[Federal Register Volume 75, Number 115 (Wednesday, June 16, 2010)]
[Rules and Regulations]
[Pages 33990-33992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14431]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9487]
RIN 1545-BG03


Built-in Gains and Losses Under Section 382(h)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations that apply to loss 
corporations that have undergone an ownership change within the meaning 
of section 382. These regulations provide guidance regarding the 
treatment of prepaid income under the built-in gain provisions of 
section 382(h).

DATES: Effective Date: These regulations are effective on June 11, 
2010.
    Applicability Date: For dates of applicability see Sec.  1.382-
7(b).

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 14, 
2007, temporary regulations (TD 9330; 72 FR 32792) regarding the 
treatment of prepaid income under the built-in gain provisions of 
section 382(h) were published in the Federal Register. A notice of 
proposed rulemaking (NPRM) (REG-144540-06) cross-referencing to 
temporary regulations was published in the Federal Register for the 
same day (72 FR 32828). The temporary regulations provided that prepaid 
income is not recognized built-in gain (``RBIG'') for purposes of 
section 382(h). They further provided that prepaid income means any 
amount received prior to the change date that is attributable to 
performance occurring on or after the change date. Examples of prepaid 
income include, but are not limited to, income received prior to the 
change date that is deferred until the five year section 382 
recognition period under section 455, Sec.  1.451-5, or Rev. Proc. 
2004-34 (2004-1 CB 991 (June 1, 2004)) (or any successor revenue 
procedure) (see Sec.  601.601(d)(2)(ii)(b)). These prepaid income 
provisions permit deferral in order to better match the taxpayer's 
income with the expenses incurred to earn that income and, as a result, 
to more clearly reflect the taxpayer's income both in the year of 
receipt and in the year of performance. The IRS and the Treasury 
Department therefore view such income to be properly attributable to 
the period when included in gross income, which may be within the 
recognition period. Accordingly, such income is not ``attributable to 
periods before the change date'' and so is not RBIG under section 
382(h)(6)(A).
    One comment was received and no public hearing was requested or 
held. The public comment focused on companies in the business of 
providing extended warranty coverage for automobiles or other products. 
The commenter presented an example under the facts of which the 
commenter argued that a portion of the prepaid income deferred to the 
recognition period should be treated as RBIG.
    After giving consideration to the comment, the IRS and Treasury 
continue to believe that none of the prepaid income taken into account 
during the recognition period in the example should be RBIG. As noted 
above, where prepaid income is properly deferred from gross income 
under a permissible method of accounting, such deferral reflects a 
judgment that the income has not been earned, or, in the parlance of 
section 382(h)(6)(A), is not ``attributable to'' prior performance. The 
premise of this Treasury decision is that, for purposes of section 382, 
there is not a compelling policy underlying section 382(h) that 
warrants a different timing answer for the treatment of properly 
deferred prepaid income.
    Accordingly, the proposed regulations set forth in the NPRM (REG-
144540-06), which cross-referenced to the temporary regulations for 
their substance, 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, 
merely continues to provide necessary guidance to taxpayers with 
respect to the treatment of prepaid income under the built-in gain 
provisions of section 382(h). It is hereby certified that these 
regulations will not have a significant economic impact on a 
substantial number of small entities. These regulations only apply in 
the rare circumstance in which a qualifying loss corporation that uses 
a particular accounting method undergoes an ownership change. 
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 Internal Revenue 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.

[[Page 33991]]

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 the 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 1.382-7 also issued under 26 U.S.C 382(m). * * *



0
Par. 2. Section 1.382-1T is added to read as follows:


Sec.  1.382-1T   Table of contents (temporary).

    This section lists the captions that appear in the regulations for 
Sec.  1.382-2T.


1.382-2T   Definition of ownership change under section 382, as amended 
by the Tax Reform Act of 1986 (temporary).

    (a) Ownership change. (1) In general.
    (2) Events requiring a determination of whether an ownership change 
has occurred.
    (i) Testing dates prior to November 5, 1992.
    (ii) [Reserved]
    (iii) Records to be maintained by loss corporation.
    (b) Nomenclature and assumptions.
    (c) Computing the amount of increases in percentage ownership. (1) 
In general.
    (2) Example.
    (3) Related and unrelated increases in percentage stock ownership.
    (4) Example.
    (d) Testing period. (1) In general.
    (2) Effect of a prior ownership change.
    (3) Commencement of the testing period.
    (i) In general.
    (ii) Exception for corporations with net unrealized built-in loss.
    (4) Disregarding testing dates.
    (5) Example.
    (e) Owner shift and equity structure shift.
    (1) Owner shift.
    (i) Defined.
    (ii) Transactions between persons who are not 5-percent 
shareholders disregarded.
    (iii) Examples.
    (2) Equity structure shift.
    (i) Tax-free reorganizations.
    (ii) Transactions designated under section 382(g)(3)(B) treated as 
equity structure shifts.
    (iii) Overlap of owner shift and equity structure shift.
    (iv) Examples.
    (f) Definitions. (1) Loss corporation.
    (2) Old loss corporation.
    (3) New loss corporation.
    (4) Successor corporation.
    (5) Predecessor corporation.
    (6) Shift.
    (7) Entity.
    (8) Direct ownership interest.
    (9) First tier entity.
    (10) 5-percent owner.
    (11) Public shareholder.
    (12) Public owner.
    (13) Public group.
    (14) Higher tier entity.
    (15) Indirect ownership interest.
    (16) Highest tier entity.
    (17) Next lower tier entity.
    (18) Stock.
    (i) In general.
    (ii) Treating stock as not stock.
    (iii) Treating interests not constituting stock as stock.
    (iv) Stock of the loss corporation.
    (19) Change date.
    (20) Year.
    (21) Old section 382.
    (22) Pre-change loss.
    (23) Unrelated.
    (24) Percentage ownership interest.
    (g) 5-percent shareholder. (1) In general.
    (2) Determination of whether a person is a 5-percent shareholder.
    (3) Determination of the percentage stock ownership interest of a 
5-percent shareholder.
    (4) Examples.
    (5) Stock ownership presumptions in connection with certain 
acquisitions and dispositions of loss corporation stock.
    (i) In general.
    (ii) Example.
    (h) Constructive ownership of stock.
    (1) In general.
    (2) Attribution from corporations, partnerships, estates and 
trusts.
    (i) In general.
    (ii) Limitation on attribution from entities with respect to 
certain interests.
    (iii) Limitation on attribution from certain entities.
    (iv) Examples.
    (3) Attribution to corporations, partnerships, estates and trusts.
    (4) Option attribution.
    (i) In general.
    (ii) Examples.
    (iii) Contingencies.
    (iv) Series of options.
    (v) Interests that are similar to options.
    (vi) Actual exercise of options.
    (A) In general.
    (B) Actual exercise within 120 days of deemed exercise.
    (vii) Effect of deemed exercise of options on the outstanding stock 
of the loss corporation.
    (A) Right of obligation to issue stock.
    (B) Right or obligation to acquire outstanding stock by the loss 
corporation.
    (C) Effect on value of old loss corporation.
    (viii) Options that lapse or are forfeited.
    (ix) Option rule inapplicable if pre-change losses are de minimis.
    (x) Options not subject to attribution
    (A) Long-held options with respect to actively traded stock.
    (B) Right to receive or obligation to issue a fixed dollar amount 
of value of stock upon maturity of certain debt.
    (C) Right or obligation to redeem stock of the loss corporation.
    (D) Options exercisable only upon death, disability or mental 
incompetency.
    (E) Right to receive or obligation to issue stock as interest or 
dividends.
    (F) Options outstanding following an ownership change.
    (1) In general.
    (2) Example.
    (G) Right to acquire loss corporation stock pursuant to a default 
under loan agreement.
    (H) Agreement to acquire or sell stock owned by certain 
shareholders upon retirement.
    (I) [Reserved]
    (J) Title 11 of similar case.
    (K)-(Y) [Reserved]
    (xi) Certain transfers of options disregarded.
    (xii) Exercise of an option that has not been treated as stock.
    (xiii) Effective date.
    (5) Stock transferred under certain agreements.
    (6) Family attribution.
    (i) [Reserved]
    (j) Aggregation and segregation rules.
    (1) Aggregation of public shareholders and public owners into 
public groups.
    (i) Public group.
    (ii) Treatment of public group that is a 5-percent shareholder.
    (iii) Presumption of no cross-ownership.
    (iv) Identification of the public groups treated as 5-percent 
shareholders.
    (A) Analysis of highest tier entities.
    (B) Analysis of other higher tier entities and first tier entities.
    (C) Aggregation of the public shareholders.

[[Page 33992]]

    (v) Appropriate adjustments.
    (vi) Examples.
    (2) Segregation rules applicable to transactions involving the loss 
corporation.
    (i) In general.
    (ii) Direct public group.
    (iii) Transactions to which segregation rules apply.
    (A) In general.
    (B) Certain equity structure shifts and transactions to which 
section 1032 applies.
    (1 ) In general.
    (2 ) Examples.
    (C) Redemption-type transactions.
    (1 ) In general.
    (2 ) Examples.
    (D) Acquisition of loss corporation stock as the result of the 
ownership of a right to acquire stock.
    (1) In general.
    (2) Example.
    (E) Transactions identified in the Internal Revenue Bulletin.
    (F) Issuance of rights to acquire loss corporation stock.
    (1) In general.
    (2 ) Example.
    (iv) Combination of de minimis public groups.
    (A) In general.
    (B) Example.
    (v) Multiple transactions.
    (A) In general.
    (B) Example.
    (vi) Acquisitions made by either a 5-percent shareholder or the 
loss corporation following application of the segregation rules.
    (3) Segregation rules applicable to transactions involving first 
tier entities or higher tier entities.
    (i) Dispositions.
    (ii) Example.
    (iii) Other transactions affecting direct public groups of a first 
tier entity or higher tier entity.
    (iv) Examples.
    (v) Acquisitions made by a 5-percent shareholder, a higher tier 
entity, or a first tier entity following application of the segregation 
rules.
    (k) Operating rules. (1) Presumptions regarding stock ownership.
    (i) Stock subject to regulation by the Securities and Exchange 
Commission.
    (ii) Statements under penalties of perjury.
    (2) Actual knowledge regarding stock ownership.
    (3) Duty to inquire as to actual stock ownership in the loss 
corporation.
    (4) Ownership interests structured to avoid the section 382 
limitation.
    (5) Example.
    (6) First tier entity or higher tier entity that is a foreign 
corporation or entity. [Reserved.]
    (l) Changes in percentage ownership which are attributable to 
fluctuations in value. [Reserved]
    (m) Effective date. (1) In general.
    (2) Plan of reorganization.
    (3) Earliest commencement of the testing period.
    (4) Transitional rules.
    (i) Rules provided in paragraph (j) of this section for testing 
dates before September 4, 1987.
    (ii) Example.
    (iii) Rules provided in paragraph (j) of this section for testing 
dates on or after September 4, 1987.
    (iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this 
section.
    (v) Rules provided in paragraph (a)(2)(ii) of this section.
    (vi) Rules provided in paragraph (h)(4) of this section.
    (vii) Rules provided in paragraph (a)(2)(i) of this section.
    (5) Bankruptcy proceedings.
    (i) In general.
    (ii) Example.
    (6) Transactions of domestic building and loan associations.
    (7) Transactions not subject to section 382.
    (i) Application of old section 382.
    (ii) Effect on testing period.
    (iii) Termination of old section 382. [Reserved]
    (8) Options issued or transferred before January 1, 1987.
    (i) Options issued before May 6, 1986.
    (ii) Options issued on or after May 6, 1986 and before September 
18, 1986.
    (iii) Options issued on or after September 18, 1986 and before 
January 1, 1987.
    (9) Examples.

0
Par. 3. Section 1.382-1 is amended by:
0
1. Revising the introductory text.
0
2. Removing the entry for Sec.  1.382-1T.
0
3. Removing the entries for Sec.  1.382-2T.
0
4. Adding the entries for Sec.  1.382-7.
    The revisions and the additions read as follows:


Sec.  1.382-1   Table of contents.

    This section lists the captions that appear in the regulations for 
Sec. Sec.  1.382-2 through 1.382-11.
* * * * *


Sec.  1.382-7  Built-in gains and losses.

    (a) Treatment of prepaid income.
    (b) Effective/applicability dates.
* * * * *

0
Par. 4. Section 1.382-7 is added to read as follows:


Sec.  1.382-7  Built-in gains and losses.

    (a) Treatment of prepaid income. For purposes of section 382(h), 
prepaid income is not recognized built-in gain. The term prepaid income 
means any amount received prior to the change date that is attributable 
to performance occurring on or after the change date. Examples to which 
this paragraph (a) will apply include, but are not limited to, income 
received prior to the change date that is deferred under section 455, 
Sec.  1.451-5, or Rev. Proc. 2004-34 (2004-1 CB 991 (June 1, 2004)) (or 
any successor revenue procedure) (see Sec.  601.601(d)(2)(ii)(b)).
    (b) Effective/applicability dates. This section applies to loss 
corporations that have undergone an ownership change on or after June 
11, 2010. For loss corporations that have undergone an ownership change 
before June 11, 2010, see Sec.  1.382-7T as contained in 26 CFR part 1, 
revised April 1, 2009.


Sec.  1.382-7T  [Removed]

0
Par. 5. Section 1.382-7T is removed.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
    Approved: June 8, 2010.

Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-14431 Filed 6-11-10; 4:15 pm]
BILLING CODE 4820-01-P