately with respect to each 5-
percent shareholder, each person who would be a 5-percent shareholder if
the option were treated as exercised or each
[[Page 469]]
combination of such persons. Therefore, by treating the option owned by
A as not having been exercised and the option owned by B as having been
exercised, B's interest in L increases by 100 percentage points during
the testing period. An ownership change with respect to L therefore
results from the transactions occurring on July 22, 1988.
(iii) Contingencies. Except as provided in paragraph (h)(4)(x)(D) of
this section, the extent to which an option is contingent or otherwise
not currently exercisable shall be disregarded for purposes of this
section.
(iv) Series of options. For purposes of this section, an option to
acquire an option with respect to the stock of the loss corporation, and
each one of a series of such options, shall be considered as an option
to acquire such stock.
(v) Interests that are similar to options. For purposes of this
section,
(A) An interest that is similar to an option includes, but is not
limited to, a warrant, a convertible debt instrument, an instrument
other than debt that is convertible into stock, a put, a stock interest
subject to risk of forfeiture, and a contract to acquire or sell stock,
and
(B) Any such interest shall be treated as an option.
(vi) Actual exercise of options--(A) In general. The actual exercise
of any option in existence immediately before and after an ownership
change, whether or not the option was treated as exercised in connection
with the ownership change under paragraph (h)(4)(i) of this section,
shall be disregarded for purposes of this section, but only if the
option is exercised by the 5-percent shareholder (or person who would
have been a 5-percent shareholder if the options owned by such person
had been exercised immediately before the ownership change) who owned
the option immediately before and after such ownership change.
(B) Actual exercise within 120 days of deemed exercise. If the
actual exercise of an option occurs on or before the end of the period
which is 120 days after the date on which the option is treated as
exercised under paragraph (h)(4)(i) of this section, the loss
corporation may elect to treat paragraphs (h)(4)(i) and (vi)(A) of this
section as not applying to such option and take into account only the
acquisition of loss corporation stock resulting from the actual exercise
of the option. An election under this paragraph (h)(4)(vi)(B) shall have
no effect on the determination of whether an ownership change occurs,
but shall apply only for the purpose of determining the date on which
the change date occurs. An election under this paragraph (h)(4)(vi)(B)
shall be made in the statement described in paragraph (a)(2)(ii) of this
section.
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation--(A) Right or obligation to issue stock. Solely
for purposes of determining whether an ownership change has occurred
under paragraph (h)(4)(i) of this section, the deemed exercise of an
option with respect to unissued stock (or treasury stock) of a
corporation shall result in a corresponding increase in the amount of
its total outstanding stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation. Solely for purposes of determining whether an ownership
change has occurred under paragraph (h)(4)(i) of this section, the
deemed exercise of a right to transfer outstanding stock to the issuing
corporation (or a right of the issuing corporation to acquire its stock)
shall result in a corresponding decrease in the amount of its total
outstanding stock.
(C) Effect on value of old loss corporation. The deemed exercise of
an option with respect to unissued stock (or treasury stock) under
paragraph (h)(4)(i) of this section shall have no effect on the
determination of the value of the old loss corporation and the
computation of the section 382 limitation. See section 382(l)(1)(B)
disregarding capital contributions made during the two-year period
preceding the change date for purposes of computing the section 382
limitation.
(viii) Options that lapse or are forfeited. If an option that is
treated as exercised under paragraph (h)(4)(i) of this section lapses
unexercised or the owner of such option irrevocably forfeits his right
to acquire stock pursuant to the option, the option shall be treated for
purposes of this section as if it never had been issued. In that case,
the loss
[[Page 470]]
corporation may file an amended return for prior years (subject to any
applicable statute of limitations) if the section 382 limitation was
thus inapplicable. If paragraph (h)(4)(i) of this section applied to an
option (or options) with respect to a taxable year for which an income
tax return has not been filed by the date that the option (or options)
lapses or is irrevocably forfeited, the loss corporation may treat
paragraph (h)(4)(i) of this section as inapplicable to such option (or
options).
(ix) Option rule inapplicable if pre-change losses are de minimis.
Paragraph (h)(4)(i) of this section shall not apply to treat the stock
of the loss corporation as acquired by the owner of an option if, on a
testing date, the amount of pre-change losses (determined as if the
testing date were a change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is less than twice the
amount determined by multiplying.
(A) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(B) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
(x) Options not subject to attribution. Paragraph (h)(4)(i) of this
section shall not apply to--
(A) Long-held options with respect to actively traded stock. Any
option with respect to stock of the loss corporation which stock is
actively traded on an established securities market (within the meaning
of section 1273(b)) for which market quotations are readily available,
if such option has been continuously owned by the same 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised) for at least three years, but only until the
earlier of such time as--
(1) The option is transferred by or to a 5-percent shareholder (or a
person who would be a 5-percent shareholder if such option were
exercised), or
(2) The fair market value of the stock that is subject to the option
exceeds the exercise price for such stock on the testing date. For
purposes of this paragraph (h)(4)(x)(A), options with respect to the
stock of a loss corporation that are assumed (or substituted) in a
reorganization and converted into options with respect to the stock of
another party to the reorganization shall not be treated as transferred,
provided that there are no changes in the terms of the options, other
than that the stock that may be acquired pursuant to the option is that
of another party to the reorganization and that the amount of stock
subject to the option is adjusted only to reflect the exchange ratio for
the exchange of stock of the loss corporation in the reorganization.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt. Any right to receive or
obligation to issue stock pursuant to the terms of a debt instrument
that, in economic terms, is equivalent to nonconvertible debt because
the right to receive stock of the issuer of a fixed dollar amount is
based upon the fair market value for such stock determined at or about
the date the stock is transferred pursuant to such right or obligation
(i.e., the amount of the stock transferred pursuant to the option is
equal to a fixed dollar amount, divided by the value of each share of
such stock at or about the date of the stock transfer). This paragraph
(h)(4)(x)(B) shall not apply if the method for determining the fair
market value of the stock of the issuer is intended to or, in fact,
provides the owner of the debt instrument with a participation in any
appreciation of any stock of the issuer.
(C) Right or obligation to redeem stock of the loss corporation. Any
right or obligation of the loss corporation to redeem any of its stock
at the time such stock is issued, but only to the extent such stock is
issued to persons who are not 5-percent shareholders immediately before
the issuance.
(D) Options exercisable only upon death, disability or mental
incompetency. Any option entered into between owners of the same entity
(or an owner and the entity in which the owner has a direct ownership
interest) with respect to such owner's ownership interest in the entity
that is exercisable only upon the death, complete disability or mental
incompetency of such owner.
(E) Right to receive or obligation to issue stock as interest or
dividends. Any
[[Page 471]]
right to receive or obligation to issue stock of a corporation in
payment of interest or dividends by the issuing corporation. (For an
example illustrating this exception, see paragraph (j)(2)(iv)(B) of this
section.)
(F) Options outstanding following an ownership change--(1) In
general. Any option in existence immediately before and after an
ownership change, whether or not the option was treated as exercised in
connection with the ownership change under paragraph (h)(4)(i) of this
section, but only so long as the option continues to be owned by the 5-
percent shareholder (or person who was treated as a 5-percent
shareholder) who owned the option immediately before and after such
ownership change.
(2) Example (i) A, B, C and D own all of the outstanding stock of L.
A owns 70 shares of L stock and each of B, C and D own 10 shares of L
stock. On July 12, 1988, L issues warrants to each of its shareholders
entitling them to acquire an additional 8.5 shares of L stock for each
share of stock owned. (ii) If B, C and D, but not A, each exercise their
respective rights to acquire an additional 85 shares of L stock (10
shares x 8.5 shares that may be acquired for each share owned) on July
12, 1988, their combined ownership interest in L on that date would
exceed 80 percent (255 shares deemed to be acquired + 30 shares actually
owned)/355 shares outstanding (actual and deemed)). B, C and D thus
would increase their ownership interest in L by 50.3 percentage points
during the testing period, causing an ownership change, because, under
paragraph (h)(4)(i)(B) of this section, the options are treated as
exercised if the exercise would cause an ownership change.
(iii) Following the ownership change, paragraph (h)(4)(i) of this
section applies to prevent A's right to acquire 595 shares of L stock
(70 shares x 8.5 shares that may be acquired for each share owned) or
the rights held by B, C, or D, to be treated as exercised on any
subsequent testing date, except to the extent that those rights are
transferred. To the extent any of those options are transferred
following the ownership change, paragraph (h)(4)(i) of this section will
apply to any such options on the date of the transfer and on any
subsequent testing date.
(G) Right to acquire loss corporation stock pursuant to a default
under a loan agreement. Any right to acquire stock of a corporation by a
bank (as that term is defined in section 581), an insurance company (as
that term is defined in Sec. 1.801-3(a)), or a trust qualified under
section 401(a) solely as the result of a default under a loan agreement
entered into in the ordinary course of the trade or business of such
bank, life insurance company or qualified trust.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement. Any option entered into between noncorporate owners of
the same entity (or a noncorporate owner and the entity in which the
owner has a direct ownership interest) with respect to such owner's
ownership interest in the entity, but only if each of such owners
actively participate in the management of the entity's trade or
business, the option is issued at a time that the loss corporation is
not a loss corporation and the option is exercisable solely upon the
retirement of such owner. An option with terms described in both this
paragraph (h)(4)(x)(H) and in paragraph (h)(4)(x)(D) of this section
shall also not be subject to paragraph (h)(4)(i) of this section.
(I) [Reserved]
(J) Title 11 or similar case. See Sec. 1.382-9(o) which excepts
certain options created by or under a plan of reorganization in a title
11 or similar case from the operation of paragraph (h)(4)(i) of this
section.
(K)-(Y) [Reserved]
(xi) Certain transfers of options disregarded. Transfers of options
between persons who are not 5-percent shareholders (and between members
of separate public groups resulting from the application of the
segregation rules of paragraphs (j)(2) and (3)(iii) of this section) are
not taken into account. Transfers of options in any of the circumstances
described in section 382(l)(3)(B) are also disregarded and the
transferee shall be treated as having owned the option for the period
that it was owned by the transferor.
(xii) Exercise of an option that has not been treated as stock. The
acquisition of stock pursuant to the actual exercise of an option (other
than an option described in paragraph (h)(4)(vi)(A) of this section)
shall not be disregarded.
(xiii) Effective date. See paragraph (m)(4)(vi) of this section for
special rules regarding the effective date of the provisions of this
paragraph (h)(4).
(5) Stock transferred under certain agreements. Notwithstanding
paragraph (h)(4) of this section, no shift results solely because under
section 1058(a)--
[[Page 472]]
(i) A shareholder transfers stock of a corporation pursuant to an
agreement that meets the requirements of section 1058(b), or
(ii) A person having rights under such an agreement exchanges those
rights for stock identical to the stock transferred pursuant to the
agreement.
(6) Family attribution. For purposes of this section--
(i) Paragraphs (1) and (5)(B) of section 318(a) shall not apply,
(ii) An individual and all members of his family described in
section 318(a)(1) shall be treated as one individual,
(iii) Subject to paragraph (k)(2) of this section, paragraph
(h)(6)(ii) of this section shall not apply to members of a family who,
without regard to that paragraph (h)(6)(ii), would not be 5-percent
shareholders, and
(iv) If under paragraph (h)(6)(ii) of this section, an individual
may be treated as a member of more than one family, and each family that
is treated as one individual is a 5-percent shareholder (or would be
treated as a 5-percent shareholder if such individual were treated as a
member of such family), then such individual shall be treated only as a
member of the family that results in the smallest increase in the total
percentage stock ownership of the 5-percent shareholders on the testing
date and shall not be treated as the member of any other family.
(i) [Reserved]
(j) Aggregation and segregation rules. For purposes of this section,
except as provided in paragraphs (k)(2) and (4) of this section--
(1) Aggregation of public shareholders and public owners into public
groups--(i) Public group. Under this paragraph (j), a loss corporation
or other entity can be treated as owned, in whole or in part, by one or
more public groups. A public group can include public shareholders,
public owners, and 5-percent owners who are not 5-percent shareholders
of the loss corporation.
(ii) Treatment of a public group that is a 5-percent shareholder.
Each public group that is treated as a 5-percent shareholder under
paragraph (g)(1)(ii), (iii) or (iv) of this section shall be treated as
one individual. See paragraph (j)(2)(iv) for a rule combining certain de
minimis public groups.
(iii) Presumption of no cross-ownership. The public owners, 5-
percent owners who are not 5-percent shareholders and public
shareholders in any public group, subject to paragraphs (j)(2)(iii),
(k)(2) and (k)(4) of this section, are presumed not to be members of any
other public group. It also is presumed that each such person is
unrelated to all other shareholders (direct and indirect) of the loss
corporation. See paragraph (h)(6)(iii) of this section. The members of a
public group that exists by virtue of its direct ownership interest in
an entity are presumed not to be members (and not to be related to a
member) of any other public group that exists at any time by virtue of
its direct ownership interest in any other entity. To the extent that
the presumptions adopted in this paragraph (j)(1)(iii) are not
applicable because the loss corporation has actual knowledge of facts to
the contrary and is thus subject to paragraph (k)(2) of this section,
public shareholders, public owners and 5-percent owners who are not 5-
percent shareholders may be aggregated into additional public groups.
(iv) Identification of the public groups treated as 5-percent
shareholders--(A) Analysis of highest tier entities. The loss
corporation must identify first tier entities and higher tier entities
in order to identify any highest tier entities that must be identified
under paragraph (k)(3) of this section. The loss corporation must then
identify any 5-percent owners of each such highest tier entity who
indirectly own, at any time during the testing period, five percent or
more of the loss corporation through the ownership interest in such
highest tier entity. Under paragraph (g)(1)(i)(B) of this section, any
such 5-percent owner is a 5-percent shareholder. See paragraph (k)(3) of
this section for rules explaining the extent of the obligation of the
loss corporation to determine the identity of its shareholders. Each
person who has an ownership interest in any highest tier entity and who
is not treated as a 5-percent shareholder (i.e., persons who are public
owners or 5-percent owners who are not 5-percent shareholders) is a
member of the public group of that highest tier entity. A public group,
so identified, that indirectly owns five percent
[[Page 473]]
or more of the loss corporation on the testing date is treated under
paragraph (g)(1)(ii) of this section as a 5-percent shareholder. If the
public group so identified owns less than five percent of the loss
corporation on the testing date, such public group is treated as part of
the public group of the next lower tier entity.
(B) Analysis of other higher tier entities and first tier entities.
The analysis and aggregation of public groups described in paragraph
(j)(1)(iv)(A) of this section is repeated for any next lower tier entity
and successively for any next lower tier entity of any entity described
in this paragraph (j)(1)(iv)(B) until applied to each first tier entity.
(C) Aggregation of the public shareholders. The public shareholders
are aggregated and, under paragraph (g)(1)(iii) of this section, are
treated as a public group that is a 5-percent shareholder without regard
to whether such group, at any time during the testing period, owns five
percent or more of the loss corporation. For this purpose, if the public
group of any first tier entity indirectly owns less than five percent of
the loss corporation on the testing date, and is thus not treated as a
5-percent shareholder, but is treated as part of the public group of the
loss corporation under paragraph (j)(1)(iv)(A) or (B) of this section,
the ownership interest of that group is included in the public group of
the loss corporation referred to in the preceding sentence.
(v) Appropriate adjustments. A loss corporation may apply the
principles of paragraph (g)(5) of this section with respect to--
(A) Any public group that is treated as a 5-percent shareholder on
the testing date if such public group, at any time during the testing
period, was treated as part of the public group of the next lower tier
entity, or
(B) Any public group that is treated as part of the public group of
a next lower tier entity if such public group, at any time during the
testing period, was part of the public group of a higher tier entity
that was treated as a 5-percent shareholder and had a direct or indirect
ownership interest in such lower tier entity.
(vi) Examples.
Example (1) (i) All of the stock of L is owned by 1,000
shareholders, none of whom own as much as five percent of L stock
(``Public L''). All of the stock of P is owned by 150,000 shareholders,
none of whom own as much as five percent of P stock (``Public P'').
Between July 12, 1988 and August 13, 1988, P purchases all of the L
stock through a series of transactions on the public stock exchange. P's
percentage of direct stock ownership in L increases from 4.9 percent to
five percent on July 15, 1988, and from 50 percent to 51 percent on July
30, 1988.
(ii) Before July 15, 1988, P is a public shareholder of L. On and
after July 15, 1988, P is a first tier entity (and a highest tier
entity) of L. Accordingly, under the rules of paragraph (j)(1) of this
section, Public P, on and after July 15, 1988, is treated as a public
group that is a 5-percent shareholder. Each acquisition by P on and
after such date affects the percentage of L stock that is owned by
Public P and thus constitutes an owner shift.
(iii) Immediately after the transaction on July 30, 1988, P owns 51
percent of L stock. Under paragraph (j)(1)(iv)(A) of this section,
Public P thus owns 51 percent of L. Under paragraph (j)(1)(iv)(C) of
this section, Public L, the public group that includes the public
shareholders of L, is treated as a 5-percent shareholder that owns 49
percent of L. Under paragraph (j)(1)(iii) of this section, Public L and
Public P are presumed not to have any common members and it is also
presumed that no member of either public group is related to any other
member of either of the two public groups.
(iv) Assuming that the presumption provided in paragraph (j)(1)(iii)
of this section (i.e., that no person owns stock in both P and L) is not
rebutted to any extent, Public P is treated as a 5-percent shareholder
whose stock ownership in L, as of the July 30, 1988 testing date, has
increased by 51 percentage points over its lowest percentage of stock
ownership in L at any time during the testing period (0 percent prior to
July 12, 1988). Accordingly, an ownership change with respect to L
occurs as a result of P's acquisition on July 30, 1988. L is thus a new
loss corporation and its pre-change losses are subject to limitation
under section 382.
Example (2) (i) All of the stock of P is owned by 1,000 unrelated
shareholders, none of whom owns as much as five percent of P stock.
L1 is a wholly owned subsidiary of P. On January 2, 1988, P
distributes all of the L1 stock pro rata to its shareholders.
(ii) Prior to the stock distribution, the public owners of P are
members of a public group (``Public P'') that is treated as a 5-percent
shareholder owning 100 percent of the stock of L1.
See paragraph (j)(1)(iv)(A) of this section. Following the stock
distribution to the P shareholders, L1 is owned by 1,000
public
[[Page 474]]
shareholders that are members of a public group (``Public
L1'') that is treated as a 5-percent shareholder owning 100
percent of the stock of L1. See paragraph (j)(1)(iv)(C) of
this section.
(iii) Public P and Public L1 are treated as unrelated,
individual 5-percent shareholders under paragraph (j)(1)(iii) of this
section. Although the members of one public group are presumed not to be
members of any other public group under paragraph (j)(1)(iii) of this
section, L1 has actual knowledge that all of its public
shareholders immediately following the distribution (Public
L1) received L1 stock pro rata in respect to the
outstanding P stock and thus were also members of Public P. Applying
paragraph (k)(2) of this section, the loss corporation may take into
account the identity of ownership interests between Public L1
and Public P to establish that Public L1 did not increase its
percentage ownership in L1. Accordingly, the transaction
would not constitute an owner shift.
Example (3) (i) The facts are the same as in Example (1) of
paragraph (g)(4) of this section. Thus, 20 percent of L stock is owned
by A, 10 percent is owned by P1, 20 percent is owned by E, a
joint venture, and the remaining 50 percent of L stock is owned by
Public L. P1 is owned 15 percent by B and 85 percent by
Public P1. E is owned 30 percent by P2 and 70
percent by P3, which are owned by Public P2 and
Public P3, respectively. See Example (1)(ii) of paragraph
(g)(4) of this section for a chart illustrating this ownership
structure.
(ii) The public owners of P2 and P3 (Public
P2 and Public P3, respectively), are public groups
that are treated as 5-percent shareholders of L, because each such
public group indirectly owns five percent or more of L stock (six
percent by Public P2 [(30 percent ownership of E)x(20 percent
ownership of L)] and 14 percent by Public P3 [(70 percent
ownership of E)x(20 percent ownership of L)]). The public owners of
P1 (``Public P1''), who indirectly own 8.5 percent
of L stock [(85 percent ownership of P1)x(10 percent
ownership of L)] and B, who indirectly owns 1.5 percent of L and is thus
included in Public P1 under paragraph (j)(1)(iv)(A) of this
section, are members of a public group that is treated as a 5-percent
shareholder of L that owns ten percent of L stock. Finally, the public
group of L (``Public L'') is a 5-percent shareholder that owns 50
percent of L. Accordingly, A, Public L, Public P1 (including
B), Public P2, and Public P3 are the only 5-
percent shareholders of L.
Example (4) (i) The facts are the same as Example (3) above, except
that P3 is owned 60 percent by C, 30 percent by
P4, and 10 percent by P3. The stock of
P4 is publicly traded and is owned by Public P4.
The facts are thus the same as in Example (2) in paragraph (g)(4) of
this section. See Example (2)(ii) of paragraph (g)(4) of this section
for a chart illustrating this ownership structure.
(ii) The public owners of P4 (a highest tier entity) are
members of a public group that indirectly owns 4.2 percent of L ([30
percent ownership of P3]x[70 percent ownership of E]x[20
percent ownership of L]). For purposes of identifying public groups that
are 5-.percent shareholders, L is not required to identify P4
as a highest tier entity under paragraph (k)(3) of this section because
P4 does not own five percent or more of L stock. Moreover,
under paragraph (h)(2)(iii) of this section, P4 generally is
treated as an individual from which there is no attribution of loss
corporation stock. The public group of P3 (including
P4) indirectly owns 5.6 percent of L ([40 percent of
P3]x[70 percent ownership of E]x[20 percent of L]), and is
thus a 5-percent shareholder of L. The public groups of P2
and P1 (both Public P1 and B), respectively, also
own five percent or more of L stock and are thus 5-percent shareholders
of L. In addition, the public group of L is a 5-percent shareholder
regardless of whether it owns five percent of L stock. Accordingly, A,
Public L, Public P3 (including P4), Public
P2, and Public P1 (including B), are the only 5-
percent shareholders of L.
Example (5)(i) On September 4, 1987, L is owned 14 percent by each
of A and B, 30 percent by each of P1 and P2, four
percent by each of C and P3, and two percent by each of D and
AA. P1 is owned 30 percent by each of A, B, and P4
and 10 percent by D. P2 is owned 70 percent by A, 10 percent
by each of B and D, six percent by DD and four percent by C. AA owns 100
percent of the stock of P3. P4 is owned 60 percent
by C and 20 percent by each of BB and CC.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 475]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.004
(iii) In order to identify L's 5-percent shareholders and their
respective ownership interests in L on September 4, 1987, the rules of
paragraph (j)(1) of this section apply to identify the public groups
that are treated as separate 5-percent shareholders. Analysis begins
with any highest tier entity, such as P4. Each of
P4's shareholders is a 5-percent owner of P4.
C4 owns 5.4 percent of L in his capacity as a 5-percent owner
of P4 and therefore is a 5-percent shareholder.
Notwithstanding that C actually owns, directly and by attribution, 10.6
percent of L (four percent directly, 5.4 percent indirectly through
P4, and 1.2 percent through P2), C's ownership
interest in L as a 5-percent shareholder is presumed to include only the
5.4 percent indirect ownership through P4. (Under paragraphs
(g) and (k)(2) of this section, however, L must account for C's direct
and indirect ownership interests in determining whether an ownership
change occurs on any testing date if it has actual knowledge of such
ownership on or berfore the date that its income tax return is filed for
the taxable year that includes the testing date). Although BB and CC are
each 5-percent owners of P4, they are not 5-percent
shareholders and therefore are members of the public group of
P4. Because the public group of P4 indirectly owns
only 3.6 percent of L, it is treated under paragraph (j)(1)(iv)(A) of
this section as part of the public group of the next lower tier entity,
P1.
(iv) With respect to P1, a first tier entity, each of its
shareholders are 5-percent owners. Because A and B each indirectly own
nine percent of L as 5-percent owners of P1 and A indirectly
owns 21 percent of L as a 5-percent owner of P2, they are
each 5-percent shareholders without regard to their direct
[[Page 476]]
ownership interests in L. A's ownership interest in L as a 5-percent
shareholder is 44 percent (14 percent directly, nine percent in his
capacity as a 5-percent owner of P1, and 21 percent in his
capacity as a 5-percent owner of P2). B's ownership interest
in L as a 5-percent shareholder is 23 percent (14 percent directly and
nine percent in his capacity as a 5-percent and nine percent in his
capacity as a 5-percent owner of P1). B's ownership interest
as a 5-percent shareholder does not include the three percent interest
he owns indirectly through P2. (Under paragraphs (g) and
(k)(2) of this section, however, L must account for B's direct and
indirect ownership interests, including his three percent interest
through P2, in determining whether an ownership change occurs
on any testing date if L has actual knowledge of such ownership on or
before the date that its income tax return is filed for the taxable year
that includes the testing date.) D is a 5-percent owner of
P1. Although D owns eight percent of L (two percent directly,
three percent indirectly through P1, and three percent
indirectly through P2), he is not a 5-percent shareholder
because he does not own five percent or more of L stock either directly
or in his capacity as a 5-percent owner of either P1 or
P2. (Under paragraphs (g) and (k)(2) of this section,
however, L must account for D's direct and indirect ownership interests
in determining whether an ownership change occurs on any testing date to
the extent L has actual knowledge of such ownership amounting to five
percent or more of L stock before the date that its income tax return is
filed for the taxable year that includes the testing date.) The public
group of P1 (comprised of the public group of P4
and D's direct ownership interest in P1) has a 6.6 percent
interest in L and is therefore treated as a separate 5-percent
shareholder.
(v) With respect to highest tier entity P2, D is a 5-
percent owner who is not a 5-percent shareholder for the reason
described in the preceding subdivision. DD is a 5-percent owner of
P2, who is not a 5-percent shareholder, because DD indirectly
owns only 1.8 percent of L. Assuming that L does not have actual
knowledge of B's and C's direct ownership interest in P2,
those interests are accounted for in computing the ownership interest
are accounted for in computing the ownership interest of the public
group of P2. Therefore, each of P2's shareholders,
except A who is a 5-percent shareholder in his capacity as a 5-percent
owner of P2, are treated as members of the public group of
P2 that owns nine percent of L and is thus treated as a
separate 5-percent shareholder.
(vi) Because the direct ownership interest of P3 is less
than five percent, it is a public shareholder. Therefore, assuming that
L does not have actual knowledge of C's, D's, or AA's direct and/or
indirect ownership interests in L, the public group of L is a separate
5-percent shareholder owning 12 percent of L (comprised of the direct
ownership interests of C, D, AA and P3).
(2) Segregation rules applicable to transactions involving the loss
corporation--(i) In general. For purposes of this section, if--
(A) A transaction is described in paragraph (j)(2)(iii) of this
section, and
(B) The loss corporation has one or more direct public groups
immediately before and after the transaction,
the stock owned by such direct public group or groups is subject to the
segregation rules described in paragraph (j)(2)(iii) of this section for
purposes of determining whether an ownership change has occurred on the
date of the transaction (and on any subsequent testing date with a
testing period that includes the date of such transaction). See
paragraph (j)(3) of this section for the application of the rules of
this paragraph (j)(2) to transactions involving first tier entities or
higher tier entities.
(ii) Direct public group. For purposes of this section, a direct
public group is any public group of the loss corporation described in
paragraph (j)(1)(iv)(C) of this section or any public group of the loss
corporation resulting from the application of paragraph (j)(2)(iii) or
(j)(3)(i) of this section.
(iii) Transactions to which segregation rules apply--(A) In general.
The segregation rules of this paragraph (j)(2)(iii) apply to any
transaction described in paragraph (j)(2)(iii)(B), (C), (D), (E), or (F)
of this section in the manner specified. The presumptions adopted by
this paragraph (j)(2)(iii) shall not apply only if, and to the extent
that, the loss corporation either has actual knowledge of facts to the
contrary regarding its stock ownership and is thus subject to paragraph
(k)(2) of this section, or is subject to paragraph (k)(4) of this
section. Any direct public group that is required to be identified as a
result of a transaction described in paragraph (j)(2)(iii) of this
section shall be treated as a 5-percent shareholder under paragraph
(g)(1)(iv) of this section without regard to whether such group, at any
time during the testing period, owns five percent or more of the loss
corporation stock. To the extent that the presumptions are rebutted, the
public
[[Page 477]]
shareholders, public owners and 5-percent owners who are not 5-percent
shareholders may be aggregated into additional public groups. For an
exception applicable to certain regulated investment companies, see
Sec. 1.382-3(k)(1).
(B) Certain equity structure shifts and transactions to which
section 1032 applies--(1) In general. In the case of--
(i) A transaction that is an equity structure shift that also is
described in section 381(a)(2) and in which the loss corporation is a
party to the reorganization, or
(ii) A transfer of the stock of the loss corporation (including
treasury stock) by the loss corporation in any other transaction to
which section 1032 applies,
each direct public group that exists immediately after such transaction
shall be segregated so that each direct public group that existed
immediately before the transaction is treated separately from the direct
public group that acquires stock of the loss corporation in the
transaction. The direct public group that acquires stock of the loss
corporation in the transaction is presumed not to include any members of
any direct public group that existed immediately before the transaction.
For purposes of this paragraph (j)(2)(iii)(B), a person is treated as
acquiring stock of the loss corporation in a reorganization as the
result of the person's ownership interest in another corporation that
succeeds to the loss corporation's pre-change losses (determined as if
the testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) in a transaction to which
section 381(a)(2) applies. In determining whether a transaction is
described in section 1032 for purposes of this paragraph (j)(2)(iii)(B),
the transfer by the loss corporation of any interest not constituting
stock that is treated as stock under paragraph (f)(18)(iii) of this
section shall be treated as the transfer of stock. See Sec. 1.382-3(j)
for exceptions to the segregation rules of this paragraph
(j)(2)(iii)(B)(1).
(2) Examples.
Example (1) (i) P1 owns 60 percent of the stock of L. The
remaining L stock (40 percent) is owned by Public L. A owns 40 percent
of the P1 stock. The remaining P1 stock (60
percent) is owned by Public P1. P2 is a publicly
traded corporation owned by shareholders who each own less than five
percent of P2 stock (Public P2).
(ii) On May 22, 1988, L merges into P2 in a transaction
described in section 368(a)(1)(A), with the shareholders of L receiving
an amount of P2 stock equal to 70 percent of the value of
P2 immediately after the reorganization.
(iii) Immediately before the merger, L's 5-percent shareholders were
Public L (40 percent), Public P1 (36 percent), and A (24
percent). Although the shareholders of P2 (immediately before
the merger) do not acquire any stock in the merger, they are treated as
acquiring a direct ownership interest in the loss corporation in the
reorganization because P2 succeeds to the pre-change losses
of L in a transaction to which section 381(a)(2) applies. As a result of
the merger, which constitutes a transaction described in
(j)(2)(iii)(B)(1) of this section, L's direct public group, Public L,
must be segregated from the direct public group that would otherwise
exist after the transaction (Public L and Public P2). Public
L, the direct public group that exists before the merger, has a
continuing 28 percent interest in the loss corporation [70 percent of
P2 shares received in the merger x 40 percent shares of L
owned prior to the merger] that must be segregated from the interests
acquired by Public P2.
(iv) In addition, Public P1, which owns five percent or
more of the stock of P2 through P1's ownership
interest in P2, also is segregated from any other public
group (i.e., both Public L and Public P2) under paragraph
(j)(1) of this section. Therefore, under paragraphs (j)(1) and (2) of
this section, Public P2 (excluding the members of Public L
and Public P1 immediately before the merger) is treated as a
separate public group and 5-percent shareholder.
(v) The only 5-percent shareholder whose interest in the loss
corporation, P2, has increased during the testing period is
Public P2. Its interest has increased by 30 percentage
points. Accordingly, no ownership change results from the merger. For
purposes of measuring the shift in ownership of P2 on any
subsequent testing date with a testing period that includes May 22, 1988
(the date on which L merged into P2), Public P2
will continue to be treated as a direct public group, separate from
Public L (the members of which own P2 stock as a result of
the merger) and Public P1.
Example (2) (i) P and L are each owned by 21 equal shareholders.
Each of 14 of the shareholders of P and L are owners of both
corporations (``common owners''). L has actual knowledge of this cross
ownership. therefore, as a group, these persons own 66\2/3\ percent of
each of P and L. P stock has a value of $600 and L stock has a value of
$400.
[[Page 478]]
(ii) P merges into L under section 368(a)(1)(A) on June 10, 1988.
Ordinarily, the direct public group of L that exists immediately before
the transaction would be segregated from the direct public group that
acquires stock in the merger (the public group of P immediately before
the merger). In view of the common ownership of P and L, however, a
third group may be created under paragraph (j)(2)(iii)(A) of this
section so that L's owners following the merger would be: The common
owners (66\2/3\ percent), Public L, less the common owners, 13\1/3\
percent), and Public P, less the common owners (20 percent).
Accordingly, the only 5-percent shareholder increasing its ownership
interest by 20 percentage points and no ownership change occurs as a
result of the merger.
Example (3) (i) L is entirely owned by Public L. L commences and
completes a public offering of common stock on January 22, 1988, with
the result that its outstanding stock increases from 100,000 shares to
300,000 shares. No person owns as much as five percent of L stock
following the public offering.
(ii) The public offering of L stock is a transaction to which
section 1032 applies. Immediately before the public offering, L's only
5-percent shareholder was Public L, a direct public group. Therefore,
Public L (as in existence immediately before the transaction) must be
segregated from the direct public group that would otherwise exist
immediately after the transaction. Under paragraph (j)(2)(iii)(B)(1) of
this section, the acquisition of 200,000 shares of L stock in the public
offering must be treated as acquired by a direct public group (``New
Public L'') that is separate from Public L. Each such public group is
treated as an individual that is a separate 5-percent shareholder. See
paragraphs (g)(1)(iv) and (j)(1)(ii) of this section.
(iii) As a result of the public offering, L has two 5-percent
shareholders, Public L and New Public L, which own 33\1/3\ percent and
66\2/3\ percent of the stock of L, respectively. Because the members of
New Public L are presumed not to be members of Public L (and not to be
related to any such members), the ownership interest of New Public L
immediately prior to the offering of stock was 0 percent.
(iv) New Public L is a 5-percent shareholder that has increased its
ownership interest in L by more than 50 percentage points during the
testing period (by 66\2/3\ percentage points). Thus, there is an
ownership change with respect to L. For purposes of subsequent
transactions, Public L and New Public L will not be segregated into two
public groups because a new testing period commences on the day
following the change date, January 23, 1988 (i.e., any subsequent
testing date will not have a testing period that includes the date of
the public offering).
Example (4) The facts are the same as in Example (3), but L
establishes that 60,000 shares of the newly issued L stock were acquired
by its shareholders of record on the date of the stock issuance (i.e.,
members of Public L, referred to as Acquiring Public L) by persons
owning 27 percent of the L stock immediately before the stock issuance.
Accordingly, L has actual knowledge that New Public L acquired no more
than 140,000 shares of L stock in the public offering. Under paragraphs
(j)(2)(iii) and (k)(2) of this section, New Public L may be treated as
having increased its ownership interest in L by 46\2/3\ percentage
points (140,000 shares acquired in the offering/300,000 shares
outstanding). L also has actual knowledge that the members of Public L
owning 27 percent of L stock immediately before the stock issuance
(27,000 shares/100,000 shares outstanding) own 29 percent of L stock
immediately after such issuance ([27,000 shares + 60,000 shares acquired
in the offering]/300,000 shares outstanding). Assuming that L chooses to
take its actual knowledge into account for purposes of determining
whether an ownership change occurred on January 22, 1988, Public L is
segregated into two direct public groups immediately before the stock
issuance so that the two percentage point increase in the ownership
interest in L by Acquiring Public L is taken into account. The total
increased ownership interest in L by New Public L and Acquiring Public L
on the testing date over their lowest ownership interest during the
testing period is 48 2/3 percent. Thus, no ownership change occurs with
respect to L.
Example (5) (i) L is owned entirely by 10,000 unrelated individuals,
none of whom own as much as five percent of L stock (``Public L''). P is
owned entirely by 1,500 unrelated individuals, none of whom own as much
as five percent of P stock (``Public P''). On December 22, 1988, L
acquires all of the P stock from Public P in exchange for L stock
representing 25 percent of the value of L, in a transaction described in
section 368(a)(1)(B).
(ii) Under paragraph (j)(2)(iii)(B)(1) of this section, Public L,
the direct public group that owns L stock immediately before and after
the transaction to which section 1032 applies, is treated separately
from Public P, the direct public group that acquires L stock in the
transaction. Because Public P's percentage ownership interest in L
increases to only 25 percent (as compared with 0 percent before the
acquisition), no ownership change occurs. For purposes of determining
whether an ownership change occurs on any testing date with a testing
period that includes December 22, 1988, Public L and Public P will
continue to be treated as separate 5-percent shareholders.
(iii) See Example (4) in paragraph (j)(3)(iv) of this section for
the application of paragraph (j)(2)(iii)(B) of this section to a
reorganization under section 368(a)(1)(B) in which the loss corporation
is acquired.
[[Page 479]]
(C) Redemption-type transactions--(1) In general. In the case of a
transaction in which the loss corporation acquires its stock in exchange
for property, each direct public group that exists immediately before
the transaction shall be segregated at that time (and thereafter) so
that the stock that is acquired in the transaction is treated as owned
by a separate public group from each public group that owns the stock
that is not acquired. For purposes of the preceding sentence, the term
property shall include stock described in section 1504(a)(4) and stock
described in paragraph (f)(18)(ii) of this section. Each direct public
group that owned the stock that is acquired in the transaction is
presumed not to own any such stock immediately after the transaction.
(2) Examples.
Example (1). L is entirely owned by Public L. There are 500,000
shares of L stock outstanding. On July 12, 1988, L acquires 150,000
shares of its stock for cash. Because L's acquisition is a redemption,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the redeemed interests
(``Public RL'') are treated as part of a public group that is separate
from the ownership interests that are not redeemed (``Public CL'').
Therefore, as a result of the redemption, Public CL's interest in L
increases by 30 percentage points (from 70 percent (350,000/500,000) to
100 percent) on the July 12, 1988 testing date. Because the resulting
increase is not more than 50 percentage points, no ownership change
occurs. For purposes of determining whether an ownership change occurs
on any subsequent testing date having a testing period that includes
such redemption, Public CL is treated as a 5-percent shareholder whose
percentage ownership interests in L increased by 30 percentage points as
a result of the redemption.
Example (2). L is entirely owned by Public L. There are 250,000
shares of L common stock outstanding. On April 22, 1988, L acquires
100,000 shares of its outstanding common stock in exchange for 100,000
shares of preferred stock described in section 1504(a)(4). (The
transaction thus constitutes a recapitalization within the meaning of
section 368(a)(1)(E).) As a result of the recapitalization, which is a
transaction described in paragraph (j)(2)(iii)(C) of this section,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the stock acquired by L
is treated as owned by a public group (``Public RL'') that is separate
from the public group that owns the stock that is not so acquired
(``Public CL''). Therefore, as a result of the transaction, Public CL's
interest in L increases by 40 percentage points (from 60 percent to 100
percent). Because the resulting increase is not more than 50 percentage
points, no ownership change occurs. For purposes of determining whether
an ownership change occurs on any subsequent testing date with a testing
period that includes the date of the recapitalization, Public CL is
treated as a separate 5-percent shareholder whose percentage ownership
interest increased by 40 percentage points as a result of the redemption
type transaction.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock--(1) In general. In the case of a
deemed acquisition of stock of the loss corporation as the result of the
ownership of a right issued by the loss corporation to acquire such
stock (see paragraph (h)(4) of this section), each direct public group
that exists immediately after such acquisition shall be segregated so
that each direct public group that existed immediately before the
transaction is treated separately from the direct public group that is
deemed to acquire stock of the loss corporation as a result of the
ownership of the right to acquire such stock. The direct public group
that is treated as acquiring stock of the loss corporation in the
transaction is presumed not to include any members of any direct public
group that existed immediately before the transaction. In applying the
rules of paragraph (h)(4) of this section, the segregation rules of this
paragraph (j)(2)(iii)(D) shall apply before making the determination
required under that paragraph (h)(4) of this section. See Sec. 1.382-
3(j)(9) for rules relating to this paragraph (j)(2)(iii)(D).
(2) Example.
(i) L has 700,000 shares of common stock outstanding. Public L owns
all of the outstanding L common stock. On May 20, 1988, L issues a class
of debentures to the public that, in the aggregate, may be converted
into 300,000 shares of L common stock. On September 7, 1988,
P1 acquires 210,000 shares of L common stock over a public
stock exchange. None of the L debentures have been converted as of that
date.
(ii) By virtue of L's issuance of convertible debentures, May 20,
1988 is a testing date. See paragraph (a)(2)(i) of this section.
Immediately before the issuance of the convertible debentures, L's only
5-percent shareholder
[[Page 480]]
was Public L, a direct public group. Therefore, under paragraph
(j)(2)(iii)(D) of this section, Public L must be segregated from the
direct public group that would otherwise exist immediately after the
transaction for the purpose of applying paragraph (h)(4) of this
section, so that any acquisition of L stock through the conversion of
L's debentures is treated as made by a public group other than Public L
(``New Public L''). Assuming the largest increase in the total
percentage stock ownership of New Public L on the testing date (see
paragraph (h)(4) of this section), New Public L would have increased its
ownership interest in L by 30 percentage points. Therefore, the stock of
L would not be treated as acquired pursuant to a deemed conversion of
the L debentures on May 20, 1988, under paragraph (h)(4) of this
section, because the conversion would not cause an ownership change.
(iii) P1's acquisition of L common stock results in
second testing date. For the purpose of applying paragraph (h)(4) of
this section, Public L must again be segregated from the direct public
group that would otherwise result from conversion of the debentures, so
that a deemed acquisition of L stock through the conversion of L's
debentures on September 7, 1988 is treated as made by a public group
other than Public L (``New Public L''). As on the previous testing date,
New Public L would have increased its ownership interest in L by 30
percentage points if it were treated as having acquired L common stock
pursuant to the conversion of the L debentures. The increase in New
Public L's ownership, taken together with P1's 21 percentage
point ownership increase in L during the testing period [210,000 shares
deemed converted/(700,000 (actual) + 300,000 (deemed) shares
outstanding)], results in an ownership change.
(E) Transactions identified in the Internal Revenue Bulletin. Any
transaction that is designated by the International Revenue Service in
the Internal Revenue Bulletin shall be subject to the rules, as provided
in such bulletin, similar to the rules described in this paragraph
(j)(2)(iii).
(F) Issuance of rights to acquire loss corporation stock--(1) In
general. In the case of any transaction that is described in paragraph
(j)(2)(iii)(B), (D) or (E) of this section in which the loss corporation
issues rights to acquire its stock to the members of more than one
public group, those rights shall be presumed to be exercised pro rata by
each such public group as those rights are actually exercised. See Sec.
1.382-3(j)(10) for an exception to the application of the rule of this
paragraph (j)(2)(iii)(F)(1) to stock issued on the exercise of a
transferable option.
(2) Example.
(i) L, which has six million shares outstanding, is owned entirely
by Public L and P is owned entirely by Public P. On November 30, 1988, P
merges into L in a transaction qualifying under section 368(a)(1)(A)
with Public P receiving four million shares of L stock as a result of
the reorganization. Under paragraph (j)(2)(iii)(B) of this section,
Public L and Public P continue to be treated as separate public groups
following the merger. Pursuant to the plan of reorganization, L also
issues an amount of warrants in L stock pro rata to Public L and Public
P that, if exercised, would result in the issuance of an additional two
million shares of L stock. On November 30, 1989, when only one-half of
the outstanding warrants have been exercised, A acquires all of the
unexercised warrants.
(ii) Without regard to the warrants distributed in reorganization,
Public P's ownership interest in L increases by 40 percentage points on
November 30, 1988, relative to its lowest ownership interest in L at any
time during the testing period (0 percent prior to the merger). For
purposes of determining whether an ownership change occurs on November
30, 1988, the segregation rules of paragraphs (j)(2)(iii)(B) and (D) of
this section does not require that a third direct public group be
separately identified and treated as acquiring the warrants, because L
has actual knowledge that Public L and Public P acquired the distributed
warrants in proportion to their respective ownership interests in L
stock. Because the largest increase in the ownership of L on the testing
date results from treating only Public P as exercising the distributing
warrants, in which event, its ownership interest would increase by 44.4
percentage points ([four million shares acquired in the merger + 800,000
shares deemed acquired]/10.8 million (actual and deemed) shares
outstanding), the issuance of the warrants by L does not cause an
ownership change on November 30, 1988.
(iii) Under paragraph (j)(2)(iii)(F)(1) of this section, each actual
exercise of warrants to acquire one million shares of L stock between
November 30, 1988 and November 30, 1989 is treated as made pro rata by
Public L and Public P (600,000 shares to Public L and 400,000 shares to
Public P). Accordingly, as a result of the actual exercises of warrants
during that period the ownership interests of the only 5-percent
shareholders, Public L and Public P, are proportionately increased.
(iv) A's acquisition of the all of the outstanding warrants on
November 30, 1989 requires the determination whether there has been an
ownership change with respect to L, because A would be 5-percent
shareholder
[[Page 481]]
under paragraph (g)(1)(i) of this section owning 8\1/3\ percent of the L
stock if the acquired warrants were exercised (one million shares deemed
acquired/12 million (actual and deemed) shares outstanding). See
paragraph (a)(2)(i) of this section. Under paragraph (h)(4)(i) of this
section, A is not treated as having exercised those warrants, because an
ownership change would not results. (Public P's 36\2/3\ percentage point
increase [(four million shares acquired in the merger + 400,000 shares
deemed acquired)/12 million (actual and deemed) shares outstanding] and
A's 8\1/3\ percentage point increase is not greater than 50 percentage
points).
(iv) Combination of de minimis public groups--(A) In general.
Notwithstanding paragraph (j)(2)(iii)(A) of this section, any public
group first identified during a taxable year, as a result of any
transaction described in paragraph (j)(2)(iii)(B), (D), (E), or (F) of
this section, that owns less than five percent of loss corporation stock
may be combined, at the option of the loss corporation, with any other
such groups also first identified as a result of any such transaction
that occurs during such taxable year.
(B) Example.
(i) L is widely held with no person owning as much as five percent
of the L stock at any time (``Public L''). L's taxable year ends on
December 31. On January 1, 1989, L issues a class of debt maturing on
December 31, 2019 (``Class A Debentures'') with respect to which it will
semi-annually issue L stock in discharge of its interest obligation. In
addition, L issues an amount of L stock to the public in two separate
transactions during 1989. As a percentage of the L stock outstanding at
the close of L's taxable year on December 31, 1989, L issued .45 percent
of its stock on each of two dates in payment of interest with respect to
the Class A Debentures, 4.5 percent of its stock in the first stock
offering and six percent of its stock in the second stock offering.
During 1990, L did not issue stock other than in payment of interest
with respect to the Class A Debentures. As a percentage of L stock
outstanding on December 31, 1990, L issued .41 percent of its stock on
each of two dates during 1990 with respect to its outstanding debt.
(ii) Under paragraph (h)(4)(x)(E) of this section, L's obligation to
issue stock in satisfaction of the interest with respect to the Class A
Debentures until December 31, 2019, is not subject to paragraph
(h)(4)(i) of this section and thus is taken into account only as such
stock is issued.
(iii) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least two additional, separate direct public groups during 1989. First,
the persons who acquire six percent of L stock in a public offering to
which section 1032 applies must be treated as a separate 5-percent
shareholder (``Public 1L''). See paragraph (j)(2)(iii)(B) of this
section. Even though this group was first identified in 1989, it may not
be combined with other public groups also first identified in 1989
because it owns five percent or more of L stock. Second, although each
of the three other issuances of L stock during the year ordinarily
result in the identification of an additional, separate direct public
group, each such direct public group may be combined with the two other
such groups into a single public group (``Public 2L''). As of the end of
1989, Public 2L would own a total of 5.4 percent of the stock of L.
(iv) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least one additional, direct public group during 1990. Because each
additional, direct public group first identified in 1990 acquires less
than five percent of L stock, they may be combined into a single public
group (``Public 3L'') owning .82 percent of the stock of L. Public 3L is
treated as a five percent shareholder even though it owns less than five
percent of the stock of L. See paragraph (j)(2)(iv)(A) of this section.
(v) Multiple transactions--(A) In general. If a transaction (or any
part thereof) is described by more than one subdivision of paragraph
(j)(2)(iii) of this section, each such subdivision shall apply to the
transaction (or each part of the transaction) in the manner that results
in the largest increase in the percentage stock ownership by the 5-
percent shareholders.
(B) Example.
(i) All of the common stock of L is owned by 1,000 unrelated
persons, none of whom owns as much as five percent of the L stock
(``Public CL''). L has outstanding a class of preferred stock described
in section 1504(a)(4) that is owned in equal amounts by 500 unrelated
persons (``Public PL'').
(ii) On September 4, 1988, L rearranges its capital structure by
redeeming 70 percent of the common stock owned by 700 of the
shareholders in exchange for cash. In addition, all of the preferred
stock is exchanged for a new class of common stock (nonvoting)
representing 40 percent of the value of L.
(iii) With respect to the part of the transaction that is treated as
a redemption under paragraph (j)(2)(iii)(C) of this section (the
exchange of common stock for cash), Public CL is segregated into two
different public groups immediately before the transaction (and
[[Page 482]]
thereafter) so that the owners of the redeemed stock (``Public RCL'')
are treated as part of a public group that is separate from the public
group comprised of the owners of the stock that is not redeemed
(``Public CCL''). As a result of the redemption, Public CCL's percentage
ownership interest in L thus increases by 30 percentage points from 30
percent to 60 percent (taking into account all transactions occurring on
the testing date, because the change in ownership is measured under
paragraph (a)(1)(i) of this section by reference to each 5-percent
shareholder's ownership interest immediately after the testing date). In
addition, the exchange of preferred stock for nonvoting common stock is
a transaction to which section 1032 applies. Under paragraph (j)(2)(v)
of this section, the part of the transaction to which section 1032
applies is also subject to the segregation rules in the manner specified
in paragraph (j)(2)(iii)(B) of this section. Accordingly, Public PL, the
direct public group that acquires L nonvoting common stock in exchange
for L preferred stock, must be treated as a separate public group from
the other direct public groups, Public CCL and Public RCL. As a separate
public group, Public PL's percentage stock ownership in L increases by
40 points (as compared to 0 percent prior to the transaction).
(iv) In summary, Public CCL increases its percentage ownership in L
by 30 percentage points and Public PL increases its percentage ownership
by 40 percentage points. Consequently, an ownership change occurs with
respect to L on September 4, 1988.
(vi) Acquisitions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules. Unless a
different proportion is established by either the loss corporation or
the Internal Revenue Service, the acquisition of loss corporation stock
by either a 5-percent shareholder or the loss corporation on any date on
which more than one public group of the loss corporation exists by
virtue of the application of the rules of this paragraph (j)(2) shall be
treated as being made proportionately from each public group existing
immediately before such acquisition. See paragraph (g)(5)(i)(B) of this
section for the application of this paragraph to the ownership interest
of a 5-percent shareholder that owns less than five percent of the stock
of the loss corporation on the testing date.
(3) Segregation rules applicable to transactions involving first
tier entities or higher tier entities--(i) Dispositions. If a loss
corporation is owned, in whole or in part, by a public group (or
groups), the rules of paragraphs (j)(2)(iii)(B) and (iv) of this section
shall apply to any transaction in which a first tier entity or an
individual that owns a direct ownership interest in the loss corporation
of five percent or more transfers a direct ownership interest in the
loss corporation to public shareholders. Therefore, each direct public
group that exists immediately after such a disposition shall be
segregated so that the ownership interests of each public group that
existed immediately before the transaction are treated separately from
the public group that acquires stock of the loss corporation as a result
of the disposition by the individual or first tier entity. The
principles of this paragraph (j)(3)(i) shall also apply to transactions
in which an ownership interest in a higher tier entity that owns five
percent or more of the loss corporation (determined without regard to
the application of paragraph (h)(2)(i)(A) of this section) or a first
tier entity is transferred to a public owner or 5-percent owner who is
not a 5-percent shareholder.
(ii) Example.
(A) L is owned equally by Public L, P and E. Public L consists of
150 equal, unrelated shareholders. P is owned by Public P, a group
consisting of 1,500 equal, unrelated shareholders. E is a partnership
and none of its partners are 5-percent owners. On October 22, 1988, E
sells its entire interest in L over a public stock exchange. No
individual or entity acquires as much as five percent of L's stock as
the result of E's disposition of the L stock.
(B) The disposition of the L stock by E is a transaction that causes
the segregation of L's direct public group that exists immediately
before the transaction (Public L) from the direct public group that
acquires L stock in the transaction (Public EL). As a result, L has
three 5-percent shareholders, Public L, Public P (through the
application of paragraph (j)(1) of this section) and Public EL, each of
which owns 33\1/3\ percent of L stock. Therefore, Public EL is a 5-
percent shareholder that has increased its ownership interest in L by
33\1/3\ percentage points during the testing period. For purposes of
subsequent transactions, Public L and Public EL will continue to be
treated as separate direct public groups until any subsequent testing
date that does not have a testing period that includes E's disposition
of L stock.
[[Page 483]]
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity. The rules of paragraphs (j)(2)(i),
(iii), (iv) and (v) of this section shall apply to transactions
described in such paragraphs that involve either a higher tier entity
that owns five percent or more of the loss corporation (determined
without regard to the application of paragraph (h)(2)(i)(A) of this
section) or a first tier entity. In applying those rules for purposes of
this paragraph (j)(3)(iii), each direct public group of a first tier
entity or a higher tier entity is any public group of any such entity
identified in paragraph (j)(1)(iv)(A) or (B) of this section or
resulting from the application of this paragraph (j)(3)(iii). The
principles of paragraph (j)(2)(iii)(C) of this section also shall apply
to any transaction that has the effect of a redemption-type transaction
(e.g., an acquisition by the loss corporation of stock in a first tier
entity).
(iv) Examples.
Example (1) The facts are the same as in Example (1) of paragraph
(j)(2)(iii)(B)(2) of this section, except that Public L and
P1 own 40 percent and 60 percent, respectively, of the stock
of HC which, in turn, owns 100 percent of L and HC merges into
P2. Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to segregate HC's direct
public group (Public L) immediately before the merger from the direct
public group (Public P2) that acquires loss corporation stock
in the merger. The consequences of the merger of HC into P2
are thus the same as in Example (1) of paragraph (j)(2)(iii)(B)(2) of
this section.
Example (2) (i) Twenty-five individual shareholders each own four
percent of L (``Public L''). Public L is therefore the only 5-percent
shareholder of L. Each of the shareholders of L contribute their L stock
to a newly formed corporation, HC. In exchange for their contribution of
L stock, HC issues 100 percent of each of its two classes of common
stock (voting and nonvoting).
(ii) The formation of HC, a first tier entity of L, is a transaction
to which section 1032 applies. Under paragraph (j)(3)(iii) of this
section, the rules of paragraphs (j)(1)(iii) and (j)(2)(iii)(B) of this
section are applied to this transaction with the result that the
shareholders of HC, immediately after the issuance of HC stock, are
presumed not to include any persons that previously had a direct or
indirect ownership interest in L. The presumption underlying those
rules, however, is rebutted by establishing that all of the HC stock
outstanding immediately after the transaction was issued solely in
exchange for L stock. Thus, Public HC (immediately after the
transaction) and Public L (immediately before the transaction) would be
treated owned by the same direct public group.
Example (3) (i) All of the stock of L is owned by unrelated
shareholders, none of whom owns as much as five percent of L stock. P
also is owned by unrelated shareholders, none of whom owns as much as
five percent of P stock. On November 22, 1988, P incorporates
P1 with a contribution of P stock. Immediately thereafter,
P1 acquires all of the properties of L in exchange for its P
stock in a forward triangular merger qualifying under sections 368
(a)(1)(A) and (a)(2)(D). The P stock transferred by P1 equals
45 percent of the total outstanding P stock.
(ii) Immediately before the merger of L into P1, P's only
5-percent shareholder was Public P, a direct public group of P. The
rules of paragraph (j)(2)(iii)(B) of this section thus apply to the
transaction under paragraph (j)(3)(i) of this section since P, a first
tier entity, is a party to the reorganization described in such
paragraph. Although Public P does not acquire any stock in the merger,
it is treated as acquiring stock in the loss corporation, P1,
because such corporation succeeds to the pre-change losses of L in a
transaction to which 381(a) applies. As a result of the merger, Public
P, the direct public group of P that exists immediately before the
merger, must be segregated from the direct public groups acquiring P
stock in the reorganization. Public P is, therefore, treated as
acquiring 55 percent of the outstanding stock of the loss corporation,
P1, in the transaction. The transaction, therefore, results
in an ownership change for P1.
Example (4) (i) L is owned 20 percent by A and 80 percent by 1,000
unrelated individuals and entities, none of whom owns as much as five
percent of L stock (``Public L''). P is owned 10 percent by B, 40
percent by E, and 50 percent by 5,000 unrelated individuals, none of
whom owns as much as five percent of P stock (``Public P''). E is owned
30 percent by C and 70 percent by 30 unrelated individuals, none of whom
owns as much as five percent of E (``Public E'').
(ii) On October 31, 1987, P acquires all of the L stock from A and
Public L in exchange for P stock representing 20 percent of the value of
P (determined immediately after the acquisition) in a transaction
described in section 368(a)(1)(B). After the acquisition, P is owned
eight percent by B, 32 percent by E, four percent by A, and 56 percent
by 6,000 unrelated individuals, none of whom owns as much as five
percent of P. Because L is wholly owned by P immediately after the
acquisition, L, under paragraph (j)(1) of this section, is treated as
owned as follows: Eight percent by B, 9.6 percent by C (through C's
ownership
[[Page 484]]
interest in E, a highest tier entity, and E's ownership interest in P, a
first tier entity), 22.4 percent by Public E (through its ownership
interest in E and E's ownership interest in P), four percent by A, and
56 percent by the shareholders who each own less than five percent of L
through their ownership interest in P.
(iii) Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to the reorganization
since the transaction involved a first tier entity of L. Thus, the
direct public group of P that exists immediately after the transaction
must be segregated into two public groups--the direct public group of P
that existed immediately before the acquisition (Public P) is treated
separately from the direct public group consisting of the persons who
acquire P stock in the transaction (Public L). Accordingly, immediately
after the reorganization, Public P and Public L own 40 percent and 16
percent of L, respectively. See paragraph (h) of this section. (Under
paragraph (g)(5)(ii)(B) of this section, L may treat the four percent of
L stock owned by A immediately after the reorganization as the amount of
L stock owned by A for each subsequent testing date having a testing
period that includes the reorganization.)
(iv) In summary, after applying the rules of paragraphs (j)(1) and
(3) of this section, L is treated as owned as follows:
------------------------------------------------------------------------
Percentage
5-percent shareholder ownership
interest
------------------------------------------------------------------------
A......................................................... 4.0
B......................................................... 8.0
C......................................................... 9.6
Public E.................................................. 22.4
Public P.................................................. 40.0
Public L.................................................. 16.0
------------------------------------------------------------------------
(v) The reorganization results in an ownership change, because B, C,
Public E and Public P, all of whom are 5-percent shareholders, together
have increased their percentage ownership in L by 80 percentage points
as compared to their lowest percentage ownership in L at any time during
the testing period (0 percent prior to the acquisition).
(v) Acquisitions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules. The rules of paragraph (j)(2)(vi) of this section shall apply to
the acquisition of an ownership interest in a first tier entity (or
higher tier entity) if more than one direct public group of any such
entity are segregated under the rules of this paragraph (j)(3).
Accordingly, an acquisition by such an entity or a 5-percent shareholder
of any ownership interest in such an entity shall be treated as made
proportionately from the direct public groups resulting from the
application of this paragraph (j)(3).
(k) Operating rules--(1) Presumptions regarding stock ownership.
Subject to paragraphs (k)(2) and (4) of this section, for purposes of
applying paragraphs (f), (g), (h), and (j)(1) of this section--
(i) Stock subject to regulation by the Securities and Exchange
Commission. With respect to loss corporation stock that is described in
Rule 13d-1(d) of Regulation 13D-G (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities and Exchange Act of 1934 (``registered
stock''), a loss corporation may rely on the existence and absence of
filings of Schedules 13D and 13G (or any similar schedules) as of any
date to identify all of the corporation's shareholders who have a direct
ownership interest of five percent or more (both individuals and first
tier entities) on such date. A loss corporation may similarly rely on
the existence and absence of such filings as of any date with respect to
registered stock of any first tier entity or any higher tier entity to
identify the 5-percent owners of any such entities on such date who
indirectly own five percent or more of the loss corporation stock, and
are thus 5-percent shareholders, and to identify any higher tier
entities of such entities.
(ii) Statements under penalties of perjury. A loss corporation may
rely on a statement, signed under penalties of perjury, by an officer,
director, partner, trustee, executor or similar responsible person, on
behalf of a first tier entity or a higher tier entity to establish the
extent, if any, to which the ownership interests of any 5-percent owners
or higher tier entities with respect to such entities have changed
during a testing period. A loss corporation may not rely on such a
statement (A) that it knows to be false or (B) that is made by either a
first tier entity or higher tier entity that owns 50 percent or more of
the stock of the loss corporation. For purposes of the preceding
sentence, any first tier entities and higher tier entities that are
known by the loss corporation to be members of
[[Page 485]]
the same controlled group (within the meaning of section 267(f)) shall
be treated as one corporation.
(2) Actual knowledge regarding stock ownership. For purposes of this
section (other than paragraphs (g)(5) and (j)(1)(v) of this section), to
the extent that the loss corporation has actual knowledge of stock
ownership on any testing date (or acquires such knowledge before the
date that the income tax return is filed for the taxable year in which
the testing date occurs) by--
(i) An individual who would be a 5-percent shareholder, but for the
application of paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(2) of this
section, or
(ii) A 5-percent shareholder that would be taken into account, but
for paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(3) of this section,
the loss corporation must take such stock ownership into account for
purposes of determining whether an ownership change has occurred on that
testing date. If a loss corporation acquires such knowledge after such
income tax return is filed, the loss corporation may take such ownership
into account for purposes of determining whether an ownership change
occurred on that testing date and, if appropriate, file an amended
income tax return (subject to any applicable statute of limitations). To
the extent the loss corporation has actual knowledge on or after any
testing date regarding the ownership interest in the loss corporation by
members of one public group (described in paragraphs (g)(1)(ii), (iii)
or (iv) of this section) and the ownership interest of those members in
the loss corporation as members in another such public group, the loss
corporation may take such ownership into account for purposes of
determining whether an ownership change occurred on that testing date.
(3) Duty to inquire as to actual stock ownership in the loss
corporation. For purposes of this section, the loss corporation is
required to determine the stock ownership on each testing date (and,
except as otherwise provided in this section, the changes in the stock
ownership during the testing period) of--
(i) Any individual shareholder who has a direct ownership interest
of five percent or more in the loss corporation,
(ii) Any first tier entity,
(iii) Any higher tier entity that has an indirect ownership interest
of five percent or more in the loss corporation (determined without
regard to paragraph (h)(2)(i)(A) of this section), and
(iv) Any 5-percent owner who indirectly owns five percent or more of
the stock of the loss corporation in his capacity as a 5-percent owner
in any one first tier entity or higher tier entity.
The loss corporation does not have any obligation to inquire or to
determine facts relating to the stock ownership of any shareholders
other than those described in the preceding sentence. In addition, the
loss corporation does not have any obligation to inquire or to determine
if the actual facts relating to the stock ownership of any shareholder
are consistent with the ownership interests of the loss corporation as
determined by applying the presumptions and other rules of paragraphs
(g), (h), (j) or (k)(1) of this section.
(4) Ownership interest structured to avoid the section 382
limitation. For purposes of this section, if the ownership interests in
a loss corporation are structured by a person with a direct or indirect
ownership interest in the loss corporation to avoid treating a person as
a 5-percent shareholder (or to permit the loss corporation to rely on
the presumption provided in paragraph (g)(5)(i)(B) of this section) for
a principal purpose of circumventing the section 382 limitation, then--
(i) Paragraph (h)(2)(iii) of this section shall not apply with
respect to the ownership interests so structured and the constructive
ownership rules of paragraph (h)(2)(i) of this section shall thus apply
to attribute stock from any entity without regard to the amount of stock
it owns in the loss corporation or any other corporation,
(ii) Paragraphs (g)(2) and (3) of this section shall be modified
with respect to the ownership interests so structured so that the
ownership interest of a person includes all of an individual's direct
and indirect ownership in the loss corporation, without regard to
whether each such interest represents five percent or more of the stock
of the loss corporation, and
[[Page 486]]
(iii) Paragraph (g)(5)(i)(B) of this section shall not apply with
respect to the ownership interests so structured so that the ownership
interest of a person takes into account his actual ownership interest in
the loss corporation.
This paragraph (k)(4) shall apply, however, only if application would
result in an ownership change.
(5) Example.
L is owned by 25 individuals who each own four percent of the
outstanding L stock. A purchases 40 percent of L stock from such
shareholders on August 13, 1988. Thereafter, B plans to acquire 15
percent of the L stock. B is advised concerning the potential
application of section 382 to L. On February 1, 1989, B acquires a 15
percent interest in L pursuant to a program in which each of four
corporations, P1 through P4, each of which is
wholly-owned by B, acquire a 3.75 percent interest in L. A principal
purpose of acquiring the L stock through four corporations is to avoid
treating B as owning any ownership interest in L amounting to as much as
five percent, and thus to circumvent the section 382 limitation by
avoiding an ownership change. Under paragraph (k)(4) of this section,
the limitation on the constructive ownership rules of paragraph
(h)(2)(iii) of this section are disregarded and B is treated as a 5-
percent shareholder owning 15 percent of the stock of L by virtue of his
ownership interests in P1 through P4,
notwithstanding paragraph (g)(2) of this section. Accordingly, an
ownership change occurs with respect to L.
(6) First tier entity or higher tier entity that is a foreign
corporation or entity. [Reserved]
(l) Changes in percentage ownership which are attributable to
fluctuations in value. [Reserved]
(m) Effective date--(1) In general. Except as provided in this
paragraph (m), section 382 shall apply to any ownership change that
occurs immediately after an owner shift or an equity structure shift
that occurs after December 31, 1986, or any other event occurring after
such date that requires the determination of whether an ownership change
has occurred under paragraph (a)(2)(i) of this section. In the case of
an equity structure shift (including an equity structure shift that also
constitutes an owner shift), any equity structure shift completed
pursuant to a plan of reorganization adopted before January 1, 1987,
shall be treated as occurring on the date such plan was adopted.
Therefore, section 382 shall apply to any ownership change occurring
immediately after--
(i) An owner shift (excluding an owner shift that also constitutes
an equity structure shift) that occurs on or after January 1, 1987,
(ii) An equity structure shift that occurs after December 31, 1986,
if it is completed pursuant to a plan of reorganization adopted on or
after January 1, 1987, or
(iii) Any transfer or issuance of an option, or other interest that
is similar to an option, that occurs on or after January l, 1987 and
that is taken into account under paragraph (a)(2)(i) of this section.
With respect to equity structure shifts completed pursuant to plans
adopted before January 1, 1987, section 382 shall be inapplicable only
if the equity structure shift that is treated as occurring on the date
the plan of reorganization for such shift was adopted (or other event
occurring after the adoption of such plan) results in an ownership
change before January 1, 1987. In that event, a new testing period for
the loss corporation shall begin on the day after such ownership change.
(2) Plan of reorganization. For purposes of paragraph (m)(1) of this
section, a plan of reorganization shall be treated as adopted on the
earlier of--
(i) The first date that the boards of directors of all the parties
to the reorganization have adopted the plan or have recommended adoption
to their shareholders, or
(ii) The date the shareholders approve such reorganization.
If there is an ownership change with respect to a subsidiary as the
result of a reorganization of the parent, the treatment of the
subsidiary under this paragraph (m)(2) shall be governed by the
classification of the parent-level transaction. For purposes of the
preceding sentence, a corporation shall be treated as a subsidiary of
another corporation only if the other corporation owns stock in that
corporation meeting the requirements of section 1504(a)(2).
(3) Earliest commencement of the testing period. For purposes of
determining if an ownership change has occurred at any time after May 5,
1986, the testing period shall begin no earlier than May
[[Page 487]]
6, 1986. Under paragraph (d)(4) of this section, therefore, shifts in
the ownership of stock of the loss corporation prior to May 6, 1986 are
disregarded.
(4) Transitional rules--(i) Rules provided in paragraph (j) of this
section for testing dates before September 4, 1987. For purposes of
determining whether an ownership change occurs for any testing date
before September 4, 1987.
(A) The rules of paragraph (j)(1) of this section shall apply only
to stock of the loss corporation acquired after May 5, 1986, by any
first tier entity or higher tier entity and shall not apply to any stock
acquired by such an entity on or before that date,
(B) The rules of paragraph (j)(2) of this section shall apply only
to equity structure shifts in which more than one corporation is a party
to the reorganization and shall not apply to any other transactions, and
(C) The rules of paragraph (j)(3) of this section shall apply only
to--
(1) Dispositions of stock acquired by an individual, a first tier
entity or higher tier entity after May 5, 1986 (and shall not apply to
dispositions of stock acquired on or before such date), and
(2) Equity structure shifts in which more than one corporation is a
party to the reorganization (and shall not apply to any other
transactions).
For any testing date before September 4, 1987, however, the loss
corporation is permitted to apply all of the rules of paragraph (j) of
this section. A loss corporation that applies the rules of paragraph (j)
of this section under the preceding sentence must apply all of the rules
of such paragraph in determining whether any ownership change occurs on
any testing dates after May 5, 1986.
(ii) Example.
(i) L is owned entirely by 10,000 unrelated individuals, none of
whom owns as much as five percent of the stock of L (``Public L''). P is
owned entirely by 1,000 unrelated individuals, none of whom owns as much
as five percent of the stock of P (``Public P'').
(ii) Between March 1, 1987 and June 1, 1987, P acquires 45 percent
of L stock in a series of transactions. On June 15, 1987, L redeems 20
percent of the L stock from Public L.
(iii) Under paragraph (m)(4)(i)(A) of this section, the rules of
paragraph (j)(1) of this section apply to the acquisitions made by P,
because they occurred after May 5, 1986. Accordingly, following those
acquisitions, the stock of L is owned 45 percent by Public P and 55
percent by Public L. Because the increase in the percentage ownership by
Public P as a result of P's stock purchases is not more than 50 percent,
no ownership change occurs as the result of P's purchases.
(iv) On or after September 4, 1987, the rules of paragraph
(j)(2)(iii)(C) of this section apply to treat any L stock that is
redeemed as owned by a public group that is separate from the public
group owning the stock that is not redeemed. (Under paragraph
(j)(2)(iii)(C) of this section, the continuing shareholders of Public L,
who owned 35 percent of the stock of L before the redemption ([55
percent--20 percent]/100 percent) increase their ownership interest in L
by 8.8 percentage points as a result of such redemption (43.8 percent--
35 percent)). Those rules, however, do not apply to the June 15, 1987
redemption because it occurs before the date that paragraph (j)(2)(iii)
of this section generally is effective. (Until September 4, 1987,
paragraph (j)(2)(iii) of this section generally is effective only for
equity structure shifts in which more than one corporation is a party to
the reorganization.) Solely because of the application of paragraph
(j)(1) of this section to P's acquisitions of L stock, Public P's
ownership interest in L as a result of the redemption has increased from
45 percentage points to 56.2 percentage points which, compared to its
lowest percentage ownership interest at any time during the testing
period (0 percent prior to March 1, 1987), is a more than 50 percentage
point increase thus causing an ownership change with respect to L on
June 15, 1987.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987. For purposes of determining whether
an ownership change occurs for any testing date on or after September 4,
1987, the rules of paragraphs (j)(2) and (3) of this section shall not
apply to identify any public group resulting from--
(A) Any transaction described in such paragraphs (j)(2) and (3),
unless that transaction is also described in paragraph (m)(4)(i)(B) or
(C) of this section, or
(B) Any disposition of stock acquired on or before May 5, 1986, but
only if such disposition or other transaction occurs before September 4,
1987. Thus, for example, the rules of paragraph (j)(2)(iii)(D) of this
section shall apply only to rights to acquire stock of the loss
corporation issued on or after such date.
(iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this
section. For
[[Page 488]]
purposes of determining whether an ownership change occurs for any
testing date, the rules of paragraphs (f)(18)(ii) and (iii) of this
section apply only to stock (or any other ownership interest) that is--
(A) Issued on or after September 4, 1987, or
(B) Transferred to (or by) a person who is a 5-percent shareholder
(or would be a 5-percent shareholder if paragraph (f)(18)(iii) of this
section were applicable) on or after September 4, 1987.
(v) Rules provided in paragraph (a)(2)(ii) of this section. The
information statement required under paragraph (a)(2)(ii) of this
section is not required to be filed with respect to any taxable year for
which the due date (including extensions) of the income tax return of
the loss corporation is on or before October 5, 1987.
(vi) Rules provided in paragraph (h)(4) of this section. The rules
provided in paragraph (h)(4) of this section do not apply on any testing
date on or after November 5, 1992. The rule provided in paragraph
(h)(4)(viii) of this section applies to the lapse or forfeiture of any
option treated as exercised under paragraph (h)(4)(i) of this section.
If an option is treated as exercised under paragraph (h)(4)(i) of this
section, and the option is actually exercised on a day that is within
120 days after the date on which the option is treated as exercised, the
rule provided in paragraph (h)(4)(vi)(B) of this section applies (even
if the actual exercise of the option occurs on a date on which the rules
of paragraph (h)(4) of this section would not otherwise apply). Thus, in
such a case, the loss corporation may elect to treat paragraphs
(h)(4)(i) and (vi)(A) of this section as not applying to the option and
take into account only the acquisition of loss corporation stock
resulting from the actual exercise of the option.
(vii) Rules provided in paragraph (a)(2)(i) of this section. The
rules provided in paragraph (a)(2)(i) of this section apply to determine
whether dates prior to November 5, 1992, are testing dates. For rules
regarding the determination of whether dates on or after November 5,
1992, are testing dates, see Sec. 1.382-2(a)(4).
(5) Bankruptcy proceedings--(i) In general. In the case of a
reorganization described in section 368(a)(1)(G) or an exchange of debt
for stock in a title 11 or similar case (within the meaning of section
368(a)(3)), section 382 shall not apply to any ownership change
resulting from such a reorganization or proceeding if a petition in such
case was filed with the court before August 14, 1986. Accordingly, any
shift in ownership in the loss corporation arising out of such
reorganization or proceeding shall not be taken into account for
purposes of determining whether an ownership change occurs on any
testing date that occurs after December 31, 1986.
(ii) Example.
(i) L filed a petition in bankruptcy on September 29, 1985. As a
result of a title 11 bankruptcy reorganization of L that is confirmed by
a court on February 2, 1988, there is a shift in the ownership of L so
that JK increased her interest in L by 24 percentage points relative to
her lowest ownership interest in L during the testing period. JK is the
only 5-percent shareholder of L following the reorganization whose
interest in L increased as a result of the transaction. On December 25,
1988, GK purchases 42 percent of the outstanding stock of L from
shareholders other than JK.
(ii) There is no ownership change on December 25, 1988 because the
24 percentage point increase in JK's ownership interest in L is not
taken into account under paragraph (m)(6)(i) of this section.
(iii) The facts are the same as in (i), except that the acquisitions
by JK and GK occurred on August 5, 1986 and September 26, 1986,
respectively. Because paragraph (m)(6)(i) of this section is only
applicable with respect to the determination of whether an ownership
change has occurred on any testing date that occurs after December 31,
1986, there is an ownership change as a result of GK's acquisition on
September 26, 1986. Accordingly, section 382 is inapplicable to such
ownership change under paragraph (m)(1) of this section because it
occurred prior to January 1, 1987. Under paragraph (d)(2) of this
section, the testing period for determining whether an ownership change
occurs on any subsequent testing date shall commence no earlier than
September 27, 1986.
(6) Transactions of domestic building and loan associations. The
rules of paragraph (j)(2)(iii)(B) of this section (and the application
of those rules by virtue of paragraph (j)(3) of this section) shall not
apply to a public offering of stock
[[Page 489]]
by a domestic building and loan association described in section 591 (or
any corporation that owns stock in the association meeting the
requirements of section 1504(a)(2)) prior to January 1, 1989. In the
case of any transaction described in the preceding sentence, any
transitory ownership of stock by any entity that is an underwriter shall
be disregarded so that the rules of paragraph (j)(1) of this section
shall not apply to treat such stock as owned by the owners of the
underwriter and thus the rules of paragraph (j)(3)(i) of this section
shall not apply to the disposition of such stock by the underwriter. For
purposes of this paragraph (m)(7)--
(i) Ownership shall be considered transitory only with respect to an
underwriter acquiring stock in a firm commitment underwriting to the
extent the stock is disposed of pursuant to the offer (but in no event
later than sixty (60) days after the initial offering) and,
(ii) To the extent a transaction may be described both by paragraph
(j)(2)(iii)(B) of this section and any other provision of paragraph
(j)(2)(iii) or (3) of this section, paragraph (j)(2)(v)(A) of this
section shall not apply and the transaction shall be treated as
described solely by paragraph (j)(2)(iii)(B) of this section.
(7) Transactions not subject to section 382--(i) Application of old
section 382. Old section 382 shall not apply to a loss corporation on or
after the date on which an ownership change occurs, but only if such
ownership change results in the application of the section 382
limitation (as defined in section 382(b)) with respect to the loss
corporation.
(ii) Effect on testing period. The application of old section 382 to
a transaction is disregarded for purposes of paragraph (d)(2) of this
section unless the transaction that results in such application is the
last component of an ownership change after May 5, 1986 that is not
subject to section 382 under the effective date rules of this paragraph
(m) (e.g., an ownership change occurring as the result of an
individual's purchase of more than 50 percent of L stock on any date on
or before December 31, 1986).
(iii) Termination of old section 382. [Reserved]
(8) Options issued or transferred before January 1, 1987--(i)
Options issued before May 6, 1986. An option issued before May 6, 1986,
is subject to the rules of paragraph (h)(4) of this section only if it
is transferred by (or to) a 5-percent shareholder (or a person who would
be a 5-percent shareholder if the option were treated as exercised) on
or after such date. In all other cases, such an option shall not be
subject to paragraph (h)(4)(i) of this section, but shall be subject to
paragraph (h)(4)(xii) of this section. Thus, for example, a warrant to
acquire stock of the loss corporation issued before May 6, 1986 shall
not be subject to paragraph (h)(4) of this section unless the warrant is
transferred by (or to) a 5-percent shareholder. The exercise of such a
warrant, however, would be taken into account as required by this
paragraph (m)(8)(i) and paragraph (h)(4)(xii) of this section.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986. An option issued or transferred on or after May 6, 1986, and
before September 18, 1986, is subject to the rules of paragraph (h)(4)
of this section.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987. An option issued or transferred on or after September
18, 1986, and before January 1, 1987, is subject to the rules of
paragraph (h)(4) of this section, except that the option shall be
treated for purposes of this section as if it never had been issued in
the event that either--
(A) The option lapses unexercised or is irrevocably forfeited by the
holder thereof, or
(B) On the date the option was issued, there was no significant
likelihood that such option would be exercised within the five-year
period from the date of such issuance and a purpose for the issuance of
the option was to cause an ownership change prior to January 1, 1987.
(9) Examples. The rules of this paragraph (m) may be illustrated by
the following examples.
Example (1) (i) A owns all 100 outstanding shares of L stock. A
sells 11 shares to B on January 1, 1986. The January 1, 1986 testing
date is disregarded under paragraph (m)(3) of this section. A sells
another 40 shares to B on
[[Page 490]]
January 1, 1988. B's second stock purchase is an owner shift that does
not result in an ownership change. B's percentage ownership interest on
the testing date (51 percent) is only 40 percentage points greater than
the lowest percentage of L stock owned by B at any time during the
testing period (11 percent on and after May 6, 1986).
(ii) The facts are the same as in (i). In addition A sells 20 shares
of his L stock to C on July 1, 1990. C's stock purchase is an owner
shift. Because B and C together have increased their respective
ownership interests in L by 40 and 20 percentage points relative to
their lowest percentage stock ownership interests in L at any time
during the testing period, C's purchase causes an ownership change. The
testing period for any subsequent ownership change begins on the first
day following C's acquisition, July 2, 1990.
Example (2) (i) C has owned 100 percent of L since March 22, 1980.
On October 13, 1986, P merges into L. As a result of the merger, 40
percent of L stock is acquired by A, the sole shareholder of P. The
merger of P into L is both an equity structure shift and an owner shift.
The transaction, however, is not an ownership change with respect to L,
because A's percentage ownership interest has increased by only 40
percentage points. On August 22, 1987, B purchases 15 percent of the L
stock from C. B's purchase constitutes an owner shift resulting in an
ownership change that is subject to section 382 because the aggregate
increases in percentage ownership by B and C (respectively 40 percent
and 15 percent) is more than 50 percentage points.
(ii) The facts are the same as in (i), except that the plan of
reorganization is adopted on October 13, 1986, and the merger is
completed on July 22, 1987. The result is the same as in (i).
(iii) The facts are the same as in (ii), except that the
reorganization is completed on August 22, 1987, and B's purchase of the
L stock occurs one month earlier, on July 22, 1987. Assume that after
the reorganization on August 22, 1987, A and B own 40 percent and 15
percent, respectively, of L stock. Although the merger occurred pursuant
to a plan of reorganization adopted before 1987, L is subject to section
382 following the equity structure shift, because the merger would not
have caused an ownership change if it had been completed in 1986 after
the commencement of the L's testing period.
(iv) The facts are the same as in (ii), except that B's purchase
occurs on June 7, 1986. Assume that immediately after the reorganization
on August 22, 1987, A and B own 40 percent and 15 percent, respectively,
of L stock. Since the reorganization pursuant to a plan adopted before
1987, taken together with the other shifts in the ownership of L's stock
between May 5, 1986, and December 31, 1986, would have caused an
ownership change, section 382 does not apply as a result of the merger.
Since an ownership change occurs as a result of the merger, L's testing
period for purposes of any subsequent ownership change begins on October
14, 1986.
(v) The facts are the same as in (iv), except that B makes an
additional purchase from C of one percent of L's stock on February 14,
1987. The result is the same as in (iv). B's additional purchase,
however, is taken into account for the purpose of determining whether
there is a second ownership change with respect to L.
[T.D. 8149, 52 FR 29675, Aug. 11, 1987, as amended by T.D. 8264, 54 FR
38666, Sept. 20, 1989; T.D. 8277, 54 FR 52936, Dec. 26, 1989; T.D. 8352,
56 FR 29434, June 27, 1991; T.D. 8405, 57 FR 10741, Mar. 30, 1992; T.D.
8407, 57 FR 12210, Apr. 9, 1992; T.D. 8428, 57 FR 38282, Aug. 24, 1992;
T.D. 8440, 57 FR 45712, Oct. 5, 1992; 57 FR 52827, Nov. 5, 1992; T.D.
8490, 59 FR 51573, Oct. 4, 1993; T.D. 8531, 59 FR 12837, Mar. 18, 1994;
T.D. 8679, 61 FR 33315, June 27, 1996; T.D. 8825, 64 FR 36177, July 2,
1999]
Sec. 1.382-3 Definitions and rules relating to a 5-percent shareholder.
(a) Definitions--(1) Entity--(i) In general. An entity is any
corporation, estate, trust, association, company, partnership or similar
organization. An entity includes a group of persons who have a formal or
informal understanding among themselves to make a coordinated
acquisition of stock. A principal element in determining if such an
understanding exists is whether the investment decision of each member
of a group is based upon the investment decision of one or more other
members. However, the participation by creditors in formulating a plan
for an insolvency workout or a reorganization in a title 11 or similar
case (whether as members of a creditors' committee or otherwise) and the
receipt of stock by creditors in satisfaction of indebtedness pursuant
to the workout or reorganization do not cause the creditors to be
considered an entity.
(ii) Examples. The following examples illustrate the provisions of
paragraph (a)(1)(i) of this section.
Example 1. (i) L corporation has 1,000 shares of common stock
outstanding. For the three-year period ending on October 1, 1992, L's
stock was owned by unrelated individuals, none of whom owned five
percent or more of L. A group of 20 individuals who previously owned no
stock (the ``Group'') agree among themselves to acquire more than 5
percent of L's stock. The Group is not a corporation,
[[Page 491]]
trust, association, partnership or company. On October 1, 1992, pursuant
to their understanding, the members of the Group purchase 600 shares of
L common stock from the old shareholders of L (a total of 60 percent of
L stock), with each member purchasing 30 shares.
(ii) Before the members of the Group acquired L's stock on October
1, 1992, no individual or entity owned, directly or indirectly, five
percent or more of the stock of L. As a result, all shareholders were
aggregated into a public group and L was considered to be owned by a
single 5-percent shareholder (``Public L'') in accordance with Sec.
1.382-2T (g)(1) and (j)(1).
(iii) Under paragraph (a)(1)(i) of this section, the members of the
Group have a formal or informal understanding among themselves to make a
coordinated acquisition of stock and, therefore, the Group is an entity.
Thus, the acquisition of more than five percent of the stock of L on
October 1, 1992, by members of the Group is not disregarded under Sec.
1.382-2T(e)(1)(ii). Because no member of the Group owns, directly or
indirectly, five percent or more of the stock of L, Sec. Sec. 1.382-2T
(g)(1) and (j)(1) require that the members of the Group be aggregated
into a separate public group, which will be presumed to consist of
persons unrelated to the members of Public L. Because there is a shift
of more than fifty percentage points in the ownership of L stock during
the three-year testing period ending on October 1, 1992, an ownership
change occurs on October 1, 1992, as a result of the Group's purchase of
the 600 shares.
Example 2. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. L's management is
concerned that L may become subject to a takeover bid. In separate
meetings, L's management meets with potential investors who own no stock
and are friendly to management to convince them to acquire L's stock
based on an understanding that L will assemble a group that in the
aggregate will acquire more than 50 percent of L's stock. On October 1,
1992, 15 of these investors each purchase 4 percent of L's stock.
(ii) Under paragraph (a)(1)(i) of this section, the 15 investors
(the ``Group'') are treated as an entity because the members of the
Group purchase L stock pursuant to a formal or informal understanding
among themselves to make a coordinated acquisition of stock. Sections
1.382-2T (g)(1) and (j)(1) require that on October 1, 1992, the Group be
aggregated into a separate public group, which has increased its
ownership of L stock by 60 percentage points over its lowest level of
ownership in the three-year period ending on October 1, 1992.
Accordingly, an ownership change occurs on that date.
Example 3. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. On October 1, 1992, an
investment advisor advises its clients that it believes L's stock is
undervalued and recommends that they acquire L stock. Acting on the
investment advisor's recommendation, 20 unrelated individuals purchase 6
percent of L's stock in aggregate, with each individual purchasing less
than 5 percent. Each client's decision was not based upon the investment
decisions made by one or more other clients.
(ii) Because there is no formal or informal understanding among the
clients to make a coordinated acquisition of L stock, their purchase of
stock is not made by an entity under paragraph (a)(1)(i) of this
section. As a result, they remain part of the public group which owns L
stock, and no owner shift results upon their purchase of L stock under
Sec. 1.382-2T(e)(1)(ii).
(iii) The result in this example would be the same under paragraph
(a)(3)(i) of this section if the only additional fact was that the
investment advisor is also the underwriter (without regard to whether it
is a firm commitment or best efforts underwriting) for a primary or
secondary offering of L stock.
(iv) Assume that the facts are the same except that, instead of an
investment advisor recommending that clients purchase L stock, the
trustee of several trusts qualified under section 401(a) sponsored by
unrelated corporations causes each trust to purchase the L stock. In
this case, the result is the same, so long as the investment decision
made on behalf of each trust was not based on the investment decision
made on behalf of one or more of the other trusts.
(iii) Effective date. (A) In general. The second, third and fourth
sentences of paragraph (a)(1)(i) of this section and Examples 1, 2 and 3
of paragraph (a)(1)(ii) of this section apply to testing dates
(determined by applying such sentence and examples) on or after November
20, 1990, but with respect to any group of persons that pursuant to a
formal or informal understanding among themselves makes a coordinated
acquisition of stock before November 20, 1990, only if the group
increases or decreases its ownership of stock of the loss corporation
relative to its percentage ownership interest at the close of November
19, 1990, by five percentage points or more on or after November 20,
1990.
(B) Special rule. If pursuant to a formal or informal understanding
among
[[Page 492]]
themselves a group consisting only of regulated investment companies
under section 851, qualified trusts under section 401, common trust
funds under section 584, or trusts or estates that are clients of a
trust department of a bank under section 581, make a coordinated
acquisition of stock before November 20, 1990, the second, third and
fourth sentences of paragraph (a)(1)(i) of this section and Examples 1,
2, and 3 of paragraph (a)(1)(ii) of this section apply for testing dates
(determined by applying such sentences and examples) on or after
November 20, 1990, only if the group increases its ownership of stock of
the loss corporation relative to its percentage ownership interest at
the close of November 19, 1990, by five percentage points or more on or
after November 20, 1990.
(C) Example. The following example illustrates the provisions of
paragraph (a)(1)(iii) of this section.
Example. Prior to November 1, 1990, L, a loss, corporation, is owned
entirely by 1,000 unrelated individuals, none of whom owns as much as 5
percent of the stock of L (``Public L''). On November 1, 1990, 15
individuals (the ``Group'') each acquired 3 percent, or 45 percent, in
total, of L stock pursuant to an understanding among themselves to make
a coordinated acquisition of stock. The Group is not a corporation,
trust, association, partnership or company. On March 1, 1992, six
members of the Group each purchased an additional one percent of L
stock, or 6 percent, in total, pursuant to the understanding.
Accordingly, the Group increased its ownership in L stock by 51
percentage points during the three-year testing period ending on March
1, 1992. As a result, an ownership change of L occurs on March 1, 1992.
(2) [Reserved]
(b)-(i) [Reserved]
(j) Modification of the segregation rules of Sec. 1.382-
2T(j)(2)(iii) in the case of certain issuances of stock--(1)
Introduction. This paragraph (j) exempts, in whole or in part, certain
issuances of stock by a loss corporation from the segregation rules of
Sec. 1.382-2T(j)(2)(iii)(B). Terms and nomenclature used in this
paragraph (j), and not otherwise defined herein, have the same meanings
as in section 382 and the regulations thereunder.
(2) Small issuance exception--(i) In general. Section 1.382-
2T(j)(2)(iii)(B) does not apply to a small issuance (as defined in
paragraph (j)(2)(ii) of this section), except to the extent that the
total amount of stock issued in that issuance and all other small
issuances previously made in the same taxable year (determined in each
case on issuance) exceeds the small issuance limitation. This paragraph
(j)(2) does not apply to an issuance of stock that, by itself, exceeds
the small issuance limitation.
(ii) Small issuance defined. ``Small issuance'' means an issuance
(other than an issuance described in paragraph (j)(6) of this section)
by the loss corporation of an amount of stock not exceeding the small
issuance limitation. For purposes of this paragraph (j)(2)(ii), all
stock issued in the issuance is taken into account, including stock
owned immediately after the issuance by a 5-percent shareholder that is
not a direct public group.
(iii) Small issuance limitation--(A) In general. For each taxable
year, the loss corporation may, at its option, apply this paragraph
(j)(2)--
(1) On a corporation-wide basis, in which case the small issuance
limitation is 10 percent of the total value of the loss corporation's
stock outstanding at the beginning of the taxable year (excluding the
value of stock described in section 1504(a)(4)); or
(2) On a class-by-class basis, in which case the small issuance
limitation is 10 percent of the number of shares of the class
outstanding at the beginning of the taxable year.
(B) Class of stock defined. For purposes of this paragraph
(j)(2)(iii), a class of stock includes all stock with the same material
terms.
(C) Adjustments for stock splits and similar transactions.
Appropriate adjustments to the number of shares of a class outstanding
at the beginning of a taxable year must be made to take into account any
stock split, reverse stock split, stock dividend to which section 305(a)
applies, recapitalization, or similar transaction occurring during the
taxable year.
(D) Exception. The loss corporation may not apply this paragraph
(j)(2)(iii) on a class-by-class basis if, during the taxable year, more
than one class of stock is issued in a single issuance (or in two or
more issuances that are
[[Page 493]]
treated as a single issuance under paragraph (j)(8)(ii) of this
section).
(iv) Short taxable years. In the case of a taxable year that is less
than 365 days, the small issuance limitation is reduced by multiplying
it by a fraction, the numerator of which is the number of days in the
taxable year, and the denominator of which is 365.
(3) Other issuances of stock for cash--(i) In general. If the loss
corporation issues stock solely for cash, Sec. 1.382-2T(j)(2)(iii)(B)
does not apply to such stock in an amount equal (as a percentage of the
total stock issued) to one-half of the aggregate percentage ownership
interest of direct public groups immediately before the issuance.
(ii) Solely for cash--(A) In general. A share of stock is not issued
solely for cash if--
(1) The acquiror, as a condition of acquiring that share for cash,
is required to purchase other stock for consideration other than cash;
or
(2) The share is acquired upon the exercise of an option that was
not issued solely for cash or was not distributed with respect to stock.
(B) Related issuances. Paragraph (j)(8)(i) of this section (relating
to the treatment of one or more issuances as a single issuance) does not
apply in determining whether stock is issued solely for cash.
(iii) Coordination with paragraph (j)(2) of this section. This
paragraph (j)(3) does not apply to a small issuance exempted in whole
from Sec. 1.382-2T(j)(2)(iii)(B) under paragraph (j)(2) of this
section. In the case of a small issuance exempted in part from Sec.
1.382-2T(j)(2)(iii)(B) under paragraph (j)(2) of this section, this
paragraph (j)(3) applies only to the portion of the issuance not so
exempted, and that portion is treated as a separate issuance for
purposes of this paragraph (j)(3).
(4) Limitation on exempted stock. The total amount of stock that is
exempted from the application of Sec. 1.382-2T(j)(2)(iii)(B) under
paragraphs (j)(2) and (j)(3) of this section cannot exceed the total
amount of stock issued in the issuance less the amount of that stock
owned by a 5-percent shareholder (other than a direct public group)
immediately after the issuance. Except to the extent that the loss
corporation has actual knowledge to the contrary, any increase in the
amount of the loss corporation's stock owned by a 5-percent shareholder
on the day of the issuance is considered to be attributable to an
acquisition of stock in the issuance.
(5) Proportionate acquisition of exempted stock--(i) In general.
Each direct public group that exists immediately before an issuance to
which paragraph (j)(2) or (j)(3) of this section applies is treated as
acquiring its proportionate share of the amount of stock exempted from
the application of Sec. 1.382-2T(j)(2)(iii)(B) under paragraph (j)(2)
or (j)(3) of this section.
(ii) Actual knowledge of greater overlapping ownership. Under the
last sentence of Sec. 1.382-2T(k)(2), the loss corporation may treat
direct public groups existing immediately before an issuance to which
paragraph (j)(2) or (j)(3) of this section applies as acquiring in the
aggregate more stock than the amount determined under paragraph
(j)(5)(i) of this section, but only if the loss corporation actually
knows that the aggregate amount acquired by those groups in the issuance
exceeds the amount so determined.
(6) Exception for equity structure shifts. This paragraph (j) does
not apply to any issuance of stock in an equity structure shift, except
that paragraph (j)(2) of this section applies (if its requirements are
met) to the issuance of stock in a recapitalization under section
368(a)(1)(E).
(7) Transitory ownership by underwriter disregarded. For purposes of
Sec. 1.382-2T(g)(1) and (j), and this paragraph (j), the transitory
ownership of stock by an underwriter of the issuance is disregarded.
(8) Certain related issuances. For purposes of this paragraph (j),
two or more issuances (including issuances of stock by first tier or
higher tier entities) are treated as a single issuance if--
(i) The issuances occur at approximately the same time pursuant to
the same plan or arrangement; or
(ii) A principal purpose of issuing the stock in separate issuances
rather than in a single issuance is to minimize or avoid an owner shift
under the rules of this paragraph (j).
[[Page 494]]
(9) Application to options. The principles of this paragraph (j)
apply for purposes of applying Sec. 1.382-2T(j)(2)(iii)(D) (relating to
the deemed acquisition of stock as a result of the ownership of an
option).
(10) Issuance of stock pursuant to the exercise of certain options.
If stock is issued on the exercise of a transferable option issued by
the loss corporation, Sec. 1.382-2T(j)(2)(iii)(F) does not apply and,
in applying the last sentence of Sec. 1.382-2T(k)(2), the loss
corporation must take into account any transfers of the option
(including transfers described in Sec. 1.382-2T(h)(4)(xi)). Therefore,
even if transferable options are distributed pro rata to members of
existing public groups, the actual knowledge exception of Sec. 1.382-
2T(k)(2) applies only to the extent that the loss corporation actually
knows that the persons acquiring stock on exercise of the options are
members of a pre-existing public group. Moreover, if transferable
options are issued to more than one public group, Sec. 1.382-
2T(j)(2)(iii)(F) does not apply to treat the options as exercised pro
rata by each such public group as the options are actually exercised.
(11) Application to first tier and higher tier entities. The
principles of this paragraph (j) apply to issuances of stock by a first
tier entity or a higher tier entity that owns 5 percent or more of the
loss corporation's stock (determined without regard to Sec. 1.382-
2T(h)(2)(i)(A)).
(12) Certain non-stock ownership interests. As the context may
require, a non-stock ownership interest in an entity other than a
corporation is treated as stock for purposes of this paragraph (j).
(13) Examples. The provisions of this paragraph (j) are illustrated
by the following examples:
Example 1. (i) L corporation is a calendar year taxpayer. On January
1, 1994, L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a single direct public group
(Public L). On February 1, 1994, L issues to employees as compensation
60 new common shares of the same class. On May 1, 1994, L issues 50 new
common shares of the same class solely for cash. Following each
issuance, L's stock is owned entirely by public shareholders. No other
changes in the ownership of L's stock occur prior to May 1, 1994. L
chooses to determine its small issuance limitation for 1994 on a class-
by-class basis under paragraph (j)(2)(iii)(A)(2) of this section.
(ii) The February issuance is a small issuance because the number of
shares issued (60) does not exceed 100, the small issuance limitation
(10 percent of the number of common shares outstanding on January 1,
1994). Under paragraph (j)(2) of this section, the segregation rules of
Sec. 1.382-2T(j)(2)(iii)(B) do not apply to the February issuance.
Under paragraph (j)(5) of this section, Public L is treated as acquiring
all 60 shares issued.
(iii) The May issuance is a small issuance because the number of
shares issued (50) does not exceed 100, the small issuance limitation
(10 percent of the number of common shares outstanding on January 1,
1994). However, under paragraph (j)(2) of this section, only 40 of the
50 shares issued are exempted from the segregation rules of Sec. 1.382-
2T(j)(2)(iii)(B) because the total number of shares of common stock
issued in the February and May issuances exceeds 100, the small issuance
limitation, by 10. Because the May issuance is solely for cash,
paragraph (j)(3) of this section exempts 5 of the 10 remaining shares
from the segregation rules of Sec. 1.382-2T(j)(2)(iii)(B) (10 shares
multiplied by 50 percent, one-half of Public L's 100 percent ownership
interest immediately before the May issuance--1,060 shares/1,060
shares). Accordingly, under paragraph (j)(5) of this section, Public L
is treated as acquiring 45 shares in the May issuance. Section 1.382-
2T(j)(2)(iii)(B) applies to the remaining 5 shares issued, which are
treated as acquired by a direct public group separate from Public L.
Each such public group is treated as an individual who is a separate 5-
percent shareholder. See Sec. 1.382-2T (g)(1)(iv) and (j)(1)(ii).
(iv) Assume that L actually knows that at least 10 shares of the May
issuance are acquired by members of Public L. The result is the same.
See paragraph (j)(5)(ii) of this section.
(v) Assume instead that L actually knows that all 50 shares of the
May issuance are acquired by members of Public L. Under paragraph
(j)(5)(ii) of this section, L may treat Public L as acquiring 50 shares
in the May issuance.
Example 2. (i) L corporation is a calendar year taxpayer. On January
1, 1995, L has 1,000 shares of Class A common stock outstanding, the
aggregate value of which is $1,000. Five hundred shares are owned by one
direct public group (Public 1), and 500 shares are owned by another
direct public group (Public 2). On August 1, 1995, L issues 200 shares
of Class B common stock for $200 cash. A, an individual, acquires 120
Class B shares in the transaction. The remaining 80 Class B shares are
acquired by public shareholders. No other changes in ownership of L's
stock occur prior to August 1, 1995.
(ii) The August issuance is not a small issuance. The total value of
the Class B
[[Page 495]]
stock issued ($200) exceeds $100, the small issuance limitation as
calculated under paragraph (j)(2)(iii)(A)(1) of this section (10 percent
of the value of L's stock on January 1, 1995). The total number of Class
B shares issued (200) exceeds 0, the small issuance limitation as
calculated under paragraph (j)(2)(iii)(A)(2) of this section (10 percent
of the number of Class B shares outstanding on January 1, 1995).
Accordingly, paragraph (j)(2) of this section does not apply to the
August issuance.
(iii) Paragraph (j)(3) of this section, as limited by paragraph
(j)(4) of this section, exempts 80 Class B shares from the segregation
rule of Sec. 1.382-2T(j)(2)(iii)(B). Paragraph (j)(3) of this section,
without regard to paragraph (j)(4) of this section, would exempt 100
Class B shares: the product of the 200 Class B shares issued and 50
percent (one-half of the combined 100 percent pre-issuance ownership
interest of Public 1 and Public 2). Paragraph (j)(4), however, limits
the total number of Class B shares that may be excluded to 80 Class B
shares: the difference between the 200 shares issued and the 120 shares
acquired by A. Under paragraph (j)(5) of this section, Public 1 and
Public 2 are treated as acquiring the 80 exempted Class B shares.
Because Public 1 and Public 2 each owned 500 Class A shares prior to the
issuance, Public 1 and Public 2 are considered to acquire 40 Class B
shares each.
Example 3. (i) L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a direct public group (Public L).
At the same time pursuant to the same plan, L issues 500 shares of its
stock to its creditors in exchange for its outstanding debt and 500
shares of its stock to the public for cash. Assume that the separate
issuances of stock for debt and stock for cash do not have a principal
purpose of minimizing or avoiding an owner shift. L has no individual 5-
percent shareholders immediately after the issuances.
(ii) The 500 shares of stock issued by L to its former creditors
were not issued solely for cash. Therefore, paragraph (j)(3) of this
section does not apply to those 500 shares, which are treated as owned
by a public group separate from Public L. See Sec. 1.382-
2T(j)(2)(iii)(B)(1)(ii).
(iii) Paragraph (j)(3) of this section applies to the 500 shares of
stock issued by L to the public because that stock was issued solely for
cash. Because the two issuances occur at the same time pursuant to the
same plan, they are generally treated as a single issuance for purposes
of this paragraph (j). See paragraph (j)(8)(i) of this section. The
treatment of the two issuances as a single issuance does not apply,
however, for the purpose of determining whether the stock issued to the
public was issued solely for cash. See paragraph (j)(3)(ii)(B) of this
section.
(iv) Paragraph (j)(3) of this section applies to exempt 250 of the
500 shares issued solely for cash from the segregation rules of Sec.
1.382-2T(j)(2)(iii)(B) (the product of the 500 shares issued for cash
and 50 percent (one-half of the 100 percent pre-issuance ownership
interest of Public L)). The creditors that receive stock in exchange for
their debt would not be treated as acquiring any of the 250 exempted
shares even if their exchange of debt for stock occurs prior to the cash
issuance. Paragraph (j)(5)(i) of this section allocates exempted shares
among the direct public groups that exist immediately before an
issuance. Because the issuance for cash and the issuance for debt are
generally treated as a single issuance, the public group comprised of
the former creditors of L was not a public group that existed
immediately before the issuance.
(v) Three public groups owning L stock exist immediately after the
two issuances. Public L owns 1,250 shares--the 1,000 shares it owned
prior to the issuances plus the 250 shares it is treated as acquiring in
the cash issuance. A separate group comprised of the former creditors of
L owns the 500 shares issued for debt. A third public group owns the 250
shares that are not treated as acquired by Public L in the cash
issuance.
Example 4. (i) L has 1,000 shares of a single class of common stock
outstanding, all of which are owned by a direct public group (Public L).
L issues 1,000 shares pursuant to an offer under which 500 shares must
be acquired in exchange for debt and the remainder may be acquired for
cash. Under the terms of the offer, only persons that acquire stock for
debt are eligible to acquire stock for cash. L has no 5-percent
shareholders other than direct public groups immediately after the
issuance.
(ii) As a condition of acquiring shares for cash, the creditors are
required to purchase stock for debt. Therefore, paragraph (j)(3) of this
section does not apply to any part of the issuance because it is not an
issuance of stock solely for cash. The segregation rules of Sec. 1.382-
2T(j)(2)(iii)(B) apply to treat all 1,000 shares as acquired by a new
public group separate from Public L.
(14) Effective date--(i) In general. Except as otherwise provided in
this paragraph (j)(14), this paragraph (j) applies to issuances or
deemed issuances of stock in taxable years beginning on or after
November 4, 1992.
(ii) Effective date for paragraph (j)(10) of this section. Paragraph
(j)(10) of this section applies to stock issued on the exercise of an
option issued on or after November 4, 1992, unless the option was issued
before May 4, 1993, and the issuer, on or before November 4, 1992,
[[Page 496]]
filed a registration statement with the Securities and Exchange
Commission (or a comparable document with a State agency regulating
securities) for the specific purpose of such issuance.
(iii) Election to apply this paragraph (j) retroactively--(A)
Election. A loss corporation may elect to apply paragraphs (j)(1)
through (j)(13) of this section to all issuances or deemed issuances of
stock to which Sec. 1.382-2T(j)(2)(iii)(B) or (D) applied (or would
have applied taking paragraph (j)(7) of this section into account)
occurring in taxable years beginning prior to November 4, 1992. This
election is made by filing with the loss corporation's first income tax
return filed more than 60 days after October 4, 1993, the statement,
``This is an Election to Apply Sec. 1.382-3(j) Retroactively,''
accompanied by the amended returns and revised information statements
described in paragraphs (j)(14)(iii)(B) and (C) of this section. An
election under this paragraph (j)(14)(iii) is irrevocable.
(B) Amended returns. If the retroactive application of the rules of
this paragraph (j) affects the amount of taxable income or loss for a
prior taxable year, then, except as precluded by the applicable statute
of limitations, the loss corporation (or the common parent of any
consolidated group of which the loss corporation was a member for the
year) must file an amended return for the year that reflects the effects
of the retroactive application of the rules of this paragraph (j). If
the statute of limitations precludes the filing of an amended return for
one or more such prior taxable years, the loss corporation (or the
common parent) must make appropriate adjustments under the principles of
section 382(l)(2)(A) in subsequent taxable years to reflect the
difference between the losses and credits actually used in such prior
taxable years and the amount that would have been used in those years
applying the rules of this paragraph (j).
(C) Revised information statements. If the retroactive application
of the rules of this paragraph (j) affects the information reported on
an information statement filed for any prior taxable year pursuant to
Sec. 1.382-2T(a)(2)(ii), then the loss corporation (or the common
parent of any consolidated group of which the loss corporation was a
member for the year) must file a revised information statement for the
year that reflects the retroactive application of the rules of this
paragraph (j).
(k) Special rules for certain regulated investment companies--(1) In
general. The segregation rules of Sec. 1.382-2T(j)(2) do not apply to
the issuance (as described in Sec. 1.382-2T(j)(2)(iii)(B)(1)(ii)) or
the redemption (as described in Sec. 1.382-2T(j)(2)(iii)(C)) of any
redeemable security, as defined in 15 U.S.C. 80a-2(a)(32), by a
regulated investment company in the ordinary course of business.
(2) Effective date--(i) General rule. Paragraph (k)(1) of this
section applies to testing dates after December 31, 1986. A corporation
may file an amended return for taxable years ending before August 21,
1992 (subject to any applicable statute of limitations) to take into
account paragraph (k)(1) of this section only if corresponding
adjustments are made in amended returns for all affected taxable years
ending after December 31, 1986 (subject to any applicable statute of
limitations).
(ii) Election to apply prospectively. A corporation may elect to
apply paragraph (k)(1) of this section only to testing dates on or after
October 29, 1991. The election must be made on the first return which is
filed after October 20, 1992 by stating on such return, ``This is an
Election To Apply Sec. 1.382-3(k)(1) Only to Testing Dates on or After
October 29, 1991.''
[T.D. 8428, 57 FR 38282, Aug. 24, 1992. Redesignated by T.D. 8440, 57 FR
45712, Oct. 5, 1992; 57 FR 52827, Nov. 5, 1992; T.D. 8490, 59 FR 51573,
Oct. 4, 1993]
Sec. 1.382-4 Constructive ownership of stock.
(a) In general. [Reserved]
(b) Attribution from corporations, partnerships, estates and trusts.
(1) [Reserved].
(2) Limitation. Section 1.382-2T(h)(2)(i)(A) applies solely for
purposes of determining whether a loss corporation has an ownership
change.
(c) Attribution to corporations, partnerships, estates and trusts.
[Reserved]
(d) Treatment of options as exercised--(1) General rule. Except as
provided in paragraph (d)(2) of this section, an option is not treated
as exercised under section 382(l)(3)(A).
[[Page 497]]
(2) Options treated as exercised--(i) Issuance or transfer. For
purposes of determining whether an ownership change occurs, an option is
treated as exercised on the date of its issuance or transfer if, on that
date, the option satisfies--
(A) The ownership test of paragraph (d)(3) of this section,
(B) The control test of paragraph (d)(4) of this section, or
(C) The income test of paragraph (d)(5) of this section.
(ii) Subsequent testing dates. Except as provided in paragraph
(d)(10) of this section, an option that is treated as exercised on the
date of its issuance or transfer is treated as exercised on any
subsequent testing date (as defined in Sec. 1.382-2(a)(4)) for purposes
of determining whether an ownership change occurs.
(3) The ownership test. An option satisfies the ownership test if a
principal purpose of the issuance, transfer, or structuring of the
option (alone or in combination with other arrangements) is to avoid or
ameliorate the impact of an ownership change of the loss corporation by
providing the holder of the option, prior to its exercise or transfer,
with a substantial portion of the attributes of ownership of the
underlying stock.
(4) The control test--(i) In general. An option satisfies the
control test if--
(A) A principal purpose of the issuance, transfer, or structuring of
the option (alone or in combination with other arrangements) is to avoid
or ameliorate the impact of an ownership change of the loss corporation,
and
(B) The holder of the option and any persons related to the option
holder have, in the aggregate, a direct and indirect ownership interest
in the loss corporation of more than 50 percent (determined as if the
increase in such persons' percentage ownership interest that would
result from the exercise of the option in question and any other options
to acquire stock held by such persons, and any other intended increases
in such persons' percentage ownership interest, actually occurred on the
date the option is issued or transferred).
(ii) Operating rules--(A) Person and related persons. For purposes
of this paragraph (d)(4)--
(1) The term person includes an individual or entity, but not a
public group, as defined in Sec. 1.382-2T(f)(13), and
(2) Persons are related if they bear a relationship specified in
section 267(b) or 707(b) or if they have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock, within the meaning of Sec. 1.382-3(a)(1)(i).
(B) Indirect ownership interest. The indirect ownership interest
that the holder of the option and any persons related to the holder have
in the loss corporation is determined by applying the constructive
ownership rules of Sec. 1.382-2T(h), other than Sec. 1.382-
2T(h)(2)(i)(A) (which treats stock attributed pursuant to section
318(a)(2) as no longer being owned by the entity from which it is
attributed) and Sec. 1.382-2T(h)(4) (which treats options as exercised
in certain circumstances). If, however, the application of such
constructive ownership rules without regard to Sec. 1.382-
2T(h)(2)(i)(A) would result in the same stock of the loss corporation
being owned by two or more such persons, appropriate adjustments must be
made so that such stock is not counted more than once in computing the
aggregate ownership interests of such persons.
(5) The income test. An option satisfies the income test if a
principal purpose of the issuance, transfer, or structuring of the
option (alone or in combination with other arrangements) is to avoid or
ameliorate the impact of an ownership change of the loss corporation by
facilitating the creation of income (including accelerating income or
deferring deductions) or value (including unrealized built-in gains)
prior to the exercise or transfer of the option.
(6) Application of the ownership, control, and income tests--(i) In
general. Whether an option satisfies the ownership, control, or income
test depends on all the relevant facts and circumstances. Among the
factors that are relevant in applying all three tests are any business
purposes for the issuance, transfer, or structure of the option, the
likelihood of exercise of the
[[Page 498]]
option (taking into account, for example, any contingencies to its
exercise), transactions related to the issuance or transfer of the
option, and the consequences of treating the option as exercised.
An option is not treated as exercised under any of the three tests,
however, if a principal purpose of its issuance, transfer, or
structuring is to avoid an ownership change by having it treated as
exercised. Paragraphs (d)(6)(ii), (iii) and (iv) of this section
describe additional examples of factors that are relevant in applying
each test. The weight given to any factor depends on all the facts and
circumstances. The presence or absence of any factor described in this
paragraph (d)(6) does not create a presumption.
(ii) Application of ownership test. Among the additional factors
that are taken into account in applying the ownership test are the
relationship, at the time of issuance or transfer of the option, between
the exercise price of the option and the value of the underlying stock,
whether the option provides its holder or a related person with the
right to participate in the management of the loss corporation or with
other rights that ordinarily would be afforded to owners of the
underlying stock, and the existence of reciprocal options (e.g., a call
option held by the prospective purchaser and a corresponding put option
held by the prospective seller). The ability of the holder of an option
with a fixed exercise price to share in future appreciation of the
underlying stock is also a relevant factor, but is not sufficient, by
itself, for the option to satisfy the ownership test. Conversely, the
fact that the holder of such an option does not bear the risk of loss
due to declines in value of the underlying stock does not preclude the
option from satisfying the ownership test.
(iii) Application of control test. Among the additional factors that
are taken into account in applying the control test are the economic
interests in the loss corporation of the option holder or related
persons and the influence of those persons over the management of the
loss corporation (in either case, through the option or a related
arrangement, or through rights in stock).
(iv) Application of income test. Among the additional factors that
are taken into account in applying the income test are whether, in
connection with the issuance or transfer of the option, the loss
corporation engages in income acceleration transactions or the holder of
the option or a related person purchases stock (including section
1504(a)(4) stock) from, or makes a capital contribution or loan to, the
loss corporation that can reasonably be expected to avoid or ameliorate
the impact of an ownership change. Examples of income acceleration
transactions are those outside the ordinary course of the loss
corporation's business that accelerate income or gain into the period
prior to the exercise of the option (or defer deductions to the period
after the exercise of the option). A stock purchase, capital
contribution, or loan is more probative toward an option satisfying the
income test the larger the amount received by the loss corporation in
the transaction or related transactions. A stock purchase, capital
contribution, or loan is generally not taken into account in applying
the income test if it is made to enable the loss corporation to continue
basic operations of its business (e.g., to meet the monthly payroll or
fund other operating expenses of the loss corporation).
(7) Safe harbors. Except as provided in paragraph (d)(7)(i) of this
section, an option described in this paragraph (d)(7) is not treated as
exercised pursuant to the ownership, control, or income test. The
failure of an option to be described in this paragraph (d)(7) does not
affect the determination of whether the option satisfies the ownership,
income, or control test. The following options are described in this
paragraph (d)(7):
(i) Contracts to acquire stock. A stock purchase agreement or a
similar arrangement, the terms of which are commercially reasonable, in
which the parties' obligations to complete the transaction are subject
only to reasonable closing conditions, and which is closed on a change
date within one year after it is entered into. An option is not exempt
from the income test of paragraph (d)(5) of this section solely by
reason of its description in this paragraph (d)(7)(i).
[[Page 499]]
(ii) Escrow, pledge, or other security agreements. An option that is
part of a security arrangement in a typical lending transaction
(including a purchase money loan), if the arrangement is subject to
customary commercial conditions. For this purpose, a security
arrangement includes, for example, an agreement for holding stock in
escrow or under a pledge or other security agreement, or an option to
acquire stock contingent upon a default under a loan.
(iii) Compensatory options. An option to acquire stock in a
corporation with customary terms and conditions provided to an employee,
director, or independent contractor in connection with the performance
of services for the corporation or a related person (and that is not
excessive by reference to the services performed) and which--
(A) Is nontransferable within the meaning of Sec. 1.83-3(d); and
(B) Does not have a readily ascertainable fair market value as
defined in Sec. 1.83-7(b) on the date the option is issued.
(iv) Options exercisable only upon death, disability, mental
incompetency, or retirement. An option entered into between stockholders
of a corporation (or a stockholder and the corporation) with respect to
stock of either stockholder, that is exercisable only upon the death,
disability, mental incompetency of the stockholder, or, in the case of
stock acquired in connection with the performance of services for the
corporation or a related person (and that is not excessive by reference
to the services performed), the stockholder's retirement.
(v) Rights of first refusal. A bona fide right of first refusal with
customary terms, entered into between stockholders of a corporation (or
between the corporation and a stockholder), and regarding the
corporation's stock.
(vi) Options designated in the Internal Revenue Bulletin. An option
designated by the Internal Revenue Service in the Internal Revenue
Bulletin as being exempt from one or more of the ownership, control, or
income tests. See Sec. 601.601(d)(2)(ii) of this chapter (relating to
the Internal Revenue Bulletin).
(8) Additional rules--(i) Contracts to acquire stock. For purposes
of this paragraph (d), a contract is considered to be issued or
transferred on the date it is entered into or assigned, respectively.
(ii) Indirect transfer of an option. If an entity is formed or
availed of for a principal purpose of facilitating an indirect transfer
of an option by issuing or transferring interests in the entity, an
issuance or transfer of an interest in the entity will be treated as a
transfer of the option for purposes of applying the ownership, control,
and income tests of paragraphs (d)(3) through (5) of this section.
(iii) Options related to interests in non-corporate entities. The
rules of this paragraph (d) apply, with appropriate adjustments, to
options to acquire or transfer interests in non-corporate entities.
(iv) Puts. In applying the rules of this section to puts,
appropriate adjustments must be made to take into account that the put
provides its holder with a right to transfer, instead of acquire, stock.
(9) Definition of option--(i) In general. Any contingent purchase,
warrant, convertible debt, put, stock subject to a risk of forfeiture,
contract to acquire stock, or similar interest is treated as an option
for purposes of this paragraph (d), regardless of whether it is
contingent or otherwise not currently exercisable.
(ii) Convertible stock. Convertible stock is treated as an option
for purposes of this paragraph (d) (in addition to being treated as
stock under Sec. 1.382-2(a)(3)(ii)) only if the terms of the conversion
feature permit or require consideration other than the stock being
converted.
(iii) Series of options. For purposes of this paragraph (d), an
option to acquire an option with respect to the stock of the loss
corporation, and each one of a series of such options, is treated as an
option to acquire such stock.
(iv) General principles of tax law. This paragraph (d) does not
affect the determination under general principles of tax law (such as
substance over form) of whether an instrument is an option or stock.
(10) Subsequent treatment of options treated as exercised on a
change date--(i) In general. The following rules apply to options that
are treated as exercised
[[Page 500]]
under paragraph (d)(2) of this section on a change date:
(A) The option is not treated as exercised under paragraph (d)(2) of
this section on any testing date after the change date and prior to a
transfer of the option that would itself (i.e., without regard to the
purposes for the issuance or any prior transfers of the option) cause
the option to satisfy the ownership test of paragraph (d)(3) of this
section, the control test of paragraph (d)(4) of this section, or the
income test of paragraph (d)(5) of this section; and
(B) The exercise of the option, if by the person who owned the
option immediately after the ownership change (or by a transferee of the
option who acquired the option, directly or indirectly, from that person
in one or more transfers described in paragraph (d)(11) of this
section), does not contribute to another ownership change on any testing
date on or after the date of exercise.
(ii) Alternative look-back rule for options exercised within 3 years
after change date. If a loss corporation, on its return, as originally
filed, for a taxable year that includes a change date, properly treats
an option as exercised under paragraph (d)(2) of this section on the
change date, and the option is actually exercised within three years
after the change date, the loss corporation may treat the rules of
paragraph (d)(10)(i) of this section as inapplicable to the option and
instead treat the option as having been exercised on the change date for
the purpose of determining whether an ownership change occurs on any and
all testing dates after the change date (filing such amended returns as
may be necessary for taxable years ending after the change date and
before the date of exercise of the option). A transfer after the change
date of an option to which this paragraph (d)(10)(ii) applies is treated
as a transfer of the stock subject to the option. The exercise of an
option to which this paragraph (d)(10)(ii) applies is not taken into
account for the purpose of determining whether an ownership change
occurs on or after the date of exercise.
(11) Transfers not subject to deemed exercise. Paragraph (d)(2) of
this section does not apply to the transfer of an option (including a
transfer described in paragraph (d)(8)(i) or (ii) of this section), if--
(i) Neither the transferor nor the transferee is a 5-percent
shareholder and neither person would be a 5-percent shareholder if all
options held by that person to acquire stock were treated as exercised;
(ii) The transfer is between members of separate public groups
resulting from the application of the segregation rules of Sec. 1.382-
2T(j)(2) and (3)(iii); or
(iii) The transfer occurs in any of the circumstances described in
section 382(l)(3)(B) (relating to stock acquired by reason of death,
gift, divorce, separation, etc.).
(12) Certain rules regarding non-stock interests as stock. Section
1.382-2T(f)(18)(iii) does not apply to treat an option (whether or not
treated as exercised under this paragraph (d)) as stock.
(e) Stock transferred under certain agreements. [Reserved]
(f) Family attribution. [Reserved]
(g) Definitions. The terms and nomenclature used in this section,
and not otherwise defined herein, have the same meaning as in section
382 and the regulations thereunder.
(h) Effective date--(1) In general. [Reserved]
(2) Option attribution rules--(i) General rule. The rules of
paragraph (d) of this section apply, instead of the rules of Sec.
1.382-2T(h)(4), on any testing date on or after November 5, 1992. See
paragraph (h)(2)(vi) of this section for an election relating to the
effective date.
(ii) Special rule for control test. An option issued on or before
March 17, 1994, or an option issued within 60 days after that date
pursuant to a plan existing before that date, is not treated as
exercised under the control test provided in paragraph (d)(4) of this
section on any testing date prior to a transfer of the option after
March 17, 1994 that would itself cause the option to satisfy the control
test.
(iii) Convertible stock issued prior to July 20, 1988--(A) In
general. Except as provided in paragraph (h)(2)(iii)(B) of this section,
convertible stock issued prior to July 20, 1988, is not treated as an
option subject to the rules of Sec. 1.382-
[[Page 501]]
2T(h)(4) or paragraph (d)(2) of this section.
(B) Exceptions--(1) Nonvoting convertible preferred stock.
Convertible stock issued prior to July 20, 1988, is treated as an option
subject to the rules of Sec. 1.382-2T(h)(4) or paragraph (d)(2) of this
section if--
(i) The stock, when issued, would be described in section 1504(a)(4)
by disregarding subparagraph (D) thereof and by ignoring the potential
participation in corporate growth that the conversion feature may offer;
and
(ii) The loss corporation makes the election described in Notice 88-
67, 1988-1 C.B. 555 (see Sec. 601.601(d)(2)(ii)(b) of this chapter for
availability of Cumulative Bulletins (C.B.)), on or before the earlier
of the date prescribed in Notice 88-67 or December 7, 1992.
(2) Other convertible stock. Convertible stock issued prior to July
20, 1988, is treated as an option subject to the rules of Sec. 1.382-
2T(h)(4) or paragraph (d)(2) of this section if--
(i) The terms of the conversion feature permit or require the tender
of consideration other than the stock being converted; and
(ii) The loss corporation makes the election described in Notice 88-
67 on or before the date prescribed in the Notice.
(iv) Convertible stock issued on or after July 20, 1988, and before
November 5, 1992. Convertible stock issued on or after July 20, 1988,
and before November 5, 1992, is treated as an option subject to the
rules of Sec. 1.382-2T(h)(4) or paragraph (d) of this section only if--
(A) The stock, when issued, would be described in section 1504(a)(4)
by disregarding subparagraph (D) thereof and by ignoring the potential
participation in corporate growth that the conversion feature may offer;
or
(B) The terms of the conversion feature permit or require the tender
of consideration other than the stock being converted.
(v) Certain options in existence immediately before and after an
ownership change. If an option existed immediately before and after an
ownership change occurring on a testing date to which Sec. 1.382-
2T(h)(4) applies--
(A) The option is not treated as exercised under paragraph (d)(2) of
this section on any testing date after the change date and prior to a
transfer of the option that would itself cause the option to satisfy the
ownership test of paragraph (d)(3) of this section, the control test of
paragraph (d)(4) of this section, or the income test of paragraph (d)(5)
of this section; and
(B) Except as provided in Sec. 1.382-2T(m)(4)(vi) (which relates to
the effective date of the rules provided in Sec. 1.382-2T(h)(4) and
includes a special rule related to options that are actually exercised
within 120 days after they are treated as exercised under that section),
the actual exercise of the option, if by the person who owned the option
immediately after the ownership change (or by a transferee of the option
who acquired the option, directly or indirectly, from that person in one
or more transfers described in paragraph (d)(11) of this section), will
not contribute to an ownership change on any testing date on or after
the date of exercise.
(vi) Election to apply Sec. 1.382-2T(h)(4)--(A) In general. If a
loss corporation makes an election under this paragraph (h)(2)(vi),
Sec. Sec. 1.382-2T(a)(2)(i) and (h)(4) (relating to testing dates and
option attribution) apply (instead of the definition of testing date in
Sec. 1.382-2(a)(4) and paragraph (d) of this section) for the purpose
of determining whether an ownership change occurs--
(1) On any testing date on or before May 17, 1994, or
(2) In the case of a loss corporation that is under the jurisdiction
of a court in a title 11 or similar case filed on or before May 17,
1994, subject to Sec. 1.382-9(o)(1), on any testing date at or before
the time the plan of reorganization becomes effective.
(B) Additional consequences of election. If a loss corporation makes
an election under this paragraph (h)(2)(vi)--
(1) In determining whether any convertible preferred stock issued by
the loss corporation during the period that the election is in effect is
treated as stock or as an option, the convertible preferred stock is
treated as if it were issued on November 4, 1992, and
(2) The special effective date for the control test provided in
paragraph (h)(2)(ii) of this section does not apply
[[Page 502]]
to any option with respect to stock of the loss corporation.
(C) Time and manner of making the election. The election described
in paragraph (h)(2)(vi)(A) of this section is made by attaching a
statement to the loss corporation's income tax return for the first
taxable year ending after November 4, 1992, in which a testing date
(within the meaning of Sec. 1.382-2T(a)(2)(i)) occurs, or if such
return is filed on or before May 17, 1994, with its first return filed
after May 17, 1994. However, a loss corporation that is under the
jurisdiction of a court in a title 11 or similar case filed on or before
May 17, 1994, may make the election described in paragraph (h)(2)(vi)(A)
by attaching a statement to its tax return for its first taxable year
ending after that date. The statement must say ``THIS IS AN ELECTION
UNDER Sec. 1.382-4(h)(2)(vi) TO APPLY Sec. 1.382-2T(h)(4) ON OR AFTER
NOVEMBER 5, 1992.'' Any amended returns required by paragraph
(h)(2)(vi)(D) of this section must accompany the return with which the
election is made. An election under paragraph (h)(2)(vi)(A) of this
section is irrevocable.
(D) Amended returns. If an election under this paragraph (h)(2)(vi)
affects the amount of taxable income or loss for a prior taxable year,
the loss corporation (or the common parent of any consolidated group of
which the loss corporation was a member for the year) must file an
amended return for the year that reflects the effect of the election.
(3) Special rule for options subject to attribution under Sec.
1.382-2T(h)(4). Section Sec. 1.382-2T(h)(4)(i) does not apply to any
option designated by the Internal Revenue Service in the Internal
Revenue Bulletin as being excepted from the operation of Sec. 1.382-
2T(h)(4)(i).
[T.D. 8531, 59 FR 12837, Mar. 18, 1994, as amended by T.D. 8825, 64 FR
36178, July 2, 1999]
Sec. 1.382-5 Section 382 limitation.
(a) Scope. Following an ownership change, the section 382 limitation
for any post-change year is an amount equal to the value of the loss
corporation multiplied by the long-term tax-exempt rate that applies
with respect to the ownership change, and adjusted as required by
section 382 and the regulations thereunder. See, for example, section
382(b)(2) (relating to the carryforward of unused section 382
limitation), section 382(b)(3)(B) (relating to the section 382
limitation for the post-change year that includes the change date),
section 382(m)(2) (relating to short taxable years), and section 382(h)
(relating to recognized built-in gains and section 338 gains).
(b) Computation of value. [Reserved]
(c) Short taxable year. The section 382 limitation for any post-
change year that is less than 365 days is the amount that bears the same
ratio to the section 382 limitation determined under section 382(b)(1)
as the number of days in the post-change year bears to 365. The section
382 limitation, as so determined, is adjusted as required by section 382
and the regulations thereunder. This paragraph (c) does not apply to a
52-53 week taxable year that is less than 365 days unless a return is
required under section 443 (relating to short periods) for such year.
(d) Successive ownership changes and absorption of a section 382
limitation--(1) In general. If a loss corporation has two (or more)
ownership changes, any losses attributable to the period preceding the
earlier ownership change are treated as pre-change losses with respect
to both ownership changes. Thus, the later ownership change may result
in a lesser (but never in a greater) section 382 limitation with respect
to such losses. In any case, the amount of taxable income for any post-
change year that can be offset by pre-change losses may not exceed the
section 382 limitation for such ownership change, reduced by the amount
of taxable income offset by pre-change losses subject to any earlier
ownership change(s).
(2) Recognized built-in gains and losses. [Reserved]
(3) Effective date. This paragraph (d) applies to taxable years of a
loss corporation beginning on or after January 1, 1997.
(e) Controlled groups. See Sec. 1.382-8 for rules for determining
the value of a loss corporation that is a member of a controlled group.
(f) Effective date. Except as otherwise provided, this section
applies to a loss
[[Page 503]]
corporation that has an ownership change to which section 382(a), as
amended by the Tax Reform Act of 1986, applies.
[T.D. 8679, 61 FR 33316, June 27, 1996, as amended by T.D. 8825, 64 FR
36178, July 2, 1999]
Sec. 1.382-6 Allocation of income and loss to periods before and after
the change date for purposes of section 382.
(a) General rule. Except as provided in paragraphs (b) and (d) of
this section, a loss corporation must allocate its net operating loss or
taxable income (see section 382(k)(4)), and its net capital loss (see
section 1222(10)) or modified capital gain net income (as defined in
paragraph (g)(4) of this section), for the change year between the pre-
change period and the post-change period by ratably allocating an equal
portion to each day in the year.
(b) Closing-of-the-books election--(1) In general. Subject to
paragraphs (b)(3)(ii) and (d) of this section, a loss corporation may
elect to allocate its net operating loss or taxable income and its net
capital loss or modified capital gain net income for the change year
between the pre-change period and the post-change period as if the loss
corporation's books were closed on the change date. An election under
this paragraph (b)(1) does not terminate the loss corporation's taxable
year as of the change date (e.g., the change year is a single tax year
for purposes of section 172).
(2) Making the closing-of-the-books election--(i) Time and manner. A
loss corporation makes the closing-of-the-books election by including
the following statement on the information statement required by Sec.
1.382-2T(a)(2)(ii) for the change year: ``THE CLOSING-OF-THE-BOOKS
ELECTION UNDER Sec. 1.382-6(b) IS HEREBY MADE WITH RESPECT TO THE
OWNERSHIP CHANGE OCCURRING ON [INSERT DATE].'' The election must be made
on or before the due date (including extensions) of the loss
corporation's income tax return for the change year.
(ii) Election irrevocable. An election under this paragraph (b) is
irrevocable.
(3) Special rules relating to consolidated and controlled groups--
(i) Consolidated groups. If an election under this paragraph (b) is made
with respect to an ownership change occurring in a consolidated return
year, all allocations under this section with respect to that ownership
change must be consistent with the election.
(ii) Controlled groups. If paragraph (b)(3)(i) of this section does
not apply, and if, as part of the same plan or arrangement, two or more
members of a controlled group (as defined in section 1563(a), determined
by substituting ``50 percent'' for ``80 percent'' each place that it
appears, and without regard to section 1563(a)(4)), have ownership
changes and continue to be members of the controlled group (or become
members of the same other controlled group), a closing-of-the-books
election applies only if the election is made by all members having the
ownership changes.
(c) Operating rules for determining net operating loss, taxable
income, net capital loss, modified capital gain net income, and special
allocations. For purposes of this section, for the change year--
(1) In general--(i) Net operating loss or taxable income is
determined without regard to gains or losses on the sale or exchange of
capital assets; and
(ii) Net operating loss or taxable income and net capital loss or
modified capital gain net income are determined without regard to the
section 382 limitation and do not include the following items, which are
allocated entirely to the post-change period--
(A) Any income, gain, loss, or deduction to which section
382(h)(5)(A) applies; and
(B) Any income or gain recognized on the disposition of assets
transferred to the loss corporation during the post-change period for a
principal purpose of ameliorating the section 382 limitation.
(2) Adjustment to net operating loss--(i) Determination of remaining
capital gain. The amount of modified capital gain net income (defined in
paragraph (g)(4) of this section) allocated to each period is offset by
capital losses to which section 382(h)(5)(A) applies and capital loss
carryovers, subject to the section 382 limitation (in the case of
modified capital gain net income allocated to the post-change period).
[[Page 504]]
(ii) Reduction of net operating loss by remaining capital gain. The
amount of net operating loss allocated to each period is reduced (but
not below zero) without regard to the section 382 limitation, first by
the modified capital gain net income remaining in the same period, and
then by the modified capital gain net income remaining in the other
period.
(d) Coordination with rules relating to the allocation of income
under Sec. 1.1502-76(b). If Sec. 1.1502-76 applies (relating to the
taxable year of members of a consolidated group), an allocation of items
under paragraph (a) or (b) of this section is determined after applying
Sec. 1.1502-76. Thus, if a short taxable year under Sec. 1.1502-76 is
a change year for which an allocation under this section is to be made,
the allocation under this section applies only to the items allocated to
that short taxable year under Sec. 1.1502-76.
(e) Allocation of certain credits. The principles of this section
apply for purposes of allocating, under section 383, excess foreign
taxes under section 904(c), current year business credits under section
38, and the minimum tax credit under section 53. The loss corporation
must use the same method of allocation (ratable allocation or closing-
of-the-books) for purposes of sections 382 and 383.
(f) Examples. The rules of this section are illustrated by the
following examples:
Example 1. (i) Assume that the loss corporation, L, a calendar year
taxpayer with a May 26, 1995, change date, determines a section 382
limitation under section 382(b)(1) of $100,000. Thus, for the change
year, its section 382 limitation is $100,000 x (219/365)=$60,000. L
makes the closing-of-the- books election under paragraph (b) of this
section.
(ii) Assume that L has a $150,000 capital loss carryover (from its
1994 taxable year) and a $300,000 net operating loss carryover (from its
1994 taxable year) to the change year. L recognizes, in the pre-change
period, $200,000 of ordinary loss, and, in the post-change period,
$150,000 of capital gain and $100,000 of ordinary income. Assume that
section 382(h) does not apply to the capital gain or the ordinary
income.
(iii) L has a $100,000 net operating loss for the change year
($200,000 pre-change loss less $100,000 post-change income), as
determined under paragraph (c)(1)(i) of this section. Because L has no
current year capital losses, L's $150,000 capital gain recognized in the
post-change period is its modified capital gain net income for the
change year (as defined at paragraph (g)(4) of this section). L
allocates $100,000 of net operating loss to the pre-change period and
$150,000 of modified capital gain net income to the post-change period.
(iv) Under paragraph (c)(2)(i) of this section, L uses its capital
loss carryover to offset its modified capital gain net income allocated
to the post-change period, subject to its section 382 limitation. L's
section 382 limitation is $60,000, so L uses $60,000 of its capital loss
carryover to offset $60,000 of its $150,000 modified capital gain net
income. L has absorbed its entire section 382 limitation for the change
year and has $90,000 of modified capital gain net income remaining in
the post-change period.
(v) Under paragraph (c)(2)(ii) of this section, L offsets its
$100,000 net operating loss allocated to the pre-change period by the
$90,000 of modified capital gain net income remaining in the post-change
period, without regard to the section 382 limitation, thereby reducing
its pre-change net operating loss to $10,000.
(vi) From its 1994 taxable year, L will carry over $90,000 of
capital loss and $300,000 of net operating loss to its 1996 taxable
year. From its 1995 taxable year, L will carry over $10,000 of net
operating loss subject to the section 382 limitation to its 1996 taxable
year.
Example 2. (i) Assume the facts of Example 1, except that L does not
make the closing-of-the-books election under paragraph (b) of this
section.
(ii) L ratably allocates its $100,000 net operating loss and its
$150,000 of modified capital gain net income for the change year.
$40,000 of net operating loss ($100,000 x (146/365)) and $60,000 of
modified capital gain net income ($150,000 x (146/365)) are allocated to
the pre-change period. $60,000 of net operating loss ($100,000 x (219/
365)) and $90,000 of modified capital gain net income ($150,000 x (219/
365)) are allocated to the post-change period.
(iii) Under paragraph (c)(2)(i) of this section, L uses its capital
loss carryovers to offset modified capital gain net income. The capital
loss carryovers offset the $60,000 modified capital gain net income
allocated to the pre-change period without limitation. Subject to the
section 382 limitation, the remaining $90,000 of capital loss carryovers
offset the modified capital gain net income allocated to the post-change
period. Accordingly, L uses $60,000 of its capital loss carryovers to
offset $60,000 of its $90,000 modified capital gain net income allocated
to the post-change period. L has absorbed its entire section 382
limitation for the change year.
(iv) Under paragraph (c)(2)(ii) of this section, L's $60,000 net
operating loss allocated
[[Page 505]]
to the post-change period is offset by its remaining $30,000 of post-
change modified capital gain net income, reducing its post-change net
operating loss to $30,000.
(v) From its 1994 taxable year, L will carry over $30,000 of capital
loss and $300,000 of net operating loss to its 1996 taxable year. From
its 1995 taxable year, L will carry over $70,000 of net operating loss
($40,000 pre-change +$30,000 post-change) to its 1996 taxable year. The
$40,000 pre-change portion of that carryover is subject to the section
382 limitation.
(g) Definitions and nomenclature. The terms and nomenclature used in
this section and not otherwise defined herein have the same meanings as
in sections 382 and 383 and the regulations thereunder. For purposes of
this section:
(1) Change year. A loss corporation's taxable year that includes the
change date is its change year.
(2) Pre-change period. The pre-change period is the portion of the
change year ending on the close of the change date.
(3) Post-change period. The post-change period is the portion of the
change year beginning with the day after the change date.
(4) Modified capital gain net income. A loss corporation's modified
capital gain net income is the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or exchanges
for the change year, determined by excluding any short-term capital
losses under section 1212.
(h) Effective date. This section applies to ownership changes
occurring on or after June 22, 1994.
[T.D. 8546, 59 FR 32080, June 22, 1994]
Sec. 1.382-7 Built-in gains and losses. [Reserved]
Sec. 1.382-8 Controlled groups.
(a) Introduction. This section provides rules to adjust the value of
a loss corporation that is a member of a controlled group of
corporations on a change date so that the same value is not included
more than once in computing the limitations under section 382 for the
loss corporations that are members of the controlled group. In general,
the adjustment is made under paragraph (c) of this section by reducing
the value of the loss corporation by the value of the stock of each
component member of the controlled group that the loss corporation owns
immediately after the ownership change. The loss corporation's value
may, however, be increased under paragraph (c) of this section by any
amount of value that the other member elects to restore to the loss
corporation.
(b)(1) Controlled group loss and controlled group with respect to a
controlled group loss--(1) In general. A controlled group loss is a pre-
change loss (or a net unrealized built-in loss) of a loss corporation
that is attributable to a taxable year of the corporation with respect
to which the corporation is a component member of a controlled group (as
defined by paragraphs (e)(2) and (3) of this section). The controlled
group with respect to each controlled group loss is composed of the loss
corporation and each other corporation that is a component member of a
controlled group that includes the loss corporation both--
(1)(i) With respect to the taxable year to which the controlled
group loss is attributable; and
(1)(ii) On the date the loss corporation has an ownership change.
(2) Presumption regarding net unrealized built-in loss. For purposes
of determining whether a net unrealized built-in loss of a loss
corporation is attributable to a taxable year (the determination year)
with respect to which the corporation is a component member of a
controlled group, the built-in loss in a prior change date asset is
deemed to be attributable to a period ending before the determination
year. A prior change date asset is any asset held by the loss
corporation at all times during the period beginning on the change date
of its most recent ownership change after 1986 (the first change date),
and ending on the first day of the determination year. The built-in loss
in a prior change date asset is the amount by which the adjusted basis
of the asset on the first change date exceeds the fair market value of
the asset on that date. The principles of this paragraph (b)(2) also
apply to items described in section 382(h)(6)(B).
(c) Computation of value. For purposes of computing the limitation
under section 382 with respect to each controlled group loss, the value
of the stock of
[[Page 506]]
each component member of the controlled group with respect to that loss
is determined immediately before the ownership change, and is adjusted
by applying the following rules:
(1) Reduction in value. The value of the stock of each component
member is reduced by the value (immediately before the ownership change
and without regard to any restoration of value or other adjustment under
this section) of the stock of any other component member directly owned
by the component member immediately after the ownership change.
(2) Restoration of value. After the value of the stock of each
component member is reduced pursuant to paragraph (c)(1) of this
section, the value of the stock of each component member is increased by
the amount of value, if any, restored to the component member by another
component member (the electing member) pursuant to this paragraph
(c)(2). The electing member may elect to restore value to another
component member in an amount that does not exceed the lesser of--
(i) The sum of--
(A) The value, determined immediately before the ownership change,
of the electing member's stock (after adjustment under paragraph (c)(1)
of this section and before any restoration of value under this paragraph
(c)(2)); plus
(B) Any amount of value restored to the electing member by another
component member under this paragraph (c)(2); or
(ii) The value, determined immediately before the ownership change,
of the electing member's stock (without regard to any adjustment under
this section) that is directly owned by the other component member
immediately after the ownership change.
(3) Reduction in value by the amount restored. The value of the
stock of the electing member is reduced by any amount of value that the
electing member elects to restore under paragraph (c)(2) of this section
to another component member.
(4) Appropriate adjustments. Appropriate additional adjustments
consistent with paragraphs (c)(1), (2), and (3) of this section must be
made to prevent any duplication of value. Thus, for example, adjustments
must be made to reflect--
(i) Any indirect ownership interest in another component member;
(ii) Any cross ownership of stock by component members of the
controlled group with respect to the controlled group loss; and
(iii) Any value used to determine a limitation under section 382
with respect to controlled group losses from the same period.
(5) Certain reductions in the value of members of a controlled
group. A loss corporation that has an ownership change is required to
make adjustments consistent with this paragraph (c) with respect to its
stock if the stock of another corporation in which it had a direct or
indirect ownership interest was disposed of before the ownership change,
and;
(i) Both corporations were component members of a controlled group--
(A) With respect to a taxable year to which a controlled group loss
of the loss corporation is attributable; and
(B) At any time during the 2 year period before the ownership
change; and
(ii) Both corporations are component members of a controlled group
at any time during the 2 year period following the ownership change.
(d) No double reduction. To the extent consistent with the purposes
of this section, section 382 and this section shall not be applied to
duplicate a reduction in the value of a loss corporation. Thus, for
example, if the value of a loss corporation is reduced under section
382(l)(1) to reflect a capital contribution of stock of a component
member, it is not again reduced by such amount under paragraph (c)(1) of
this section. If this paragraph (d) applies to prevent a reduction in
value from being duplicated, the application of the other rules of this
section, such as those relating to the restoration of value, is
correspondingly limited in a manner consistent with the principles of
this section.
(e) Definitions and nomenclature--(1) Definitions in section 382 and
the regulations thereunder. Except as otherwise provided, the
definitions and nomenclature contained in section 382 and the
regulations thereunder apply to this section.
[[Page 507]]
(2) Controlled group. Controlled group has the same meaning as in
section 1563(a), determined by substituting ``50 percent'' for ``80
percent'' each place that it appears, and without regard to section
1563(a)(4).
(3) Component member. Component member has the same meaning as in
section 1563(b), determined by substituting ``December 31 (or the change
date, if earlier)'' for ``December 31'' each place it appears, and
without regard to section 1563 (b)(2), (b)(3)(C), and (b)(4).
(4) Predecessor and successor corporation. As the context may
require, a reference to a corporation, or component member includes a
reference to a predecessor or successor corporation.
(f) Coordination between consolidated groups and controlled groups.
Some or all of the component members of a controlled group may also be
members of a consolidated group, and a controlled group loss may be
subject to a consolidated section 382 limitation or subgroup section 382
limitation determined under Sec. 1.1502-93. Except as otherwise
provided in this paragraph (f) and Sec. Sec. 1.1502-91 through 1.1502-
99, Sec. 1.1502-93 applies instead of this section when both sections,
by their terms, are otherwise applicable. This section is applicable and
may require an adjustment to value if a member of a consolidated group,
a loss group, or loss subgroup (as those terms are defined in Sec. Sec.
1.1502-1(h) and 1.1502-91) is also a component member of a controlled
group with respect to a controlled group loss. Solely for purposes of
applying this section, a consolidated group, loss group, or loss
subgroup is treated as a single corporation. Thus to determine the
limitation with respect to any portion of the pre-change consolidated
attributes or pre-change subgroup attributes of the loss group or loss
subgroup that is a controlled group loss, the consolidated section 382
limitation or subgroup section 382 limitation is computed by treating
the loss group or the loss subgroup as a single corporation, and
adjusting value in accordance with paragraph (c) of this section. See
paragraph (g) Example 4 of this section.
(g) Examples. For purposes of the examples in this section, unless
otherwise stated, the nomenclature and assumptions of the examples in
Sec. 1.382-2T(b) apply, all corporations file separate income tax
returns on a calendar year basis, the only 5-percent shareholder of a
corporation is a public group, and the facts set forth the only owner
shifts with respect to the corporations during the testing period.
Example 1. Controlled group with respect to a controlled group loss.
(a) Public L owns all of the L stock, L and Public L1 own 30 percent and
70 percent, respectively, of the L1 stock, and L1 owns all of the
corporation T stock. L1 has a net operating loss arising in Year 1 that
is carried over to Year 4. L has a net operating loss arising in Year 2
that is carried over to Year 4. On August 1, Year 3, L acquires 30
percent of the stock of L1, thereby increasing its percentage ownership
interest in L1 to 60 percent. On December 1, Year 3, L1 purchases all of
the stock of corporation S from Public S. On November 1, Year 4, P
acquires all of the L stock. The acquisition by P of all of the L stock
on November 1, Year 4, causes ownership changes of both L and L1 under
the rules of Sec. 1.382-2T. The following is a graphic illustration of
these facts.
[[Page 508]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.019
(b)(1) Under paragraph (b) of this section, the Year 1 net operating
loss carryover of L1 is a controlled group loss because L1 is a
component member of a controlled group with respect to Year 1, the year
to which the loss is attributable. L1 and T compose a controlled group
with respect to the net operating loss carryover because L1 and T are
[[Page 509]]
component members of a controlled group both--
(A) With respect to the taxable year to which L1's net operating
loss carryover is attributable (i.e., Year 1); and
(B) On November 1, Year 4, L1's change date. Although L and S are
component members of L1's controlled group on L1's change date, they are
not component members of the controlled group with respect to the Year 1
net operating loss carryover because they were not component members
with respect to the year to which the net operating loss carryover is
attributable.
(2) The value of L1's stock must therefore be adjusted in accordance
with paragraph (c) of this section to take into account an adjustment
with respect to the T stock (but not the S stock) in computing L1's
limitation under section 382 with respect to its net operating loss
carryover.
(c) Although L is a member of a controlled group composed of L, L1,
S, and T on November 1, Year 4, L's change date, it is not a component
member of a controlled group with respect to Year 2, the taxable year to
which its net operating loss carryover is attributable. Therefore, L's
Year 2 net operating loss carryover is not a controlled group loss under
paragraph (b) of this section and the value of L's stock is not adjusted
in accordance with paragraph (c) of this section to compute L's
limitation under section 382 with respect to the Year 2 net operating
loss carryover.
Example 2. Adjustments to value of the controlled group members. (a)
Since Year 1, A has owned all of the stock of L, L and B have owned 80
percent and 20 percent, respectively, of the stock of corporation P, and
P and C have owned 75 percent and 25 percent, respectively, of the stock
of L1. L and L1 each has a net operating loss for the Year 6 taxable
year that is carried over to its respective Year 7 taxable year. On
December 1, Year 7, A sells all of the L stock to D. The sale results in
ownership changes of both L and L1. Immediately before the ownership
changes, the total value of the L1 stock is $40, the total value of the
P stock (including the value of its L1 stock) is $100, and the total
value of the L stock (including the value of the P stock) is $200. The
following is a graphic illustration of these facts.
[[Page 510]]
[GRAPHIC] [TIFF OMITTED] TR02JY99.020
(b) Under paragraph (b) of this section, the Year 6 net operating
loss carryovers of each of L and L1 are controlled group losses because
each of L and L1 is a component member of a controlled group with
respect to Year 6, the year to which the losses are attributable. L, P,
and L1 compose controlled groups with respect to both Year 6 net
operating loss carryovers because L, P, and L1 are component members of
a controlled group both--
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 6); and
(2) On December 1, Year 7, the change date.
(c) The value of the stock of L1 for purposes of determining its
limitation under section 382 with respect to its net operating loss
carryover from Year 6 is $40. L1 does not elect to restore any value to
P under paragraph (c)(2) of this section.
(d) The value of the stock of P ($100) is reduced under paragraph
(c)(1) of this section by the value of the stock of L1 that it directly
owns, $30 (75%x$40). Following the adjustment, the value of the stock of
P is $70. P elects to restore this entire $70 of value to L.
(e) The value of the stock of L, $200, is reduced under paragraph
(c)(1) of this section by the value of the stock of P it directly owns,
i.e., $80 (80%x$100), and increased under paragraph (c)(2) of this
section by the amount P elects to restore to L, i.e., $70. Thus, the
value of the L stock for purposes of determining L's limitation under
section 382 with respect to its net operating loss carryover from Year 6
is $190 ($200-$80+$70).
Example 3. Limitation on restoration of value. (a) The facts are the
same as in Example 2, except that L1 elects to restore $20 to P. For
purposes of determining L1's limitation under section 382 with respect
to the Year 6 net operating loss carryover, the value of the stock of L1
is $20 ($40-$20) because the value of its stock is reduced under
paragraph (c)(3) of this section by the $20 of value it elects to
restore to P.
[[Page 511]]
(b) The value of the stock of P ($100) is reduced under paragraph
(c)(1) of this section by the value of the L1 stock it directly owns
($30), and is increased under paragraph (c)(2) of this section by the
value that L1 elects to restore to P ($20). Thus, the value of the P
stock is $90 ($100-$30+$20).
(c)(1) P elects to restore to L the maximum value permitted under
this section. The value of the stock of L, $200, is reduced under
paragraph (c)(1) of this section by the value of the P stock it directly
owns ($80), and is increased by the value that P elects to restore to L.
P may elect to restore to L the lesser of--
(A) The sum of the value of its stock immediately after adjustment
under paragraph (c)(1) of this section (i.e., $70) plus the value
restored to it by L1 (i.e., $20) (a total of $90); or
(B) The value of the P stock (without regard to the adjustment
required by paragraphs (c)(1) and (2) of this section) that is directly
owned by L immediately before the ownership change (i.e., $80).
(2) Thus, $80 is the maximum amount that P may elect to restore to
L. Following the restoration of value by P, the value of the L stock for
purposes of determining L's limitation under section 382 is $200 ($200 -
$80 + $80).
Example 4. Coordination with consolidated return regulations. (a) P
and its wholly owned subsidiary L file a consolidated return. L owns 79
percent of the outstanding stock of L1. P acquired the stock of L in
Year 1 and L acquired the stock of L1 in Year 2. The P consolidated
group has a consolidated net operating loss arising in the Year 6
consolidated return year that is carried over to Year 8. L1 has a net
operating loss arising in its Year 6 taxable year that is also carried
over to Year 8. On January 1, Year 8, the P consolidated group has an
ownership change under Sec. 1.1502-92(b)(1)(i) and L1 has an ownership
change under Sec. 1.382-2T.
(b)(1) Under paragraph (b) of this section, the Year 6 net operating
loss carryover of the P group is a controlled group loss because P, L,
and L1 are component members of a controlled group with respect to Year
6, the year to which the loss is attributable. P, L, and L1 compose a
controlled group with respect to the Year 6 net operating loss carryover
of the P loss group because they are component members of a controlled
group both--
(A) With respect to the taxable years to which the net operating
loss carryover is attributable (i.e., Year 6); and -
(B) On January 1, Year 8, the P group's change date.
(2) Because P and L compose a loss group (within the meaning of
Sec. 1.1502-91(c)) with respect to its Year 6 net operating loss
carryover, the P loss group must compute a consolidated section 382
limitation with respect to its Year 6 net operating loss carryover as a
result of the ownership change.
(c) In computing the consolidated section 382 limitation under Sec.
1.1502-93 with respect to the Year 6 net operating loss carryover, the
value of the P stock immediately before the ownership change is reduced
under paragraphs (c)(1) and (f) of this section by the value immediately
before the ownership change of the L1 stock directly owned by L
immediately after the ownership change. L1 may, however, elect to
restore such value to the P consolidated group to the extent permitted
under paragraph (c)(2) of this section.
Example 5. Appropriate adjustments for indirect ownership interest.
(a) Individual A owns all of the stock of L, L owns an 80 percent
interest in the capital and profits of partnership PS, and PS owns 75
percent of the stock of L1. Both L and L1 have net operating losses for
the Year 1 taxable year that are carried over to their respective Year 2
taxable years. On December 19, Year 2, A sells all of the L stock to an
unrelated individual. The sale results in an ownership change of L and
L1.
(b) Under paragraph (b) of this section, the Year 1 net operating
loss carryovers of each of L and L1 are controlled group losses because
each of L and L1 is a component member of a controlled group with
respect to Year 1, the year to which the losses are attributable. L and
L1 compose controlled groups with respect to each corporation's net
operating loss carryovers because L and L1 are component members of a
controlled group both--
(1) With respect to the taxable years to which the net operating
loss carryovers are attributable (i.e., Year 1); and
(2) On December 19, Year 2, the change date.
(c) L has an indirect ownership interest in L1 which, under
paragraph (c)(4) of this section, must be taken into account in applying
this section. As a result, the value of the L stock for purposes of
determining its limitation under section 382 with respect to the Year 1
net operating loss carryover must be reduced by the value of L's
indirect ownership interest in the L1 stock (60 percent) that it owns
through PS immediately before the ownership change, and is increased by
the amount (if any) that L1 elects to restore to L under paragraph
(c)(2) of this section. The value of L1 is reduced under paragraph
(c)(3) of this section to the extent that L1 elects to restore value to
L.
(h) Time and manner of filing election to restore--(1) Statement
required. The election to restore value described in paragraph (c)(2) of
this section must be in the form set forth below. It must be signed on
behalf of both the electing member and the corporation to which
[[Page 512]]
such value is restored by persons authorized to sign their respective
income tax returns. (The common parent of a consolidated group must make
the election on behalf of the group.) It must be filed by the loss
corporation with its income tax return for the taxable year in which the
ownership change occurs (or with an amended return for such year filed
on or before the due date (including extensions) of the income tax
return of any component member with respect to the taxable year in which
the ownership change occurs). The statement must provide that: ``THIS IS
AN ELECTION UNDER Sec. 1.382-8 OF THE INCOME TAX REGULATIONS TO RESTORE
ALL OR PART OF THE VALUE OF [insert name and E.I.N. of the electing
member] TO [insert name and E.I.N. of the corporation to which value is
restored]. The statement must also--
(i) Identify the change date for the loss corporation in connection
with which the election is made;
(ii) State the value of the electing member's stock (without regard
to any adjustment under paragraph (c) of this section) immediately
before the ownership change;
(iii) State the amount of any reduction required under paragraph
(c)(1) of this section with respect to stock of the electing member that
is owned directly or indirectly by the corporation to which value is
restored;
(iv) State the amount of value that the electing member elects to
restore to the corporation; and
(v) State whether the value of either component member's stock was
adjusted pursuant to paragraph (c)(4) of this section.
(2) Revocation of election. An election made under this section is
revocable only with the consent of the Commissioner.
(3) Filing by component member. An electing member must attach a
copy of the statement described in paragraph (h)(1) of this section to
its income tax return (or amended return) for the taxable year which
includes the change date in connection with which the election is made.
(i) References to former temporary regulations. As the context
requires, a reference in this section to Sec. 1.382-8 includes a
reference to Sec. 1.382-8T in effect prior to June 25, 1999, as
contained in 26 CFR part 1 revised as of April 1, 1999, a reference to
Sec. Sec. 1.1502-91, 1.1502-92, 1.1502-93, and Sec. Sec. 1.1502-91
through 1.1502-99 includes a reference to Sec. Sec. 1.1502-91A, 1.1502-
92A, 1.1502-93A and Sec. Sec. 1.1502-91A through 1.1502-99A.
(j) Effective date--(1) In general. This section applies to a loss
corporation that has an ownership change with respect to a controlled
group loss on or after January 1, 1997.
(2) Transition rule--(i) In general. The members of a controlled
group on January 1, 1997, that have had an ownership change with respect
to a controlled group loss before January 1, 1997, must determine the
limitations under section 382 for any post-change year with respect to
controlled group losses by using a reasonable method to preclude the
value of stock of a component member that was owned directly or
indirectly by another member immediately after an ownership change from
being taken into account more than once in determining the limitations
under section 382 with respect to controlled group losses. If such a
reasonable method was not used for a post-change year, subject to the
exception in paragraph (j)(3) of this section, the members of the
controlled group described in the preceding sentence must reduce their
limitations under section 382 for post-change years for which the income
tax return is filed after January 1, 1997, to recapture, as quickly as
possible, any limitation that members took into account in excess of the
amount that would be allowable under this section.
(ii) Special transition rule for controlled groups that had
ownership changes before January 29, 1991. For purposes of this section,
in the case of an ownership change occurring before January 29, 1991,
the controlled group with respect to a controlled group loss does not
include a corporation that is not a component member of the controlled
group on January 29, 1991. Thus, in the case of an ownership change
occurring before January 29, 1991, paragraph (c) of this section does
not require that a loss corporation that is a component member of a
controlled group to disregard the value of stock of another corporation
[[Page 513]]
directly owned immediately after the ownership change in determining the
value of its own stock unless the other corporation is a component
member of the controlled group on January 29, 1991.
(3) Amended returns. A taxpayer that has had an ownership change
before January 1, 1997, may file an amended return for any taxable year
to modify the amount of a limitation under section 382 with respect to a
controlled group loss only if--
(i) The modification complies with the rules contained in this
section for computing a limitation under section 382;
(ii) Any other component member of the controlled group with respect
to the controlled group loss who elects to restore value and whose
taxable income is affected by the election to restore value also files
amended returns that comply with such rules; and
(iii) Corresponding adjustments are made in amended returns for all
taxable years ending after December 31, 1986.
[T.D. 8679, 61 FR 33316, June 27, 1996, as amended by T.D. 8825, 64 FR
36178, July 2, 1999]
Sec. 1.382-9 Special rules under section 382 for corporations under
the jurisdiction of a court in a title 11 or similar case.
(a) Introduction. Either section 382(l)(5) or section 382(l)(6) may
apply to an ownership change which occurs in a title 11 or similar case
(as defined in section 368(a)(3)(A)) if the transaction resulting in the
ownership change is ordered by the court or is pursuant to a plan
approved by the court. Terms and nomenclature used in this section, and
not otherwise defined herein (including the nomenclature and assumptions
in Sec. 1.382-2T(b) relating to the examples) have the same respective
meanings as in section 382 and the regulations thereunder.
(b) Application of section 382(l)(5). section 382(a) does not apply
to any ownership change if--
(1) The old loss corporation is (immediately before the ownership
change) under the jurisdiction of the court in a title 11 or similar
case; and
(2) The pre-change shareholders and qualified creditors of the old
loss corporation (determined immediately before the ownership change)
own (after the ownership change and as a result of being pre-change
shareholders or qualified creditors immediately before the ownership
change) stock of the new loss corporation (or stock of a controlling
corporation if also in bankruptcy) that meets the requirements of
section 1504(a)(2) (determined by substituting ``50 percent'' for ``80
percent'' each place it appears).
(c) [Reserved]
(d) Rules for determining whether stock of the loss corporation is
owned as a result of being a qualified creditor--(1) Qualified creditor.
A qualified creditor is the beneficial owner, immediately before the
ownership change, of qualified indebtedness of the loss corporation. A
qualified creditor owns stock of the new loss corporation (or a
controlling corporation) as a result of being a qualified creditor only
to the extent that the qualified creditor receives stock in full or
partial satisfaction of qualified indebtedness (including interest
accrued on such indebtedness) in a transaction that is ordered by the
court or is pursuant to a plan approved by the court in a title 11 or
similar case. For purposes of this paragraph (d)(1), ownership of stock
after the ownership change is determined without applying the
attribution rules generally applicable under section 382(l)(3)(A) or
Sec. 1.382-2T(h).
(2) General rules for determining whether indebtedness is qualified
indebtedness--(i) Definition. Indebtedness of the loss corporation is
qualified indebtedness if it--
(A) Has been owned by the same beneficial owner since the date that
is 18 months before the date of the filing of the title 11 or similar
case; or
(B) Arose in the ordinary course of the trade or business of the
loss corporation and has been owned at all times by the same beneficial
owner.
(ii) Determination of beneficial ownership. For purposes of
paragraph (d)(2)(i) of this section, beneficial ownership of
indebtedness is determined without applying attribution rules.
(iii) Duty of inquiry. The loss corporation must determine that
indebtedness
[[Page 514]]
that the loss corporation treats as qualified indebtedness, other than
indebtedness to which paragraph (d)(3)(i) of this section applies, has
been owned for the requisite period by the beneficial owner who owns the
indebtedness immediately before the ownership change. The loss
corporation may rely on a statement, signed under penalties of perjury,
by a beneficial owner regarding the amount of indebtedness the
beneficial owner owns and the length of time that the beneficial owner
has owned the indebtedness.
(iv) Ordinary course indebtedness. For purposes of this paragraph
(d)(2), indebtedness arises in the ordinary course of the loss
corporation's trade or business only if the indebtedness is incurred by
the loss corporation in connection with the normal, usual, or customary
conduct of business, determined without regard to whether the
indebtedness funds ordinary or capital expenditures of the loss
corporation. For example, indebtedness (other than indebtedness acquired
for a principal purpose of being exchanged for stock) arises in the
ordinary course of the loss corporation's trade or business if it is
trade debt; a tax liability; a liability arising from a past or present
employment relationship, a past or present business relationship with a
supplier, customer, or competitor of the loss corporation, a tort, a
breach of warranty, or a breach of statutory duty; or indebtedness
incurred to pay an expense deductible under section 162 or included in
the cost of goods sold. A claim that arises upon the rejection of a
burdensome contract or lease pursuant to the title 11 or similar case is
treated as arising in the ordinary course of the loss corporation's
trade or business if the contract or lease so arose.
(3) Treatment of certain indebtedness as continuously owned by the
same owner--(i) In general. For purposes of paragraph (d)(2) of this
section, a loss corporation may treat indebtedness as always having been
owned by the beneficial owner of the indebtedness immediately before the
ownership change if the beneficial owner is not, immediately after the
ownership change, either a 5-percent shareholder or an entity through
which a 5-percent shareholder owns an indirect ownership interest in the
loss corporation (a 5-percent entity). This paragraph (d)(3)(i) does not
apply to indebtedness beneficially owned by a person whose participation
in formulating a plan of reorganization makes evident to the loss
corporation (whether or not the loss corporation had previous knowledge)
that the person has not owned the indebtedness for the requisite period.
(ii) Operating rules. For purposes of paragraph (d)(3)(i) of this
section: (A) If a loss corporation has actual knowledge of a coordinated
acquisition of its indebtedness by a group of persons, through a formal
or informal understanding among themselves, for a principal purpose of
exchanging the indebtedness for stock, the indebtedness (and any stock
received in exchange therefor) is treated as owned by an entity. A
principal element in determining if an understanding exists among
members of a group is whether the investment decision of each member is
based upon the investment decision of one or more other members.
(B) If the loss corporation has actual knowledge regarding stock
ownership described in Sec. 1.382-2T(k)(2), the loss corporation must
take that ownership into account in determining which beneficial owners
of indebtedness are, immediately after the ownership change, 5-percent
shareholders or 5-percent entities. The loss corporation is not required
to take into account an ownership interest described in Sec. 1.382-
2T(k)(4) unless the loss corporation has actual knowledge of the
ownership interest.
(C) The term 5-percent shareholder includes any person who is a 5-
percent shareholder of the loss corporation within the meaning of Sec.
1.382-2T(g), without regard to the option attribution rules of section
382(l)(3)(A) or Sec. 1.382-4(d) (or, if applicable, Sec. 1.382-
2T(h)(4)).
(D) Paragraph (d)(3)(i) of this section does not apply to
indebtedness if the loss corporation has actual knowledge immediately
after the ownership change that the exercise of an option to acquire or
dispose of stock of the loss corporation would cause the beneficial
owner of the indebtedness immediately before the ownership change to
[[Page 515]]
be, after the ownership change, either a 5-percent shareholder or a 5-
percent entity. An interest that is treated as an option under Sec.
1.382-4(d)(9) (or Sec. 1.382-2T(h)(4)(v) if applicable) is treated as
an option for purposes of this paragraph (d)(3)(ii)(D).
(iii) Indebtedness owned by beneficial owner who becomes a 5-percent
shareholder or 5-percent entity. If the beneficial owner of indebtedness
immediately before the ownership change is a 5-percent shareholder or 5-
percent entity immediately after the ownership change, the general rules
of paragraph (d)(2) of this section apply to determine whether the
indebtedness has been owned for the requisite period by the beneficial
owner.
(iv) Example. The following example illustrates paragraph (d)(3) of
this section.
(A)(1) L is a loss corporation in a title 11 case. The plan of
reorganization of L approved by the bankruptcy court provides for the
satisfaction of claims by the issuance of new L common stock to its
creditors as follows:
A--2 percent
B--7.5 percent
C--2.5 percent
P1--3 percent
P2--10 percent
P3--4.9 percent
P4--4.9 percent
P5--4.9 percent
(2) P2 is owned by Public P2. B owns 10 percent of the stock of P1
and L has no actual knowledge of this ownership. L has actual knowledge
that D owns P3, P4 and P5. In addition, L has actual knowledge,
immediately after the ownership change, that C owns an option to acquire
newly-issued stock of L that, if exercised, would increase C's
percentage ownership of L stock from 2.5 percent to 8 percent. An
ownership change of L occurs on the date the plan becomes effective.
(B) Under paragraph (d)(3)(i) of this section, L may treat the
indebtedness owned by A and P1 immediately before the ownership change
as always having been owned by A and P1. Neither A nor P1 is a 5-percent
shareholder immediately after the ownership change. Further, because P1
owns less than 5 percent of the L stock (and L has no actual knowledge
of B's ownership interest in P1), P1 is treated as an individual, and
the L stock owned by P1 is not attributed to any other person, including
B. See Sec. 1.382-2T(h)(2)(iii). Therefore, P1 is not a 5-percent
entity.
(C) Paragraph (d)(3)(i) of this section does not apply to the
indebtedness owned by B, C, P2, P3, P4, or P5. B is a 5-percent
shareholder immediately after the ownership change. L has actual
knowledge immediately after the ownership change that the exercise of
C's option would cause C to be a 5-percent shareholder immediately after
the ownership change. (L does not take into account the effect of the
exercise of the option, however, in determining the percentage stock
ownership of any person other than C because the deemed exercise would
not cause any other person to be a 5-percent shareholder or a 5-percent
entity after the ownership change.) P2 is a 5-percent entity, because
Public P2, a 5-percent shareholder, owns an indirect ownership interest
in L through P2. P3, P4, and P5 are 5-percent entities because D, a 5-
percent shareholder, owns an indirect ownership interest in L through
P3, P4, and P5. Because L has actual knowledge that D would be a 5-
percent shareholder but for the application of Sec. 1.382-
2T(h)(2)(iii), that section does not apply to P3, P4, or P5. See Sec.
1.382-2T(k)(2). Thus, under Sec. 1.382-2T(h)(2)(i), the L stock owned
by P3, P4, and P5 is attributed to D, and D is a 5-percent shareholder.
Because paragraph (d)(3)(i) of this section does not apply to the
indebtedness owned by B, C, P2, P3, P4, and P5, L may treat as qualified
indebtedness only indebtedness that it determines had been owned by such
persons for the requisite period. See paragraph (d)(2)(iii) of this
section.
(4) Special rule if indebtedness is a large portion of creditor's
assets--(i) In general. Indebtedness is not qualified indebtedness if--
(A) The beneficial owner of the indebtedness is a corporation or
other entity that had an ownership change on any day during the
applicable period;
(B) The indebtedness represents more than 25 percent of the fair
market value of the total gross assets (excluding cash or cash
equivalents) of the beneficial owner on its change date; and
(C) The beneficial owner is a 5-percent entity immediately after the
ownership change of the loss corporation (determined by applying the
rules of paragraph (d)(3) of this section).
(ii) Applicable period. For purposes of paragraph (d)(4)(i) of this
section, the term applicable period means the period beginning on the
day 18 months before the filing of the title 11 or similar case (or the
day on which the beneficial owner acquired the indebtedness, if later)
and ending with the change date of the loss corporation.
[[Page 516]]
(iii) Determination of ownership change. For purposes of paragraph
(d)(4)(i) of this section, the determination whether a beneficial owner
of indebtedness has an ownership change is made under the principles of
section 382 and the regulations thereunder, without regard to whether
the beneficial owner is a loss corporation and by beginning the testing
period no earlier than the latest of the day three years before the
change date, the day 18 months before the filing of the title 11 or
similar case, or the day on which the beneficial owner acquired the
indebtedness.
(iv) Reliance on statement. Paragraph (d)(4)(i) of this section does
not apply to indebtedness if the loss corporation obtains a statement,
signed under penalties of perjury, by the beneficial owner of the
indebtedness that states that paragraph (d)(4)(i) of this section does
not apply to the indebtedness.
(5) Tacking of ownership periods--(i) Transferee treated as owning
indebtedness for period owned by transferor. To determine whether
indebtedness transferred in a qualified transfer is qualified
indebtedness, the transferee is treated as having owned the indebtedness
for the period that it was owned by the transferor.
(ii) Qualified transfer. For purposes of paragraph (d)(5)(i) of this
section, a transfer of indebtedness is a qualified transfer if--
(A) The transfer is between parties who bear a relationship to each
other described in section 267(b) or 707(b) (substituting at least 80
percent for more than 50 percent each place it appears in section 267(b)
(and section 267(f)(1)) or 707(b));
(B) The transfer is a transfer of a loan within 90 days after its
origination, pursuant to a customary syndication transaction;
(C) The transfer is a transfer of newly incurred indebtedness by an
underwriter that owned the indebtedness for a transitory period pursuant
to an underwriting;
(D) The transferee's basis in the indebtedness is determined under
section 1014 or 1015 or with reference to the transferor's basis in the
indebtedness;
(E) The transfer is in satisfaction of a right to receive a
pecuniary bequest;
(F) The transfer is pursuant to any divorce or separation instrument
(within the meaning of section 71(b)(2));
(G) The transfer is pursuant to a subrogation in which the
transferee acquires a claim against the loss corporation by reason of a
payment to the claimant pursuant to an insurance policy or a guarantee,
letter of credit or similar security arrangement; or
(H) The transfer is a transfer of an account receivable in a
customary commercial factoring transaction made within 30 days after the
account arose to a transferee that regularly engages in such
transactions.
(iii) Exception. A transfer of indebtedness is not a qualified
transfer for purposes of paragraph (d)(5)(i) of this section if the
transferee acquired the indebtedness for a principal purpose of
benefiting from the losses of the loss corporation by--
(A) Exchanging the indebtedness for stock of the loss corporation
pursuant to the title 11 or similar case; or
(B) Selling the indebtedness at a profit that reflects the
expectation that, by reason of section 382(l)(5), section 382(a) will
not apply to any ownership change resulting from the title 11 or similar
case.
(iv) Debt-for-debt exchanges. If the loss corporation satisfies its
indebtedness with new indebtedness, either through an exchange of new
indebtedness for old indebtedness or a change in the terms of
indebtedness that results in an exchange under section 1001--
(A) The owner of the new indebtedness is treated as having owned
that indebtedness for the period that it owned the old indebtedness; and
(B) The new indebtedness is treated as having arisen in the ordinary
course of the trade or business of the loss corporation if the old
indebtedness so arose.
(6) Effective date--(i) In general. This paragraph (d) applies to
ownership changes occurring on or after March 17, 1994.
(ii) Elections and amended returns--(A) Election to apply this
paragraph (d) retroactively. A loss corporation may elect to apply this
paragraph (d) to an ownership change occurring prior to March 17, 1994.
This election must be made by
[[Page 517]]
the later of the due date (including any extensions of time) of the loss
corporation's tax return for the taxable year which includes the change
date or the date that the loss corporation files its first tax return
after May 16, 1994. The election is made by attaching the following
statement to the return: ``This is an Election to Apply Sec. 1.382-9(d)
Retroactively with Respect to the Ownership Change on [Insert Date of
Ownership Change] That Occurred in Connection with the Title 11 or
Similar Case filed on [Insert Date of Filing].'' This statement must be
accompanied by the amended returns described in paragraph (d)(6)(ii)(C)
of this section. An election under this paragraph (d)(6) is irrevocable.
(B) Election to revoke section 382(l)(5)(H) election. A loss
corporation may elect to revoke a prior election made under section
382(l)(5)(H) with respect to an ownership change occurring before March
17, 1994 by including the following statement with its election to apply
Sec. 1.382-9(d) retroactively: ``This is an Election to Revoke a Prior
Election Made Under Section 382(l)(5)(H) With Respect to the Ownership
Change on [Insert Date of Ownership Change] That Occurred in Connection
With the Title 11 or Similar Case Filed on [Insert Date of Filing].''
(C) Amended returns. If the retroactive application of this
paragraph (d) affects the amount of taxable income or loss for a prior
taxable year, then, except as precluded by the applicable statute of
limitations, the loss corporation (or the common parent of any
consolidated group of which the loss corporation was a member for the
year) must file an amended return for the year that reflects the effects
of the retroactive application of the rules of this paragraph (d). If
the statute of limitations precludes the filing of an amended return for
one or more such prior taxable years, the loss corporation (or the
common parent) must make appropriate adjustments under the principles of
section 382(l)(2)(A) in subsequent taxable years to reflect the
difference between the losses and credits actually used in such prior
taxable years and the amount that would have been used in those years
applying the rules of this paragraph (d).
(e) Option attribution for purposes of determining stock ownership
under section 382(l)(5)(A)(ii)--(1) In general. Solely for purposes of
determining whether the stock ownership requirements of section
382(l)(5)(A)(ii) are satisfied at the time of an ownership change, stock
of the loss corporation (or of a controlling corporation if also in
bankruptcy) that is subject to an option is treated as acquired at that
time, pursuant to an exercise of the option by its owner, if such deemed
exercise would cause the pre-change shareholders and qualified creditors
of the loss corporation to own (after such ownership change and as a
result of being pre-change shareholders or qualified creditors
immediately before such change) less than an amount of such stock
sufficient to satisfy the ownership requirements of section
382(l)(5)(A)(ii). An option that is owned as a result of being a pre-
change shareholder or qualified creditor and that, if exercised, would
result in the ownership of stock by a pre-change shareholder or
qualified creditor is not treated as exercised under this paragraph (e).
For purposes of this paragraph (e)(1), rules similar to those option
attribution rules under Sec. 1.382-2T(h)(4)(iii), (iv), (v), (vii), and
(x)(A), (B) (except with respect to a debt instrument that was issued
after the filing of the petition in the title 11 or similar case), (D),
(E) (except with respect to a right to receive or obligation to issue
stock as interest or dividends on a debt instrument or stock that was
issued after the filing of the petition in the title 11 or similar
case), (G), (H), and (Z), apply.
(2) Special rules--(i) Lapse or forfeiture of options deemed
exercised. A loss corporation may apply rules similar to the rules of
Sec. 1.382-2T(h)(4)(viii) with respect to an option except to the
extent any person owning the option at any time on or after the change
date acquires additional stock or an option to acquire additional stock
during the period of time on or after the ownership change and on or
before the lapse or forfeiture of the option.
(ii) Actual exercise of options not deemed exercised. In determining
whether the ownership change pursuant to the plan of reorganization
qualifies
[[Page 518]]
under section 382(l)(5), a loss corporation may take into account stock
acquired pursuant to the actual exercise of an option issued pursuant to
the plan of reorganization if that option was not deemed exercised under
paragraph (e)(1) of this section. However, this paragraph (e)(2)(ii)
applies only if the option is actually exercised within the 3 years of
the ownership change by the 5-percent shareholder who, as a result of
being a pre-change shareholder or qualified creditor, acquired the
option under the plan.
(iii) Amended returns. A loss corporation may file an amended return
for a prior taxable year (subject to any applicable statute of
limitations) if it determines that section 382(l)(5) applies to an
ownership change as a result of the operation of paragraph (e)(2)(i) or
(ii) of this section, but only if the loss corporation makes
corresponding adjustments on amended returns for all affected taxable
years (subject to any applicable statute of limitations).
(3) Examples. In each of the examples in this paragraph (e)(3),
assume that there is an ownership change of loss corporation L on the
date the plan of reorganization is effective.
Example 1. L is a loss corporation in a title 11 case. The plan of
reorganization of L approved by the bankruptcy court provides for the
cancellation of all existing L stock, the issuance of 100 shares of new
L common stock to qualified creditors, and the issuance of an option to
a new investor to acquire, at any time during the next 3 years, 90
shares of new L common stock from L at its fair market value on the date
the plan becomes effective. Under paragraph (e)(1) of this section, on
the date the plan becomes effective, the option held by the new investor
is deemed exercised if the exercise would cause the qualified creditors
of L to own less than 50 percent of the total voting power or value of
the L stock after the ownership change. Because the qualified creditors
would receive at least 50 percent of the voting power and value of the
new L common stock even if the option were deemed exercised, the stock
ownership requirements of section 382(l)(5)(A)(ii) are satisfied.
Example 2. The facts are the same as in Example 1, except that L
issues an option to the new investor to acquire 110 shares of new L
common stock. This option is deemed exercised under paragraph (e)(1) of
this section on the date the plan becomes effective, because, as a
result of the deemed exercise, the qualified creditors would own only
100 of 210 shares of the new L common stock (approximately 48 percent)
after the ownership change. Accordingly, the stock ownership
requirements of section 382(l)(5)(A)(ii) are not satisfied and section
382(a) applies to the ownership change.
Example 3. (a) L is a loss corporation in a title 11 case. The plan
of reorganization of L approved by the bankruptcy court provides for the
cancellation of all existing L stock, the issuance of new L common stock
and 5-year options to acquire L common stock as follows:
(i) To qualified creditors--100 shares of stock and options to
acquire 50 shares;
(ii) To a new investor--options to acquire 110 shares.
(b) Under paragraph (e)(1) of this section, the option held by the
new investor is deemed exercised on the date the plan becomes effective
because the exercise would cause the qualified creditors of L to own
less than 50 percent of the total voting power and value of the L stock
after the ownership change (100 of 210 shares or approximately 48
percent). Accordingly, the stock ownership requirements of section
382(l)(5)(A)(ii) are not satisfied initially and section 382(a) applies
to the ownership change.
(c) Assume, however, that the qualified creditors actually exercise
enough options that were acquired pursuant to the plan of reorganization
to purchase 30 additional shares during the 3 year period after the plan
becomes effective. Under paragraph (e)(2)(ii) of this section, L may
take into account the 30 shares purchased by the qualified creditors by
the exercise of the options in determining whether the stock ownership
requirements of section 382(l)(5)(A)(ii) were satisfied on the date the
plan of reorganization became effective. If L takes such purchases into
account, the qualified creditors of L are deemed to own as of the date
of the ownership change more than 50 percent of the total voting power
or value of the L stock after the ownership change (130 of 240 shares or
approximately 54 percent), with the result that the stock ownership
requirements of section 382(l)(5)(A)(ii) are satisfied and section
382(l)(5) applies to the ownership change as of the effective date of
the plan.
(d) Assume instead that the qualified creditors acquire 30
additional shares by exercise of options more than 3 years after the
plan becomes effective. Such exercise is not taken into account under
paragraph (e)(2)(ii) of this section for purposes of determining whether
the stock ownership requirements of section 382(l)(5)(A)(ii) are
satisfied as of the effective date of the plan. Thus, the qualified
creditors are deemed to own less than 50 percent of the total voting
power and value of the L stock after the ownership change (100 of 210
shares) and section 382(l)(5) does not apply to the ownership change.
[[Page 519]]
(e) Assume instead that, during the 3 year period after the plan
becomes effective, the new investor exercises part of his option and
purchases 105 shares of stock. The exercise causes a lapse of the rights
to acquire the remaining 5 shares of stock. Also during that time, the
qualified creditors exercise part of their options and acquire 6
additional shares of stock. Under paragraph (e)(2)(i) of this section, L
may treat the lapse of that part of the new investor's option to acquire
5 shares of stock as if that part of the option had never been issued
for purposes of determining whether the stock ownership requirements of
section 382(l)(5)(A)(ii) are satisfied as of the effective date of the
plan. Also, under paragraph (e)(2)(ii) of this section, L may take into
account the 6 shares purchased by the qualified creditors by the
exercise of the options in determining whether the stock ownership
requirements of section 382(l)(5)(A)(ii) are satisfied as of the
effective date of the plan. If L takes all of this information into
account, the qualified creditors are deemed to own more than 50 percent
of the total voting power or value of the L stock after the ownership
change (106 of 211 shares or approximately 50.2 percent) and section
382(l)(5) applies to the ownership change as of the effective date of
the plan.
(4) Effective dates--(i) In general. This paragraph (e) applies to
ownership changes occurring on or after September 5, 1990.
(ii) Special rule for interest or dividends. Rules similar to the
rules of Sec. 1.382-2T(h)(4)(x)(E) (relating to option attribution for
purposes of determining whether an ownership change occurs) apply to a
right to receive or obligation to issue stock as interest or dividends
on a debt instrument or stock that was issued after the filing of the
petition in the title 11 or similar case for ownership changes occurring
before April 8, 1992.
(f)-(h) [Reserved]
(i) Election not to apply section 382(l)(5). Under section
382(l)(5)(H), a loss corporation may elect not to have the provisions of
section 382(l)(5) apply to an ownership change in a title 11 or similar
case. This election is irrevocable and must be made by the due date
(including any extensions of time) of the loss corporation's tax return
for the taxable year which includes the change date. The election is to
be made by attaching the following statement to the tax return of the
loss corporation for that taxable year: ``This is an Election Under
Sec. 1.382-9(i) not to Apply the Provisions of Section 382(l)(5) to the
Ownership Change Occurring Pursuant to a Plan of Reorganization
Confirmed by the Court on [Insert Confirmation Date].''
(j) Value of the loss corporation in an ownership change to which
section 382(l)(6) applies. Section 382(l)(6) applies to any ownership
change occurring pursuant to a plan of reorganization in a title 11 or
similar case to which section 382(l)(5) does not apply. In such case,
the value of the loss corporation under section 382(e) is equal to the
lesser of--
(1) The value of the stock of the loss corporation immediately after
the ownership change (determined under the rules of paragraph (k) of
this section); or
(2) The value of the loss corporation's pre-change assets
(determined under the rules of paragraph (l) of this section).
(k) Rules for determining the value of the stock of the loss
corporation--(1) Certain ownership interests treated as stock. For
purposes of paragraph (j)(1) of this section--
(i) Stock includes stock described in section 1504(a)(4) and any
stock that is not treated as stock under Sec. 1.382-2T(f)(18)(ii) for
purposes of determining whether a loss corporation has an ownership
change; and
(ii) Stock does not include an ownership interest that is treated as
stock under Sec. 1.382-2T(f)(18)(iii) for purposes of determining
whether a loss corporation has an ownership change.
(2) Coordination with section 382(e)(2). In the case of a redemption
or other corporate contraction occurring after and in connection with
the ownership change, the value of the stock of the loss corporation
under paragraph (j)(1) of this section is reduced under section
382(e)(2).
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the stock under
paragraph (j)(1) of this section, only items treated as connected with
the conduct of a trade or business in the United States are taken into
account.
(4) Coordination with section 382(l)(1). Section 382(l)(1) does not
apply in determining the value of the stock of the
[[Page 520]]
loss corporation under paragraph (j)(1) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the stock of the loss corporation under
paragraph (j)(1) of this section is reduced by the excess of the value
of such nonbusiness assets over those assets' share of the loss
corporation's indebtedness (determined under section 382(l)(4)(D) taking
into account the loss corporation's assets and liabilities immediately
after the ownership change).
(6) Special rule for stock not subject to the risk of corporate
business operations--(i) In general. The value of the stock of the loss
corporation under paragraph (j)(1) of this section is reduced by the
value of stock that is issued as part of a plan one of the principal
purposes of which is to increase the section 382 limitation without
subjecting the investment to the entrepreneurial risks of corporate
business operations.
(ii) Coordination of special rule and other rules affecting value.
If the value of the loss corporation is modified under another rule
affecting value, appropriate adjustments are to be made so that such
modification is not duplicated under this paragraph (k)(6).
(7) Limitation on value of stock. For purposes of paragraph (j)(1)
of this section, the value of stock of the loss corporation issued in
connection with the ownership change cannot exceed the cash and the
value of any property (including indebtedness of the loss corporation)
received by the loss corporation in consideration for the issuance of
that stock.
(l) Rules for determining the value of the loss corporation's pre-
change assets--(1) In general. Except as otherwise provided in this
paragraph (l), the value of the loss corporation's pre-change assets is
the value of its assets (determined without regard to liabilities)
immediately before the ownership change.
(2) Coordination with section 382(e)(2). Section 382(e)(2) does not
apply in determining the value of the pre-change assets of the loss
corporation under paragraph (j)(2) of this section.
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the pre-change assets
under paragraph (j)(2) of this section, only assets treated as connected
with the conduct of a trade or business in the United States are taken
into account.
(4) Coordination with section 382(l)(1). For purposes of paragraph
(j)(2) of this section, the value of the pre-change assets of the loss
corporation is determined without regard to the amount of any capital
contribution to which section 382(l)(1) applies. For purposes of
applying this paragraph (l)(4), the receipt of cash or property by the
loss corporation in exchange for the issuance of indebtedness is
considered a capital contribution if it is part of a plan one of the
principal purposes of which is to increase the value of the loss
corporation under paragraph (j) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the loss corporation's pre-change assets
is reduced by the value of the nonbusiness assets.
(m) Continuity of business requirement--(1) Under section 382(l)(5).
If section 382(l)(5) applies to an ownership change of a loss
corporation, section 382(c) and the regulations thereunder do not apply
with respect to the ownership change.
(2) Under section 382(l)(6). If section 382(l)(6) applies to an
ownership change of a loss corporation, section 382(c) and the
regulations thereunder apply to the ownership change.
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years--(1) Section 382(l)(5) applies
to the first ownership change. If section 382(l)(5) applies to an
ownership change and, within the two-year period immediately following
such ownership change, a second ownership change occurs, section
382(l)(5) cannot apply to the second ownership
[[Page 521]]
change and the section 382(a) limitation with respect to the second
ownership change is zero.
(2) Section 382(l)(6) applies to the first ownership change. If the
value of a loss corporation in an ownership change was determined under
section 382(l)(6) and a second ownership change occurs within the two-
year period immediately following the first ownership change, the value
of the loss corporation under section 382(e) with respect to the second
ownership change is not reduced under section 382(l)(1) for any increase
in value of the loss corporation previously taken into account under
section 382(l)(6) with respect to the first ownership change.
(o) Treatment of certain options for ownership change purposes--(1)
Neither Sec. 1.382-2T(h)(4)(i) nor Sec. 1.382-4(d) (relating to the
treatment of options as exercised) applies to the following options to
acquire stock of a loss corporation reorganized pursuant to a plan of
reorganization that is confirmed in a title 11 or similar case (within
the meaning of section 368(a)(3)(A)) but only until the time the plan
becomes effective--
(i) Any option created by the solicitation or receipt of acceptances
to the plan;
(ii) The option created by the confirmation of the plan; and
(iii) Any option created under the plan.
(2) This paragraph (o) generally applies to any testing date
occurring on or after September 5, 1990. However, this paragraph (o)
does not apply on any testing date occurring on or after April 8, 1992,
if, in connection with the plan of reorganization, the loss corporation
issues stock (including stock described in section 1504(a)(4)) or
otherwise receives a capital contribution before the effective date of
the plan for a principal purpose of using before the effective date
losses and credits that would be subject to limitation under section
382(a) or would be eliminated under section 382(l)(5)(B) or (C) if this
paragraph (o) did not apply on the testing date. A loss corporation may
elect to apply this paragraph (o) to any testing date occurring before
September 5, 1990, by filing a statement substantially similar to the
following with its income tax return: ``THIS IS AN ELECTION TO APPLY
Sec. 1.382-3(o) (OR Sec. 1.382-9(o) AFTER REDESIGNATION) FOR TESTING
DATES PRIOR TO SEPTEMBER 5, 1990, TO OPTIONS CREATED BY OR UNDER A PLAN
OF REORGANIZATION CONFIRMED IN A TITLE 11 OR SIMILAR CASE.'' A loss
corporation may elect to not apply this paragraph (o) to testing dates
occurring on or after September 5, 1990, to April 8, 1992, by filing a
statement substantially similar to the following with its income tax
return: ``THIS IS AN ELECTION TO NOT APPLY Sec. 1.382-3(o) (OR Sec.
1.382-9(o) AFTER REDESIGNATION) FOR TESTING DATES OCCURRING ON OR AFTER
SEPTEMBER 5, 1990, TO APRIL 8, 1992, TO OPTIONS CREATED BY OR UNDER A
PLAN OF REORGANIZATION CONFIRMED IN A TITLE 11 OR SIMILAR CASE.''
(p) Effective date for rules relating to section 382(l)(6)--(1) In
general. Paragraphs (i), (j), (k), (l), (m)(2), and (n)(2) of this
section apply to any ownership change occurring on or after March 17,
1994.
(2) Ownership change to which section 382(l)(6) applies occurring
before March 17, 1994. In the case of an ownership change occurring
before March 17, 1994, the loss corporation may elect to apply the rules
of paragraphs (j), (k), (l), (m)(2), and (n)(2) of Sec. 1.382-9 in
their entirety. The election must be made by the later of the due date
(including any extensions of time) of the loss corporation's tax return
for the taxable year which includes the change date or the date that the
loss corporation files its first tax return after May 16, 1994. The
election is made by attaching the following statement to the return:
``This is an Election to Apply Sec. Sec. 1.382-9 (j), (k), (l), (m)(2),
and (n)(2) of the Income Tax Regulations to the Ownership Change
Occurring Pursuant to a Plan of Reorganization Confirmed by the Court on
[Insert Confirmation Date].'' In connection with making this election,
on the same return the loss corporation may also elect not to apply
section 382(l)(5) to the ownership change under paragraph (i) of this
section (if the loss corporation has not already done so pursuant to
Sec. 301.9100-7T(a) of this chapter). If, under the applicable statute
of limitations, the loss corporation may file amended returns for the
year of the
[[Page 522]]
ownership change and all subsequent years (an open year), an electing
loss corporation must file an amended return for each prior affected
year to reflect the elections. If, under the applicable statute of
limitations, the loss corporation may not file an amended return for the
year of the ownership change or any subsequent year (a closed year), an
electing loss corporation must file an amended return for each affected
open year to reflect the elections and the section 382 limitation
resulting from the ownership change must be appropriately adjusted for
the earliest open year (or years) to reflect the difference between the
amount of pre-change losses actually used in closed years and the amount
of pre-change losses that would have been used in such years applying
the rules of paragraphs (j), (k), (l), (m)(2), (n)(2) of this section to
the ownership change.
[T.D. 8388, 57 FR 346, Jan. 6, 1992; T.D. 8407, 57 FR 12210, Apr. 9,
1992. Redesignated by T.D. 8440, 57 FR 45712, 45713, Oct. 5, 1992; 57 FR
52827, Nov. 5, 1992; T.D. 8531, 59 FR 12840, Mar. 18, 1994; T.D. 8530,
59 FR 12843, Mar. 18, 1994; T.D. 8529, 59 FR 12846, Mar. 18, 1994]
Sec. 1.382-10 [Reserved]
Sec. 1.382-10T Special rules of determining time and maner of acquisition
of an interest in a loss corporation (temporary).
(a) Distributions from qualified trusts--(1) In general. For
purposes of Sec. 1.382-2T, if a qualified trust described in section
401(a) (qualified trust) distributes an ownership interest in an entity
(as defined in Sec. 1.382-3(a)(1)), then for testing dates on or after
the date of the distribution, the distributed ownership interest is
treated as having been acquired by the distributee on the date and in
the manner acquired by the trust and not as having been acquired or
disposed of by the trust. The distribution does not cause the day of the
distribution to be a testing date.
(2) Accounting for dispositions--(i) General rule. For purposes of
this paragraph (a), in order to determine which ownership interest in an
entity is distributed from a qualified trust, a loss corporation must
either specifically identify the ownership interests that are the
subject of all dispositions by the qualified trust of ownership
interests in an entity, or apply the first-in, first-out (FIFO) method
to all such dispositions.
(ii) Special rules. For purposes of this paragraph (a)(2):
(A) The FIFO method must be applied on a class-by-class basis; and
(B) The term dispositions includes distributions, sales, and other
transfers.
(3) Examples. The following examples illustrate the principles of
this paragraph (a). For purposes of these examples, unless otherwise
stated, the nomenclature and assumptions of the examples in Sec. 1.382-
2T(b) apply, all corporations file separate income tax returns on a
calendar year basis, the only 5-percent shareholder of a loss
corporation is a public group, and the facts set forth the only
acquisitions of stock by any participants in a qualified plan and the
only owner shifts with respect to the loss corporation during the
testing period. The examples are as follows:
Example 1. (i) Facts. In 1994, E, a qualified trust established
under Plan F, acquires 10 percent of L stock. A is a participant in Plan
F. On January 1, 2002, A acquires 4 percent of L stock, and B, who is
not a participant or a beneficiary of a participant in Plan F, acquires
5 percent of L stock. On January 1, 2004, E distributes 2 percent of L
stock to A. On July 1, 2004, A acquires 1 percent of L stock.
(ii) Analysis. January 1, 2002, is a testing date because B's
acquisition of 5 percent of L stock causes an increase in the percentage
ownership of B, a 5-percent shareholder. As of the close of that testing
date, A is treated as owning only 4 percent of L stock. Therefore, A is
treated as a member of the public group of L. In addition, E is treated
as owning 10 percent of L stock that it acquired in 1994.
(iii) As a result of the application of paragraph (a)(1) of this
section to E's distribution of 2 percent of L stock to A on January 1,
2004, for testing dates on and after January 1, 2004, A is treated as
having acquired that 2 percent interest in L in 1994, and E is treated
as having acquired only 8 percent of L stock in 1994. Because there are
no owner shifts on January 1, 2004, that date is not a testing date.
(iv) July 1, 2004, is a testing date because on that date A, a 5-
percent shareholder, acquires 1 percent of L stock. As of the close of
that testing date, A's percentage of ownership of L stock is 7 percent,
and A's lowest percentage of ownership of L stock at any time within the
testing period is 2 percent (deemed acquired in 1994), representing an
[[Page 523]]
increase of 5 percentage points. In addition, as of the close of July 1,
2004, B's percentage of ownership of L stock is 5 percent, and B's
lowest percentage of ownership of L stock at any time within the testing
period is 0 percent, representing an increase of 5 percentage points.
Thus, on July 1, 2004, L must take into account an increase of 10 (5 +
5) percentage points in determining whether it has an ownership change.
Example 2. (i) Facts. E is a qualified trust established under Plan
F. L, a publicly traded corporation, has 100x shares of stock
outstanding. As of January 1, 2006, C owns 5x shares of L stock and is
not a participant or beneficiary of a participant in Plan F. At all
times prior to January 1, 2006, E owns no L stock. On January 1, 2006, E
acquires 10x shares of L stock from members of the public group of L. On
December 1, 2007, E distributes 5x shares of L stock to some of the
participants in Plan F. No one participant acquires all 5x shares as a
result of the distribution. On February 1, 2008, C purchases 1x shares
of L stock from the public group of L.
(ii) Analysis. Because E's acquisition of 10x shares of L stock on
January 1, 2006, is an owner shift, that date is a testing date. As of
the close of that date, E's percentage of stock ownership in L has
increased by 10 percentage points.
(iii) As a result of the application of paragraph (a)(1) of this
section to E's distribution of 5x shares of L stock to some Plan F
participants on December 1, 2007, for testing dates on and after
December 1, 2007, those distributees are treated as having acquired
those shares of stock on January 1, 2006, from members of the public
group of L, and E is not treated as having acquired those shares on that
date. E's distribution of the 5x shares is not an owner shift.
Therefore, December 1, 2007, is not a testing date.
(iv) February 1, 2008, is a testing date because on that date an
owner shift results from C's purchase of 1x shares of L stock. As of the
close of that testing date, the distributees of 5x shares of L stock are
treated as members of the public group of L having acquired 5x shares of
L stock from other members of the public group of L on January 1, 2006.
Because those acquisitions are not by 5-percent shareholders, L does not
take them into account. In addition, as of the close of February 1,
2008, E's percentage of stock ownership in L is 5 percent, and E's
lowest percentage of stock ownership in L at any time within the testing
period is 0 percent, representing an increase of 5 percentage points. In
addition, as of the close of February 1, 2008, C's percentage of stock
ownership in L is 6 percent, and C's lowest percentage of stock
ownership in L at any time within the testing period is 5 percent,
representing an increase of 1 percentage point. Therefore, on February
1, 2008, L must take into account an increase of 6 (5 + 1) percentage
points in determining whether it has an ownership change.
(4) Effective date--(i) General rule. This section applies to all
distributions after June 27, 2003.
(ii) Retroactive application. Notwithstanding paragraph (a)(4)(i) of
this section, a loss corporation may apply the rules of this section
retroactively to:
(A) All distributions on or before June 27, 2003 that are within a
testing period that includes June 27, 2003; or
(B) All distributions after December 31, 1986.
(b) [Reserved]
[T.D. 9063, 68 FR 38178, June 27, 2003]
Sec. 1.382-11 Effective dates. [Reserved]
Sec. 1.383-0 Effective date.
(a) The regulations under section 383 (other than the regulations
described in paragraph (b) of this section) reflect the amendments made
to sections 382 and 383 by the Tax Reform Act of 1986. See Sec. 1.383-
1(j) for effective date rules.
(b) Sections 1.383-1A, 1.383-2A, and 1.383-3A do not reflect the
amendments made to sections 382 and 383 by the Tax Reform Act of 1986.
[T.D. 8352, 56 FR 29434, June 27, 1991]
Sec. 1.383-1 Special limitations on certain capital losses and excess
credits.
(a) Outline of topics. In order to facilitate the use of this
section, this paragraph lists the paragraphs, subparagraphs and
subdivisions contained in this section.
(a) Outline of topics.
(b) In general.
(c) Definitions.
(1) Coordination with definitions and nomenclature used in section
382.
(2) Pre-change capital loss.
(3) Pre-change credit.
(4) Pre-change loss.
(5) Regular tax liability.
(6) Section 383 credit limitation.
(i) Definition.
(ii) Example.
(d) Limitation on use of pre-change losses and pre-change credits.
(1) In general.
(2) Ordering rules for utilization of pre-change losses and pre-
change credits and for absorption of the section 382 limitation and the
section 383 credit limitation.
(3) Coordination with other limitations.
[[Page 524]]
(i) In general.
(ii) Examples.
(e) Carryforward of unused section 382 limitation.
(1) Computation of carryforward amount.
(2) Section 383 credit reduction amount.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988.
(4) Special rules for determining the section 383 credit reduction
amount.
(i) Ordering rules.
(ii) Special rule for credits under section 38(a).
(f) Examples.
(g) Coordination with section 382 and the regulations thereunder.
(h) Alternative minimum tax.
(i) [Reserved]
(j) Effective date.
(k) Transitional rules regarding information statements
(b) In general. Under section 383, if an ownership change occurs
with respect to a loss corporation, the section 382 limitation and the
section 383 credit limitation (as defined in paragraph (c)(6) of this
section) for a post-change year shall apply to limit the amount of
taxable income and regular tax liability, respectively, that can be
offset by pre-change capital losses and pre-change credits of the new
loss corporation. The section 383 credit limitation for a post-change
year bears a direct relationship to the amount, if any, of the section
382 limitation that remains after taking into account the reduction in
the loss corporation's taxable income during a post-change year as a
result of its pre-change losses (as defined in paragraph (c)(4) of this
section). In general, the section 383 credit limitation is an amount
equal to the tax liability of the new loss corporation for the post-
change year which is attributable to so much of the corporation's
taxable income that would be reduced by allowing as a deduction its
section 382 limitation remaining after accounting for the use of pre-
change losses. As pre-change losses and pre-change credits of a
corporation are used, they absorb the section 382 limitation and the
section 383 credit limitation, respectively, in the manner prescribed by
paragraph (d) of this section. See also section 382 and the regulations
thereunder.
(c) Definitions--(1) Coordination with definitions and nomenclature
used in section 382. Terms and nomenclature used in this section, and
not otherwise defined herein, shall have the same respective meanings as
in section 382 and the regulations thereunder, taking into account that
the limitations of section 383 and this section apply to pre-change
capital losses and pre-change credits.
(2) Pre-change capital loss. The term pre-change capital loss
means--
(i) Any capital loss carryover under section 1212 of the old loss
corporation to the taxable year ending on the change date or in which
the change date occurs,
(ii) Any net capital loss of the old loss corporation for the
taxable year in which the ownership change occurs, to the extent such
loss is allocable to the period in such year ending on or before the
change date, and
(iii) If the old loss corporation has a net unrealized built-in
loss, any recognized built-in loss for any recognition period taxable
year (within the meaning of section 382(h)) that is a capital loss.
(3) Pre-change credit. The term pre-change credit means--
(i) Any excess foreign taxes under section 904(c) of the old loss
corporation--
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from the taxable year that includes the change
date, to the extent such credit is allocable to the period in such year
ending on or before the change date,
(ii) Any credit under section 38 of the old loss corporation--
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from a taxable year that includes the change
date to the extent such credit is allocable to the period in such year
ending on or before the change date, and
(iii) The available minimum tax credit of the old loss corporation
under section 53 to the extent attributable to periods ending on or
before the change date.
(4) Pre-change loss. Solely for purposes of this section, the term
prechange loss means any pre-change
[[Page 525]]
loss described in Sec. 1.382-2(a)(2) other than pre-change credits
described in paragraph (c)(3) of this section.
(5) Regular tax liability. For purposes of this section, the term
regular tax liability has the same meaning as provided in section 26(b).
(6) Section 383 credit limitation--(i) Definition. The section 383
credit limitation for a post-change year of a new loss corporation is an
amount equal to the excess of--
(A) The new loss corporation's regular tax liability for the post-
change year, over
(B) The new loss corporation's regular tax liability for the post-
change year computed, for this purpose, by allowing as an additional
deduction an amount equal to the section 382 limitation remaining after
the application of paragraphs (d)(2)(i) through (iv) of this section.
(ii) Example.
L, a new loss corporation, is a calendar year taxpayer. L has an
ownership change on December 31, 1987. For 1988, L has taxable income
(prior to the use of any pre-change losses) of $100,000. In addition, L
has a section 382 limitation of $25,000, a pre-change net operating loss
carryover of $12,000, a pre-change minimum tax credit of $50,000, and no
pre-change capital losses. L's section 383 credit limitation is the
excess of its regular tax liability computed after allowing a $12,000
net operating loss deduction (taxable income of $88,000; regular tax
liability of $18,170), over its regular tax liability computed after
allowing an additional deduction in the amount of L's section 382
limitation remaining after the application of paragraphs (d)(2)(i)
through (iv) of this section, or $13,000 (taxable income of $75,000;
regular tax liability of $13,750). L's section 383 credit limitation is
therefore $4,420 ($18,170 minus $13,750).
(d) Limitation on use of pre-change losses and pre-change credits--
(1) In general. The amount of taxable income of a new loss corporation
for any post-change year that may be offset by pre-change losses shall
not exceed the amount of the section 382 limitation for the post-change
year. The amount of the regular tax liability of a new loss corporation
for any post-change year that may be offset by pre-change credits shall
not exceed the amount of the section 383 credit limitation for the post-
change year.
(2) Ordering rules for utilization of pre-change losses and pre-
change credits and for absorption of the section 382 limitation and the
section 383 credit limitation. Pre-change losses described in any
subdivision of this paragraph (d)(2) can offset taxable income in a
post-change year only to the extent that the section 382 limitation for
that year has not been absorbed by pre-change losses described in any
lower-numbered subdivisions. Pre-change credits described in any
subdivision of this paragraph (d)(2) can offset regular tax liability in
a post-change year only to the extent that the section 383 credit
limitation for that year has not been absorbed by pre-change credits
described in any lower numbered subdivisions. The section 382 limitation
is absorbed by one dollar for each dollar of pre-change loss that is
used to offset taxable income. The section 383 credit limitation is
absorbed by one dollar for each dollar of pre-change credit that is used
to offset regular tax liability. For each post-change year, the section
382 limitation and the section 383 credit limitation of a new loss
corporation are absorbed by such corporation's pre-change losses and
pre-change credits in the following order:
(i) Pre-change capital losses described in paragraph (c)(2)(iii) of
this section that are recognized and are subject to the section 382
limitation in such post-change year,
(ii) Pre-change capital losses described in paragraphs (c)(2)(i) and
(ii) of this section,
(iii) Pre-change losses that are described in Sec. 1.382-2(a)(2)
(other than losses that are pre-change capital losses) that are
recognized and are subject to the section 382 limitation in such post-
change year,
(iv) Pre-change losses not described in paragraphs (d)(2)(i) through
(iii) of this section,
(v) Pre-change credits described in paragraph (c)(3)(i) of this
section (excess foreign taxes),
(vi) Pre-change credits described in paragraph (c)(3)(ii) of this
section (business credits), and
(vii) Pre-change credits described in paragraph (c)(3)(iii) of this
section (minimum tax credit).
[[Page 526]]
(3) Coordination with other limitations--(i) In general. Paragraphs
(d)(1) and (2) of this section shall be applied after the application of
all other limitations contained in subtitle A which are applicable to
the use of a pre-change loss or pre-change credit in a post-change year.
Thus, only otherwise currently allowable pre-change losses and pre-
change credits will result in the absorption of the section 382
limitation and the section 383 credit limitation.
(ii) Examples:
Example (1). L is a calendar year taxpayer and has an ownership
change on December 31, 1987. For 1988, L has taxable income of $300,000,
a regular tax liability of $100,250 and a tentative minimum tax of
$90,000. L has no pre-change losses, but has a business credit
carryforward from 1985 of $25,000, no portion of which is due to the
regular percentage of the investment tax credit under section 46. L has
a section 382 limitation for 1988 of $50,000. L's section 383 credit
limitation is $19,500, i.e., an amount equal to the excess of L's
regular tax liability ($100,250) over its regular tax liability
calculated by allowing an additional deduction of $50,000. Pursuant to
the limitation contained in section 38(c), however, L is entitled to use
only $10,250 of its business credit carryforward in 1988. The unabsorbed
portion of L's section 382 limitation (computed pursuant to paragraph
(e) of this section) is carried forward under section 382(b)(2). The
unused portion of L's business credit carryforward, $14,750, is carried
forward to the extent provided in section 39.
Example (2). Assume the same facts as in Example (1), except that
L's tentative minimum tax is $70,000. L's use of its investment tax
credit carryforward is no longer limited by section 38(c); however,
pursuant to section 383 and this section, L is entitled to use only
$19,500 of its business credit carryforward in 1988. The unused portion
of L's business credit carryforward, $5,500, is carried forward to the
extent provided in section 39. There is no unused section 382 limitation
to be carried forward.
(e) Carryforward of unused section 382 limitation--(1) Computation
of carryforward amount. The section 382 limitation that can be carried
forward under section 382(b)(2) is the excess, if any, of (i) the
section 382 limitation for the post-change year remaining after the
application of paragraphs (d)(2)(i) through (iv) of this section, over
(ii) the section 383 credit reduction amount for that post-change year.
(2) Section 383 credit reduction amount. The section 383 credit
reduction amount for a post-change year is equal to the amount of
taxable income attributable to the portion of the new loss corporation's
regular tax liability for the year that is offset by pre-change credits.
Each dollar of regular tax liability that is offset by a dollar of pre-
change credit is divided by the effective marginal rate at which that
dollar of tax was imposed to determine the amount of taxable income that
resulted in that particular dollar of regular tax liability. The sum of
these ``grossed-up'' amounts for the taxable year is the section 383
credit reduction amount. In determining the effective marginal rate at
which a dollar of tax was imposed, special rules regarding rates of tax
(e.g., sections 11(b)(2) and (15) or taxable income brackets (e.g.,
section 1561), or both, shall be taken into account. See Example (3) in
paragraph (f) of this section illustrating the effect of section
1561(a). Paragraph (e)(3) of this section illustrates the gross-up
computation of the section 383 credit reduction amount based on the tax
table and the rates of tax prescribed by section 11(b) as in effect for
taxable years beginning on January 1, 1988.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988. (i)
Assuming no special rules regarding rates of tax or taxable income
brackets apply, the section 383 credit reduction amount for a new loss
corporation is the sum of the amounts determined under paragraphs
(e)(3)(ii), (iii), (iv), (v), and (vi) of this section.
(ii) The amount determined under this subdivision (ii) is the amount
(if any) by which pre-change credits offset so much of the new loss
corporation's regular tax liability as exceeds $113,900, divided by
0.34.
(iii) The amount determined under this subdivision (e)(3)(iii) is
the amount (if any) by which pre-change credits offset so much of the
new loss corporation's regular tax liability as exceeds $22,250 (but
does not exceed $113,900), divided by 0.39.
(iv) The amount determined under this subdivision (e)(3)(iv) is the
amount (if any) by which pre-change credits
[[Page 527]]
offset so much of the new loss corporation's regular tax liability as
exceeds $13,750 (but does not exceed $22,250), divided by 0.34.
(v) The amount determined under this subdivision (e)(3)(v) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $7,500 (but does not
exceed $13,750), divided by 0.25.
(vi) The amount determined under this subdivision (e)(3)(vi) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as does not exceed $7,500,
divided by 0.15.
(4) Special rules for determining the section 383 credit reduction
amount--(i) Ordering rules. For purposes of this paragraph (e), credits,
including pre-change credits, are considered to offset regular tax
liability in the order that such credits are applied under the ordering
rules of part IV of subchapter A of chapter 1 and section 904. For
example, for purposes of this paragraph (e), excess foreign taxes
carried over under section 904(c) (whether or not a pre-change credit)
are considered (under section 38(c)) to offset regular tax liability
before the general business credit carryovers to the taxable year are
considered (under section 39) to offset regular tax liability before
general business credits arising in the taxable year.
(ii) Special rule for credits under section 38(a). For purposes of
applying this paragraph (e), credits under section 38(a) that, under
section 38(c)(2) as applicable, taking into account amendments made by
section 11813 of the Revenue Reconciliation Act of 1990, effectively
offset both regular tax liability and the tax imposed by section 55
(relating to minimum tax), are considered to offset regular tax
liability.
(f) Examples. The following examples illustrate the operation of
paragraphs (b) through (e) of this section. For purposes of these
examples, the term modified tax liability means the amount determined
under paragraph (c)(6)(i)(B) of this section.
Example (1). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. Before the application of carryovers, L, a
new loss corporation, has $60,000 of capital gain, $100,000 of ordinary
taxable income and a section 382 limitation of $100,000 for its first
post-change year beginning after the change date. L's only carryovers
are an $80,000 capital loss carryover and a $100,000 net operating loss
carryover. Both carryovers are from taxable years ending before the
change date and thus are pre-change losses.
(ii) L first uses $60,000 of its pre-change capital loss carryover
to offset its capital gain. This reduces its section 382 limitation to
$40,000 (i.e., $100,000-$60,000). L's pre-change net operating loss
carryover can therefore be used only to the extent of $40,000. L's
remaining $20,000 pre-change capital loss carryover and remaining
$60,000 pre-change net operating loss carryover are carried to later
years to the extent permitted under this section and sections 172,
382(l)(2) and 1212.
Example (2). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. L has $750,000 of ordinary taxable income
(before the application of carryovers) and a section 382 limitation of
$1,500,000 for 1988. L's only carryovers are from pre-1987 taxable years
and consist of a $500,000 net operating loss (``NOL'') carryover and a
$200,000 foreign tax credit carryover, all of which may be used under
the section 904 limitation. The NOL carryover is a pre-change loss, and
the foreign tax credit carryover is a pre-change credit. L has no other
credits which can be used for 1988 and is not liable for an alternative
minimum tax for 1988.
(ii) The following computation illustrates the application of this
section for 1988:
1. Taxable income before carryovers....................... $750,000
2. Pre-change NOL carryover............................... 500,000
3. Section 382 limitation................................. 1,500,000
4. Amount of pre-change NOL carryover that can be used 500,000
(lesser of line 1, 2, or 3)...............................
5. Taxable income (line 1 minus line 4)................... 250,000
6. Section 382 limitation remaining (line 3 minus line 4). 1,000,000
7. Pre-change credit carryover............................ 200,000
8. Regular tax liability (line 5 x section 11 rates):
$50,000x0.15=$7,500
25,000x0.25=6,250
25,000x0.34=8,500
150,000x0.39=58,500.................................... 80,750
9. Modified tax liability (line 5 minus line 6 (but not 0
less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9).... 80,750
11. Amount of pre-change credits that can be used (lesser 80,750
of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989 119,250
under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount:
($80,750 minus $22,250)/0.39=$150,000
($22,250 minus $13,750)/0.34=25,000
($13,750 minus $7,500)/0.25=25,000
$7,500/0.15=50,000..................................... 250,000
14. Section 382 limitation to be carried to 1989 under 750,000
section 382(b)(2) (Line 6 minus line 13)..................
[[Page 528]]
Example (3). (i) Assume the same facts as in Example (2), except
that, for purposes of section 1561(a), L is a component member of a
controlled group of corporations and the taxable income of the
controlled group of corporations for 1988 is $2,000,000.
(ii) The following computation illustrates the application of this
section for 1988:
1. Taxable income before carryovers....................... $750,000
2.Pre-change NOL carryover................................ 500,000
3. Section 382 limitation................................. 1,500,000
4. Amount of pre-change NOL carryover that can be used 500,000
(lesser of line 1, 2, or 3)...............................
5. Taxable income (line 1 minus line 4)................... 250,000
6. Section 382 limitation remaining (line 3 minus line 4). 1,000,000
7. Pre-change credit carryover............................ 200,000
8. Regular tax liability (line 5x0.34 (the effective 85,000
section 11 rate under section 1561(a)))...................
9. Modified tax liability (line 5 minus line 6 (but not 0
less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9).... 85,000
11. Amount of pre-change credits that can be used (lesser 85,000
of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989 115,000
under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount (line 11 divided by 250,000
0.34).....................................................
14. Section 383 limitation to be carried to 1989 under 750,000
section 382(b)(2) (line 6 minus line 13)..................
Example (4). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. L has $80,000 of ordinary taxable income
(before the application of carryovers) and a section 382 limitation of
$25,000 for 1988, a post-change year. L's only carryover is from a pre-
1987 taxable year and is a general business credit carryforward under
section 39 in the amount of $10,000 (no portion of which is attributable
to the investment tax credit under section 46). The general business
credit carryforward is a pre-change credit. L has no other credits which
can be used for 1988 and is not liable for an alternative minimum tax
for 1988.
(ii) The following computation illustrates the application of this
section:
1. Taxable income.......................................... $80,000
2. Section 382 limitation.................................. 25,000
3. Pre-change credit carryover............................. 10,000
4. Regular tax liability (line 1 x section 11 rates):
$50,000x0.15=$7,500
25,000x0.25=6,250
5,000x0.34=1,700....................................... 15,450
5. Modified tax liability ((line 1 minus line 2) x section
11 rates):
$50,000x0.15=$7,500
5,000x0.25=1,250....................................... 8,750
6. Section 383 credit limitation (line 4 minus line 5)..... 6,700
7. Amount of pre-change credits that can be used (lesser of 6,700
line 3 or line 6).........................................
8. Amount of pre-change credits to be carried over to 1989 3,300
under sections 39 and 382(l)(2) (line 3 minus line 7).....
9. Regular tax payable (line 4 minus line 7)............... 8,750
10. Section 383 credit reduction amount:
($15,450 minus $13,750)/0.34=$5,000
($13,750 minus $8,750)/0.25=20,000..................... 25,000
11. Section 382 limitation to be carried to 1989 under 0
section 382(b)(2) (line 2 minus line 10)
(g) Coordination with section 382 and the regulations thereunder.
The rules and principles of section 382 (including, for example, section
382(b)(3) and section 382(l)(2)) and the regulations thereunder shall
also apply with respect to section 383 and this section. To the extent
section 382(h)(6) applies to credits, the principles of this section
apply to such credits. In applying the rules and principles of section
382 and the regulations thereunder, appropriate adjustments shall be
made to take into account that section 383 and this section apply to
pre-change capital losses and pre-change credits. For example, in
applying Sec. 1.382-2T (f)(18)(ii)(C), (f)(18)(iii)(C) and (h)(4)(ix),
any pre-change credits, as defined in paragraph (c)(3) of this section,
must be converted to a deduction equivalent by dividing the amount of
such credits by the maximum effective rate of tax provided for under
section 11 (e.g., 0.34 for taxable years beginning in 1989).
(h) Alternative minimum tax. See Sec. 1.383-2T for the application
of the limitations contained in sections 382 and 383 in computing the
alternative minimum tax under section 55.
(i) [Reserved]
(j) Effective date. Subject to any exception from the application of
section 382 or the section 382 limitation with respect to a loss
corporation, section 383 and this section apply to any loss corporation
with respect to which an ownership change occurs after December 31,
1986. See Sec. 1.382-2T(m) for effective date rules relating to
ownership changes. If section 383 was not taken into account or was
applied other than in accordance with this section in a prior taxable
year with respect to which section 383 applies, the taxpayer should,
within the period of limitation, file an amended return and pay any
additional tax due plus interest.
(k) Transitional rules regarding information statements--(1)
Exception. An information statement described in Sec. 1.382-
2T(a)(2)(ii) of this section that would be required to be filed solely
by reason of the loss corporation having pre-change capital losses (as
defined in Sec. 1.382-2T (a)(2)(ii)(A) and (B) or pre-change credits
(as defined in paragraph
[[Page 529]]
(c)(3) of this section) is not required to be filed with the income tax
return of the loss corporation for any taxable year for which the due
date (including extensions) of the income tax return is on or before
November 20, 1989, or for which the income tax return is filed on or
before October 10, 1989.
(2) Statement with respect to prior periods. A corporation which is
a loss corporation for any taxable year ending in 1987, 1988 or 1989
solely because it has pre-change capital losses (as defined in
paragraphs (c)(2)(i) and (ii) of this section or pre-change credits (as
defined in paragraph (c)(3) of this section) must attach a separate
information statement to its 1988 and 1989 income tax returns. Such
information statement must (i) include the information specified in
Sec. 1.382-2T (a)(2)(ii)(A) and (B) (without regard to testing dates
before May 6, 1986) for each taxable year ending on or after May 6, 1986
for which the corporation was a loss corporation, (ii) state whether and
to what extent pre-change capital losses (as defined in paragraphs
(c)(2)(i) and (ii) of this section) or pre-change credits (as defined in
paragraph (c)(3) of this section) utilized by the corporation in a
taxable year to which the section 382 limitation applied, exceeded the
amount permitted under this section, and (iii) be labeled ``Information
Statement with Respect to Transition Periods.'' For purposes of the
preceding sentence, information previously reported in an information
statement, including a statement filed with a 1988 return, may be
excluded. The requirements of this paragraph (k)(2) apply only with
respect to 1988 and 1989 taxable years with respect to which the due
date of the income tax return (including extensions) is after November
20, 1989, and for which the income tax return is not filed on or before
October 10, 1989.
[T.D. 8264, 54 FR 38668, Sept. 20, 1989; T.D. 8264, 54 FR 46187, Nov. 1,
1989; T.D. 8264, 54 FR 50043, Dec. 4, 1989. Redesignated and amended by
T.D. 8352, 56 FR 29434, June 27, 1991]
Sec. 1.383-2 Limitations on certain capital losses and excess credits
in computing alternative minimum tax. [Reserved]
[[Page 531]]
FINDING AIDS
--------------------------------------------------------------------
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
[[Page 533]]
Table of CFR Titles and Chapters
(Revised as of April 1, 2004)
Title 1--General Provisions
I Administrative Committee of the Federal Register
(Parts 1--49)
II Office of the Federal Register (Parts 50--299)
IV Miscellaneous Agencies (Parts 400--500)
Title 2 [Reserved]
Title 3--The President
I Executive Office of the President (Parts 100--199)
Title 4--Accounts
I General Accounting Office (Parts 1--99)
Title 5--Administrative Personnel
I Office of Personnel Management (Parts 1--1199)
II Merit Systems Protection Board (Parts 1200--1299)
III Office of Management and Budget (Parts 1300--1399)
V The International Organizations Employees Loyalty
Board (Parts 1500--1599)
VI Federal Retirement Thrift Investment Board (Parts
1600--1699)
VIII Office of Special Counsel (Parts 1800--1899)
IX Appalachian Regional Commission (Parts 1900--1999)
XI Armed Forces Retirement Home (Part 2100)
XIV Federal Labor Relations Authority, General Counsel of
the Federal Labor Relations Authority and Federal
Service Impasses Panel (Parts 2400--2499)
XV Office of Administration, Executive Office of the
President (Parts 2500--2599)
XVI Office of Government Ethics (Parts 2600--2699)
XXI Department of the Treasury (Parts 3100--3199)
XXII Federal Deposit Insurance Corporation (Part 3201)
XXIII Department of Energy (Part 3301)
XXIV Federal Energy Regulatory Commission (Part 3401)
XXV Department of the Interior (Part 3501)
XXVI Department of Defense (Part 3601)
[[Page 534]]
XXVIII Department of Justice (Part 3801)
XXIX Federal Communications Commission (Parts 3900--3999)
XXX Farm Credit System Insurance Corporation (Parts 4000--
4099)
XXXI Farm Credit Administration (Parts 4100--4199)
XXXIII Overseas Private Investment Corporation (Part 4301)
XXXV Office of Personnel Management (Part 4501)
XL Interstate Commerce Commission (Part 5001)
XLI Commodity Futures Trading Commission (Part 5101)
XLII Department of Labor (Part 5201)
XLIII National Science Foundation (Part 5301)
XLV Department of Health and Human Services (Part 5501)
XLVI Postal Rate Commission (Part 5601)
XLVII Federal Trade Commission (Part 5701)
XLVIII Nuclear Regulatory Commission (Part 5801)
L Department of Transportation (Part 6001)
LII Export-Import Bank of the United States (Part 6201)
LIII Department of Education (Parts 6300--6399)
LIV Environmental Protection Agency (Part 6401)
LV National Endowment for the Arts (Part 6501)
LVI National Endowment for the Humanities (Part 6601)
LVII General Services Administration (Part 6701)
LVIII Board of Governors of the Federal Reserve System (Part
6801)
LIX National Aeronautics and Space Administration (Part
6901)
LX United States Postal Service (Part 7001)
LXI National Labor Relations Board (Part 7101)
LXII Equal Employment Opportunity Commission (Part 7201)
LXIII Inter-American Foundation (Part 7301)
LXV Department of Housing and Urban Development (Part
7501)
LXVI National Archives and Records Administration (Part
7601)
LXVII Institute of Museum and Library Services (Part 7701)
LXIX Tennessee Valley Authority (Part 7901)
LXXI Consumer Product Safety Commission (Part 8101)
LXXIII Department of Agriculture (Part 8301)
LXXIV Federal Mine Safety and Health Review Commission (Part
8401)
LXXVI Federal Retirement Thrift Investment Board (Part 8601)
LXXVII Office of Management and Budget (Part 8701)
Title 6--Homeland Security
I Department of Homeland Security, Office of the
Secretary (Parts 0--99)
[[Page 535]]
Title 7--Agriculture
Subtitle A--Office of the Secretary of Agriculture
(Parts 0--26)
Subtitle B--Regulations of the Department of
Agriculture
I Agricultural Marketing Service (Standards,
Inspections, Marketing Practices), Department of
Agriculture (Parts 27--209)
II Food and Nutrition Service, Department of Agriculture
(Parts 210--299)
III Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 300--399)
IV Federal Crop Insurance Corporation, Department of
Agriculture (Parts 400--499)
V Agricultural Research Service, Department of
Agriculture (Parts 500--599)
VI Natural Resources Conservation Service, Department of
Agriculture (Parts 600--699)
VII Farm Service Agency, Department of Agriculture (Parts
700--799)
VIII Grain Inspection, Packers and Stockyards
Administration (Federal Grain Inspection Service),
Department of Agriculture (Parts 800--899)
IX Agricultural Marketing Service (Marketing Agreements
and Orders; Fruits, Vegetables, Nuts), Department
of Agriculture (Parts 900--999)
X Agricultural Marketing Service (Marketing Agreements
and Orders; Milk), Department of Agriculture
(Parts 1000--1199)
XI Agricultural Marketing Service (Marketing Agreements
and Orders; Miscellaneous Commodities), Department
of Agriculture (Parts 1200--1299)
XIV Commodity Credit Corporation, Department of
Agriculture (Parts 1400--1499)
XV Foreign Agricultural Service, Department of
Agriculture (Parts 1500--1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts
1600--1699)
XVII Rural Utilities Service, Department of Agriculture
(Parts 1700--1799)
XVIII Rural Housing Service, Rural Business-Cooperative
Service, Rural Utilities Service, and Farm Service
Agency, Department of Agriculture (Parts 1800--
2099)
XX Local Television Loan Guarantee Board (Parts 2200--
2299)
XXVI Office of Inspector General, Department of Agriculture
(Parts 2600--2699)
XXVII Office of Information Resources Management, Department
of Agriculture (Parts 2700--2799)
XXVIII Office of Operations, Department of Agriculture (Parts
2800--2899)
XXIX Office of Energy, Department of Agriculture (Parts
2900--2999)
XXX Office of the Chief Financial Officer, Department of
Agriculture (Parts 3000--3099)
[[Page 536]]
XXXI Office of Environmental Quality, Department of
Agriculture (Parts 3100--3199)
XXXII Office of Procurement and Property Management,
Department of Agriculture (Parts 3200--3299)
XXXIII Office of Transportation, Department of Agriculture
(Parts 3300--3399)
XXXIV Cooperative State Research, Education, and Extension
Service, Department of Agriculture (Parts 3400--
3499)
XXXV Rural Housing Service, Department of Agriculture
(Parts 3500--3599)
XXXVI National Agricultural Statistics Service, Department
of Agriculture (Parts 3600--3699)
XXXVII Economic Research Service, Department of Agriculture
(Parts 3700--3799)
XXXVIII World Agricultural Outlook Board, Department of
Agriculture (Parts 3800--3899)
XLI [Reserved]
XLII Rural Business-Cooperative Service and Rural Utilities
Service, Department of Agriculture (Parts 4200--
4299)
Title 8--Aliens and Nationality
I Department of Homeland Security (Immigration and
Naturalization) (Parts 1--499)
V Executive Office for Immigration Review, Department of
Justice (Parts 1000--1399)
Title 9--Animals and Animal Products
I Animal and Plant Health Inspection Service, Department
of Agriculture (Parts 1--199)
II Grain Inspection, Packers and Stockyards
Administration (Packers and Stockyards Programs),
Department of Agriculture (Parts 200--299)
III Food Safety and Inspection Service, Department of
Agriculture (Parts 300--599)
Title 10--Energy
I Nuclear Regulatory Commission (Parts 0--199)
II Department of Energy (Parts 200--699)
III Department of Energy (Parts 700--999)
X Department of Energy (General Provisions) (Parts
1000--1099)
XVII Defense Nuclear Facilities Safety Board (Parts 1700--
1799)
XVIII Northeast Interstate Low-Level Radioactive Waste
Commission (Part 1800)
[[Page 537]]
Title 11--Federal Elections
I Federal Election Commission (Parts 1--9099)
Title 12--Banks and Banking
I Comptroller of the Currency, Department of the
Treasury (Parts 1--199)
II Federal Reserve System (Parts 200--299)
III Federal Deposit Insurance Corporation (Parts 300--399)
IV Export-Import Bank of the United States (Parts 400--
499)
V Office of Thrift Supervision, Department of the
Treasury (Parts 500--599)
VI Farm Credit Administration (Parts 600--699)
VII National Credit Union Administration (Parts 700--799)
VIII Federal Financing Bank (Parts 800--899)
IX Federal Housing Finance Board (Parts 900--999)
XI Federal Financial Institutions Examination Council
(Parts 1100--1199)
XIV Farm Credit System Insurance Corporation (Parts 1400--
1499)
XV Department of the Treasury (Parts 1500--1599)
XVII Office of Federal Housing Enterprise Oversight,
Department of Housing and Urban Development (Parts
1700--1799)
XVIII Community Development Financial Institutions Fund,
Department of the Treasury (Parts 1800--1899)
Title 13--Business Credit and Assistance
I Small Business Administration (Parts 1--199)
III Economic Development Administration, Department of
Commerce (Parts 300--399)
IV Emergency Steel Guarantee Loan Board, Department of
Commerce (Parts 400--499)
V Emergency Oil and Gas Guaranteed Loan Board,
Department of Commerce (Parts 500--599)
Title 14--Aeronautics and Space
I Federal Aviation Administration, Department of
Transportation (Parts 1--199)
II Office of the Secretary, Department of Transportation
(Aviation Proceedings) (Parts 200--399)
III Commercial Space Transportation, Federal Aviation
Administration, Department of Transportation
(Parts 400--499)
V National Aeronautics and Space Administration (Parts
1200--1299)
VI Air Transportation System Stabilization (Parts 1300--
1399)
[[Page 538]]
Title 15--Commerce and Foreign Trade
Subtitle A--Office of the Secretary of Commerce (Parts
0--29)
Subtitle B--Regulations Relating to Commerce and
Foreign Trade
I Bureau of the Census, Department of Commerce (Parts
30--199)
II National Institute of Standards and Technology,
Department of Commerce (Parts 200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV Foreign-Trade Zones Board, Department of Commerce
(Parts 400--499)
VII Bureau of Industry and Security, Department of
Commerce (Parts 700--799)
VIII Bureau of Economic Analysis, Department of Commerce
(Parts 800--899)
IX National Oceanic and Atmospheric Administration,
Department of Commerce (Parts 900--999)
XI Technology Administration, Department of Commerce
(Parts 1100--1199)
XIII East-West Foreign Trade Board (Parts 1300--1399)
XIV Minority Business Development Agency (Parts 1400--
1499)
Subtitle C--Regulations Relating to Foreign Trade
Agreements
XX Office of the United States Trade Representative
(Parts 2000--2099)
Subtitle D--Regulations Relating to Telecommunications
and Information
XXIII National Telecommunications and Information
Administration, Department of Commerce (Parts
2300--2399)
Title 16--Commercial Practices
I Federal Trade Commission (Parts 0--999)
II Consumer Product Safety Commission (Parts 1000--1799)
Title 17--Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1--199)
II Securities and Exchange Commission (Parts 200--399)
IV Department of the Treasury (Parts 400--499)
Title 18--Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of
Energy (Parts 1--399)
III Delaware River Basin Commission (Parts 400--499)
VI Water Resources Council (Parts 700--799)
[[Page 539]]
VIII Susquehanna River Basin Commission (Parts 800--899)
XIII Tennessee Valley Authority (Parts 1300--1399)
Title 19--Customs Duties
I Bureau of Customs and Border Protection, Department of
Homeland Security; Department of the Treasury
(Parts 0--199)
II United States International Trade Commission (Parts
200--299)
III International Trade Administration, Department of
Commerce (Parts 300--399)
IV Bureau of Immigration and Customs Enforcement,
Department of Homeland Security (Parts 400--599)
Title 20--Employees' Benefits
I Office of Workers' Compensation Programs, Department
of Labor (Parts 1--199)
II Railroad Retirement Board (Parts 200--399)
III Social Security Administration (Parts 400--499)
IV Employees Compensation Appeals Board, Department of
Labor (Parts 500--599)
V Employment and Training Administration, Department of
Labor (Parts 600--699)
VI Employment Standards Administration, Department of
Labor (Parts 700--799)
VII Benefits Review Board, Department of Labor (Parts
800--899)
VIII Joint Board for the Enrollment of Actuaries (Parts
900--999)
IX Office of the Assistant Secretary for Veterans'
Employment and Training, Department of Labor
(Parts 1000--1099)
Title 21--Food and Drugs
I Food and Drug Administration, Department of Health and
Human Services (Parts 1--1299)
II Drug Enforcement Administration, Department of Justice
(Parts 1300--1399)
III Office of National Drug Control Policy (Parts 1400--
1499)
Title 22--Foreign Relations
I Department of State (Parts 1--199)
II Agency for International Development (Parts 200--299)
III Peace Corps (Parts 300--399)
IV International Joint Commission, United States and
Canada (Parts 400--499)
V Broadcasting Board of Governors (Parts 500--599)
VII Overseas Private Investment Corporation (Parts 700--
799)
IX Foreign Service Grievance Board Regulations (Parts
900--999)
[[Page 540]]
X Inter-American Foundation (Parts 1000--1099)
XI International Boundary and Water Commission, United
States and Mexico, United States Section (Parts
1100--1199)
XII United States International Development Cooperation
Agency (Parts 1200--1299)
XIV Foreign Service Labor Relations Board; Federal Labor
Relations Authority; General Counsel of the
Federal Labor Relations Authority; and the Foreign
Service Impasse Disputes Panel (Parts 1400--1499)
XV African Development Foundation (Parts 1500--1599)
XVI Japan-United States Friendship Commission (Parts
1600--1699)
XVII United States Institute of Peace (Parts 1700--1799)
Title 23--Highways
I Federal Highway Administration, Department of
Transportation (Parts 1--999)
II National Highway Traffic Safety Administration and
Federal Highway Administration, Department of
Transportation (Parts 1200--1299)
III National Highway Traffic Safety Administration,
Department of Transportation (Parts 1300--1399)
Title 24--Housing and Urban Development
Subtitle A--Office of the Secretary, Department of
Housing and Urban Development (Parts 0--99)
Subtitle B--Regulations Relating to Housing and Urban
Development
I Office of Assistant Secretary for Equal Opportunity,
Department of Housing and Urban Development (Parts
100--199)
II Office of Assistant Secretary for Housing-Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 200--299)
III Government National Mortgage Association, Department
of Housing and Urban Development (Parts 300--399)
IV Office of Housing and Office of Multifamily Housing
Assistance Restructuring, Department of Housing
and Urban Development (Parts 400--499)
V Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 500--599)
VI Office of Assistant Secretary for Community Planning
and Development, Department of Housing and Urban
Development (Parts 600--699) [Reserved]
VII Office of the Secretary, Department of Housing and
Urban Development (Housing Assistance Programs and
Public and Indian Housing Programs) (Parts 700--
799)
[[Page 541]]
VIII Office of the Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Section 8 Housing Assistance
Programs, Section 202 Direct Loan Program, Section
202 Supportive Housing for the Elderly Program and
Section 811 Supportive Housing for Persons With
Disabilities Program) (Parts 800--899)
IX Office of Assistant Secretary for Public and Indian
Housing, Department of Housing and Urban
Development (Parts 900--1699)
X Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Interstate Land Sales
Registration Program) (Parts 1700--1799)
XII Office of Inspector General, Department of Housing and
Urban Development (Parts 2000--2099)
XX Office of Assistant Secretary for Housing--Federal
Housing Commissioner, Department of Housing and
Urban Development (Parts 3200--3899)
XXV Neighborhood Reinvestment Corporation (Parts 4100--
4199)
Title 25--Indians
I Bureau of Indian Affairs, Department of the Interior
(Parts 1--299)
II Indian Arts and Crafts Board, Department of the
Interior (Parts 300--399)
III National Indian Gaming Commission, Department of the
Interior (Parts 500--599)
IV Office of Navajo and Hopi Indian Relocation (Parts
700--799)
V Bureau of Indian Affairs, Department of the Interior,
and Indian Health Service, Department of Health
and Human Services (Part 900)
VI Office of the Assistant Secretary-Indian Affairs,
Department of the Interior (Parts 1000--1199)
VII Office of the Special Trustee for American Indians,
Department of the Interior (Part 1200)
Title 26--Internal Revenue
I Internal Revenue Service, Department of the Treasury
(Parts 1--899)
Title 27--Alcohol, Tobacco Products and Firearms
I Alcohol and Tobacco Tax and Trade Bureau, Department
of the Treasury (Parts 1--399)
II Bureau of Alcohol, Tobacco, Firearms, and Explosives,
Department of Justice (Parts 400--699)
Title 28--Judicial Administration
I Department of Justice (Parts 0--299)
[[Page 542]]
III Federal Prison Industries, Inc., Department of Justice
(Parts 300--399)
V Bureau of Prisons, Department of Justice (Parts 500--
599)
VI Offices of Independent Counsel, Department of Justice
(Parts 600--699)
VII Office of Independent Counsel (Parts 700--799)
VIII Court Services and Offender Supervision Agency for the
District of Columbia (Parts 800--899)
IX National Crime Prevention and Privacy Compact Council
(Parts 900--999)
XI Department of Justice and Department of State (Parts
1100--1199)
Title 29--Labor
Subtitle A--Office of the Secretary of Labor (Parts
0--99)
Subtitle B--Regulations Relating to Labor
I National Labor Relations Board (Parts 100--199)
II Office of Labor-Management Standards, Department of
Labor (Parts 200--299)
III National Railroad Adjustment Board (Parts 300--399)
IV Office of Labor-Management Standards, Department of
Labor (Parts 400--499)
V Wage and Hour Division, Department of Labor (Parts
500--899)
IX Construction Industry Collective Bargaining Commission
(Parts 900--999)
X National Mediation Board (Parts 1200--1299)
XII Federal Mediation and Conciliation Service (Parts
1400--1499)
XIV Equal Employment Opportunity Commission (Parts 1600--
1699)
XVII Occupational Safety and Health Administration,
Department of Labor (Parts 1900--1999)
XX Occupational Safety and Health Review Commission
(Parts 2200--2499)
XXV Employee Benefits Security Administration, Department
of Labor (Parts 2500--2599)
XXVII Federal Mine Safety and Health Review Commission
(Parts 2700--2799)
XL Pension Benefit Guaranty Corporation (Parts 4000--
4999)
Title 30--Mineral Resources
I Mine Safety and Health Administration, Department of
Labor (Parts 1--199)
II Minerals Management Service, Department of the
Interior (Parts 200--299)
III Board of Surface Mining and Reclamation Appeals,
Department of the Interior (Parts 300--399)
IV Geological Survey, Department of the Interior (Parts
400--499)
[[Page 543]]
VII Office of Surface Mining Reclamation and Enforcement,
Department of the Interior (Parts 700--999)
Title 31--Money and Finance: Treasury
Subtitle A--Office of the Secretary of the Treasury
(Parts 0--50)
Subtitle B--Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts
51--199)
II Fiscal Service, Department of the Treasury (Parts
200--399)
IV Secret Service, Department of the Treasury (Parts
400--499)
V Office of Foreign Assets Control, Department of the
Treasury (Parts 500--599)
VI Bureau of Engraving and Printing, Department of the
Treasury (Parts 600--699)
VII Federal Law Enforcement Training Center, Department of
the Treasury (Parts 700--799)
VIII Office of International Investment, Department of the
Treasury (Parts 800--899)
IX Federal Claims Collection Standards (Department of the
Treasury--Department of Justice) (Parts 900--999)
Title 32--National Defense
Subtitle A--Department of Defense
I Office of the Secretary of Defense (Parts 1--399)
V Department of the Army (Parts 400--699)
VI Department of the Navy (Parts 700--799)
VII Department of the Air Force (Parts 800--1099)
Subtitle B--Other Regulations Relating to National
Defense
XII Defense Logistics Agency (Parts 1200--1299)
XVI Selective Service System (Parts 1600--1699)
XVIII National Counterintelligence Center (Parts 1800--1899)
XIX Central Intelligence Agency (Parts 1900--1999)
XX Information Security Oversight Office, National
Archives and Records Administration (Parts 2000--
2099)
XXI National Security Council (Parts 2100--2199)
XXIV Office of Science and Technology Policy (Parts 2400--
2499)
XXVII Office for Micronesian Status Negotiations (Parts
2700--2799)
XXVIII Office of the Vice President of the United States
(Parts 2800--2899)
Title 33--Navigation and Navigable Waters
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Corps of Engineers, Department of the Army (Parts
200--399)
[[Page 544]]
IV Saint Lawrence Seaway Development Corporation,
Department of Transportation (Parts 400--499)
Title 34--Education
Subtitle A--Office of the Secretary, Department of
Education (Parts 1--99)
Subtitle B--Regulations of the Offices of the
Department of Education
I Office for Civil Rights, Department of Education
(Parts 100--199)
II Office of Elementary and Secondary Education,
Department of Education (Parts 200--299)
III Office of Special Education and Rehabilitative
Services, Department of Education (Parts 300--399)
IV Office of Vocational and Adult Education, Department
of Education (Parts 400--499)
V Office of Bilingual Education and Minority Languages
Affairs, Department of Education (Parts 500--599)
VI Office of Postsecondary Education, Department of
Education (Parts 600--699)
XI National Institute for Literacy (Parts 1100--1199)
Subtitle C--Regulations Relating to Education
XII National Council on Disability (Parts 1200--1299)
Title 35--Panama Canal
I Panama Canal Regulations (Parts 1--299)
Title 36--Parks, Forests, and Public Property
I National Park Service, Department of the Interior
(Parts 1--199)
II Forest Service, Department of Agriculture (Parts 200--
299)
III Corps of Engineers, Department of the Army (Parts
300--399)
IV American Battle Monuments Commission (Parts 400--499)
V Smithsonian Institution (Parts 500--599)
VII Library of Congress (Parts 700--799)
VIII Advisory Council on Historic Preservation (Parts 800--
899)
IX Pennsylvania Avenue Development Corporation (Parts
900--999)
X Presidio Trust (Parts 1000--1099)
XI Architectural and Transportation Barriers Compliance
Board (Parts 1100--1199)
XII National Archives and Records Administration (Parts
1200--1299)
XV Oklahoma City National Memorial Trust (Part 1501)
XVI Morris K. Udall Scholarship and Excellence in National
Environmental Policy Foundation (Parts 1600--1699)
[[Page 545]]
Title 37--Patents, Trademarks, and Copyrights
I United States Patent and Trademark Office, Department
of Commerce (Parts 1--199)
II Copyright Office, Library of Congress (Parts 200--299)
IV Assistant Secretary for Technology Policy, Department
of Commerce (Parts 400--499)
V Under Secretary for Technology, Department of Commerce
(Parts 500--599)
Title 38--Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0--99)
Title 39--Postal Service
I United States Postal Service (Parts 1--999)
III Postal Rate Commission (Parts 3000--3099)
Title 40--Protection of Environment
I Environmental Protection Agency (Parts 1--1099)
IV Environmental Protection Agency and Department of
Justice (Parts 1400--1499)
V Council on Environmental Quality (Parts 1500--1599)
VI Chemical Safety and Hazard Investigation Board (Parts
1600--1699)
VII Environmental Protection Agency and Department of
Defense; Uniform National Discharge Standards for
Vessels of the Armed Forces (Parts 1700--1799)
Title 41--Public Contracts and Property Management
Subtitle B--Other Provisions Relating to Public
Contracts
50 Public Contracts, Department of Labor (Parts 50-1--50-
999)
51 Committee for Purchase From People Who Are Blind or
Severely Disabled (Parts 51-1--51-99)
60 Office of Federal Contract Compliance Programs, Equal
Employment Opportunity, Department of Labor (Parts
60-1--60-999)
61 Office of the Assistant Secretary for Veterans'
Employment and Training Service, Department of
Labor (Parts 61-1--61-999)
Subtitle C--Federal Property Management Regulations
System
101 Federal Property Management Regulations (Parts 101-1--
101-99)
102 Federal Management Regulation (Parts 102-1--102-299)
105 General Services Administration (Parts 105-1--105-999)
109 Department of Energy Property Management Regulations
(Parts 109-1--109-99)
114 Department of the Interior (Parts 114-1--114-99)
115 Environmental Protection Agency (Parts 115-1--115-99)
[[Page 546]]
128 Department of Justice (Parts 128-1--128-99)
Subtitle D--Other Provisions Relating to Property
Management [Reserved]
Subtitle E--Federal Information Resources Management
Regulations System
201 Federal Information Resources Management Regulation
(Parts 201-1--201-99) [Reserved]
Subtitle F--Federal Travel Regulation System
300 General (Parts 300-1--300-99)
301 Temporary Duty (TDY) Travel Allowances (Parts 301-1--
301-99)
302 Relocation Allowances (Parts 302-1--302-99)
303 Payment of Expenses Connected with the Death of
Certain Employees (Part 303-70)
304 Payment of Travel Expenses from a Non-Federal Source
(Parts 304-1--304-99)
Title 42--Public Health
I Public Health Service, Department of Health and Human
Services (Parts 1--199)
IV Centers for Medicare & Medicaid Services, Department
of Health and Human Services (Parts 400--499)
V Office of Inspector General-Health Care, Department of
Health and Human Services (Parts 1000--1999)
Title 43--Public Lands: Interior
Subtitle A--Office of the Secretary of the Interior
(Parts 1--199)
Subtitle B--Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior
(Parts 200--499)
II Bureau of Land Management, Department of the Interior
(Parts 1000--9999)
III Utah Reclamation Mitigation and Conservation
Commission (Parts 10000--10010)
Title 44--Emergency Management and Assistance
I Federal Emergency Management Agency, Department of
Homeland Security (Parts 0--399)
IV Department of Commerce and Department of
Transportation (Parts 400--499)
Title 45--Public Welfare
Subtitle A--Department of Health and Human Services
(Parts 1--199)
Subtitle B--Regulations Relating to Public Welfare
[[Page 547]]
II Office of Family Assistance (Assistance Programs),
Administration for Children and Families,
Department of Health and Human Services (Parts
200--299)
III Office of Child Support Enforcement (Child Support
Enforcement Program), Administration for Children
and Families, Department of Health and Human
Services (Parts 300--399)
IV Office of Refugee Resettlement, Administration for
Children and Families, Department of Health and
Human Services (Parts 400--499)
V Foreign Claims Settlement Commission of the United
States, Department of Justice (Parts 500--599)
VI National Science Foundation (Parts 600--699)
VII Commission on Civil Rights (Parts 700--799)
VIII Office of Personnel Management (Parts 800--899)
X Office of Community Services, Administration for
Children and Families, Department of Health and
Human Services (Parts 1000--1099)
XI National Foundation on the Arts and the Humanities
(Parts 1100--1199)
XII Corporation for National and Community Service (Parts
1200--1299)
XIII Office of Human Development Services, Department of
Health and Human Services (Parts 1300--1399)
XVI Legal Services Corporation (Parts 1600--1699)
XVII National Commission on Libraries and Information
Science (Parts 1700--1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800--
1899)
XXI Commission on Fine Arts (Parts 2100--2199)
XXIII Arctic Research Commission (Part 2301)
XXIV James Madison Memorial Fellowship Foundation (Parts
2400--2499)
XXV Corporation for National and Community Service (Parts
2500--2599)
Title 46--Shipping
I Coast Guard, Department of Homeland Security (Parts
1--199)
II Maritime Administration, Department of Transportation
(Parts 200--399)
III Coast Guard (Great Lakes Pilotage), Department of
Homeland Security (Parts 400--499)
IV Federal Maritime Commission (Parts 500--599)
Title 47--Telecommunication
I Federal Communications Commission (Parts 0--199)
II Office of Science and Technology Policy and National
Security Council (Parts 200--299)
[[Page 548]]
III National Telecommunications and Information
Administration, Department of Commerce (Parts
300--399)
Title 48--Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1--99)
2 Department of Defense (Parts 200--299)
3 Department of Health and Human Services (Parts 300--
399)
4 Department of Agriculture (Parts 400--499)
5 General Services Administration (Parts 500--599)
6 Department of State (Parts 600--699)
7 United States Agency for International Development
(Parts 700--799)
8 Department of Veterans Affairs (Parts 800--899)
9 Department of Energy (Parts 900--999)
10 Department of the Treasury (Parts 1000--1099)
12 Department of Transportation (Parts 1200--1299)
13 Department of Commerce (Parts 1300--1399)
14 Department of the Interior (Parts 1400--1499)
15 Environmental Protection Agency (Parts 1500--1599)
16 Office of Personnel Management, Federal Employees
Health Benefits Acquisition Regulation (Parts
1600--1699)
17 Office of Personnel Management (Parts 1700--1799)
18 National Aeronautics and Space Administration (Parts
1800--1899)
19 Broadcasting Board of Governors (Parts 1900--1999)
20 Nuclear Regulatory Commission (Parts 2000--2099)
21 Office of Personnel Management, Federal Employees
Group Life Insurance Federal Acquisition
Regulation (Parts 2100--2199)
23 Social Security Administration (Parts 2300--2399)
24 Department of Housing and Urban Development (Parts
2400--2499)
25 National Science Foundation (Parts 2500--2599)
28 Department of Justice (Parts 2800--2899)
29 Department of Labor (Parts 2900--2999)
30 Department of Homeland Security, Homeland Security
Acquisition Regulation (HSAR) (Parts 3000--3099)
34 Department of Education Acquisition Regulation (Parts
3400--3499)
35 Panama Canal Commission (Parts 3500--3599)
44 Federal Emergency Management Agency (Parts 4400--4499)
51 Department of the Army Acquisition Regulations (Parts
5100--5199)
52 Department of the Navy Acquisition Regulations (Parts
5200--5299)
53 Department of the Air Force Federal Acquisition
Regulation Supplement (Parts 5300--5399)
[[Page 549]]
54 Defense Logistics Agency, Department of Defense (Parts
5400--5499)
57 African Development Foundation (Parts 5700--5799)
61 General Services Administration Board of Contract
Appeals (Parts 6100--6199)
63 Department of Transportation Board of Contract Appeals
(Parts 6300--6399)
99 Cost Accounting Standards Board, Office of Federal
Procurement Policy, Office of Management and
Budget (Parts 9900--9999)
Title 49--Transportation
Subtitle A--Office of the Secretary of Transportation
(Parts 1--99)
Subtitle B--Other Regulations Relating to
Transportation
I Research and Special Programs Administration,
Department of Transportation (Parts 100--199)
II Federal Railroad Administration, Department of
Transportation (Parts 200--299)
III Federal Motor Carrier Safety Administration,
Department of Transportation (Parts 300--399)
IV Coast Guard, Department of Homeland Security (Parts
400--499)
V National Highway Traffic Safety Administration,
Department of Transportation (Parts 500--599)
VI Federal Transit Administration, Department of
Transportation (Parts 600--699)
VII National Railroad Passenger Corporation (AMTRAK)
(Parts 700--799)
VIII National Transportation Safety Board (Parts 800--999)
X Surface Transportation Board, Department of
Transportation (Parts 1000--1399)
XI Bureau of Transportation Statistics, Department of
Transportation (Parts 1400--1499)
XII Transportation Security Administration, Department of
Homeland Security (Parts 1500--1599)
Title 50--Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of
the Interior (Parts 1--199)
II National Marine Fisheries Service, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 200--299)
III International Fishing and Related Activities (Parts
300--399)
IV Joint Regulations (United States Fish and Wildlife
Service, Department of the Interior and National
Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of
Commerce); Endangered Species Committee
Regulations (Parts 400--499)
[[Page 550]]
V Marine Mammal Commission (Parts 500--599)
VI Fishery Conservation and Management, National Oceanic
and Atmospheric Administration, Department of
Commerce (Parts 600--699)
CFR Index and Finding Aids
Subject/Agency Index
List of Agency Prepared Indexes
Parallel Tables of Statutory Authorities and Rules
List of CFR Titles, Chapters, Subchapters, and Parts
Alphabetical List of Agencies Appearing in the CFR
[[Page 551]]
Alphabetical List of Agencies Appearing in the CFR
(Revised as of April 1, 2004)
CFR Title, Subtitle or
Agency Chapter
Administrative Committee of the Federal Register 1, I
Advanced Research Projects Agency 32, I
Advisory Council on Historic Preservation 36, VIII
African Development Foundation 22, XV
Federal Acquisition Regulation 48, 57
Agency for International Development, United 22, II
States
Federal Acquisition Regulation 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agriculture Department 5, LXXIII
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Animal and Plant Health Inspection Service 7, III; 9, I
Chief Financial Officer, Office of 7, XXX
Commodity Credit Corporation 7, XIV
Cooperative State Research, Education, and 7, XXXIV
Extension Service
Economic Research Service 7, XXXVII
Energy, Office of 7, XXIX
Environmental Quality, Office of 7, XXXI
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Forest Service 36, II
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
Natural Resources Conservation Service 7, VI
Operations, Office of 7, XXVIII
Procurement and Property Management, Office of 7, XXXII
Rural Business-Cooperative Service 7, XVIII, XLII
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII
Secretary of Agriculture, Office of 7, Subtitle A
Transportation, Office of 7, XXXIII
World Agricultural Outlook Board 7, XXXVIII
Air Force Department 32, VII
Federal Acquisition Regulation Supplement 48, 53
Air Transportation Stabilization Board 14, VI
Alcohol and Tobacco Tax and Trade Bureau 27, I
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
American Indians, Office of the Special Trustee 25, VII
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
[[Page 552]]
Architectural and Transportation Barriers 36, XI
Compliance Board
Arctic Research Commission 45, XXIII
Armed Forces Retirement Home 5, XI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Benefits Review Board 20, VII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Blind or Severely Disabled, Committee for 41, 51
Purchase From People Who Are
Broadcasting Board of Governors 22, V
Federal Acquisition Regulation 48, 19
Census Bureau 15, I
Centers for Medicare & Medicaid Services 42, IV
Central Intelligence Agency 32, XIX
Chief Financial Officer, Office of 7, XXX
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Civil Rights, Commission on 45, VII
Civil Rights, Office for 34, I
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Commerce Department 44, IV
Census Bureau 15, I
Economic Affairs, Under Secretary 37, V
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 13
Fishery Conservation and Management 50, VI
Foreign-Trade Zones Board 15, IV
Industry and Security, Bureau of 15, VII
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II
National Marine Fisheries Service 50, II, IV, VI
National Oceanic and Atmospheric 15, IX; 50, II, III, IV,
Administration VI
National Telecommunications and Information 15, XXIII; 47, III
Administration
National Weather Service 15, IX
Patent and Trademark Office, United States 37, I
Productivity, Technology and Innovation, 37, IV
Assistant Secretary for
Secretary of Commerce, Office of 15, Subtitle A
Technology, Under Secretary for 37, V
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
Commercial Space Transportation 14, III
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 5, XLI; 17, I
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining 29, IX
Commission
Consumer Product Safety Commission 5, LXXI; 16, II
Cooperative State Research, Education, and 7, XXXIV
Extension Service
Copyright Office 37, II
Corporation for National and Community Service 45, XII, XXV
Cost Accounting Standards Board 48, 99
Council on Environmental Quality 40, V
Court Services and Offender Supervision Agency 28, VIII
for the District of Columbia
Customs and Border Protection Bureau 19, I
Defense Contract Audit Agency 32, I
Defense Department 5, XXVI; 32, Subtitle A;
40, VII
[[Page 553]]
Advanced Research Projects Agency 32, I
Air Force Department 32, VII
Army Department 32, V; 33, II; 36, III,
48, 51
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, I, XII; 48, 54
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 2
National Imagery and Mapping Agency 32, I
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 32, I
Defense Contract Audit Agency 32, I
Defense Intelligence Agency 32, I
Defense Logistics Agency 32, XII; 48, 54
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
District of Columbia, Court Services and 28, VIII
Offender Supervision Agency for the
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Affairs, Under Secretary 37, V
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Economic Research Service 7, XXXVII
Education, Department of 5, LIII
Bilingual Education and Minority Languages 34, V
Affairs, Office of
Civil Rights, Office for 34, I
Educational Research and Improvement, Office 34, VII
of
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, 34, III
Office of
Vocational and Adult Education, Office of 34, IV
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Emergency Oil and Gas Guaranteed Loan Board 13, V
Emergency Steel Guarantee Loan Board 13, IV
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 5, XXIII; 10, II, III, X
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 5, XXIV; 18, I
Property Management Regulations 41, 109
Energy, Office of 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 5, LIV; 40, I, IV, VII
Federal Acquisition Regulation 48, 15
Property Management Regulations 41, 115
Environmental Quality, Office of 7, XXXI
Equal Employment Opportunity Commission 5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary 24, I
for
Executive Office of the President 3, I
Administration, Office of 5, XV
Environmental Quality, Council on 40, V
Management and Budget, Office of 5, III, LXXVII; 14, VI;
48, 99
National Drug Control Policy, Office of 21, III
National Security Council 32, XXI; 47, 2
Presidential Documents 3
Science and Technology Policy, Office of 32, XXIV; 47, II
[[Page 554]]
Trade Representative, Office of the United 15, XX
States
Export-Import Bank of the United States 5, LII; 12, IV
Family Assistance, Office of 45, II
Farm Credit Administration 5, XXXI; 12, VI
Farm Credit System Insurance Corporation 5, XXX; 12, XIV
Farm Service Agency 7, VII, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Commercial Space Transportation 14, III
Federal Claims Collection Standards 31, IX
Federal Communications Commission 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 5, XXII; 12, III
Federal Election Commission 11, I
Federal Emergency Management Agency 44, I
Federal Acquisition Regulation 48, 44
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Federal Energy Regulatory Commission 5, XXIV; 18, I
Federal Financial Institutions Examination 12, XI
Council
Federal Financing Bank 12, VIII
Federal Highway Administration 23, I, II
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Enterprise Oversight Office 12, XVII
Federal Housing Finance Board 12, IX
Federal Labor Relations Authority, and General 5, XIV; 22, XIV
Counsel of the Federal Labor Relations
Authority
Federal Law Enforcement Training Center 31, VII
Federal Management Regulation 41, 102
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration 49, III
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Board of Governors 5, LVIII
Federal Retirement Thrift Investment Board 5, VI, LXXVI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 5, XLVII; 16, I
Federal Transit Administration 49, VI
Federal Travel Regulation System 41, Subtitle F
Fine Arts, Commission on 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Fishery Conservation and Management 50, VI
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of the 45, V
United States
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Accounting Office 4, I
General Services Administration 5, LVII; 41, 105
Contract Appeals, Board of 48, 61
Federal Acquisition Regulation 48, 5
[[Page 555]]
Federal Management Regulation 41, 102
Federal Property Management Regulations 41, 101
Federal Travel Regulation System 41, Subtitle F
General 41, 300
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death 41, 303
of Certain Employees
Relocation Allowances 41, 302
Temporary Duty (TDY) Travel Allowances 41, 301
Geological Survey 30, IV
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grain Inspection, Packers and Stockyards 7, VIII; 9, II
Administration
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 5, XLV; 45, Subtitle A
Centers for Medicare & Medicaid Services 42, IV
Child Support Enforcement, Office of 45, III
Children and Families, Administration for 45, II, III, IV, X
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Human Development Services, Office of 45, XIII
Indian Health Service 25, V; 42, I
Inspector General (Health Care), Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Homeland Security, Department of 6, I
Coast Guard 33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage) 46, III
Customs and Border Protection Bureau 19, I
Federal Emergency Management Agency 44, I
Immigration and Customs Enforcement Bureau 19, IV
Immigration and Naturalization 8, I
Transportation Security Administration 49, XII
Housing and Urban Development, Department of 5, LXV; 24, Subtitle B
Community Planning and Development, Office of 24, V, VI
Assistant Secretary for
Equal Opportunity, Office of Assistant 24, I
Secretary for
Federal Acquisition Regulation 48, 24
Federal Housing Enterprise Oversight, Office 12, XVII
of
Government National Mortgage Association 24, III
Housing--Federal Housing Commissioner, Office 24, II, VIII, X, XX
of Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Inspector General, Office of 24, XII
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Secretary, Office of 24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of 24, II, VIII, X, XX
Assistant Secretary for
Housing, Office of, and Multifamily Housing 24, IV
Assistance Restructuring, Office of
Human Development Services, Office of 45, XIII
Immigration and Customs Enforcement Bureau 19, IV
Immigration and Naturalization 8, I
Immigration Review, Executive Office for 8, V
Independent Counsel, Office of 28, VII
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
Indian Health Service 25, V; 42, I
Industry and Security, Bureau of 15, VII
Information Resources Management, Office of 7, XXVII
Information Security Oversight Office, National 32, XX
Archives and Records Administration
Inspector General
[[Page 556]]
Agriculture Department 7, XXVI
Health and Human Services Department 42, V
Housing and Urban Development Department 24, XII
Institute of Peace, United States 22, XVII
Inter-American Foundation 5, LXIII; 22, X
Interior Department
American Indians, Office of the Special 25, VII
Trustee
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I, V
Indian Affairs, Office of the Assistant 25, VI
Secretary
Indian Arts and Crafts Board 25, II
Land Management, Bureau of 43, II
Minerals Management Service 30, II
National Indian Gaming Commission 25, III
National Park Service 36, I
Reclamation, Bureau of 43, I
Secretary of the Interior, Office of 43, Subtitle A
Surface Mining and Reclamation Appeals, Board 30, III
of
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Internal Revenue Service 26, I
International Boundary and Water Commission, 22, XI
United States and Mexico, United States
Section
International Development, United States Agency 22, II
for
Federal Acquisition Regulation 48, 7
International Development Cooperation Agency, 22, XII
United States
International Fishing and Related Activities 50, III
International Investment, Office of 31, VIII
International Joint Commission, United States 22, IV
and Canada
International Organizations Employees Loyalty 5, V
Board
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 5, XL
James Madison Memorial Fellowship Foundation 45, XXIV
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 5, XXVIII; 28, I, XI; 40,
IV
Alcohol, Tobacco, Firearms, and Explosives, 27, II
Bureau of
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 31, IX
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the 45, V
United States
Immigration Review, Executive Office for 8, V
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Property Management Regulations 41, 128
Labor Department 5, XLII
Benefits Review Board 20, VII
Employee Benefits Security Administration 29, XXV
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office 41, 60
of
Federal Procurement Regulations System 41, 50
Labor-Management Standards, Office of 29, II, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
[[Page 557]]
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Standards, Office of 29, II, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Office 37, II
Local Television Loan Guarantee Board 7, XX
Management and Budget, Office of 5, III, LXXVII; 14, VI;
48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II
Micronesian Status Negotiations, Office for 32, XXVII
Mine Safety and Health Administration 30, I
Minerals Management Service 30, II
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Morris K. Udall Scholarship and Excellence in 36, XVI
National Environmental Policy Foundation
National Aeronautics and Space Administration 5, LIX; 14, V
Federal Acquisition Regulation 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National and Community Service, Corporation for 45, XII, XXV
National Archives and Records Administration 5, LXVI; 36, XII
Information Security Oversight Office 32, XX
National Bureau of Standards 15, II
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information 45, XVII
Science
National Council on Disability 34, XII
National Counterintelligence Center 32, XVIII
National Credit Union Administration 12, VII
National Crime Prevention and Privacy Compact 28, IX
Council
National Drug Control Policy, Office of 21, III
National Foundation on the Arts and the 45, XI
Humanities
National Highway Traffic Safety Administration 23, II, III; 49, V
National Imagery and Mapping Agency 32, I
National Indian Gaming Commission 25, III
National Institute for Literacy 34, XI
National Institute of Standards and Technology 15, II
National Labor Relations Board 5, LXI; 29, I
National Marine Fisheries Service 50, II, IV, VI
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III, IV,
VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 5, XLIII; 45, VI
Federal Acquisition Regulation 48, 25
National Security Council 32, XXI
National Security Council and Office of Science 47, II
and Technology Policy
National Telecommunications and Information 15, XXIII; 47, III
Administration
National Transportation Safety Board 49, VIII
National Weather Service 15, IX
Natural Resources Conservation Service 7, VI
Navajo and Hopi Indian Relocation, Office of 25, IV
Navy Department 32, VI
Federal Acquisition Regulation 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Northeast Interstate Low-Level Radioactive Waste 10, XVIII
Commission
[[Page 558]]
Nuclear Regulatory Commission 5, XLVIII; 10, I
Federal Acquisition Regulation 48, 20
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Offices of Independent Counsel 28, VI
Oklahoma City National Memorial Trust 36, XV
Operations Office 7, XXVIII
Overseas Private Investment Corporation 5, XXXIII; 22, VII
Panama Canal Commission 48, 35
Panama Canal Regulations 35, I
Patent and Trademark Office, United States 37, I
Payment From a Non-Federal Source for Travel 41, 304
Expenses
Payment of Expenses Connected With the Death of 41, 303
Certain Employees
Peace Corps 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension Benefit Guaranty Corporation 29, XL
Personnel Management, Office of 5, I, XXXV; 45, VIII
Federal Acquisition Regulation 48, 17
Federal Employees Group Life Insurance Federal 48, 21
Acquisition Regulation
Federal Employees Health Benefits Acquisition 48, 16
Regulation
Postal Rate Commission 5, XLVI; 39, III
Postal Service, United States 5, LX; 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House 1, IV
Fellowships
Presidential Documents 3
Presidio Trust 36, X
Prisons, Bureau of 28, V
Procurement and Property Management, Office of 7, XXXII
Productivity, Technology and Innovation, 37, IV
Assistant Secretary
Public Contracts, Department of Labor 41, 50
Public and Indian Housing, Office of Assistant 24, IX
Secretary for
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation, Bureau of 43, I
Refugee Resettlement, Office of 45, IV
Regional Action Planning Commissions 13, V
Relocation Allowances 41, 302
Research and Special Programs Administration 49, I
Rural Business-Cooperative Service 7, XVIII, XLII
Rural Development Administration 7, XLII
Rural Housing Service 7, XVIII, XXXV
Rural Telephone Bank 7, XVI
Rural Utilities Service 7, XVII, XVIII, XLII
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
Science and Technology Policy, Office of, and 47, II
National Security Council
Secret Service 31, IV
Securities and Exchange Commission 17, II
Selective Service System 32, XVI
Small Business Administration 13, I
Smithsonian Institution 36, V
Social Security Administration 20, III; 48, 23
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, 34, III
Office of
State Department 22, I; 28, XI
Federal Acquisition Regulation 48, 6
Surface Mining and Reclamation Appeals, Board of 30, III
Surface Mining Reclamation and Enforcement, 30, VII
Office of
Surface Transportation Board 49, X
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Technology Policy, Assistant Secretary for 37, IV
[[Page 559]]
Technology, Under Secretary for 37, V
Tennessee Valley Authority 5, LXIX; 18, XIII
Thrift Supervision Office, Department of the 12, V
Treasury
Trade Representative, United States, Office of 15, XX
Transportation, Department of 5, L
Commercial Space Transportation 14, III
Contract Appeals, Board of 48, 63
Emergency Management and Assistance 44, IV
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II
Federal Motor Carrier Safety Administration 49, III
Federal Railroad Administration 49, II
Federal Transit Administration 49, VI
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 49, V
Research and Special Programs Administration 49, I
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Surface Transportation Board 49, X
Transportation Statistics Bureau 49, XI
Transportation, Office of 7, XXXIII
Transportation Security Administration 49, XII
Transportation Statistics Bureau 49, XI
Travel Allowances, Temporary Duty (TDY) 41, 301
Treasury Department 5, XXI; 12, XV; 17, IV;
31, IX
Alcohol and Tobacco Tax and Trade Bureau 27, I
Community Development Financial Institutions 12, XVIII
Fund
Comptroller of the Currency 12, I
Customs and Border Protection Bureau 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Law Enforcement Training Center 31, VII
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
International Investment, Office of 31, VIII
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision, Office of 12, V
Truman, Harry S. Scholarship Foundation 45, XVIII
United States and Canada, International Joint 22, IV
Commission
United States and Mexico, International Boundary 22, XI
and Water Commission, United States Section
Utah Reclamation Mitigation and Conservation 43, III
Commission
Veterans Affairs Department 38, I
Federal Acquisition Regulation 48, 8
Veterans' Employment and Training Service, 41, 61; 20, IX
Office of the Assistant Secretary for
Vice President of the United States, Office of 32, XXVIII
Vocational and Adult Education, Office of 34, IV
Wage and Hour Division 29, V
Water Resources Council 18, VI
Workers' Compensation Programs, Office of 20, I
World Agricultural Outlook Board 7, XXXVIII
[[Page 561]]
Table Of OMB Control Numbers
The OMB control numbers for chapter I of title 26 were consolidated into
Sec. Sec. 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR
58008, Nov. 12, 1996, Sec. 601.9000 was removed. Section 602.101 is
reprinted below for the convenience of the user.
PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Sec. 602.101 OMB Control numbers.
(a) Purpose. This part collects and displays the control numbers
assigned to collections of information in Internal Revenue Service
regulations by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980. The Internal Revenue Service intends
that this part comply with the requirements of Sec. Sec. 1320.7(f),
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations
implementing the Paperwork Reduction Act), for the display of control
numbers assigned by OMB to collections of information in Internal
Revenue Service regulations. This part does not display control numbers
assigned by the Office of Management and Budget to collections of
information of the Bureau of Alcohol, Tobacco, and Firearms.
(b) Display.
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................ 1545-1654
1.23-5..................................................... 1545-0074
1.25-1T.................................................... 1545-0922
1545-0930
1.25-2T.................................................... 1545-0922
1545-0930
1.25-3T.................................................... 1545-0922
1545-0930
1.25-4T.................................................... 1545-0922
1.25-5T.................................................... 1545-0922
1.25-6T.................................................... 1545-0922
1.25-7T.................................................... 1545-0922
1.25-8T.................................................... 1545-0922
1.25A-1.................................................... 1545-1630
1.28-1..................................................... 1545-0619
1.31-2..................................................... 1545-0074
1.32-2..................................................... 1545-0074
1.32-3..................................................... 1545-1575
1.37-1..................................................... 1545-0074
1.37-3..................................................... 1545-0074
1.41-2..................................................... 1545-0619
1.41-3..................................................... 1545-0619
1.41-4A.................................................... 1545-0074
1.41-4 (b) and (c)......................................... 1545-0074
1.41-8(b).................................................. 1545-1625
1.41-8(d).................................................. 1545-0732
1.41-9..................................................... 1545-0619
1.42-1T.................................................... 1545-0984
1545-0988
1.42-2..................................................... 1545-1005
1.42-5..................................................... 1545-1357
1.42-6..................................................... 1545-1102
1.42-8..................................................... 1545-1102
1.42-10.................................................... 1545-1102
1.42-13.................................................... 1545-1357
1.42-14.................................................... 1545-1423
1.42-17.................................................... 1545-1357
1.43-3(a)(3)............................................... 1545-1292
1.43-3(b)(3)............................................... 1545-1292
1.44A-1.................................................... 1545-0068
1.44A-3.................................................... 1545-0074
1.44B-1.................................................... 1545-0219
1.45D-1T................................................... 1545-1765
1.46-1..................................................... 1545-0123
1545-0155
1.46-3..................................................... 1545-0155
1.46-4..................................................... 1545-0155
1.46-5..................................................... 1545-0155
1.46-6..................................................... 1545-0155
1.46-8..................................................... 1545-0155
1.46-9..................................................... 1545-0155
1.46-10.................................................... 1545-0118
1.46-11.................................................... 1545-0155
1.47-1..................................................... 1545-0166
1545-0155
1.47-3..................................................... 1545-0166
1545-0155
1.47-4..................................................... 1545-0123
1.47-5..................................................... 1545-0092
1.47-6..................................................... 1545-0099
1.48-3..................................................... 1545-0155
1.48-4..................................................... 1545-0808
1545-0155
1.48-5..................................................... 1545-0155
1.48-6..................................................... 1545-0155
1.48-12.................................................... 1545-0155
1545-1783
1.50A-1.................................................... 1545-0895
1.50A-2.................................................... 1545-0895
1.50A-3.................................................... 1545-0895
1.50A-4.................................................... 1545-0895
1.50A-5.................................................... 1545-0895
1.50A-6.................................................... 1545-0895
1.50A-7.................................................... 1545-0895
1.50B-1.................................................... 1545-0895
1.50B-2.................................................... 1545-0895
1.50B-3.................................................... 1545-0895
[[Page 562]]
1.50B-4.................................................... 1545-0895
1.50B-5.................................................... 1545-0895
1.51-1..................................................... 1545-0219
1545-0241
1545-0244
1545-0797
1.52-2..................................................... 1545-0219
1.52-3..................................................... 1545-0219
1.56-1..................................................... 1545-0123
1.56(g)-1.................................................. 1545-1233
1.56A-1.................................................... 1545-0227
1.56A-2.................................................... 1545-0227
1.56A-3.................................................... 1545-0227
1.56A-4.................................................... 1545-0227
1.56A-5.................................................... 1545-0227
1.57-5..................................................... 1545-0227
1.58-1..................................................... 1545-0175
1.58-9(c)(5)(iii)(B)....................................... 1545-1093
1.58-9(e)(3)............................................... 1545-1093
1.61-2..................................................... 1545-0771
1.61-2T.................................................... 1545-0771
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1.66-4..................................................... 1545-1770
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1.72-17.................................................... 1545-0074
1.72-17A................................................... 1545-0074
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1.74-1..................................................... 1545-1100
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1.103-10................................................... 1545-0123
1545-0940
1.103-15AT................................................. 1545-0720
1.103-18................................................... 1545-1226
1.103(n)-2T................................................ 1545-0874
1.103(n)-4T................................................ 1545-0874
1.103A-2................................................... 1545-0720
1.105-4.................................................... 1545-0074
1.105-5.................................................... 1545-0074
1.105-6.................................................... 1545-0074
1.108-4.................................................... 1545-1539
1.108-5.................................................... 1545-1421
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1.121-4.................................................... 1545-0072
1545-0091
1.121-5.................................................... 1545-0072
1.127-2.................................................... 1545-0768
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1.132-5.................................................... 1545-0771
1.132-5T................................................... 1545-0771
1545-1098
1.132-9(b)................................................. 1545-1676
1.141-1.................................................... 1545-1451
1.141-12................................................... 1545-1451
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1.142(f)(4)-1.............................................. 1545-1730
1.148-0.................................................... 1545-1098
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1545-1347
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1545-1347
1.149(e)-1................................................. 1545-0720
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1.152-3.................................................... 1545-0071
1545-1783
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1.163-5.................................................... 1545-0786
1545-1132
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1.163(d)-1................................................. 1545-1421
1.165-1.................................................... 1545-0177
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1.165-11................................................... 1545-0074
1545-0177
1545-0786
1.165-12................................................... 1545-0786
1.166-1.................................................... 1545-0123
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[[Page 563]]
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1.167(a)-5T................................................ 1545-1021
1.167(a)-7................................................. 1545-0172
1.167(a)-11................................................ 1545-0152
1545-0172
1.167(a)-12................................................ 1545-0172
1.167(d)-1................................................. 1545-0172
1.167(e)-1................................................. 1545-0172
1.167(f)-11................................................ 1545-0172
1.167(l)-1................................................. 1545-0172
1.168(d)-1................................................. 1545-1146
1.168(f)(8)-1T............................................. 1545-0923
1.168(i)-1................................................. 1545-1331
1.168-5.................................................... 1545-0172
1.169-4.................................................... 1545-0172
1.170-1.................................................... 1545-0074
1.170-2.................................................... 1545-0074
1.170-3.................................................... 1545-0123
1.170A-1................................................... 1545-0074
1.170A-2................................................... 1545-0074
1.170A-4(A)(b)............................................. 1545-0123
1.170A-8................................................... 1545-0074
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1545-0074
1.170A-11.................................................. 1545-0123
1545-0074
1.170A-11T................................................. 1545-1868
1.170A-12.................................................. 1545-0020
1545-0074
1.170A-13.................................................. 1545-0074
1545-0754
1545-0908
1545-1431
1.170A-13(f)............................................... 1545-1464
1.170A-14.................................................. 1545-0763
1.171-4.................................................... 1545-1491
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1.172-1.................................................... 1545-0172
1.172-13................................................... 1545-0863
1.173-1.................................................... 1545-0172
1.174-3.................................................... 1545-0152
1.174-4.................................................... 1545-0152
1.175-3.................................................... 1545-0187
1.175-6.................................................... 1545-0152
1.177-1.................................................... 1545-0172
1.179-2.................................................... 1545-1201
1.179-3.................................................... 1545-1201
1.179-5.................................................... 1545-0172
1.180-2.................................................... 1545-0074
1.182-6.................................................... 1545-0074
1.183-1.................................................... 1545-0195
1.183-2.................................................... 1545-0195
1.183-3.................................................... 1545-0195
1.183-4.................................................... 1545-0195
1.190-3.................................................... 1545-0074
1.194-2.................................................... 1545-0735
1.194-4.................................................... 1545-0735
1.195-1.................................................... 1545-1582
1.197-1T................................................... 1545-1425
1.197-2.................................................... 1545-1671
1.213-1.................................................... 1545-0074
1.215-1T................................................... 1545-0074
1.217-2.................................................... 1545-0182
1.243-3.................................................... 1545-0123
1.243-4.................................................... 1545-0123
1.243-5.................................................... 1545-0123
1.248-1.................................................... 1545-0172
1.261-1.................................................... 1545-1041
1.263(a)-5................................................. 1545-1870
1.263(e)-1................................................. 1545-0123
1.263A-1................................................... 1545-0987
1.263A-1T.................................................. 1545-0187
1.263A-2................................................... 1545-0987
1.263A-3................................................... 1545-0987
1545-0987
1.263A-8(b)(2)(iii)........................................ 1545-1265
1.263A-9(d)(1)............................................. 1545-1265
1.263A-9(f)(1)(ii)......................................... 1545-1265
1.263A-9(f)(2)(iv)......................................... 1545-1265
1.263A-9(g)(2)(iv)(C)...................................... 1545-1265
1.263A-9(g)(3)(iv)......................................... 1545-1265
1.265-1.................................................... 1545-0074
1.265-2.................................................... 1545-0123
1.266-1.................................................... 1545-0123
1.267(f)-1................................................. 1545-0885
1.268-1.................................................... 1545-0184
1.274-1.................................................... 1545-0139
1.274-2.................................................... 1545-0139
1.274-3.................................................... 1545-0139
1.274-4.................................................... 1545-0139
1.274-5.................................................... 1545-0771
1.274-5A................................................... 1545-0139
1545-0771
1.274-5T................................................... 1545-0074
1545-0172
1545-0771
1.274-6.................................................... 1545-0139
1545-0771
1.274-6T................................................... 1545-0074
1545-0771
1.274-7.................................................... 1545-0139
1.274-8.................................................... 1545-0139
1.279-6.................................................... 1545-0123
1.280C-4................................................... 1545-1155
1.280F-3T.................................................. 1545-0074
1.280G-1................................................... 1545-1851
1.281-4.................................................... 1545-0123
1.302-4.................................................... 1545-0074
1.305-3.................................................... 1545-0123
1.305-5.................................................... 1545-1438
1.307-2.................................................... 1545-0074
1.312-15................................................... 1545-0172
1.316-1.................................................... 1545-0123
1.331-1.................................................... 1545-0074
1.332-4.................................................... 1545-0123
1.332-6.................................................... 1545-0123
1.337(d)-1................................................. 1545-1160
1.337(d)-2................................................. 1545-1160
1.337(d)-2T................................................ 1545-1774
1.337(d)-4................................................. 1545-1633
1.337(d)-5................................................. 1545-1672
1.337(d)-6................................................. 1545-1672
1.337(d)-7................................................. 1545-1672
1.338-2.................................................... 1545-1658
1.338-5.................................................... 1545-1658
1.338-10................................................... 1545-1658
1.338(h)(10)-1............................................. 1545-1658
1.341-7.................................................... 1545-0123
1.351-3.................................................... 1545-0074
1.355-5.................................................... 1545-0123
1.362-2.................................................... 1545-0123
1.367(a)-1T................................................ 1545-0026
1.367(a)-2T................................................ 1545-0026
1.367(a)-3................................................. 1545-0026
1545-1478
1.367(a)-6T................................................ 1545-0026
1.367(a)-8................................................. 1545-1271
1.367(b)-1................................................. 1545-1271
1.367(b)-3T................................................ 1545-1666
1.367(d)-1T................................................ 1545-0026
1.367(e)-1................................................. 1545-1487
1.367(e)-2................................................. 1545-1487
1.368-1.................................................... 1545-1691
[[Page 564]]
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1.371-1.................................................... 1545-0123
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1.374-3.................................................... 1545-0123
1.381(b)-1................................................. 1545-0123
1.381(c)(4)-1.............................................. 1545-0123
1545-0152
1545-0879
1.381(c)(5)-1.............................................. 1545-0123
1545-0152
1.381(c)(6)-1.............................................. 1545-0123
1545-0152
1.381(c)(8)-1.............................................. 1545-0123
1.381(c)(10)-1............................................. 1545-0123
1.381(c)(11)-1(k).......................................... 1545-0123
1.381(c)(13)-1............................................. 1545-0123
1.381(c)(17)-1............................................. 1545-0045
1.381(c)(25)-1............................................. 1545-0045
1.382-1T................................................... 1545-0123
1.382-2.................................................... 1545-0123
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1.382-3.................................................... 1545-1281
1545-1345
1.382-4.................................................... 1545-1120
1.382-6.................................................... 1545-1381
1.382-8.................................................... 1545-1434
1.382-9.................................................... 1545-1260
1545-1120
1545-1275
1545-1324
1.382-91................................................... 1545-1260
1545-1324
1.383-1.................................................... 1545-0074
1545-1120
1.401(a)-11................................................ 1545-0710
1.401(a)-20................................................ 1545-0928
1.401(a)-31................................................ 1545-1341
1.401(a)-50................................................ 1545-0710
1.401(a)(31)-1............................................. 1545-1341
1.401(b)-1................................................. 1545-0197
1.401(f)-1................................................. 1545-0710
1.401(k)-1................................................. 1545-1039
1545-1069
1.401-1.................................................... 1545-0020
1545-0197
1545-0200
1545-0534
1545-0710
1.401(a)(9)-1.............................................. 1545-1573
1.401(a)(9)-3.............................................. 1545-1466
1.401(a)(9)-4.............................................. 1545-1573
1.401-12(n)................................................ 1545-0806
1.401-14................................................... 1545-0710
1.402(c)-2................................................. 1545-1341
1.402(f)-1................................................. 1545-1341
1545-1632
1.403(b)-1................................................. 1545-0710
1.403(b)-2................................................. 1545-1341
1.403(b)-3................................................. 1545-0996
1.404(a)-4................................................. 1545-0710
1.404(a)-12................................................ 1545-0710
1.404A-2................................................... 1545-0123
1.404A-6................................................... 1545-0123
1.408-2.................................................... 1545-0390
1.408-5.................................................... 1545-0747
1.408-6.................................................... 1545-0203
1545-0390
1.408-7.................................................... 1545-0119
1.408A-2................................................... 1545-1616
1.408A-4................................................... 1545-1616
1.408A-5................................................... 1545-1616
1.408A-7................................................... 1545-1616
1.410(a)-2................................................. 1545-0710
1.410(d)-1................................................. 1545-0710
1.411(a)-11................................................ 1545-1471
1545-1632
1.411(d)-4................................................. 1545-1545
1.411(d)-6................................................. 1545-1477
1.412(b)-5................................................. 1545-0710
1.412(c)(1)-2.............................................. 1545-0710
1.412(c)(2)-1.............................................. 1545-0710
1.412(c)(3)-2.............................................. 1545-0710
1.414(c)-5................................................. 1545-0797
1.414(r)-1................................................. 1545-1221
1.415-2.................................................... 1545-0710
1.415-6.................................................... 1545-0710
1.417(a)(3)-1.............................................. 1545-0928
1.417(e)-1................................................. 1545-1471
1545-1724
1.417(e)-1T................................................ 1545-1471
1.419A(f)(6)-1............................................. 1545-1795
1.441-2.................................................... 1545-1748
1.442-1.................................................... 1545-0074
1545-0123
1545-0134
1545-0152
1545-1748
1.443-1.................................................... 1545-0123
1.444-3T................................................... 1545-1036
1.444-4.................................................... 1545-1591
1.446-1.................................................... 1545-0074
1545-0152
1.446-4(d)................................................. 1545-1412
1.448-1(g)................................................. 1545-0152
1.448-1(h)................................................. 1545-0152
1.448-1(i)................................................. 1545-0152
1.448-2T................................................... 1545-0152
1545-1855
1.451-1.................................................... 1545-0091
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1.451-5.................................................... 1545-0074
1.451-6.................................................... 1545-0074
1.451-7.................................................... 1545-0074
1.453-1.................................................... 1545-0152
1.453-2.................................................... 1545-0152
1.453-8.................................................... 1545-0152
1545-0228
1.453-10................................................... 1545-0152
1.453A-1................................................... 1545-0152
1545-1134
1.453A-2................................................... 1545-0152
1545-1134
1.453A-3................................................... 1545-0963
1.454-1.................................................... 1545-0074
1.455-2.................................................... 1545-0152
1.455-6.................................................... 1545-0123
1.456-2.................................................... 1545-0123
1.456-6.................................................... 1545-0123
1.456-7.................................................... 1545-0123
1.457-8.................................................... 1545-1580
1.458-1.................................................... 1545-0879
1.458-2.................................................... 1545-0152
1.460-1.................................................... 1545-1650
1.460-6.................................................... 1545-1031
1545-1572
1545-1732
1.461-1.................................................... 1545-0074
1.461-2.................................................... 1545-0096
1.461-4.................................................... 1545-0917
1.461-5.................................................... 1545-0917
1.463-1T................................................... 1545-0916
1.465-1T................................................... 1545-0712
1.466-1T................................................... 1545-0152
1.466-4.................................................... 1545-0152
[[Page 565]]
1.468A-3................................................... 1545-1269
1545-1378
1545-1511
1.468A-4................................................... 1545-0954
1.468A-7................................................... 1545-0954
1.468A-8................................................... 1545-1269
1.468B-1(j)................................................ 1545-1299
1.468B-2(k)................................................ 1545-1299
1.468B-2(l)................................................ 1545-1299
1.468B-3(b)................................................ 1545-1299
1.468B-3(e)................................................ 1545-1299
1.468B-5(b)................................................ 1545-1299
1.469-1.................................................... 1545-1008
1.469-2T................................................... 1545-0712
1545-1091
1.469-4T................................................... 1545-0985
1545-1037
1.469-7.................................................... 1545-1244
1.471-2.................................................... 1545-0123
1.471-5.................................................... 1545-0123
1.471-6.................................................... 1545-0123
1.471-8.................................................... 1545-0123
1.471-11................................................... 1545-0123
1545-0152
1.472-1.................................................... 1545-0042
1545-0152
1.472-2.................................................... 1545-0152
1.472-3.................................................... 1545-0042
1.472-5.................................................... 1545-0152
1.472-8.................................................... 1545-0028
1545-0042
1545-1767
1.475(b)-4................................................. 1545-1496
1.481-4.................................................... 1545-0152
1.481-5.................................................... 1545-0152
1.482-1.................................................... 1545-1364
1.482-4.................................................... 1545-1364
1.482-7.................................................... 1545-1364
1545-1794
1.501(a)-1................................................. 1545-0056
1545-0057
1.501(c)(3)-1.............................................. 1545-0056
1.501(c)(9)-5.............................................. 1545-0047
1.501(c)(17)-3............................................. 1545-0047
1.501(e)-1................................................. 1545-0814
1.503(c)-1................................................. 1545-0047
1545-0052
1.505(c)-1T................................................ 1545-0916
1.507-1.................................................... 1545-0052
1.507-2.................................................... 1545-0052
1.508-1.................................................... 1545-0052
1545-0056
1.509(a)-3................................................. 1545-0047
1.509(a)-5................................................. 1545-0047
1.509(c)-1................................................. 1545-0052
1.512(a)-1................................................. 1545-0687
1.512(a)-4................................................. 1545-0047
1545-0687
1.521-1.................................................... 1545-0051
1545-0058
1.527-2.................................................... 1545-0129
1.527-5.................................................... 1545-0129
1.527-6.................................................... 1545-0129
1.527-9.................................................... 1545-0129
1.528-8.................................................... 1545-0127
1.533-2.................................................... 1545-0123
1.534-2.................................................... 1545-0123
1.542-3.................................................... 1545-0123
1.545-2.................................................... 1545-0123
1.545-3.................................................... 1545-0123
1.547-2.................................................... 1545-0045
1545-0123
1.547-3.................................................... 1545-0123
1.551-4.................................................... 1545-0074
1.552-3.................................................... 1545-0099
1.552-4.................................................... 1545-0099
1.552-5.................................................... 1545-0099
1.556-2.................................................... 1545-0704
1.561-1.................................................... 1545-0044
1.561-2.................................................... 1545-0123
1.562-3.................................................... 1545-0123
1.563-2.................................................... 1545-0123
1.564-1.................................................... 1545-0123
1.565-1.................................................... 1545-0043
1545-0123
1.565-2.................................................... 1545-0043
1.565-3.................................................... 1545-0043
1.565-5.................................................... 1545-0043
1.565-6.................................................... 1545-0043
1.585-1.................................................... 1545-0123
1.585-3.................................................... 1545-0123
1.585-8.................................................... 1545-1290
1.586-2.................................................... 1545-0123
1.593-1.................................................... 1545-0123
1.593-6.................................................... 1545-0123
1.593-6A................................................... 1545-0123
1.593-7.................................................... 1545-0123
1.595-1.................................................... 1545-0123
1.597-2.................................................... 1545-1300
1.597-4.................................................... 1545-1300
1.597-6.................................................... 1545-1300
1.597-7.................................................... 1545-1300
1.611-2.................................................... 1545-0099
1.611-3.................................................... 1545-0007
1545-0099
1545-1784
1.612-4.................................................... 1545-0074
1.612-5.................................................... 1545-0099
1.613-3.................................................... 1545-0099
1.613-4.................................................... 1545-0099
1.613-6.................................................... 1545-0099
1.613-7.................................................... 1545-0099
1.613A-3................................................... 1545-0919
1.613A-3(e)................................................ 1545-1251
1.613A-3(l)................................................ 1545-0919
1.613A-5................................................... 1545-0099
1.613A-6................................................... 1545-0099
1.614-2.................................................... 1545-0099
1.614-3.................................................... 1545-0099
1.614-5.................................................... 1545-0099
1.614-6.................................................... 1545-0099
1.614-8.................................................... 1545-0099
1.617-1.................................................... 1545-0099
1.617-3.................................................... 1545-0099
1.617-4.................................................... 1545-0099
1.631-1.................................................... 1545-0007
1.631-2.................................................... 1545-0007
1.641(b)-2................................................. 1545-0092
1.642(c)-1................................................. 1545-0092
1.642(c)-2................................................. 1545-0092
1.642(c)-5................................................. 1545-0074
1.642(c)-6................................................. 1545-0020
1545-0074
1545-0092
1.642(g)-1................................................. 1545-0092
1.642(i)-1................................................. 1545-0092
1.645-1.................................................... 1545-1578
1.663(b)-2................................................. 1545-0092
1.664-1.................................................... 1545-0196
1.664-1(a)(7).............................................. 1545-1536
1.664-2.................................................... 1545-0196
1.664-3.................................................... 1545-0196
1.664-4.................................................... 1545-0020
1545-0196
[[Page 566]]
1.665(a)-0A through1.665(g)-2A............................. 1545-0192
1.666(d)-1A................................................ 1545-0092
1.671-4.................................................... 1545-1442
1.701-1.................................................... 1545-0099
1.702-1.................................................... 1545-0074
1.703-1.................................................... 1545-0099
1.704-2.................................................... 1545-1090
1.706-1.................................................... 1545-0099
1545-0074
1545-0134
1.706-1T................................................... 1545-0099
1.707-3(c)(2).............................................. 1545-1243
1.707-5(a)(7)(ii).......................................... 1545-1243
1.707-6(c)................................................. 1545-1243
1.707-8.................................................... 1545-1243
1.708-1.................................................... 1545-0099
1.732-1.................................................... 1545-0099
1545-1588
1.736-1.................................................... 1545-0074
1.743-1.................................................... 1545-0074
1545-1588
1.751-1.................................................... 1545-0074
1545-0099
1545-0941
1.752-5.................................................... 1545-1090
1.754-1.................................................... 1545-0099
1.755-1.................................................... 1545-0099
1.761-2.................................................... 1545-1338
1.801-1.................................................... 1545-0123
1545-0128
1.801-3.................................................... 1545-0123
1.801-5.................................................... 1545-0128
1.801-8.................................................... 1545-0128
1.804-4.................................................... 1545-0128
1.811-2.................................................... 1545-0128
1.812-2.................................................... 1545-0128
1.815-6.................................................... 1545-0128
1.818-4.................................................... 1545-0128
1.818-5.................................................... 1545-0128
1.818-8.................................................... 1545-0128
1.819-2.................................................... 1545-0128
1.821-1.................................................... 1545-1027
1.821-3.................................................... 1545-1027
1.821-4.................................................... 1545-1027
1.822-5.................................................... 1545-1027
1.822-6.................................................... 1545-1027
1.822-8.................................................... 1545-1027
1.822-9.................................................... 1545-1027
1.823-2.................................................... 1545-1027
1.823-5.................................................... 1545-1027
1.823-6.................................................... 1545-1027
1.825-1.................................................... 1545-1027
1.826-1.................................................... 1545-1027
1.826-2.................................................... 1545-1027
1.826-3.................................................... 1545-1027
1.826-4.................................................... 1545-1027
1.826-6.................................................... 1545-1027
1.831-3.................................................... 1545-0123
1.831-4.................................................... 1545-0123
1.832-4.................................................... 1545-1227
1.832-5.................................................... 1545-0123
1.848-2(g)(8).............................................. 1545-1287
1.848-2(h)(3).............................................. 1545-1287
1.848-2(i)(4).............................................. 1545-1287
1.851-2.................................................... 1545-1010
1.851-4.................................................... 1545-0123
1.852-1.................................................... 1545-0123
1.852-4.................................................... 1545-0123
1545-0145
1.852-6.................................................... 1545-0123
1545-0144
1.852-7.................................................... 1545-0074
1.852-9.................................................... 1545-0074
1545-0123
1545-0144
1545-0145
1545-1783
1.852-11................................................... 1545-1094
1.853-3.................................................... 1545-0123
1.853-4.................................................... 1545-0123
1.854-2.................................................... 1545-0123
1.855-1.................................................... 1545-0123
1.856-2.................................................... 1545-0123
1545-1004
1.856-6.................................................... 1545-0123
1.856-7.................................................... 1545-0123
1.856-8.................................................... 1545-0123
1.857-8.................................................... 1545-0123
1.857-9.................................................... 1545-0074
1.858-1.................................................... 1545-0123
1.860-2.................................................... 1545-0045
1.860-4.................................................... 1545-0045
1545-1054
1545-1057
1.860E-1................................................... 1545-1675
1.860E-2(a)(5)............................................. 1545-1276
1.860E-2(a)(7)............................................. 1545-1276
1.860E-2(b)(2)............................................. 1545-1276
1.861-2.................................................... 1545-0089
1.861-3.................................................... 1545-0089
1.861-8.................................................... 1545-0126
1.861-8(e)(6) and (g)...................................... 1545-1224
1.861-9T................................................... 1545-0121
1545-1072
1.861-18................................................... 1545-1594
1.863-1.................................................... 1545-1476
1.863-3.................................................... 1545-1476
1545-1556
1.863-3A................................................... 1545-0126
1.863-4.................................................... 1545-0126
1.863-7.................................................... 1545-0132
1.864-4.................................................... 1545-0126
1.871-1.................................................... 1545-0096
1.871-6.................................................... 1545-0795
1.871-7.................................................... 1545-0089
1.871-10................................................... 1545-0089
1545-0165
1.874-1.................................................... 1545-0089
1.881-4.................................................... 1545-1440
1.882-4.................................................... 1545-0126
1.883-1.................................................... 1545-1677
1.883-2.................................................... 1545-1677
1.883-3.................................................... 1545-1677
1.883-4.................................................... 1545-1677
1.883-5.................................................... 1545-1677
1.884-0.................................................... 1545-1070
1.884-1.................................................... 1545-1070
1.884-2.................................................... 1545-1070
1.884-2T................................................... 1545-0126
1545-1070
1.884-4.................................................... 1545-1070
1.884-5.................................................... 1545-1070
1.892-1T................................................... 1545-1053
1.892-2T................................................... 1545-1053
1.892-3T................................................... 1545-1053
1.892-4T................................................... 1545-1053
1.892-5T................................................... 1545-1053
1.892-6T................................................... 1545-1053
1.892-7T................................................... 1545-1053
1.897-2.................................................... 1545-0123
1545-0902
1.897-3.................................................... 1545-0123
1.897-5T................................................... 1545-0902
1.897-6T................................................... 1545-0902
[[Page 567]]
1.901-2.................................................... 1545-0746
1.901-2A................................................... 1545-0746
1.901-3.................................................... 1545-0122
1.902-1.................................................... 1545-0122
1545-1458
1.904-1.................................................... 1545-0121
1545-0122
1.904-2.................................................... 1545-0121
1545-0122
1.904-3.................................................... 1545-0121
1.904-4.................................................... 1545-0121
1.904-5.................................................... 1545-0121
1.904(f)-1................................................. 1545-0121
1545-0122
1.904(f)-2................................................. 1545-0121
1.904(f)-3................................................. 1545-0121
1.904(f)-4................................................. 1545-0121
1.904(f)-5................................................. 1545-0121
1.904(f)-6................................................. 1545-0121
1.904(f)-7................................................. 1545-1127
1.905-2.................................................... 1545-0122
1.905-3T................................................... 1545-1056
1.905-4T................................................... 1545-1056
1.905-5T................................................... 1545-1056
1.911-1.................................................... 1545-0067
1545-0070
1.911-2.................................................... 1545-0067
1545-0070
1.911-3.................................................... 1545-0067
1545-0070
1.911-4.................................................... 1545-0067
1545-0070
1.911-5.................................................... 1545-0067
1545-0070
1.911-6.................................................... 1545-0067
1545-0070
1.911-7.................................................... 1545-0067
1545-0070
1.913-13................................................... 1545-0067
1.921-1T................................................... 1545-0190
1545-0884
1545-0935
1545-0939
1.921-2.................................................... 1545-0884
1.921-3T................................................... 1545-0935
1.923-1T................................................... 1545-0935
1.924(a)-1T................................................ 1545-0935
1.925(a)-1T................................................ 1545-0935
1.925(b)-1T................................................ 1545-0935
1.926(a)-1T................................................ 1545-0935
1.927(a)-1T................................................ 1545-0935
1.927(b)-1T................................................ 1545-0935
1.927(d)-1................................................. 1545-0884
1.927(d)-2T................................................ 1545-0935
1.927(e)-1T................................................ 1545-0935
1.927(e)-2T................................................ 1545-0935
1.927(f)-1................................................. 1545-0884
1.931-1.................................................... 1545-0074
1545-0123
1.934-1.................................................... 1545-0782
1.935-1.................................................... 1545-0074
1545-0087
1545-0803
1.936-1.................................................... 1545-0215
1545-0217
1.936-4.................................................... 1545-0215
1.936-5.................................................... 1545-0704
1.936-6.................................................... 1545-0215
1.936-7.................................................... 1545-0215
1.936-10(c)................................................ 1545-1138
1.952-2.................................................... 1545-0126
1.953-2.................................................... 1545-0126
1.954-1.................................................... 1545-1068
1.954-2.................................................... 1545-1068
1.955-2.................................................... 1545-0123
1.955-3.................................................... 1545-0123
1.955A-2................................................... 1545-0755
1.955A-3................................................... 1545-0755
1.956-1.................................................... 1545-0704
1.956-2.................................................... 1545-0704
1.959-1.................................................... 1545-0704
1.959-2.................................................... 1545-0704
1.960-1.................................................... 1545-0122
1.962-2.................................................... 1545-0704
1.962-3.................................................... 1545-0704
1.962-4.................................................... 1545-0704
1.964-1.................................................... 1545-0126
1545-0704
1545-1072
1.964-3.................................................... 1545-0126
1.970-2.................................................... 1545-0126
1.985-2.................................................... 1545-1051
1545-1131
1.985-3.................................................... 1545-1051
1.988-0.................................................... 1545-1131
1.988-1.................................................... 1545-1131
1.988-2.................................................... 1545-1131
1.988-3.................................................... 1545-1131
1.988-4.................................................... 1545-1131
1.988-5.................................................... 1545-1131
1.992-1.................................................... 1545-0190
1545-0938
1.992-2.................................................... 1545-0190
1545-0884
1545-0938
1.992-3.................................................... 1545-0190
1545-0938
1.992-4.................................................... 1545-0190
1545-0938
1.993-3.................................................... 1545-0938
1.993-4.................................................... 1545-0938
1.994-1.................................................... 1545-0938
1.995-5.................................................... 1545-0938
1.1012-1................................................... 1545-0074
1545-1139
1.1014-4................................................... 1545-0184
1.1015-1................................................... 1545-0020
1.1017-1................................................... 1545-1539
1.1031(d)-1T............................................... 1545-1021
1.1033(a)-2................................................ 1545-0184
1.1033(g)-1................................................ 1545-0184
1.1034-1................................................... 1545-0072
1.1039-1................................................... 1545-0184
1.1041-1T.................................................. 1545-0074
1.1041-2................................................... 1545-1751
1.1042-1T.................................................. 1545-0916
1.1044(a)-1................................................ 1545-1421
1.1060-1................................................... 1545-1658
1.1071-1................................................... 1545-0184
1.1071-4................................................... 1545-0184
1.1081-4................................................... 1545-0028
1545-0046
1545-0123
1.1081-11.................................................. 1545-0074
1545-0123
1.1082-1................................................... 1545-0046
1.1082-2................................................... 1545-0046
1.1082-3................................................... 1545-0046
1545-0184
1.1082-4................................................... 1545-0046
1.1082-5................................................... 1545-0046
1.1082-6................................................... 1545-0046
1.1083-1................................................... 1545-0123
1.1092(b)-1T............................................... 1545-0644
[[Page 568]]
1.1092(b)-2T............................................... 1545-0644
1.1092(b)-3T............................................... 1545-0644
1.1092(b)-4T............................................... 1545-0644
1.1092(b)-5T............................................... 1545-0644
1.1211-1................................................... 1545-0074
1.1212-1................................................... 1545-0074
1.1221-2................................................... 1545-1480
1.1231-1................................................... 1545-0177
1545-0184
1.1231-2................................................... 1545-0177
1545-0184
1545-0074
1.1232-3................................................... 1545-0074
1.1237-1................................................... 1545-0184
1.1239-1................................................... 1545-0091
1.1242-1................................................... 1545-0184
1.1243-1................................................... 1545-0123
1.1244(e)-1................................................ 1545-0123
1545-1447
1.1245-1................................................... 1545-0184
1.1245-2................................................... 1545-0184
1.1245-3................................................... 1545-0184
1.1245-4................................................... 1545-0184
1.1245-5................................................... 1545-0184
1.1245-6................................................... 1545-0184
1.1247-1................................................... 1545-0122
1.1247-2................................................... 1545-0122
1.1247-4................................................... 1545-0122
1.1247-5................................................... 1545-0122
1.1248-7................................................... 1545-0074
1.1250-1................................................... 1545-0184
1.1250-2................................................... 1545-0184
1.1250-3................................................... 1545-0184
1.1250-4................................................... 1545-0184
1.1250-5................................................... 1545-0184
1.1251-1................................................... 1545-0184
1.1251-2................................................... 1545-0074
1545-0184
1.1251-3................................................... 1545-0184
1.1251-4................................................... 1545-0184
1.1252-1................................................... 1545-0184
1.1252-2................................................... 1545-0184
1.1254-1(c)(3)............................................. 1545-1352
1.1254-4................................................... 1545-1493
1.1254-5(d)(2)............................................. 1545-1352
1.1258-1................................................... 1545-1452
1.1272-3................................................... 1545-1353
1.1273-2(h)(2)............................................. 1545-1353
1.1274-3(d)................................................ 1545-1353
1.1274-5(b)................................................ 1545-1353
1.1274A-1(c)............................................... 1545-1353
1.1275-2................................................... 1545-1450
1.1275-3................................................... 1545-0887
1545-1353
1545-1450
1.1275-4................................................... 1545-1450
1.1275-6................................................... 1545-1450
1.1287-1................................................... 1545-0786
1.1291-9................................................... 1545-1507
1.1291-10.................................................. 1545-1507
1545-1304
1.1294-1T.................................................. 1545-1002
1545-1028
1.1295-1................................................... 1545-1555
1.1295-3................................................... 1545-1555
1.1297-3T.................................................. 1545-1028
1.1301-1................................................... 1545-1662
1.1311(a)-1................................................ 1545-0074
1.1361-1................................................... 1545-0731
1545-1591
1.1361-3................................................... 1545-1590
1.1361-5................................................... 1545-1590
1.1362-1................................................... 1545-1308
1.1362-2................................................... 1545-1308
1.1362-3................................................... 1545-1308
1.1362-4................................................... 1545-1308
1.1362-5................................................... 1545-1308
1.1362-6................................................... 1545-1308
1.1362-7................................................... 1545-1308
1.1362-8................................................... 1545-1590
1.1366-1................................................... 1545-1613
1.1367-1(f)................................................ 1545-1139
1.1368-1(f)(2)............................................. 1545-1139
1.1368-1(f)(3)............................................. 1545-1139
1.1368-1(f)(4)............................................. 1545-1139
1.1368-1(g)(2)............................................. 1545-1139
1.1374-1A.................................................. 1545-0130
1.1377-1................................................... 1545-1462
1.1378-1................................................... 1545-1748
1.1383-1................................................... 1545-0074
1.1385-1................................................... 1545-0074
1545-0098
1.1388-1................................................... 1545-0118
1545-0123
1.1398-1................................................... 1545-1375
1.1398-2................................................... 1545-1375
1.1402(a)-2................................................ 1545-0074
1.1402(a)-5................................................ 1545-0074
1.1402(a)-11............................................... 1545-0074
1.1402(a)-15............................................... 1545-0074
1.1402(a)-16............................................... 1545-0074
1.1402(b)-1................................................ 1545-0171
1.1402(c)-2................................................ 1545-0074
1.1402(e)(1)-1............................................. 1545-0074
1.1402(e)(2)-1............................................. 1545-0074
1.1402(e)-1A............................................... 1545-0168
1.1402(e)-2A............................................... 1545-0168
1.1402(e)-3A............................................... 1545-0168
1.1402(e)-4A............................................... 1545-0168
1.1402(e)-5A............................................... 1545-0168
1.1402(f)-1................................................ 1545-0074
1.1402(h)-1................................................ 1545-0064
1.1441-1................................................... 1545-1484
1.1441-2................................................... 1545-0795
1.1441-3................................................... 1545-0165
1545-0795
1.1441-4................................................... 1545-1484
1.1441-5................................................... 1545-0096
1545-0795
1545-1484
1.1441-6................................................... 1545-0055
1545-0795
1545-1484
1.1441-7................................................... 1545-0795
1.1441-8................................................... 1545-1053
1545-1484
1.1441-9................................................... 1545-1484
1.1443-1................................................... 1545-0096
1.1445-1................................................... 1545-0902
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1545-1060
1545-1797
1.1445-3................................................... 1545-0902
1545-1060
1545-1797
1.1445-4................................................... 1545-0902
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1.1445-6................................................... 1545-0902
1545-1060
1.1445-7................................................... 1545-0902
1.1445-8................................................... 1545-0096
1.1445-9T.................................................. 1545-0902
1.1445-10T................................................. 1545-0902
1.1451-1................................................... 1545-0054
[[Page 569]]
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1.1461-1................................................... 1545-0054
1545-0055
1545-0795
1545-1484
1.1461-2................................................... 1545-0054
1545-0055
1545-0096
1545-0795
1.1462-1................................................... 1545-0795
1.1492-1................................................... 1545-0026
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1.1502-5................................................... 1545-0257
1.1502-9................................................... 1545-1634
1.1502-9A.................................................. 1545-0121
1.1502-13.................................................. 1545-0123
1545-0885
1545-1161
1545-1433
1.1502-16.................................................. 1545-0123
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1.1502-20.................................................. 1545-1160
1545-1218
1.1502-20T................................................. 1545-1774
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1.1502-21T................................................. 1545-1790
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1.1502-35T................................................. 1545-1828
1.1502-47.................................................. 1545-0123
1.1502-75.................................................. 1545-0025
1545-0123
1545-0133
1545-0152
1.1502-76.................................................. 1545-1344
1.1502-77.................................................. 1545-1699
1.1502-77A................................................. 1545-0123
1545-1046
1.1502-78.................................................. 1545-0582
1.1502-95.................................................. 1545-1218
1.1502-95A................................................. 1545-1218
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1.1503-2................................................... 1545-1583
1.1503-2A.................................................. 1545-1083
1.1552-1................................................... 1545-0123
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1.1563-1................................................... 1545-0123
1545-0797
1.1563-3................................................... 1545-0123
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1545-0074
1545-0099
1545-0123
1545-0865
1.6011-1................................................... 1545-0055
1545-0074
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1545-0089
1545-0090
1545-0091
1545-0096
1545-0121
1545-0458
1545-0666
1545-0675
1545-0908
1.6011-2................................................... 1545-0055
1545-0938
1.6011-3................................................... 1545-0238
1545-0239
1.6011-4................................................... 1545-1685
1.6012-1................................................... 1545-0067
1545-0085
1545-0089
1545-0675
1545-0074
1.6012-2................................................... 1545-0047
1545-0051
1545-0067
1545-0123
1545-0126
1545-0130
1545-0128
1545-0175
1545-0687
1545-0890
1545-1023
1545-1027
1.6012-3................................................... 1545-0047
1545-0067
1545-0092
1545-0196
1545-0687
1.6012-4................................................... 1545-0067
1.6012-5................................................... 1545-0067
1545-0967
1545-0970
1545-0991
1545-0936
1545-1023
1545-1033
1545-1079
1.6012-6................................................... 1545-0067
1545-0089
1545-0129
1.6013-1................................................... 1545-0074
1.6013-2................................................... 1545-0091
1.6013-6................................................... 1545-0074
1.6013-7................................................... 1545-0074
1.6015-5................................................... 1545-1719
1.6015(a)-1................................................ 1545-0087
1.6015(b)-1................................................ 1545-0087
1.6015(d)-1................................................ 1545-0087
1.6015(e)-1................................................ 1545-0087
1.6015(f)-1................................................ 1545-0087
1.6015(g)-1................................................ 1545-0087
1.6015(h)-1................................................ 1545-0087
1.6015(i)-1................................................ 1545-0087
1.6017-1................................................... 1545-0074
1545-0087
1545-0090
1.6031(a)-1................................................ 1545-1583
1.6031(b)-1T............................................... 1545-0099
1.6031(c)-1T............................................... 1545-0099
1.6032-1................................................... 1545-0099
1.6033-2................................................... 1545-0047
1545-0049
1545-0052
1545-0092
1545-0687
1545-1150
1.6033-3................................................... 1545-0052
1.6034-1................................................... 1545-0092
1545-0094
1.6035-1................................................... 1545-0704
1.6035-2................................................... 1545-0704
1.6035-3................................................... 1545-0704
1.6037-1................................................... 1545-0130
1545-1023
1.6038-2................................................... 1545-1617
1.6038-3................................................... 1545-1617
[[Page 570]]
1.6038A-2.................................................. 1545-1191
1.6038A-3.................................................. 1545-1191
1545-1440
1.6038B-1.................................................. 1545-1617
1.6038B-1T................................................. 1545-0026
1.6038B-2.................................................. 1545-1617
1.6039-2................................................... 1545-0820
1.6041-1................................................... 1545-0008
1545-0108
1545-0112
1545-0115
1545-0120
1545-0295
1545-0350
1545-0367
1545-0387
1545-0441
1545-0957
1545-1705
1.6041-2................................................... 1545-0008
1545-0119
1545-0350
1545-0441
1545-1729
1.6041-3................................................... 1545-1148
1.6041-4................................................... 1545-0115
1545-0295
1545-0367
1545-0387
1545-0957
1.6041-5................................................... 1545-0295
1545-0367
1545-0387
1545-0957
1.6041-6................................................... 1545-0008
1545-0115
1.6041-7................................................... 1545-0112
1545-0295
1545-0350
1545-0367
1545-0387
1545-0441
1545-0957
1.6042-1................................................... 1545-0110
1.6042-2................................................... 1545-0110
1545-0295
1545-0367
1545-0387
1545-0957
1.6042-3................................................... 1545-0295
1545-0367
1545-0387
1545-0957
1.6042-4................................................... 1545-0110
1.6043-1................................................... 1545-0041
1.6043-2................................................... 1545-0041
1545-0110
1545-0295
1545-0387
1.6043-3................................................... 1545-0047
1.6044-1................................................... 1545-0118
1.6044-2................................................... 1545-0118
1.6044-3................................................... 1545-0118
1.6044-4................................................... 1545-0118
1.6044-5................................................... 1545-0118
1.6045-1................................................... 1545-0715
1545-1705
1.6045-2................................................... 1545-0115
1.6045-4................................................... 1545-1085
1.6046-1................................................... 1545-0704
1545-0794
1545-1317
1.6046-2................................................... 1545-0704
1.6046-3................................................... 1545-0704
1.6046A.................................................... 1545-1646
1.6047-1................................................... 1545-0119
1545-0295
1545-0387
1.6049-1................................................... 1545-0112
1545-0117
1545-0295
1545-0367
1545-0387
1545-0597
1545-0957
1.6049-2................................................... 1545-0117
1.6049-3................................................... 1545-0117
1.6049-4................................................... 1545-0096
1545-0112
1545-0117
1545-1018
1545-1050
1.6049-5................................................... 1545-0096
1545-0112
1545-0117
1.6049-6................................................... 1545-0096
1.6049-7................................................... 1545-1018
1.6049-7T.................................................. 1545-0112
1545-0117
1545-0118
1.6050A-1.................................................. 1545-0115
1.6050B-1.................................................. 1545-0120
1.6050D-1.................................................. 1545-0120
1545-0232
1.6050E-1.................................................. 1545-0120
1.6050H-1.................................................. 1545-0901
1545-1380
1.6050H-2.................................................. 1545-0901
1545-1339
1545-1380
1.6050H-1T................................................. 1545-0901
1.6050I-2.................................................. 1545-1449
1.6050J-1T................................................. 1545-0877
1.6050K-1.................................................. 1545-0941
1.6050P-1.................................................. 1545-1419
1.6050P-1T................................................. 1545-1419
1.6050S-1.................................................. 1545-1678
1.6050S-2.................................................. 1545-1729
1.6050S-3.................................................. 1545-1678
1.6050S-4.................................................. 1545-1729
1.6052-1................................................... 1545-0008
1.6052-2................................................... 1545-0008
1.6060-1................................................... 1545-0074
1.6061-1................................................... 1545-0123
1.6062-1................................................... 1545-0123
1.6063-1................................................... 1545-0123
1.6065-1................................................... 1545-0123
1.6071-1................................................... 1545-0123
1545-0810
1.6072-1................................................... 1545-0074
1.6072-2................................................... 1545-0123
1545-0807
1.6073-1................................................... 1545-0087
1.6073-2................................................... 1545-0087
1.6073-3................................................... 1545-0087
1.6073-4................................................... 1545-0087
1.6074-1................................................... 1545-0123
1.6074-2................................................... 1545-0123
1.6081-1................................................... 1545-0066
1545-0148
1545-0233
1545-1057
1545-1081
1.6081-2................................................... 1545-0148
[[Page 571]]
1545-1054
1545-1036
1.6081-3................................................... 1545-0233
1.6081-4................................................... 1545-0188
1545-1479
1.6081-6................................................... 1545-0148
1545-1054
1.6081-7................................................... 1545-0148
1545-1054
1.6081-8T.................................................. 1545-1840
1.6081-9T.................................................. 1545-1840
1.6091-3................................................... 1545-0089
1.6107-1................................................... 1545-0074
1.6109-1................................................... 1545-0074
1.6109-2................................................... 1545-0074
1.6115-1................................................... 1545-1464
1.6151-1................................................... 1545-0074
1.6153-1................................................... 1545-0087
1.6153-4................................................... 1545-0087
1.6154-2................................................... 1545-0257
1.6154-3................................................... 1545-0135
1.6154-5................................................... 1545-0976
1.6161-1................................................... 1545-0087
1.6162-1................................................... 1545-0087
1.6164-1................................................... 1545-0135
1.6164-2................................................... 1545-0135
1.6164-3................................................... 1545-0135
1.6164-5................................................... 1545-0135
1.6164-6................................................... 1545-0135
1.6164-7................................................... 1545-0135
1.6164-8................................................... 1545-0135
1.6164-9................................................... 1545-0135
1.6302-1................................................... 1545-0257
1.6302-2................................................... 1545-0098
1545-0257
1.6411-1................................................... 1545-0098
1545-0135
1545-0582
1.6411-2................................................... 1545-0098
1545-0582
1.6411-3................................................... 1545-0098
1545-0582
1.6411-4................................................... 1545-0582
1.6414-1................................................... 1545-0096
1.6425-1................................................... 1545-0170
1.6425-2................................................... 1545-0170
1.6425-3................................................... 1545-0170
1.6654-1................................................... 1545-0087
1545-0140
1.6654-2................................................... 1545-0087
1.6654-3................................................... 1545-0087
1.6654-4................................................... 1545-0087
1.6655-1................................................... 1545-0142
1.6655-2................................................... 1545-0142
1.6655-3................................................... 1545-0142
1.6655-7................................................... 1545-0123
1.6655(e)-1................................................ 1545-1421
1.6661-3................................................... 1545-0988
1545-1031
1.6661-4................................................... 1545-0739
1.6662-3(c)................................................ 1545-0889
1.6662-4(e) and (f)........................................ 1545-0889
1.6662-6................................................... 1545-1426
1.6694-1................................................... 1545-0074
1.6694-2................................................... 1545-0074
1.6694-2(c)................................................ 1545-1231
1.6694-3(e)................................................ 1545-1231
1.6695-1................................................... 1545-0074
1545-1385
1.6695-2................................................... 1545-1570
1.6696-1................................................... 1545-0074
1545-0240
1.6851-1................................................... 1545-0086
1545-0138
1.6851-2................................................... 1545-0086
1545-0138
1.7476-1................................................... 1545-0197
1.7476-2................................................... 1545-0197
1.7519-2T.................................................. 1545-1036
1.7520-1................................................... 1545-1343
1.7520-2................................................... 1545-1343
1.7520-3................................................... 1545-1343
1.7520-4................................................... 1545-1343
1.7701(l)-3................................................ 1545-1642
1.7872-15.................................................. 1545-1792
1.9100-1................................................... 1545-0074
1.9101-1................................................... 1545-0008
2.1-4...................................................... 1545-0123
2.1-5...................................................... 1545-0123
2.1-6...................................................... 1545-0123
2.1-10..................................................... 1545-0123
2.1-11..................................................... 1545-0123
2.1-12..................................................... 1545-0123
2.1-13..................................................... 1545-0123
2.1-20..................................................... 1545-0123
2.1-22..................................................... 1545-0123
2.1-26..................................................... 1545-0123
3.2........................................................ 1545-0123
4.954-1.................................................... 1545-1068
4.954-2.................................................... 1545-1068
5.6411-1................................................... 1545-0098
1545-0582
1545-0042
1545-0074
1545-0129
1545-0172
1545-0619
5c.44F-1................................................... 1545-0619
5c.128-1................................................... 1545-0123
5c.168(f)(8)-1............................................. 1545-0123
5c.168(f)(8)-2............................................. 1545-0123
5c.168(f)(8)-6............................................. 1545-0123
5c.168(f)(8)-8............................................. 1545-0123
5c.305-1................................................... 1545-0110
5c.442-1................................................... 1545-0152
5f.103-1................................................... 1545-0720
5f.103-3................................................... 1545-0720
5f.6045-1.................................................. 1545-0715
6a.103A-2.................................................. 1545-0123
1545-0720
6a.103A-3.................................................. 1545-0720
7.465-1.................................................... 1545-0712
7.465-2.................................................... 1545-0712
7.465-3.................................................... 1545-0712
7.465-4.................................................... 1545-0712
7.465-5.................................................... 1545-0712
7.936-1.................................................... 1545-0217
7.999-1.................................................... 1545-0216
7.6039A-1.................................................. 1545-0015
7.6041-1................................................... 1545-0115
11.410-1................................................... 1545-0710
11.412(c)-7................................................ 1545-0710
11.412(c)-11............................................... 1545-0710
12.7....................................................... 1545-0190
12.8....................................................... 1545-0191
12.9....................................................... 1545-0195
14a.422A-1................................................. 1545-0123
15A.453-1.................................................. 1545-0228
16.3-1..................................................... 1545-0159
16A.126-2.................................................. 1545-0074
16A.1255-1................................................. 1545-0184
16A.1255-2................................................. 1545-0184
18.1371-1.................................................. 1545-0130
18.1378-1.................................................. 1545-0130
[[Page 572]]
18.1379-1.................................................. 1545-0130
18.1379-2.................................................. 1545-0130
20.2011-1.................................................. 1545-0015
20.2014-5.................................................. 1545-0015
1545-0260
20.2014-6.................................................. 1545-0015
20.2016-1.................................................. 1545-0015
20.2031-2.................................................. 1545-0015
20.2031-3.................................................. 1545-0015
20.2031-4.................................................. 1545-0015
20.2031-6.................................................. 1545-0015
20.2031-7.................................................. 1545-0020
20.2031-10................................................. 1545-0015
20.2032-1.................................................. 1545-0015
20.2032A-3................................................. 1545-0015
20.2032A-4................................................. 1545-0015
20.2032A-8................................................. 1545-0015
20.2039-4.................................................. 1545-0015
20.2051-1.................................................. 1545-0015
20.2053-3.................................................. 1545-0015
20.2053-9.................................................. 1545-0015
20.2053-10................................................. 1545-0015
20.2055-1.................................................. 1545-0015
20.2055-2.................................................. 1545-0015
1545-0092
20.2055-3.................................................. 1545-0015
20.2056(b)-4............................................... 1545-0015
20.2056(b)-7............................................... 1545-0015
1545-1612
20.2056A-2................................................. 1545-1443
20.2056A-3................................................. 1545-1360
20.2056A-4................................................. 1545-1360
20.2056A-10................................................ 1545-1360
20.2106-1.................................................. 1545-0015
20.2106-2.................................................. 1545-0015
20.2204-1.................................................. 1545-0015
20.2204-2.................................................. 1545-0015
20.6001-1.................................................. 1545-0015
20.6011-1.................................................. 1545-0015
20.6018-1.................................................. 1545-0015
1545-0531
20.6018-2.................................................. 1545-0015
20.6018-3.................................................. 1545-0015
20.6018-4.................................................. 1545-0015
1545-0022
20.6036-2.................................................. 1545-0015
20.6061-1.................................................. 1545-0015
20.6065-1.................................................. 1545-0015
20.6075-1.................................................. 1545-0015
20.6081-1.................................................. 1545-0015
1545-0181
1545-1707
20.6091-1.................................................. 1545-0015
20.6161-1.................................................. 1545-0015
1545-0181
20.6161-2.................................................. 1545-0015
1545-0181
20.6163-1.................................................. 1545-0015
20.6166-1.................................................. 1545-0181
20.6166A-1................................................. 1545-0015
20.6166A-3................................................. 1545-0015
20.6324A-1................................................. 1545-0754
20.7520-1.................................................. 1545-1343
20.7520-2.................................................. 1545-1343
20.7520-3.................................................. 1545-1343
20.7520-4.................................................. 1545-1343
22.0....................................................... 1545-0015
25.2511-2.................................................. 1545-0020
25.2512-2.................................................. 1545-0020
25.2512-3.................................................. 1545-0020
25.2512-5.................................................. 1545-0020
25.2512-9.................................................. 1545-0020
25.2513-1.................................................. 1545-0020
25.2513-2.................................................. 1545-0020
1545-0021
25.2513-3.................................................. 1545-0020
25.2518-2.................................................. 1545-0959
25.2522(a)-1............................................... 1545-0196
25.2522(c)-3............................................... 1545-0020
1545-0196
25.2523(a)-1............................................... 1545-0020
1545-0196
25.2523(f)-1............................................... 1545-0015
25.2701-2.................................................. 1545-1241
25.2701-4.................................................. 1545-1241
25.2701-5.................................................. 1545-1273
25.2702-5.................................................. 1545-1485
25.2702-6.................................................. 1545-1273
25.6001-1.................................................. 1545-0020
1545-0022
25.6011-1.................................................. 1545-0020
25.6019-1.................................................. 1545-0020
25.6019-2.................................................. 1545-0020
25.6019-3.................................................. 1545-0020
25.6019-4.................................................. 1545-0020
25.6061-1.................................................. 1545-0020
25.6065-1.................................................. 1545-0020
25.6075-1.................................................. 1545-0020
25.6081-1.................................................. 1545-0020
25.6091-1.................................................. 1545-0020
25.6091-2.................................................. 1545-0020
25.6151-1.................................................. 1545-0020
25.6161-1.................................................. 1545-0020
25.7520-1.................................................. 1545-1343
25.7520-2.................................................. 1545-1343
25.7520-3.................................................. 1545-1343
25.7520-4.................................................. 1545-1343
26.2601-1.................................................. 1545-0985
26.2632-1.................................................. 1545-0985
26.2642-1.................................................. 1545-0985
26.2642-2.................................................. 1545-0985
26.2642-3.................................................. 1545-0985
26.2642-4.................................................. 1545-0985
26.2652-2.................................................. 1545-0985
26.2662-1.................................................. 1545-0015
1545-0985
26.2662-2.................................................. 1545-0985
31.3102-3.................................................. 1545-0029
1545-0059
1545-0065
31.3121(b)(19)-1........................................... 1545-0029
31.3121(d)-1............................................... 1545-0004
31.3121(i)-1............................................... 1545-0034
31.3121(k)-4............................................... 1545-0137
31.3121(r)-1............................................... 1545-0029
31.3121(s)-1............................................... 1545-0029
31.3121(v)(2)-1............................................ 1545-1643
31.3302(a)-2............................................... 1545-0028
31.3302(a)-3............................................... 1545-0028
31.3302(b)-2............................................... 1545-0028
31.3302(e)-1............................................... 1545-0028
31.3306(c)(18)-1........................................... 1545-0029
31.3401(a)-1............................................... 1545-0029
31.3401(a)(6).............................................. 1545-1484
31.3401(a)(6)-1............................................ 1545-0029
1545-0096
1545-0795
31.3401(a)(7)-1............................................ 1545-0029
31.3401(a)(8)(A)-1 ........................................ 1545-0029
1545-0666
31.3401(a)(8)(C)-1 ........................................ 1545-0029
31.3401(a)(15)-1........................................... 1545-0182
31.3401(c)-1............................................... 1545-0004
31.3402(b)-1............................................... 1545-0010
[[Page 573]]
31.3402(c)-1............................................... 1545-0010
31.3402(f)(1)-1............................................ 1545-0010
31.3402(f)(2)-1............................................ 1545-0010
1545-0410
31.3402(f)(3)-1............................................ 1545-0010
31.3402(f)(4)-1............................................ 1545-0010
31.3402(f)(4)-2............................................ 1545-0010
31.3402(f)(5)-1............................................ 1545-0010
1545-1435
31.3402(h)(1)-1............................................ 1545-0029
31.3402(h)(3)-1............................................ 1545-0010
31.3402(h)(3)-1............................................ 1545-0029
31.3402(h)(4)-1............................................ 1545-0010
31.3402(i)-(1)............................................. 1545-0010
31.3402(i)-(2)............................................. 1545-0010
31.3402(k)-1............................................... 1545-0065
31.3402(l)-(1)............................................. 1545-0010
31.3402(m)-(1)............................................. 1545-0010
31.3402(n)-(1)............................................. 1545-0010
31.3402(o)-2............................................... 1545-0415
31.3402(o)-3............................................... 1545-0008
1545-0010
1545-0415
1545-0717
31.3402(p)-1............................................... 1545-0415
1545-0717
31.3402(q)-1............................................... 1545-0238
1545-0239
31.3404-1.................................................. 1545-0029
31.3405(c)-1............................................... 1545-1341
31.3406(a)-1............................................... 1545-0112
31.3406(a)-2............................................... 1545-0112
31.3406(a)-3............................................... 1545-0112
31.3406(a)-4............................................... 1545-0112
31.3406(b)(2)-1............................................ 1545-0112
31.3406(b)(2)-2............................................ 1545-0112
31.3406(b)(2)-3............................................ 1545-0112
31.3406(b)(2)-4............................................ 1545-0112
31.3406(b)(2)-5............................................ 1545-0112
31.3406(b)(3)-1............................................ 1545-0112
31.3406(b)(3)-2............................................ 1545-0112
31.3406(b)(3)-3............................................ 1545-0112
31.3406(b)(3)-4............................................ 1545-0112
31.3406(b)(4)-1............................................ 1545-0112
31.3406(c)-1............................................... 1545-0112
31.3406(d)-1............................................... 1545-0112
31.3406(d)-2............................................... 1545-0112
31.3406(d)-3............................................... 1545-0112
31.3406(d)-4............................................... 1545-0112
31.3406(d)-5............................................... 1545-0112
31.3406(e)-1............................................... 1545-0112
31.3406(f)-1............................................... 1545-0112
31.3406(g)-1............................................... 1545-0096
1545-0112
31.3406(g)-2............................................... 1545-0112
31.3406(g)-3............................................... 1545-0112
31.3406(h)-1............................................... 1545-0112
31.3406(h)-2............................................... 1545-0112
31.3406(h)-3............................................... 1545-0112
31.3406(i)-1............................................... 1545-0112
31.3501(a)-1T.............................................. 1545-0771
31.3503-1.................................................. 1545-0024
31.3504-1.................................................. 1545-0029
31.6001-1.................................................. 1545-0798
31.6001-2.................................................. 1545-0034
1545-0798
31.6001-3.................................................. 1545-0798
31.6001-4.................................................. 1545-0028
31.6001-5.................................................. 1545-0798
31.6001-6.................................................. 1545-0029
1459-0798
31.6011(a)-1............................................... 1545-0029
1545-0034
1545-0035
1545-0059
1545-0074
1545-0718
1545-0256
31.6011(a)-2............................................... 1545-0001
1545-0002
31.6011(a)-3............................................... 1545-0028
31.6011(a)-3A.............................................. 1545-0955
31.6011(a)-4............................................... 1545-0034
1545-0035
1545-0718
1545-1413
31.6011(a)-5............................................... 1545-0718
1545-0028
31.6011(a)-6............................................... 1545-0028
31.6011(a)-7............................................... 1545-0074
31.6011(a)-8............................................... 1545-0028
31.6011(a)-9............................................... 1545-0028
31.6011(a)-10.............................................. 1545-0112
31.6011(b)-1............................................... 1545-0003
31.6011(b)-2............................................... 1545-0029
31.6051-1.................................................. 1545-0008
1545-0182
1545-0458
1545-1729
31.6051-2.................................................. 1545-0008
31.6051-3.................................................. 1545-0008
31.6053-1.................................................. 1545-0029
1545-0062
1545-0064
1545-0065
1545-1603
31.6053-2.................................................. 1545-0008
31.6053-3.................................................. 1545-0065
1545-0714
31.6053-4.................................................. 1545-0065
1545-1603
31.6065(a)-1............................................... 1545-0029
31.6071(a)-1............................................... 1545-0001
1545-0028
1545-0029
31.6071(a)-1A.............................................. 1545-0955
31.6081(a)-1............................................... 1545-0008
1545-0028
31.6091-1.................................................. 1545-0028
1545-0029
31.6157-1.................................................. 1545-0955
31.6205-1.................................................. 1545-0029
31.6301(c)-1AT............................................. 1545-0035
1545-0112
1545-0257
31.6302-1.................................................. 1545-1413
31.6302-2.................................................. 1545-1413
31.6302-3.................................................. 1545-1413
31.6302-4.................................................. 1545-1413
31.6302(c)-2............................................... 1545-0001
1545-0257
31.6302(c)-2A.............................................. 1545-0955
31.6302(c)-3............................................... 1545-0257
31.6402(a)-2............................................... 1545-0256
31.6413(a)-1............................................... 1545-0029
31.6413(a)-2............................................... 1545-0029
1545-0256
31.6413(c)-1............................................... 1545-0029
1545-0171
31.6414-1.................................................. 1545-0029
32.1....................................................... 1545-0029
1545-0415
32.2....................................................... 1545-0029
35a.3406-2................................................. 1545-0112
[[Page 574]]
35a.9999-5................................................. 1545-0029
36.3121(l)(1)-1............................................ 1545-0137
36.3121(l)(1)-2............................................ 1545-0137
36.3121(l)(3)-1............................................ 1545-0123
36.3121(1)(7)-1............................................ 1545-0123
36.3121(1)(10)-1........................................... 1545-0029
36.3121(1)(10)-3........................................... 1545-0029
36.3121(1)(10)-4........................................... 1545-0257
40.6302(c)-3(b)(2)(ii)..................................... 1545-1296
40.6302(c)-3(b)(2)(iii).................................... 1545-1296
40.6302(c)-3(e)............................................ 1545-1296
40.6302(c)-3(f)(2)(ii)..................................... 1545-1296
41.4481-1.................................................. 1545-0143
41.4481-2.................................................. 1545-0143
41.4483-3.................................................. 1545-0143
41.6001-1.................................................. 1545-0143
41.6001-2.................................................. 1545-0143
41.6001-3.................................................. 1545-0143
41.6071(a)-1............................................... 1545-0143
41.6081(a)-1............................................... 1545-0143
41.6091-1.................................................. 1545-0143
41.6109-1.................................................. 1545-0143
41.6151(a)-1............................................... 1545-0143
41.6156-1.................................................. 1545-0143
41.6161(a)(1)-1............................................ 1545-0143
44.4401-1.................................................. 1545-0235
44.4403-1.................................................. 1545-0235
44.4412-1.................................................. 1545-0236
44.4901-1.................................................. 1545-0236
44.4905-1.................................................. 1545-0236
44.4905-2.................................................. 1545-0236
44.6001-1.................................................. 1545-0235
44.6011(a)-1............................................... 1545-0235
1545-0236
44.6071-1.................................................. 1545-0235
44.6091-1.................................................. 1545-0235
44.6151-1.................................................. 1545-0235
44.6419-1.................................................. 1545-0235
44.6419-1.................................................. 1545-0235
44.6419-2.................................................. 1545-0235
46.4371-4.................................................. 1545-0023
46.4374-1.................................................. 1545-0023
46.4701-1.................................................. 1545-0023
1545-0257
48.4041-4.................................................. 1545-0023
48.4041-5.................................................. 1545-0023
48.4041-6.................................................. 1545-0023
48.4041-7.................................................. 1545-0023
48.4041-9.................................................. 1545-0023
48.4041-10................................................. 1545-0023
48.4041-11................................................. 1545-0023
48.4041-12................................................. 1545-0023
48.4041-13................................................. 1545-0023
48.4041-18................................................. 1545-0023
48.4041-19................................................. 1545-0023
48.4041-20................................................. 1545-0023
48.4041-21................................................. 1545-1270
48.4042-2.................................................. 1545-0023
48.4052-1.................................................. 1545-1418
48.4061(a)-1............................................... 1545-0023
48.4061(a)-2............................................... 1545-0023
48.4061(b)-3............................................... 1545-0023
48.4064-1.................................................. 1545-0014
1545-0242
48.4071-1.................................................. 1545-0023
48.4073-1.................................................. 1545-0023
48.4073-3.................................................. 1545-0023
1545-1074
1545-1087
48.4081-2.................................................. 1545-1270
1545-1418
48.4081-3.................................................. 1545-1270
1545-1418
48.4081-4(b)(2)(ii)........................................ 1545-1270
48.4081-4(b)(3)(i)......................................... 1545-1270
48.4081-4(c)............................................... 1545-1270
48.4081-6(c)(1)(ii)........................................ 1545-1270
48.4081-7.................................................. 1545-1270
1545-1418
48.4082-2.................................................. 1545-1418
48.4082-6.................................................. 1545-1418
48.4082-7.................................................. 1545-1418
48.4091-3.................................................. 1545-1418
48.4101-1.................................................. 1545-1418
48.4101-2.................................................. 1545-1418
48.4161(a)-1............................................... 1545-0723
48.4161(a)-2............................................... 1545-0723
48.4161(a)-3............................................... 1545-0723
48.4161(b)-1............................................... 1545-0723
1545-0723
48.4216(a)-2............................................... 1545-0023
48.4216(a)-3............................................... 1545-0023
48.4216(c)-1............................................... 1545-0023
48.4221-1.................................................. 1545-0023
48.4221-2.................................................. 1545-0023
48.4221-3.................................................. 1545-0023
48.4221-4.................................................. 1545-0023
48.4221-5.................................................. 1545-0023
48.4221-6.................................................. 1545-0023
48.4221-7.................................................. 1545-0023
48.4222(a)-1............................................... 1545-0023
1545-0014
48.4223-1.................................................. 1545-0023
1545-0723
1545-0723
1545-0723
1545-0257
48.6302(c)-1............................................... 1545-0023
1545-0257
48.6412-1.................................................. 1545-0723
48.6416(a)-1............................................... 1545-0023
1545-0723
48.6416(a)-2............................................... 1545-0723
48.6416(a)-3............................................... 1545-0723
48.6416(b)(2)-3............................................ 1545-1087
48.6416(b)(1)-1............................................ 1545-0723
48.6416(b)(1)-2............................................ 1545-0723
48.6416(b)(1)-3............................................ 1545-0723
48.6416(b)(1)-4............................................ 1545-0723
48.6416(b)(2)-1............................................ 1545-0723
48.6416(b)(2)-2............................................ 1545-0723
48.6416(b)(2)-3............................................ 1545-0723
1545-1087
48.6416(b)(2)-4............................................ 1545-0723
48.6416(b)(3)-1............................................ 1545-0723
48.6416(b)(3)-2............................................ 1545-0723
48.6416(b)(3)-3............................................ 1545-0723
48.6416(b)(4)-1............................................ 1545-0723
48.6416(b)(5)-1............................................ 1545-0723
48.6416(c)-1............................................... 1545-0723
48.6416(e)-1............................................... 1545-0023
1545-0723
48.6416(f)-1............................................... 1545-0023
1545-0723
48.6416(g)-1............................................... 1545-0723
48.6416(h)-1............................................... 1545-0723
48.6420(c)-2............................................... 1545-0023
48.6420(f)-1............................................... 1545-0023
48.6420-1.................................................. 1545-0162
1545-0723
48.6420-2.................................................. 1545-0162
1545-0723
48.6420-3.................................................. 1545-0162
1545-0723
48.6420-4.................................................. 1545-0162
[[Page 575]]
1545-0723
48.6420-5.................................................. 1545-0162
1545-0723
48.6420-6.................................................. 1545-0162
1545-0723
48.6421-0.................................................. 1545-0162
1545-0723
48.6421-1.................................................. 1545-0162
1545-0723
48.6421-2.................................................. 1545-0162
1545-0723
48.6421-3.................................................. 1545-0162
1545-0723
48.6421-4.................................................. 1545-0162
1545-0723
48.6421-5.................................................. 1545-0162
1545-0723
48.6421-6.................................................. 1545-0162
1545-0723
48.6421-7.................................................. 1545-0162
1545-0723
48.6424-0.................................................. 1545-0723
48.6424-1.................................................. 1545-0723
48.6424-2.................................................. 1545-0723
48.6424-3.................................................. 1545-0723
48.6424-4.................................................. 1545-0723
48.6424-5.................................................. 1545-0723
48.6424-6.................................................. 1545-0723
48.6427-0.................................................. 1545-0723
48.6427-1.................................................. 1545-0023
1545-0162
1545-0723
48.6427-2.................................................. 1545-0162
1545-0723
48.6427-3.................................................. 1545-0723
48.6427-4.................................................. 1545-0723
48.6427-5.................................................. 1545-0723
48.6427-8.................................................. 1545-1418
48.6427-9.................................................. 1545-1418
48.6427-10................................................. 1545-1418
48.6427-11................................................. 1545-1418
49.4251-1.................................................. 1545-1075
49.4251-2.................................................. 1545-1075
49.4251-4(d)(2)............................................ 1545-1628
49.4253-3.................................................. 1545-0023
49.4253-4.................................................. 1545-0023
49.4264(b)-1............................................... 1545-0023
1545-0226
1545-0226
1545-0912
1545-0912
1545-0257
1545-0230
1545-0224
1545-0225
1545-0224
1545-0230
49.4271-1(d)............................................... 1545-0685
52.4682-1(b)(2)(iii)....................................... 1545-1153
52.4682-2(b)............................................... 1545-1153
1545-1361
52.4682-2(d)............................................... 1545-1153
1545-1361
52.4682-3(c)(2)............................................ 1545-1153
52.4682-3(g)............................................... 1545-1153
52.4682-4(f)............................................... 1545-1153
1545-0257
52.4682-5(d)............................................... 1545-1361
52.4682-5(f)............................................... 1545-1361
53.4940-1.................................................. 1545-0052
1545-0196
53.4942(a)-1............................................... 1545-0052
53.4942(a)-2............................................... 1545-0052
53.4942(a)-3............................................... 1545-0052
53.4942(b)-3............................................... 1545-0052
53.4945-1.................................................. 1545-0052
53.4945-4.................................................. 1545-0052
53.4945-5.................................................. 1545-0052
53.4945-6.................................................. 1545-0052
53.4947-1.................................................. 1545-0196
53.4947-2.................................................. 1545-0196
53.4948-1.................................................. 1545-0052
53.4958-6.................................................. 1545-1623
53.4961-2.................................................. 1545-0024
53.4963-1.................................................. 1545-0024
53.6001-1.................................................. 1545-0052
53.6011-1.................................................. 1545-0049
1545-0052
1545-0092
1545-0196
53.6065-1.................................................. 1545-0052
53.6071-1.................................................. 1545-0049
53.6081-1.................................................. 1545-0066
1545-0148
53.6161-1.................................................. 1545-0575
54.4972-1.................................................. 1545-0197
54.4975-7.................................................. 1545-0575
54.4977-1T................................................. 1545-0771
54.4980B-6................................................. 1545-1581
54.4980B-7................................................. 1545-1581
54.4980B-8................................................. 1545-1581
54.4980F-1................................................. 1545-1780
54.4981A-1T................................................ 1545-0203
54.6011-1.................................................. 1545-0575
54.6011-1T................................................. 1545-0575
54.9801-3T................................................. 1545-1537
54.9801-4T................................................. 1545-1537
54.9801-5T................................................. 1545-1537
54.9801-6T................................................. 1545-1537
55.6001-1.................................................. 1545-0123
55.6011-1.................................................. 1545-0999
1545-0123
1545-1016
55.6061-1.................................................. 1545-0999
55.6071-1.................................................. 1545-0999
56.4911-6.................................................. 1545-0052
56.4911-7.................................................. 1545-0052
56.4911-9.................................................. 1545-0052
56.4911-10................................................. 1545-0052
56.6001-1.................................................. 1545-1049
56.6011-1.................................................. 1545-1049
56.6081-1.................................................. 1545-1049
56.6161-1.................................................. 1545-1049
1545-0257
145.4051-1................................................. 1545-0745
145.4052-1................................................. 1545-0120
1545-0745
1545-1076
1545-0745
1545-1076
145.4061-1................................................. 1545-0745
1545-0257
1545-0230
1545-0224
156.6001-1................................................. 1545-1049
156.6011-1................................................. 1545-1049
156.6081-1................................................. 1545-1049
156.6161-1................................................. 1545-1049
157.6001-1T................................................ 1545-1824
157.6011-1T................................................ 1545-1824
157.6081-1T................................................ 1545-1824
157.6161-1T................................................ 1545-1824
301.6011-2................................................. 1545-0225
1545-0350
[[Page 576]]
1545-0387
1545-0441
1545-0957
301.6017-1................................................. 1545-0090
301.6034-1................................................. 1545-0092
301.6035-1................................................. 1545-0123
301.6036-1................................................. 1545-0013
1545-0773
301.6047-1................................................. 1545-0367
1545-0957
301.6057-1................................................. 1545-0710
301.6057-2................................................. 1545-0710
301.6058-1................................................. 1545-0710
301.6059-1................................................. 1545-0710
301.6103(c)-1.............................................. 1545-1816
301.6103(n)-1.............................................. 1545-1841
301.6103(p)(2)(B)-1........................................ 1545-1757
301.6104(a)-1.............................................. 1545-0495
301.6104(a)-5.............................................. 1545-0056
301.6104(a)-6.............................................. 1545-0056
301.6104(b)-1.............................................. 1545-0094
1545-0742
301.6104(d)-1.............................................. 1545-1655
301.6104(d)-2.............................................. 1545-1655
301.6104(d)-3.............................................. 1545-1655
301.6109-1................................................. 1545-0003
1545-0295
1545-0367
1545-0387
1545-0957
1545-1461
301.6109-3................................................. 1545-1564
301.6110-3................................................. 1545-0074
301.6110-5................................................. 1545-0074
301.6111-1T................................................ 1545-0865
1545-0881
301.6111-2................................................. 1545-0865
1545-1687
301.6112-1................................................. 1545-0865
1545-1686
301.6112-1T................................................ 1545-0865
1545-1686
301.6114-1................................................. 1545-1126
1545-1484
301.6222(a)-2.............................................. 1545-0790
301.6222(b)-1.............................................. 1545-0790
301.6222(b)-2.............................................. 1545-0790
301.6222(b)-3.............................................. 1545-0790
301.6223(b)-1.............................................. 1545-0790
301.6223(c)-1.............................................. 1545-0790
301.6223(e)-2.............................................. 1545-0790
301.6223(g)-1.............................................. 1545-0790
301.6223(h)-1.............................................. 1545-0790
301.6224(b)-1.............................................. 1545-0790
301.6224(c)-1.............................................. 1545-0790
301.6224(c)-3.............................................. 1545-0790
301.6227(c)-1.............................................. 1545-0790
301.6227(d)-1.............................................. 1545-0790
301.6229(b)-2.............................................. 1545-0790
301.6230(b)-1.............................................. 1545-0790
301.6230(e)-1.............................................. 1545-0790
301.6231(a)(1)-1........................................... 1545-0790
301.6231(a)(7)-1........................................... 1545-0790
301.6231(c)-1.............................................. 1545-0790
301.6231(c)-2.............................................. 1545-0790
301.6241-1T................................................ 1545-0130
301.6316-4................................................. 1545-0074
301.6316-5................................................. 1545-0074
301.6316-6................................................. 1545-0074
301.6316-7................................................. 1545-0029
301.6324A-1................................................ 1545-0015
301.6361-1................................................. 1545-0074
1545-0024
301.6361-2................................................. 1545-0024
301.6361-3................................................. 1545-0074
301.6402-2................................................. 1545-0024
1545-0073
1545-0091
301.6402-3................................................. 1545-0055
1545-0073
1545-0091
1545-0132
1545-1484
301.6402-5................................................. 1545-0928
301.6404-1................................................. 1545-0024
301.6404-2T................................................ 1545-0024
301.6404-3................................................. 1545-0024
301.6405-1................................................. 1545-0024
301.6501(c)-1.............................................. 1545-1241
1545-1637
301.6501(d)-1.............................................. 1545-0074
1545-0430
301.6501(o)-2.............................................. 1545-0728
301.6511(d)-1.............................................. 1545-0582
1545-0024
301.6511(d)-2.............................................. 1545-0582
1545-0024
301.6511(d)-3.............................................. 1545-0024
1545-0582
301.6652-2................................................. 1545-0092
301.6685-1................................................. 1545-0092
301.6689-1T................................................ 1545-1056
301.6707-1T................................................ 1545-0865
1545-0881
301.6708-1T................................................ 1545-0865
301.6712-1................................................. 1545-1126
301.6723-1A(d)............................................. 1545-0909
301.6903-1................................................. 1545-0013
1545-1783
301.6905-1................................................. 1545-0074
301.7001-1................................................. 1545-0123
301.7101-1................................................. 1545-1029
301.7207-1................................................. 1545-0092
301.7216-2................................................. 1545-0074
301.7216-2(o).............................................. 1545-1209
301.7425-3................................................. 1545-0854
301.7430-2(c).............................................. 1545-1356
301.7507-8................................................. 1545-0123
301.7507-9................................................. 1545-0123
301.7513-1................................................. 1545-0429
301.7517-1................................................. 1545-0015
301.7605-1................................................. 1545-0795
301.7623-1................................................. 1545-0409
1545-1534
301.7654-1................................................. 1545-0803
301.7701-3................................................. 1545-1486
301.7701-4................................................. 1545-1465
301.7701-7................................................. 1545-1600
301.7701-16................................................ 1545-0795
301.7701(b)-1.............................................. 1545-0089
301.7701(b)-2.............................................. 1545-0089
301.7701(b)-3.............................................. 1545-0089
301.7701(b)-4.............................................. 1545-0089
301.7701(b)-5.............................................. 1545-0089
301.7701(b)-6.............................................. 1545-0089
301.7701(b)-7.............................................. 1545-0089
1545-1126
301.7701(b)-9.............................................. 1545-0089
301.7805-1................................................. 1545-0805
301.9001-1................................................. 1545-0220
301.9100-2................................................. 1545-1488
301.9100-3................................................. 1545-1488
301.9100-4T................................................ 1545-0016
1545-0042
[[Page 577]]
1545-0074
1545-0129
1545-0172
1545-0619
301.9100-6T................................................ 1545-0872
301.9100-7T................................................ 1545-0982
301.9100-8................................................. 1545-1112
301.9100-11T............................................... 1545-0123
301.9100-12T............................................... 1545-0026
1545-0074
1545-0172
1545-1027
301.9100-14T............................................... 1545-0046
301.9100-15T............................................... 1545-0046
301.9100-16T............................................... 1545-0152
302.1-7.................................................... 1545-0024
305.7701-1................................................. 1545-0823
305.7871-1................................................. 1545-0823
404.6048-1................................................. 1545-0160
420.0-1.................................................... 1545-0710
Part 509................................................... 1545-0846
Part 513................................................... 1545-0834
Part 514................................................... 1545-0845
Part 521................................................... 1545-0848
601.104.................................................... 1545-0233
601.105.................................................... 1545-0091
601.201.................................................... 1545-0019
1545-0819
601.204.................................................... 1545-0152
601.401.................................................... 1545-0257
601.504.................................................... 1545-0150
601.601.................................................... 1545-0800
601.602.................................................... 1545-0295
1545-0387
1545-0957
601.702.................................................... 1545-0429
------------------------------------------------------------------------
(26 U.S.C. 7805)
[T.D. 8011, 50 FR 10222, Mar. 14, 1985]
Editorial Note: For Federal Register citations affecting Sec.
602.101, see the List of CFR Sections Affected, which appears in the
Findings Aids section of the printed volume and on GPO Access.
[[Page 579]]
List of CFR Sections Affected
All changes to the sections of part 1 (Sec. Sec. 1.301 to 1.400) of
title 26 of the Code of Federal Regulations which were made by documents
published in the Federal Register since January 1, 2001, are enumerated
in the following list. Entries indicate the nature of the changes
effected. Page numbers refer to Federal Register pages. The user should
consult the entries for chapters and parts as well as sections for
revisions.
For the period before January 1, 2001, see the ``List of CFR Sections
Affected, 1949-1963, 1964-1972, 1973-1985, and 1986-2000'' published in
11 separate volumes.
2001
26 CFR
66 FR
Page
Chapter I
1.301-1 (g) amended..................................................725
(g) revised....................................................49278
1.301-1T Added.......................................................725
Removed........................................................49279
1.338-0T Removed....................................................9948
1.338-1T Removed....................................................9948
1.338-2T Removed....................................................9948
1.338-3T Removed....................................................9948
1.338-4T Removed....................................................9948
1.338-5T Removed....................................................9948
1.338-6T Removed....................................................9948
1.338-7T Removed....................................................9948
1.338-10T Removed...................................................9950
1.338-0 Added.......................................................9929
1.338-1 Added.......................................................9929
1.338-2 Added.......................................................9929
1.338-3 Added.......................................................9929
(b)(3)(iv) Example 1 corrected.................................17363
1.338-4 Added.......................................................9929
Corrected......................................................17466
1.338-5 Added.......................................................9929
1.338-6 Added.......................................................9929
(d) Example 1 corrected........................................17363
1.338-7 Added.......................................................9929
1.338-8 (h)(1) amended..............................................9929
(h)(1) corrected...............................................17466
1.338-9 (a), (b)(1), (3)(i)(B), (ii), (4) and (f)(2) Example 1
amended.....................................................9929
(b)(1) corrected...............................................17466
1.338-10 Added......................................................9948
1.338(h)(10)-1 Added................................................9950
1.338(h)(10)-1T Removed.............................................9954
1.338(i)-1 Added....................................................9954
1.338(i)-1T Removed.................................................9954
1.355-0 Amended....................................................40591
1.355-6 (e)(3)(i) corrected.........................................9034
1.355-7T Added.....................................................40591
1.367(b)-0 Amended; introductory text revised.......................2257
1.367(b)-12 Added...................................................2257
1.368-1 (a) and (e)(6) Example 4 amended............................9929
2002
26 CFR
67 FR
Page
Chapter I
1 Technical correction........................35732, 37671, 45311, 46855
Authority citation amended........12, 819, 1082, 4174, 11036, 12865,
15114, 18994, 20899, 20904, 34394, 37999, 38002,
1.334-1 (b) amended................................................34605
1.337(d)-2 (g)(4) added............................................11036
1.337(d)-2T Added..................................................11036
(a)(4) and (b)(4) added........................................37999
1.337(d)-5T Heading and (d) revised...................................12
1.337(d)-6T Added.....................................................12
1.337(d)-7T Added.....................................................12
1.338-1 (b)(2)(vii) amended........................................43540
1.355-0 Heading revised; text amended..............................20636
Corrected......................................................38200
1.355-7T (n) corrected..............................................8579
Revised........................................................20636
(b)(3)(iii) and (j) Example 4 corrected........................38200
1.358-1 (a) amended................................................34604
[[Page 580]]
1.362-1 (a) amended................................................34605
1.381(c)(4)-1 (a)(2) amended.......................................34605
2003
26 CFR
68 FR
Page
Chapter I
1 Authority citation amended....4920, 11313, 12290, 12819, 20069, 23588,
24350, 34295, 34798, 38178, 40130, 40767, 41070, 42259, 42592,
44617, 45750, 51399, 52490, 54344, 63734
Technical correction.......................5346, 24644, 60625, 63986
Authority citation corrected...................................68511
1.301-1 (q) added..................................................54352
1.337(d)-5T Redesignated as 1.337(d)-5.............................12819
1.337(d)-5 Redesignated from 1.337(d)-5T; heading, (b)(3), and (d)
amended....................................................12819
1.337(d)-6 Added...................................................12820
1.337(d)-6T Removed................................................12822
1.337(d)-7 Added...................................................12822
1.337(d)-7T Removed................................................12825
1.338-3 (c)(1)(i) amended..........................................40768
1.338(h)(10)-1 (c)(2), (3) and (4) redesignated as (c)(3), (4) and
(5); new (c)(2) added......................................40768
1.338(h)(10)-1T Added (temporary)..................................40768
1.367(e)-2 (b)(2)(iii)(C)(1) amended; (d) revised..................39453
1.368-2 (b)(1) revised..............................................3387
1.368-2T Added......................................................3387
1.382-1 Amended....................................................38178
Corrected......................................................53219
1.382-10T Added (temporary)........................................38178
Corrected......................................................41417
Correctly designated...........................................53219
2004
(Regulations published from January 1, 2004, through April 1, 2004)
26 CFR
69 FR
Page
1.337(d)-2T (c)(2) and (4) Example revised.........................12800
[all]