[Federal Register: June 27, 2003 (Volume 68, Number 124)]
[Rules and Regulations]
[Page 38177-38179]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn03-7]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9063]
RIN 1545-BB99
Distributions of Interests in a Loss Corporation From Qualified
Trusts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations under section 382
of the Internal Revenue Code of 1986. The temporary regulations affect
loss corporations and provide guidance on whether a loss corporation
has an ownership change where a qualified trust described in section
401(a) distributes an ownership interest in an entity. The text of
these temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section in this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective June 27, 2003.
Applicability Date: For dates of applicability see Sec. 1.382-
10T(a)(4).
FOR FURTHER INFORMATION CONTACT: Martin Huck (202) 622-7750 (not a toll
free call).
SUPPLEMENTARY INFORMATION:
Background
Section 382 in General
Section 382 limits the amount of taxable income that may be offset
by certain loss carryovers and recognized built-in losses following an
ownership change of a loss corporation. Section 382(g) defines an
ownership change as a change in the percentage of ownership of the loss
corporation's stock owned by the 5-percent shareholders of more than 50
percentage points (by value) over a 3-year period. Congress intended
the section 382 limitation to apply when new shareholders that did not
bear the economic burden of the losses acquire a controlling interest
in the loss corporation. See H.R. Rep. No. 99-426, 1986-3 C.B. (Vol. 2)
256; S. Rep. No. 99-313 1986-3 C.B. (Vol. 3) 232.
Constructive Ownership Rules
Section 382(l)(3) provides that in determining the ownership of
stock of a loss corporation, the constructive ownership rules of
section 318 apply, with certain exceptions. Section 382 (by reference
to the rules of section 318) and the regulations thereunder generally
attribute stock owned by an entity such as a corporation or a
partnership to its shareholders or partners, respectively. Therefore,
if a corporation makes a pro rata distribution of an interest in a loss
corporation to its shareholders, the distribution does not result in an
acquisition of that interest by the shareholders that must be taken
into account in determining whether the loss corporation has an
ownership change. On the other hand, section 382 and the regulations
thereunder do not attribute stock owned by a qualified trust described
in section 401(a) (qualified trust) to participants in the qualified
plan under which the trust is established. In particular, although
section 318(a)(2) provides for attribution of stock owned by a trust to
its beneficiaries, it excepts qualified trusts from the application of
this rule. Moreover, Sec. 1.382-2T(h)(2)(iii) provides that a
qualified trust is treated as an individual unrelated to any other
direct or indirect owner of the loss corporation. Accordingly, the
participants under a qualified plan are not treated as owning any
interest in a loss corporation owned by the trust. Therefore, if a
qualified trust owns directly 5 percent or more of a loss corporation,
a distribution of an interest in the loss corporation from the trust to
plan participants (or their beneficiaries) results in an acquisition of
that interest by the participants (or their beneficiaries) that must be
taken into account in determining whether the loss corporation has an
ownership change.
Explanation of Provisions
In General
Treasury and the IRS are concerned that, under the current rules, a
distribution of an ownership interest in an entity from a qualified
trust may cause an ownership change, even though that event may not
change the ultimate beneficial ownership of the loss corporation. To
prevent this result, these temporary regulations set forth new rules.
Distributions From Qualified Trusts
The temporary regulations provide that 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. Furthermore, the
distribution itself does not give rise to a testing date. Because the
rule applies only for testing dates on or after the date of the
distribution, a distribution does not retroactively cause (or undo) an
owner shift that would (or would not) have occurred if the distributee
had actually acquired the ownership interest on the date and in the
manner acquired by the qualified trust.
To determine 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. The loss corporation, however, must apply the same
method to all dispositions by the qualified trust.
Effective Dates
The temporary regulations apply to all distributions from qualified
trusts after June 27, 2003. The loss corporation may choose to apply
the rules retroactively in one of two ways: (1) To all distributions
from qualified trusts on or before June 27, 2003 and within a testing
period that includes June 27,
[[Page 38178]]
2003; or (2) to all distributions from qualified trusts after December
31, 1986. Retroactive application will affect a taxpayer's items of
income, gain, deduction, or loss only in open years.
Request for Comments and Future Regulations
Treasury and the IRS request 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, Treasury and the IRS have 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. Subject to certain exceptions, Sec. 1.382-
2T(h)(6)(ii) treats an individual, his spouse (other than a spouse who
is legally separated from the individual under a decree of divorce or
separate maintenance), his children, his grandchildren, and his parents
as one individual, and aggregates shares owned by those persons for
purposes of determining whether a loss corporation has an ownership
change. Treasury and the IRS are concerned that, under the current
rules, a change in the composition of a family may be interpreted to
cause an ownership change. Treasury and the IRS believe that, as in the
case of a distribution from a qualified trust, when a change in family
composition does not change the ultimate beneficial ownership of the
loss corporation, it should not be taken into account in determining
whether a loss corporation has an ownership change. For example, a
change in family composition that results from a marriage of two
individuals does not change the ultimate beneficial ownership of the
loss corporation and, therefore, should not cause an ownership change.
Accordingly, Treasury and the IRS intend to promulgate regulations to
address changes in family composition that result from marriage, birth,
adoption, divorce, death, or other events in which an individual joins
or leaves a family. It is anticipated that these regulations will be
electively retroactive on terms similar to those applicable to the
rules regarding distributions from a qualified trust.
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. These temporary
regulations provide relief to qualifying loss corporations that might
be affected by an unintended consequence of the operation of the
statute. The regulations relieve a restriction on the ability of
qualified trusts that distribute interests in a loss corporation
without causing an ownership change. In addition, it is necessary to
provide immediate guidance to taxpayers. Accordingly, good cause is
found for dispensing with prior notice and comment pursuant to 5 U.S.C.
553(b) and for dispensing with a delayed effective date pursuant to 5
U.S.C. 553(d). For applicability of the Regulatory Flexibility Act (5
U.S.C. chapter 6), see the notice of proposed rulemaking on this
subject in the Proposed Rules section in this issue of the Federal
Register. The IRS and Treasury request comments from small entities
that believe they might be adversely affected by these regulations.
Pursuant to section 7805(f) of the Code, these temporary regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact.
Drafting Information
The principal author of these regulations is Martin Huck, Office of
Associate Chief Counsel (Corporate). However, 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.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
Sec. 1.382-1 Table of contents.
* * * * *
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382-10T is also issued under 26 U.S.C. 382(m). * * *
0
Par. 2. Section 1.382-1 is amended by adding an entry in numerical
order to read as follows:
Sec. 1.382-10T Special rules for determining time and manner of
acquisition of an interest in a loss corporation (temporary).
* * * * *
0
Par. 3. Section 1.382.10T is added to read as follows:
Sec. 1.382-01 Special rules of determining time and maner of
acquisition of an interest in a loss corporation (temporary).
(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.
[[Page 38179]]
(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 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 date--(i) General rule. This section applies to all
distributions after June 27, 2003.
(ii) Retroactive application. Notwithstanding paragraph (a)(4)(i)
of this section, a loss corporation may apply the rules of this section
retroactively to:
(A) All distributions on or before June 27, 2003 that are within a
testing period that includes June 27, 2003; or
(B) All distributions after December 31, 1986.
(b) [Reserved]
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: June 18, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-16229 Filed 6-26-03; 8:45 am]
BILLING CODE 4830-01-P