[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Rules and Regulations]
[Pages 43302-43304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16373]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9140]
RIN 1545-BA90


Transfers To Provide for Satisfaction of Contested Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to transfers 
of money or other property to provide for the satisfaction of contested 
liabilities. The regulations affect taxpayers that are contesting an 
asserted liability and that transfer their own stock or indebtedness, 
the stock or indebtedness of a related party, or a promise to provide 
services or property in the future, to provide for the satisfaction of 
the liability prior to the resolution of the contest. The regulations 
also affect taxpayers that transfer money or other property to a trust, 
an escrow account, or a court to provide for the satisfaction of a 
liability for which payment is economic performance.

DATES: Effective Date: These regulations are effective July 20, 2004.
    Applicability Dates: For dates of applicability, see Sec.  1.461-
2(g).

FOR FURTHER INFORMATION CONTACT: Norma Rotunno, (202) 622-7900 (not a 
toll free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under section 
461(f) of the Internal Revenue Code (Code). On November 21, 2003, 
temporary regulations (TD 9095) were published in the Federal Register 
(68 FR 65634) relating to the transfer of money or other property to 
provide for the satisfaction of an asserted liability that a taxpayer 
is contesting. A notice of proposed

[[Page 43303]]

rulemaking (REG-136890-02) cross-referencing the temporary regulations 
also was published in the Federal Register (68 FR 65645) on November 
21, 2003. No public hearing was requested or held. One comment was 
received responding to the notice of proposed rulemaking. After 
consideration of the comment, the proposed regulations are adopted by 
this Treasury decision.

Summary of Comment

    The temporary regulations clarify that, in general, economic 
performance does not occur in the taxable year in which a taxpayer 
transfers money or other property to a trust, escrow account, or court 
to provide for the satisfaction of an asserted liability under section 
461(f) for which payment constitutes economic performance. Rather, 
economic performance occurs in the taxable year in which a taxpayer 
transfers money or other property to the person asserting the liability 
that the taxpayer is contesting, or in the taxable year in which 
payment from the trust, escrow account, or court registry is made to 
the person to which the liability is owed. The temporary regulations 
also indicate that economic performance may be satisfied under section 
468B and the regulations thereunder (relating to designated settlement 
funds and qualified settlement funds).
    A commentator suggested that the regulations provide an example of 
a transfer to a contested liability fund that qualifies for a deduction 
in the taxable year of transfer because it also satisfies the 
requirements for a qualified settlement fund under Sec.  1.468B-1. The 
final regulations do not adopt this comment because the requirements 
for establishing a qualified settlement fund under Sec.  1.468B-1 are 
complex and are beyond the scope of these regulations.

Effective Date

    In general, these final regulations apply to transfers made in 
taxable years beginning after December 31, 1953, and ending after 
August 16, 1954. However, these regulations apply to transfers of any 
stock of the taxpayer or any stock or indebtedness of a related person 
on or after November 19, 2003. Additionally, Sec.  1.461-2(e)(2)(i), 
relating to economic performance, applies to transfers of money or 
other property after July 18, 1984, the effective date of section 
461(h). Section 1.461-2(e)(2)(ii) applies to (1) transfers of money or 
other property after July 18, 1984, to satisfy workers compensation or 
tort liabilities, and (2) transfers of money or other property in 
taxable years beginning after December 31, 1991, the effective date of 
Sec.  1.461-4(g), to satisfy payment liabilities designated under Sec.  
1.461-4(g) (other than liabilities for workers compensation or tort).

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 
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 Code, the proposed 
regulations preceding these regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
Par. 2. In Sec.  1.461-2, paragraphs (c)(1), (e)(2), (e)(3) Example 2, 
and (g) are revised to read as follows:


Sec.  1.461-2  Contested liabilities.

* * * * *
    (c) Transfer to provide for the satisfaction of an asserted 
liability--(1) In general. (i) A taxpayer may provide for the 
satisfaction of an asserted liability by transferring money or other 
property beyond his control to--
    (A) The person who is asserting the liability;
    (B) An escrowee or trustee pursuant to a written agreement (among 
the escrowee or trustee, the taxpayer, and the person who is asserting 
the liability) that the money or other property be delivered in 
accordance with the settlement of the contest;
    (C) An escrowee or trustee pursuant to an order of the United 
States or of any State or political subdivision thereof or any agency 
or instrumentality of the foregoing, or of a court, that the money or 
other property be delivered in accordance with the settlement of the 
contest; or
    (D) A court with jurisdiction over the contest.
    (ii) In order for money or other property to be beyond the control 
of a taxpayer, the taxpayer must relinquish all authority over the 
money or other property.
    (iii) The following are not transfers to provide for the 
satisfaction of an asserted liability--
    (A) Purchasing a bond to guarantee payment of the asserted 
liability;
    (B) An entry on the taxpayer's books of account;
    (C) A transfer to an account that is within the control of the 
taxpayer;
    (D) A transfer of any indebtedness of the taxpayer or of any 
promise by the taxpayer to provide services or property in the future; 
and
    (E) A transfer to a person (other than the person asserting the 
liability) of any stock of the taxpayer or of any stock or indebtedness 
of a person related to the taxpayer (as defined in section 267(b)).
* * * * *
    (e) * * *
    (2) Application of economic performance rules to transfers under 
section 461(f). (i) A taxpayer using an accrual method of accounting is 
not allowed a deduction under section 461(f) in the taxable year of the 
transfer unless economic performance has occurred.
    (ii) Economic performance occurs for liabilities requiring payment 
to another person arising out of any workers compensation act or any 
tort, or any other liability designated in Sec.  1.461-4(g), as 
payments are made to the person to which the liability is owed. Except 
as provided in section 468B or the regulations thereunder, economic 
performance does not occur when a taxpayer transfers money or other 
property to a trust, an escrow account, or a court to provide for the 
satisfaction of an asserted workers compensation, tort, or other 
liability designated under Sec.  1.461-4(g) that the taxpayer is 
contesting unless the trust, escrow account, or court is the person to 
which the liability is owed or the taxpayer's payment to the trust, 
escrow account, or court discharges the taxpayer's liability to the 
claimant. Rather, economic performance occurs in the taxable year

[[Page 43304]]

the taxpayer transfers money or other property to the person that is 
asserting the workers compensation, tort, or other liability designated 
under Sec.  1.461-4(g) that the taxpayer is contesting or in the 
taxable year that payment is made from a trust, an escrow account, or a 
court registry funded by the taxpayer to the person to which the 
liability is owed.
    (3) * * *

    Example 2. Corporation X is a defendant in a class action suit 
for tort liabilities. In 2002, X establishes a trust for the purpose 
of satisfying the asserted liability and transfers $10,000,000 to 
the trust. The trust does not satisfy the requirements of section 
468B or the regulations thereunder. In 2004, the trustee pays 
$10,000,000 to the plaintiffs in settlement of the litigation. Under 
paragraph (e)(2) of this section, economic performance with respect 
to X's liability to the plaintiffs occurs in 2004. X may deduct the 
$10,000,000 payment to the plaintiffs in 2004.
* * * * *
    (g) Effective dates. (1) Except as otherwise provided, this section 
applies to transfers of money or other property in taxable years 
beginning after December 31, 1953, and ending after August 16, 1954.
    (2) Paragraph (c)(1)(iii)(E) of this section applies to transfers 
of any stock of the taxpayer or any stock or indebtedness of a person 
related to the taxpayer on or after November 19, 2003.
    (3) Paragraph (e)(2)(i) of this section applies to transfers of 
money or other property after July 18, 1984.
    (4) Paragraph (e)(2)(ii) and paragraph (e)(3) Example 2 of this 
section apply to--
    (i) Transfers after July 18, 1984, of money or other property to 
provide for the satisfaction of an asserted workers compensation or 
tort liability; and
    (ii) Transfers in taxable years beginning after December 31, 1991, 
of money or other property to provide for the satisfaction of asserted 
liabilities designated in Sec.  1.461-4(g) (other than liabilities for 
workers compensation or tort).

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: July 7, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-16373 Filed 7-19-04; 8:45 am]
BILLING CODE 4830-01-P