[Federal Register Volume 62, Number 136 (Wednesday, July 16, 1997)]
[Rules and Regulations]
[Pages 38027-38028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-18750]



Internal Revenue Service

26 CFR Part 1

[TD 8724]
RIN 1545-AU16

Section 1059 Extraordinary Dividends

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.


SUMMARY: This document contains final regulations under section 1059(e) 
of the Internal Revenue Code. The final regulations clarify that 
certain distributions in redemption of stock held by a corporate 
shareholder are treated as extraordinary dividends notwithstanding 
provisions that otherwise might exempt the distributions from 
extraordinary dividend treatment. Corporations that receive a 
distribution in redemption of stock may be affected if the redemption 
is either part of a partial liquidation of the redeeming corporation or 
is not pro

[[Page 38028]]

rata as to all shareholders. The final regulations also provide that 
section 1059(e)(1) applies to certain exchanges described in section 

DATES: This regulation is effective July 16, 1997.
    For date of applicability, see Sec. 1.1059(e)-1(c).

FOR FURTHER INFORMATION CONTACT: Richard K. Passales, (202) 622-7530 
(not a toll-free number).



    On June 18, 1996, the IRS published in the Federal Register a 
notice of proposed rulemaking (CO-9-96), 61 FR 30845, concerning 
certain distributions under section 1059(e)(1) of the Internal Revenue 
Code. The proposed rules were based on the conclusion that applying the 
exceptions to extraordinary dividend treatment found in sections 1059 
(d)(6) and (e)(2) to amounts treated as extraordinary dividends under 
section 1059(e)(1) is inconsistent with the purposes of section 1059 
and may create inappropriate consequences, such as basis shifting that 
eliminates gain or creates artificial loss.
    The IRS received a few comments on the proposed regulations. No one 
requested to speak at the public hearing. After consideration of all 
the comments, the regulations are adopted as revised by this Treasury 
decision. The revisions and significant comments are discussed below.

Explanation of Revisions

    Section 1.1059(e)-1(b) of the proposed regulations provides that 
for purposes of section 1059(e)(1), an exchange under section 356(a)(1) 
is treated as a redemption and, to the extent any amount is treated as 
a dividend under section 356(a)(2), it is treated as a dividend under 
section 301. One practitioner questioned whether section 1.1059(e)-1(b) 
applies to exchanges for section 306 stock that are treated as section 
301 distributions under section 356(e). The final regulations clarify 
that for purposes of section 1059(e)(1), all exchanges under section 
356 are treated as redemptions and all amounts treated as a dividend 
under section 356(a)(2) are treated as dividends under section 301. 
Accordingly, the final regulations delete the reference to subsection 
(a)(1) of section 356.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and because the regulation does 
not impose a collection of information on small entities, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding these regulations was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Richard K. Passales, 
Office of Assistant Chief Counsel (Corporate), IRS. However, other 
personnel from the IRS and Treasury Department participated in their 

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:


    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.1059(e)-1 also issued under 26 U.S.C. 1059 (e)(1) and 
(e)(2). * * *
    Par. 2. In Sec. 1.302-2, paragraph (c) introductory text is amended 
by adding a sentence immediately following the first sentence to read 
as follows:

Sec. 1.302-2  Redemptions not taxable as dividends.

* * * * *
    (c) * * * (For adjustments to basis required for certain 
redemptions of corporate shareholders that are treated as extraordinary 
dividends, see section 1059 and the regulations thereunder.) * * *
* * * * *
    Par. 3. Section 1.1059(e)-1 is added to read as follows:

Sec. 1.1059(e)-1  Non-pro rata redemptions.

    (a) In general. Section 1059(d)(6) (exception where stock held 
during entire existence of corporation) and section 1059(e)(2) 
(qualifying dividends) do not apply to any distribution treated as an 
extraordinary dividend under section 1059(e)(1). For example, if a 
redemption of stock is not pro rata as to all shareholders, any amount 
treated as a dividend under section 301 is treated as an extraordinary 
dividend regardless of whether the dividend is a qualifying dividend.
    (b) Reorganizations. For purposes of section 1059(e)(1), any 
exchange under section 356 is treated as a redemption and, to the 
extent any amount is treated as a dividend under section 356(a)(2), it 
is treated as a dividend under section 301.
    (c) Effective date. This section applies to distributions announced 
(within the meaning of section 1059(d)(5)) on or after June 17, 1996.

Michael P. Dolan,
Acting Commissioner of Internal Revenue.
    Approved: June 27, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 97-18750 Filed 7-15-97; 8:45 am]