[Federal Register Volume 65, Number 25 (Monday, February 7, 2000)]
[Rules and Regulations]
[Pages 5775-5777]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1894]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8872]
RIN 1545-AW93


Certain Asset Transfers to Regulated Investment Companies [RICs] 
and Real Estate Investment Trusts [REITs]

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Temporary regulations.

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SUMMARY:  This document contains temporary regulations that apply with 
respect to the net built-in gain of C corporation assets that become 
assets of a Regulated Investment Company [RIC] or Real Estate 
Investment Trust [REIT] by the qualification of a C corporation as a 
RIC or REIT or by the transfer of assets of a C corporation to a RIC or 
REIT in a carryover basis transaction. The regulations generally 
require the corporation to recognize gain as if it had sold the assets 
transferred or converted to RIC or REIT assets at fair market value and 
immediately liquidated. The regulations permit the transferee RIC or 
REIT to elect, in lieu of liquidation treatment, to be subject to the 
rules of section 1374 of the Internal Revenue Code and the regulations 
thereunder. The text of the temporary regulations also serves as the 
text of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: Effective Date: These regulations are effective February 4, 
2000.
    Applicability Dates: For dates of applicability, see the Effective 
Dates portion of the preamble under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT:  Christopher W. Schoen, (202) 622-7750 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 
section 553). For this reason, the collection of information contained 
in these regulations has been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1672. Responses to this collection of 
information are required to obtain a benefit, i.e., to elect to be 
subject to section 1374 of the Internal Revenue Code (Code) and the 
regulations thereunder.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions as to reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 
section 6103.

Background

    Sections 631 and 633 of the Tax Reform Act of 1986 (the 1986 Act) 
(Public Law 99-514), as amended by sections 1006(e) and (g) of the 
Technical and Miscellaneous Revenue Act of 1988 (the 1988 Act) (Public 
Law 100-647), amended the Code to repeal the General Utilities 
doctrine. The 1986 Act amended sections 336 and 337 of the Code, 
generally requiring corporations to recognize gain when appreciated 
property is distributed in connection with a complete liquidation. 
Section 337(d) directs the Secretary to prescribe regulations as may be 
necessary to carry out the purposes of General Utilities repeal, 
including rules to ``ensure that such purposes shall not be 
circumvented * * * through the use of a regulated investment company 
[RIC], a real estate investment trust [REIT], or a tax exempt entity * 
* *.'' The transfer of the assets of a C corporation to a RIC or REIT 
could result in permanently removing the built-in gain inherent in 
those assets from the reach of the corporate income tax because RIC and 
REIT income is not subject to a corporate-level income tax if such 
income is distributed to the RIC or REIT shareholders.
    Accordingly, on February 4, 1988, the IRS issued Notice 88-19 
(1988-1 C.B. 486). Notice 88-19 announced that the IRS intended to 
promulgate regulations under the authority of section 337(d) with 
respect to transactions or events that result in the ownership of C 
corporation assets by a RIC or REIT with a basis determined by 
reference to the corporation's basis (a carryover basis). Notice 88-19 
served as an ``administrative pronouncement,'' and could be relied upon 
to the same extent as a revenue ruling or revenue procedure. Notice 88-
19 also indicated that the regulations would be applicable 
retroactively to June 10, 1987. See also Notice 88-96 (1988-2 C.B. 
420).
    As a result of the issuance of Notice 88-19, many taxpayers have 
become uncertain about the current law applicable to their 
transactions, as well as the proper method of making a valid election 
to be subject to the rules of section 1374 and the regulations 
thereunder. In order to resolve this uncertainty and to provide 
taxpayers with guidance, the IRS and Treasury are issuing these 
temporary regulations.

Explanation of Provisions

    These regulations implement Notice 88-19 by providing that when a C 
corporation (1) qualifies to be taxed as a RIC or REIT, or (2) 
transfers assets to a RIC or REIT in a carryover basis transaction, the 
C corporation is treated as if it sold all of its assets at their 
respective fair market values and immediately liquidated, unless the 
RIC or REIT elects to be subject to tax under

[[Page 5776]]

section 1374. Any resulting net built-in gain is recognized by the C 
corporation and the bases of the assets in the hands of the RIC or REIT 
are generally adjusted to their fair market values to reflect the 
recognized net built-in gain. The regulations do not permit a C 
corporation to recognize a net built-in loss, and, in this case, the 
carryover bases of the assets in the hands of the RIC or REIT are 
preserved.
    If the RIC or REIT elects to be subject to treatment under section 
1374, its built-in gain, and the corporate-level tax imposed on that 
gain, is subject to rules similar to the rules applying to the net 
income of foreclosure property of REITs.

Effective Dates

    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. 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.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, these temporary regulations 
will be submitted to the Chief Counsel of Advocacy of the Small 
Business Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Christopher W. Schoen 
of the Office of Assistant Chief Counsel (Corporate). Other personnel 
from the IRS and Treasury participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for 26 CFR part 1 is amended by 
adding an entry in numerical order to read as follows:

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

    Section 1.337(d)-5T also issued under 26 U.S.C. 337. * * *


    Par. 2. Section 1.337(d)-5T is added to read as follows:


Sec. 1.337(d)-5T  Tax on C assets becoming RIC or REIT assets 
(temporary).

    (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.
    (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 
Sec. 1.337(d)-5T(b) to be subject to the rules of section 1374 and the 
regulations thereunder with respect to its assets which formerly were 
held by

[[Page 5777]]

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. 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.

    Par. 3. In Sec. 1.852-12, paragraph (d) is added to read as 
follows:


Sec. 1.852-12  Non-RIC earnings and profits.

* * * * *
    (d) For treatment of net built-in gain assets of a C corporation 
that become assets of a RIC, see Sec. 1.337(d)-5T.

    Par. 4. In Sec. 1.857-11, paragraph (e) is added to read as 
follows:


Sec. 1.857-11  Non-REIT earnings and profits.

* * * * *
    (e) For treatment of net built-in gain assets of a C corporation 
that become assets of a REIT, see Sec. 1.337(d)-5T.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 4. In Sec. 602.101, paragraph (b) is amended by adding an 
entry in numerical order to the table to read as follows:


Sec. 602.101    OMB control numbers.

* * * * *
    (b) * * *

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                                                          Current OMB
  CFR Part or section where identified or described       control No.
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1.337(d)-5T..........................................          1545-1672
 
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Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: January 21, 2000.
Jonathan Talisman,
Acting Assistant Secretary for Tax Policy.
[FR Doc. 00-1894 Filed 2-4-00; 8:45 am]
BILLING CODE 4830-01-U