[Federal Register Volume 70, Number 244 (Wednesday, December 21, 2005)]
[Rules and Regulations]
[Pages 75730-75731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-24283]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9236]
RIN 1545-BD95


Section 1374 Effective Dates

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations that provide guidance 
concerning the applicability of section 1374 of the Internal Revenue 
Code to S corporations that acquire assets in carryover basis 
transactions from C corporations on or after December 27, 1994, and to 
certain corporations that terminate S corporation status and later 
elect again to become S corporations.

DATES: Effective Date: These regulations are effective December 21, 
2005.
    Applicability Dates: Section 1.1374-8 applies to any transaction 
described in section 1374(d)(8) that occurs on or after December 27, 
1994. Section 1.1374-10 applies for taxable years beginning after 
December 22, 2004.

FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 622-7750, 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR Part 1. On December 22, 
2004, temporary regulations (TD 9170) regarding the applicability of 
section 1374 to S corporations that acquire assets in certain carryover 
basis transactions and to certain corporations that terminate S 
corporation status and later elect again to become S corporations were 
published in the Federal Register (69 FR 76612). A notice of proposed 
rule making (REG-139683-04) cross-referencing the temporary regulations 
was published in the Federal Register for the same day (69 FR 76635). 
The temporary regulations provide that (1) section 1374(d)(8) applies 
to any transaction described in that section that occurs on or after 
December 27, 1994, regardless of the date of the S corporation's 
election under section 1362, and (2) for purposes of section 633(d)(8) 
of the Tax Reform Act of 1986, as amended by the Technical and 
Miscellaneous Revenue Act of 1988, a corporation's most recent S 
election, not an earlier election that has been revoked or terminated, 
determines whether or not it is subject to current section 1374.
    No comments were received responding to the notice of proposed 
rulemaking, and no public hearing was requested or held. The proposed 
regulations are adopted with no substantive change by this Treasury 
decision, and the corresponding temporary regulations are removed.

Special Analyses

    It has been determined that this regulation 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) and (d) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to Sec.  1.1374-8(a)(2) of these regulations. 
With respect to Sec.  1.1374-10(c) of these regulations, it has been 
determined, pursuant to 5 U.S.C. 553(d)(3), that good cause exists to 
dispense with a delayed effective date. This section, which is 
substantively identical to currently effective temporary regulations, 
merely continues to provide necessary guidance to taxpayers with 
respect to the application of the transition rule regarding qualified 
corporations in section 633(d)(8) of TRA, as amended by TAMRA, and, 
accordingly, with respect to the application of section 1374 to asset 
dispositions which occur during taxable years beginning after December 
22, 2004. Because Sec.  1.1374-8(a)(2) does not impose a collection of 
information on small entities, it is not subject to the provisions of 
the Regulatory Flexibility Act (5 U.S.C. chapter 6). It is hereby 
certified that Sec.  1.1374-10(c) of these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that Sec.  1.1374-10(c) of 
these regulations addresses an uncommon fact situation not likely to 
affect a significant number of small entities. Therefore, a regulatory 
flexibility analysis is not required. Pursuant to section 7805(f) of 
the Code,

[[Page 75731]]

the notice of proposed rulemaking preceding these final 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 Stephen R. Cleary of 
the Office of Associate Chief Counsel (Corporate). Other personnel from 
Treasury and the IRS 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 is amended by adding 
entries in numerical order to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1374-8 also issued under 26 U.S.C 337(d) and 1374(e).* 
* *
    Section 1.1374-10 also issued under 26 U.S.C. 337(d) and 
1374(e).* * *


0
Par. 2. Section 1.1374-0 is amended by revising the entries for Sec.  
1.1374-8 and adding an entry for Sec.  1.1374-10(c) to read as follows:


Sec.  1.1374-0  Table of contents.

* * * * *


Sec.  1.1374-8  Section 1374(d)(8) transactions.

    (a) In general.
    (b) Effective date of section 1374(d)(8).
    (c) Separate determination of tax.
    (d) Taxable income limitation.
    (e) Examples.
* * * * *


Sec.  1.1374-10  Effective date and additional rules.

* * * * *
    (c) Revocation and re-election of S corporation status.
    (1) In general.
    (2) Example.

0
Par. 3. Section 1.1374-8 is amended by:
0
1. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), 
and (e), respectively.
0
2. Revising paragraph (a).
0
3. Adding new paragraph (b).
    The revision and addition read as follows:


Sec.  1.1374-8  Section 1374(d)(8) transactions.

    (a) In general. If any S corporation acquires any asset in a 
transaction in which the S corporation's basis in the asset is 
determined (in whole or in part) by reference to a C corporation's 
basis in the assets (or any other property) (a section 1374(d)(8) 
transaction), section 1374 applies to the net recognized built-in gain 
attributable to the assets acquired in any section 1374(d)(8) 
transaction.
    (b) Effective date of section 1374(d)(8). Section 1374(d)(8) 
applies to any section 1374(d)(8) transaction, as defined in paragraph 
(a)(1) of this section, that occurs on or after December 27, 1994, 
without regard to the date of the corporation's election to be an S 
corporation under section 1362.
* * * * *


Sec.  1.1374-8T  [Removed]

0
Par. 4. Section 1.1374-8T is removed.

0
Par. 5. Section 1.1374-10 is amended by revising paragraph (c) to read 
as follows:


Sec.  1.1374-10  Effective date and additional rules.

* * * * *
    (c) Termination and re-election of S corporation status--(1) In 
general. For purposes of section 633(d)(8) of the Tax Reform Act of 
1986, as amended, any reference to an election to be an S corporation 
under section 1362 shall be treated as a reference to the corporation's 
most recent election to be an S corporation under section 1362. This 
paragraph (c) applies for taxable years beginning after December 22, 
2004, without regard to the date of the corporation's most recent 
election to be an S corporation under section 1362.
    (2) Example. The following example illustrates the rules of this 
paragraph (c):

    Example. (i) Effective January 1, 1988, X, a C corporation that 
is a qualified corporation under section 633(d) of the Tax Reform 
Act of 1986, as amended, elects to be an S corporation under section 
1362. Effective January 1, 1990, X revokes its S status and becomes 
a C corporation. On January 1, 2004, X again elects to be an S 
corporation under section 1362. X disposes of assets in 2006, 2007, 
and 2008, recognizing gain.
    (ii) X is not eligible for treatment under the transition rule 
of section 633(d)(8) of the Tax Reform Act of 1986, as amended, with 
respect to these assets. Accordingly, X is subject to section 1374, 
as amended by the Tax Reform Act of 1986 and the Technical and 
Miscellaneous Revenue Act of 1988, and the 10-year recognition 
period begins on January 1, 2004.
    (iii) To the extent the gain that X recognizes on the asset 
sales in 2006, 2007, and 2008 reflects built-in gain inherent in 
such assets in X's hands on January 1, 2004, such gain is subject to 
tax under section 1374 as amended by the Tax Reform Act of 1986 and 
the Technical and Miscellaneous Revenue Act of 1988.


Sec.  1.1374-10T  [Removed]

0
Par. 6. Section 1.1374-10T is removed.

    Approved: December 9, 2005.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-24283 Filed 12-20-05; 8:45 am]
BILLING CODE 4820-01-P 3