[Federal Register Volume 66, Number 11 (Wednesday, January 17, 2001)]
[Proposed Rules]
[Pages 3924-3925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-624]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[Reg-107175-00]
RIN 1545-AY19


Definition of Disqualified Person

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations to narrow the 
definition of the term disqualified person for section 1031 like-kind 
exchanges. The regulations are in response to recent changes in the 
federal banking law, especially the repeal of section 20 of the Glass-
Steagall Act of 1933. The regulations will affect the eligibility of 
certain persons to serve as escrow holders of qualified escrow 
accounts, trustees of qualified trusts, or as qualified intermediaries. 
This document also provides notice of a public hearing on these 
proposed regulations.

DATES: Written or electronic comments must be received by April 17, 
2001. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for June 5, 2001, at 10 a.m. must be received 
by May 15, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-107175-00), room 5226, 
Internal Revenue Service, Post Office Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-
107175-00), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet by selecting the ``Tax Regs'' 
option on the IRS Home Page, or by submitting comments directly to the 
IRS Internet site at http://www.irs.ustreas.gov /tax_regs /
regslist.html. The public hearing will be held in room 4718, Internal 
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
J. Peter Baumgarten, at (202) 622-4950; concerning submissions of 
comments, the hearing, or to be placed on the building access list to 
attend the hearing, Treena Garrett, at (202) 622-7190 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) for the definition of disqualified person 
under section 1.1031(k)-1(k).
    An exchange of property, like a sale, usually results in the 
current recognition of gain or loss. Section 1031(a) provides an 
exception to the general rule. Under section 1031(a), no gain or loss 
is recognized if property held for productive use in a trade or 
business or for investment is exchanged solely for property of a like 
kind that is to be held either for productive use in a trade or 
business or for investment.
    Taxpayers may use a qualified escrow account, qualified trust, or 
qualified intermediary (or any combination of the three) to facilitate 
a like-kind exchange. A requirement common to qualified escrow 
accounts, qualified trusts, and qualified intermediaries is that the 
escrow holder, trustee, or intermediary may not be the taxpayer or a 
disqualified person.
    Section 1.1031(k)-1(k) defines a disqualified person to include a 
person that is an agent of the taxpayer at the time of the transaction. 
An agent includes a person that has acted as the taxpayer's employee, 
attorney, accountant, investment banker or broker, or real estate agent 
or broker within two years of the taxpayer's transfer of relinquished 
property. However, in determining whether a person is a disqualified 
person, services provided by such person for the taxpayer with respect 
to section 1031 exchanges of property and routine financial, title 
insurance, escrow, or trust services provided to the taxpayer by a 
financial institution, title insurance company, or escrow company are 
not taken into account. A person that is related to a disqualified 
person, determined by using the attribution rules of sections 267(b) 
and 707(b) but substituting 10 percent for 50 percent, is also 
considered a disqualified person.
    Under section 20 of the Banking Act of 1933 (12 U.S.C. 377) (the 
Glass-Steagall Act), banks generally were proscribed from affiliation 
with any corporation, association, business trust, or other similar 
organization engaged principally in the issue, flotation, underwriting, 
public sale, or distribution at wholesale or retail or through 
syndicate participation of stocks, bonds, debentures, notes, or other 
securities. However, last year Congress enacted the Gramm-Leach-Bliley 
Act, Public Law 106-102 (November 12, 1999), 113 Stat. 1341 (the GLB 
Act). Section 101 of the GLB Act repeals section 20 of the Glass-
Steagall Act. In addition, section 103 of the GLB Act amends section 4 
of the Bank Holding Company Act of 1956 (12 U.S.C. 1843) by adding new 
subsection (k). Subsection (k) specifically authorizes qualifying 
financial institutions to engage in activities that are financial in 
nature, such as (1) providing financial, investment, or economic 
advisory services, including advising an investment company (as defined 
in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3)); 
(2) issuing and selling instruments representing interests in pools of 
assets permissible for a bank to hold directly; and (3) underwriting, 
dealing in, and making a market in securities.
    As a consequence of the GLB Act (and other changes in policy by the 
Federal Reserve System in recent years), many banks and bank holding 
companies are, or are in the process of becoming, members of controlled 
groups that include investment banking and brokerage firms. This, in 
turn, may cause the banks, bank holding companies, and their 
subsidiaries to be disqualified persons for purposes of section 1031 by 
virtue of the related party rule of Sec. 1.1031(k)-1(k)(4).
    Treasury and the Service believe that, in general, banks should be 
permitted to serve as qualified intermediaries, escrow holders, or 
trustees. Banks, as regulated institutions, have historically acted in 
this role as neutral or independent holders of funds. These regulations 
permit banks to continue in this role despite recent legislative and 
regulatory changes.

[[Page 3925]]

    In order to account for changes in the banking industry, the 
proposed regulations generally provide that a bank that is a member of 
a controlled group that includes an investment banking or brokerage 
firm as a member will not be a disqualified person merely because the 
investment banking or brokerage firm has provided services to an 
exchange customer within a two-year period ending on the date of the 
transfer of the relinquished property by that customer.

Proposed Effective Date

    The regulations are applicable for transfers of property made by a 
taxpayer on or after January 17, 2001.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
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. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments that 
are submitted timely to the IRS. The IRS and the Treasury Department 
request comments on the merits of the proposed regulations and how the 
proposed regulations can be made clearer and easier to understand. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for June 5, 2001, beginning at 
10 a.m. in room 4718 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the main Constitution Avenue 
entrance between 10th and 12th Streets, NW. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 15 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments and an outline of the topics to be discussed and the 
time to be devoted to each topic by May 15, 2001. A period of ten (10) 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of the speakers will be prepared after the 
deadline for receiving the outlines has passed. Copies of the agenda 
will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is J. Peter Baumgarten of 
the Office of Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1---INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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

    Par. 2. Section 1.1031(k)-1 is amended by adding a sentence to the 
end of paragraph (k)(4) to read as follows:


Sec. 1.1031(k)-1  Treatment of deferred exchanges.

* * * * *
    (k) * * *
    (4) * * * However, with respect to transfers of relinquished 
property made by a taxpayer on or after the date on which these 
regulations are published as final regulations, this paragraph (k)(4) 
does not apply to a bank (as defined in section 581) that is a member 
of a controlled group (as determined under section 267(f)(1), 
substituting ``10 percent'' for ``50 percent'' where it appears), where 
a person described in paragraph (k)(2) of this section is an investment 
banker or broker that has provided investment banking or brokerage 
services to the taxpayer within the 2-year period and also is a member 
of the controlled group.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-624 Filed 1-16-01; 8:45 am]
BILLING CODE 4830-01-P