[Federal Register Volume 68, Number 124 (Friday, June 27, 2003)]
[Rules and Regulations]
[Pages 38177-38179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-16229]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9063]
RIN 1545-BB99


Distributions of Interests in a Loss Corporation From Qualified 
Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations under section 382 
of the Internal Revenue Code of 1986. The temporary regulations affect 
loss corporations and provide guidance on whether a loss corporation 
has an ownership change where a qualified trust described in section 
401(a) distributes an ownership interest in an entity. The text of 
these 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 in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective June 27, 2003.
    Applicability Date: For dates of applicability see Sec.  1.382-
10T(a)(4).

FOR FURTHER INFORMATION CONTACT: Martin Huck (202) 622-7750 (not a toll 
free call).

SUPPLEMENTARY INFORMATION:

Background

Section 382 in General

    Section 382 limits the amount of taxable income that may be offset 
by certain loss carryovers and recognized built-in losses following an 
ownership change of a loss corporation. Section 382(g) defines an 
ownership change as a change in the percentage of ownership of the loss 
corporation's stock owned by the 5-percent shareholders of more than 50 
percentage points (by value) over a 3-year period. Congress intended 
the section 382 limitation to apply when new shareholders that did not 
bear the economic burden of the losses acquire a controlling interest 
in the loss corporation. See H.R. Rep. No. 99-426, 1986-3 C.B. (Vol. 2) 
256; S. Rep. No. 99-313 1986-3 C.B. (Vol. 3) 232.

Constructive Ownership Rules

    Section 382(l)(3) provides that in determining the ownership of 
stock of a loss corporation, the constructive ownership rules of 
section 318 apply, with certain exceptions. Section 382 (by reference 
to the rules of section 318) and the regulations thereunder generally 
attribute stock owned by an entity such as a corporation or a 
partnership to its shareholders or partners, respectively. Therefore, 
if a corporation makes a pro rata distribution of an interest in a loss 
corporation to its shareholders, the distribution does not result in an 
acquisition of that interest by the shareholders that must be taken 
into account in determining whether the loss corporation has an 
ownership change. On the other hand, section 382 and the regulations 
thereunder do not attribute stock owned by a qualified trust described 
in section 401(a) (qualified trust) to participants in the qualified 
plan under which the trust is established. In particular, although 
section 318(a)(2) provides for attribution of stock owned by a trust to 
its beneficiaries, it excepts qualified trusts from the application of 
this rule. Moreover, Sec.  1.382-2T(h)(2)(iii) provides that a 
qualified trust is treated as an individual unrelated to any other 
direct or indirect owner of the loss corporation. Accordingly, the 
participants under a qualified plan are not treated as owning any 
interest in a loss corporation owned by the trust. Therefore, if a 
qualified trust owns directly 5 percent or more of a loss corporation, 
a distribution of an interest in the loss corporation from the trust to 
plan participants (or their beneficiaries) results in an acquisition of 
that interest by the participants (or their beneficiaries) that must be 
taken into account in determining whether the loss corporation has an 
ownership change.

Explanation of Provisions

In General

    Treasury and the IRS are concerned that, under the current rules, a 
distribution of an ownership interest in an entity from a qualified 
trust may cause an ownership change, even though that event may not 
change the ultimate beneficial ownership of the loss corporation. To 
prevent this result, these temporary regulations set forth new rules.

Distributions From Qualified Trusts

    The temporary regulations provide that if a qualified trust 
distributes an ownership interest in an entity, then for testing dates 
on or after the date of the distribution, the distributed ownership 
interest will be treated as having been acquired by the distributee on 
the date and in the manner acquired by the trust. Furthermore, the 
distribution itself does not give rise to a testing date. Because the 
rule applies only for testing dates on or after the date of the 
distribution, a distribution does not retroactively cause (or undo) an 
owner shift that would (or would not) have occurred if the distributee 
had actually acquired the ownership interest on the date and in the 
manner acquired by the qualified trust.
    To determine which ownership interests have been distributed, the 
loss corporation must account for all dispositions of ownership 
interests by the qualified trust either by specifically identifying the 
ownership interest disposed of, or by using a first-in, first-out 
(FIFO) method. The loss corporation, however, must apply the same 
method to all dispositions by the qualified trust.

Effective Dates

    The temporary regulations apply to all distributions from qualified 
trusts after June 27, 2003. The loss corporation may choose to apply 
the rules retroactively in one of two ways: (1) To all distributions 
from qualified trusts on or before June 27, 2003 and within a testing 
period that includes June 27,

[[Page 38178]]

2003; or (2) to all distributions from qualified trusts after December 
31, 1986. Retroactive application will affect a taxpayer's items of 
income, gain, deduction, or loss only in open years.

Request for Comments and Future Regulations

    Treasury and the IRS request comments regarding whether there are 
other events that, under current rules, are taken into account in 
determining whether an ownership change occurs, but do not cause the 
ultimate beneficial ownership of the loss corporation to change. In 
this regard, Treasury and the IRS have been studying the constructive 
ownership rules as they apply to members of a family, and the effect of 
those rules on the determination of whether a loss corporation has an 
ownership change. Subject to certain exceptions, Sec.  1.382-
2T(h)(6)(ii) treats an individual, his spouse (other than a spouse who 
is legally separated from the individual under a decree of divorce or 
separate maintenance), his children, his grandchildren, and his parents 
as one individual, and aggregates shares owned by those persons for 
purposes of determining whether a loss corporation has an ownership 
change. Treasury and the IRS are concerned that, under the current 
rules, a change in the composition of a family may be interpreted to 
cause an ownership change. Treasury and the IRS believe that, as in the 
case of a distribution from a qualified trust, when a change in family 
composition does not change the ultimate beneficial ownership of the 
loss corporation, it should not be taken into account in determining 
whether a loss corporation has an ownership change. For example, a 
change in family composition that results from a marriage of two 
individuals does not change the ultimate beneficial ownership of the 
loss corporation and, therefore, should not cause an ownership change. 
Accordingly, Treasury and the IRS intend to promulgate regulations to 
address changes in family composition that result from marriage, birth, 
adoption, divorce, death, or other events in which an individual joins 
or leaves a family. It is anticipated that these regulations will be 
electively retroactive on terms similar to those applicable to the 
rules regarding distributions from a qualified trust.

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. These temporary 
regulations provide relief to qualifying loss corporations that might 
be affected by an unintended consequence of the operation of the 
statute. The regulations relieve a restriction on the ability of 
qualified trusts that distribute interests in a loss corporation 
without causing an ownership change. In addition, it is necessary to 
provide immediate guidance to taxpayers. Accordingly, good cause is 
found for dispensing with prior notice and comment pursuant to 5 U.S.C. 
553(b) and for dispensing with a delayed effective date pursuant to 5 
U.S.C. 553(d). For applicability of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), see the notice of proposed rulemaking on this 
subject in the Proposed Rules section in this issue of the Federal 
Register. The IRS and Treasury request comments from small entities 
that believe they might be adversely affected by these regulations. 
Pursuant to section 7805(f) of the Code, these temporary regulations 
will be submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact.

Drafting Information

    The principal author of these regulations is Martin Huck, Office of 
Associate Chief Counsel (Corporate). 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.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:


Sec.  1.382-1  Table of contents.

* * * * *

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.382-10T is also issued under 26 U.S.C. 382(m). * * *


0
Par. 2. Section 1.382-1 is amended by adding an entry in numerical 
order to read as follows:


Sec.  1.382-10T  Special rules for determining time and manner of 
acquisition of an interest in a loss corporation (temporary).

* * * * *

0
Par. 3. Section 1.382.10T is added to read as follows:


Sec.  1.382-01  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.

[[Page 38179]]

    (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 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]

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: June 18, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-16229 Filed 6-26-03; 8:45 am]
BILLING CODE 4830-01-P