[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Rules and Regulations]
[Pages 36676-36678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5676]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9269]
RIN 1545-BC00


Distributions of Interests in a Loss Corporation From Qualified 
Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations under section 382 of 
the Internal Revenue Code of 1986. The final regulations affect loss 
corporations and provide guidance on whether a loss corporation has an 
owner shift where a qualified trust described in section 401(a) 
distributes an ownership interest in an entity.

DATES: Effective Date: These regulations are effective June 23, 2006.
    Applicability Dates: For dates of applicability see Sec.  1.382-
10(a)(4).

FOR FURTHER INFORMATION CONTACT: Keith E. Stanley, (202) 622-7750, (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On June 27, 
2003, temporary regulations (TD 9063; 68 FR 38177) regarding whether a 
loss corporation has an owner shift where a qualified trust described 
in section 401(a) distributes an ownership interest in an entity were 
published in the Federal Register. A notice of proposed rule making 
(REG-108676-03) cross-referencing the temporary regulations was 
published in the Federal Register for the same day (68 FR 38247). The 
temporary regulations provided that--(1) 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, and (2) the 
distribution itself does not give rise to a testing date. They further 
provided that, in determining 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.

[[Page 36677]]

    The preamble of TD 9063 included background information and an 
explanation of provisions regarding the regulations. Also in the 
preamble, the IRS and Treasury Department requested 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, the IRS and Treasury Department indicated that 
they had 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. 
The IRS and Treasury Department expressed concern that, under the 
current rules, a change in the composition of a family might be 
interpreted in certain circumstances as shifting ownership even though 
there has been no change in the ultimate beneficial ownership of the 
loss corporation, as, for example, might occur when two individuals 
owning loss corporation stock get married.
    The IRS and Treasury Department further indicated that they were 
considering the promulgation of regulations to address such changes in 
family composition in a manner similar to that employed in the proposed 
regulations concerning qualified trusts. The IRS and Treasury 
Department will continue to study whether to issue regulations under 
section 382 concerning shifts in ownership resulting from certain 
changes in family composition.
    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. Pursuant to 5 U.S.C. 553(d)(3), 
it has been determined that good cause exists to dispense with a 
delayed effective date on grounds that this regulation, which is 
substantively identical to currently effective temporary regulations 
and relieves a restriction on affected qualified trusts, merely 
continues to provide necessary guidance to taxpayers with respect to 
whether a loss corporation has an ownership change where a qualified 
trust described in section 401(a) distributes an ownership interest in 
an entity. It is hereby certified that these regulations will not have 
a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the regulations 
provide relief to qualifying loss corporations that might be affected 
by an unintended consequence of the operation of the statute. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, 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 Keith E. Stanley of 
the Office of Associate Chief Counsel (Corporate). 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.

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 1.382-10 also issued under 26 U.S.C 382(m). * * *


0
Par. 2. Section 1.382-1 is amended by removing the entry for Sec.  
1.382-10T and revising the entry for Sec.  1.382-10 to read as follows:


Sec.  1.382-1  Table of contents.

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

0
Par. 3. Section 1.382-10 is added to read as follows:


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

    (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.
    (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

[[Page 36678]]

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 dates. This section applies to all distributions 
after June 23, 2006. For distributions on or before June 23, 2006, see 
Sec.  1.382-10T as contained in 26 CFR part 1, revised April 1, 2006.
    (b) [Reserved]


Sec.  1.382-10T  [Removed]

0
Par. 4. Section 1.382-10T is removed.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: June 20, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 06-5676 Filed 6-23-06; 9:48 am]
BILLING CODE 4820-01-P