[Federal Register Volume 82, Number 11 (Wednesday, January 18, 2017)]
[Rules and Regulations]
[Pages 5387-5388]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00479]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9810]
RIN 1535-BN06


Certain Transfers of Property to Regulated Investment Companies 
[RICs] and Real Estate Investment Trusts [REITs]

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations effecting the repeal 
of the General Utilities doctrine by the Tax Reform Act of 1986. The 
final regulations address the length of time during which a RIC or a 
REIT may be subject to corporate level tax on certain dispositions of 
property. The final regulations affect RICs and REITs.

DATES: Effective Date: These regulations are effective January 18, 
2017.
    Applicability Dates: For dates of applicability, see Sec.  
1.337(d)-7(g)(2)(iii).

FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317-
5363 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1. On June 8, 
2016, the Department of the Treasury (Treasury Department) and the IRS 
published temporary regulations (TD 9770) under section 337(d) 
(temporary regulations) in the Federal Register (81 FR 36793) 
concerning certain transfers of property to regulated investment 
companies (RICs) and real estate investment trusts (REITs). A notice of 
proposed rulemaking cross-referencing the temporary regulations (REG-
126452-15) (proposed regulations) was published in the Federal Register 
(81 FR 36816) on the same day. A correction to the temporary 
regulations was published in the Federal Register (81 FR 41800) on June 
28, 2016. The Treasury Department and the IRS received one written 
comment in response to the proposed regulations. The comment requested 
a public hearing, and a hearing was held on November 9, 2016. After 
consideration of the written comment and the comments made at the 
public hearing, the proposed regulations are adopted in part and as 
amended by this Treasury decision, and the corresponding temporary 
regulations are removed in part. The revisions adopted by this Treasury 
decision are discussed below.

Summary of Comments and Explanation of Revisions

    The comment requested that the temporary regulations and the 
proposed regulations with respect to the recognition period be 
immediately withdrawn and the recognition period with respect to REITs 
be defined with reference to the recognition period of section 
1374(d)(7), which is currently a five-year period as a result of 
section 127(a) of the Protecting Americans Against Tax Hikes Act of 
2015 (PATH Act), enacted as Division Q of the Consolidated 
Appropriations Act, 2016, Public Law 114-113, 129 Stat. 2422. The 
comment asserted that the change to the length of the recognition 
period in the temporary regulations and the proposed regulations was 
inconsistent with Congress's intent in the PATH Act and with prior 
administrative guidance. On October 18, 2016, the Chairmen and Ranking 
Members of the Ways and Means Committee of the U.S. House of 
Representatives and the Finance Committee of the U.S. Senate addressed 
a letter to the Secretary of the Treasury stating that the recognition 
period in the temporary regulations and the proposed regulations was 
inconsistent with congressional intent and the longstanding practice of 
treating REITs and RICs as having the same built-in gain recognition 
period as S corporations, currently five years. The Chairmen and 
Ranking Members also asked that the temporary regulations and the 
proposed regulations be modified to provide that REITs, RICs and S 
corporations are all subject to the same five-year built-in gain 
recognition period in order to be consistent with congressional intent 
and longstanding practice.

[[Page 5388]]

    The Treasury Department and the IRS decline to withdraw the 
temporary regulations and the proposed regulations relating to the 
recognition period but agree with the comment relating to the length of 
the recognition period. Accordingly, these final regulations provide 
that the term recognition period means the recognition period described 
in section 1374(d)(7), beginning, in the case of a conversion 
transaction that is a qualification of a C corporation as a RIC or a 
REIT, on the first day of the RIC's or the REIT's first taxable year, 
and, in the case of other conversion transactions, on the day the RIC 
or the REIT acquires the property. The final regulations will apply 
prospectively from February 17, 2017, but taxpayers may choose to apply 
the definition of recognition period in the final regulations, instead 
of the 10-year recognition period in the temporary regulations, for 
conversion transactions occurring on or after August 8, 2016, and on or 
before February 17, 2017.
    The Treasury Department and the IRS continue to study the other 
issues addressed in the temporary regulations and the proposed 
regulations, including other issues raised by the comment, and welcome 
further comment on those issues.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented by Executive 
Order 13653. Therefore, a regulatory assessment is not required. 
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is 
hereby certified that this regulation will not have a significant 
economic impact on a substantial number of small entities. This 
certification is based on the fact that this regulation will primarily 
affect large corporations with a substantial number of shareholders. 
Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding this regulation was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business, and no comments were received.

Drafting Information

    The principal author of these regulations is Austin M. Diamond-
Jones, Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department 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

    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. Section 1.337(d)-7 is amended by revising paragraphs 
(b)(2)(iii) and (g)(2)(iii) to read as follows:


Sec.  1.337(d)-7   Tax on property owned by a C corporation that 
becomes property of a RIC or REIT.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Recognition period. For purposes of applying the rules of 
section 1374 and the regulations thereunder, as modified by paragraph 
(b) of this section, the term recognition period means the recognition 
period described in section 1374(d)(7), beginning--
    (A) In the case of a conversion transaction that is a qualification 
of a C corporation as a RIC or a REIT, on the first day of the RIC's or 
the REIT's first taxable year; and
    (B) In the case of other conversion transactions, on the day the 
RIC or the REIT acquires the property.
* * * * *
    (g) * * *
    (2) * * *
    (iii) Recognition period. Paragraphs (b)(1)(ii) and (d)(2)(iii) of 
this section apply to conversion transactions that occur on or after 
August 8, 2016. Paragraph (b)(2)(iii) of this section applies to 
conversion transactions that occur after February 17, 2017. For 
conversion transactions that occurred on or after August 8, 2016 and on 
or before February 17, 2017, see Sec.  1.337(d)-7T(b)(2)(iii) in effect 
on August 8, 2016. However, taxpayers may apply paragraph (b)(2)(iii) 
of this section to conversion transactions that occurred on or after 
August 8, 2016 and on or before February 17, 2017. For conversion 
transactions that occurred on or after January 2, 2002 and before 
August 8, 2016, see Sec.  1.337(d)-7 as contained in 26 CFR part 1 in 
effect on April 1, 2016.

0
Par. 3. Section 1.337(d)-7T is amended by revising paragraphs (b)(1) 
through (3) and (g)(2)(iii) to read as follows:


Sec.  1.337(d)-7T   Tax on property owned by a C corporation that 
becomes property of a RIC or REIT.

* * * * *
    (b)(1) through (3) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(b)(1) through (3).
* * * * *
    (g) * * *
    (2) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.337(d)-
7(g)(2)(iii).
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: December 30, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2017-00479 Filed 1-17-17; 8:45 am]
 BILLING CODE 4830-01-P