26 CFR 1.338-6T Treatment of gain or loss on deemed sale of affected
target stock (temporary).
(a) Scope. This section prescribes rules relating to the treatment
of gain or loss realized by a target on the deemed sale of stock of an
affected target where an election under section 338(g) (but not an
election under section 338(h)(10)) is made with respect to the affected
target.
(b) Definitions and nomenclature -- (1) In general. The definitions
and nonmenclature in 1.338-1T, 1.338-4T (as modified by 1.338-5T(b))
and 1.338-5T also apply to this section.
(2) 1.338-6T shareholder. A 1,338-6T shareholder is a target that
directly owns stock in an affected target that meets the requirements of
section 1504(a)(2). A 1.338-6T shareholder is also a target that
directly owns stock in an affected target if both the target and
affected target are members of a consolidated group filing a final
consolidated return described in 1.338-1T(f)(2)(ii).
(c) General Rule -- (1) Deemed sale of affected target by a 1.338-6T
shareholder. Except as provided in paragraph (d) of this section, if an
express or deemed election under section 338 is made with respect to the
qualified stock purchase of a target, no gain or loss is recognized by
the target on the deemed sale of stock of an affected target with
respect to which the target is a 1.338-6T shareholder.
(2) Examples. The provisions of this paragraph (c) are illustrated
by the following examples:
Example 1. P purchases in a single transaction all of the
outstanding stock of DT. DT's sole asset consists of all of the
outstanding stock of DT1. The stock of DT1 has a basis of $50 and a
fair market value of $150. DT1's assets have a basis of $50 and a fair
market value of $150. P makes an express section 338 election with
respect to DT. Under 1.338-4T(c)(3) Q and A1, old DT is deemed to sell
all of DT's assets (the DT1 stock), resulting in old DT's realizing gain
of $100. New DT is deemed to purchase those assets, and its deemed
purchase of all the DT1 stock constitutes a qualified stock purchase of
DT1 stock. The express election for DT causes a deemed election for DT1
under section 338(f)(1) of the Code, because purchases by members of the
same affiliated group (here P and new DT) are treated as if made by one
corporation under section 338(h)(8). Because DT is a 1.338-6T
shareholder of affected target DT1, DT's $100 of gain on the deemed sale
of DT1 stock is not recognized. However, DT1 recognizes gain of $100 on
the deemed sale of its assets.
Example 2. DT owns all of the outstanding stock of DT1 and DT2. DT1
and DT2 each directly own 50 percent of the vote and value of DT3 stock.
DT is the common parent of a consolidated group and the group's final
return is a consolidated return. See 1.338-1T(f)(2)(ii). DT is a
1.338-6T shareholder of affected targets DT1 and DT2. Even though
neither DT1 nor DT2 directly owns an amount of stock meeting the
requirements of section 1504(a)(2), because DT1, DT2 and DT3 are members
of DT's consolidated group, DT1 and DT2 are 1.338-6T shareholders of
DT3. Therefore, no gain or loss is recognized by DT, DT1 or DT2 on the
respective deemed sales of affected target stock by each of the
corporations.
(d) Situations in which gain or loss is recognized -- (1) In general.
Nothwithstanding paragraph (c) of this section, gain or loss is
recognized to the extent provided in this paragraph (d).
(2) Deemed sale of foreign affected target by a domestic target.
Gain or loss is recognized by a domestic target on the deemed sale of
stock in a foreign affected target but for the filing of a regular
exclusion election under 1.338-5T(c)(2)). For the proper treatment of
such gain or loss, see e.g., sections 1246, 1248, 1291 et seq., and
338(h)(16) and 1.338-5T.
(3) Deemed sale producing effectively connected income. Gain or loss
is recognized by a foreign target on the deemed sale of the stock of a
foreign affected target to the extent that such gain or loss is
effectivley connected (or treated as effectively connected) with the
conduct of a trade or business in the United States.
(4) Deemed sale of insurance company affected target electing under
section 953(d). Gain (but not loss) is recognized by a domestic target
on the deemed sale of the stock of an affected target that has in effect
an election under section 953(d) in an amount equal to the lesser of the
gain realized or the earnings and profits described in section
953(d)(4)(B).
(5) Deemed sale of DISC affected target. Gain (but not loss) is
recognized by a foreign or domestic target on the deemed sale of the
stock of an affected target that is a DISC or a former DISC (as defined
in section 992 (a)) in an amount equal to the lesser of the gain
realized or the amount of accumulated DISC income determined with
respect to such stock under section 995(c). Such gain will be included
in gross income as a dividend as provided in sections 995(c)(2) and
996(g).
(6) Anti-stuffing rule. If an asset the adjusted basis of which
exceeds its fair market value is contributed or transferred to an
affected target as transferred basis property (within the meaning of
section 7701(a)(43)) and a purpose of such transaction is to reduce the
gain (or incease the loss) recognized on the deemed sale of such
affected target's stock, the gain or loss recognized under this
paragraph (d) will be determined as if such asset had not been
contributed or transferred.
(7) Example. The provisions of this paragraph (d) are illustrated by
the following example:
Example. (i) P purchases in a single transaction all of the
outstanding stock of DT. DT's sole asset consists of all of the
outstanding stock of FT1. FT1's sole asset consists of all of the
outstanding stock of FT2. The stock of FT1 has a basis of $25 and a
fair market value of $150. The stock of FT2 has a basis of $75 and a
fair market value of $150. FT1 and FT2 each have $50 of accumulated
earnings and profits for purposes of section 1248 (c) and (d). FT2's
assets have a basis of $125 and a fair market value of $150, and their
sale would not generate subpart F income under section 951. The sale of
the stock of FT2 or of FT2's assets would not generate income
effectively connected with the conduct of a trade or business within the
United States. FT1 does not have an election in effect under section
953(d) and neither FT1 nor FT2 is a passive foreign investment company.
(ii) P makes an express section 338 election with respect to DT,
which triggers a deemed sale of old DT's assets (the FT1 stock). New
DT's deemed purchase of all of the FT1 stock constitutes a qualified
stock purchase of the FT1 stock. No regular exclusion election for FT1
and FT2 is filed under 1.338-5T(c)(2). The express election for DT
causes a deemed election for FT1 under section 338(f)(1), because
purchases by members of the same affiliated group (here P and new DT)
are treated as if made by one corporation under section 338(h)(8). See
1.338-4T(c)(3) Q and A 1. The deemed election for FT1, in turn,
triggers a deemed sale of FT1's asset (the stock of FT2) and a deemed
election for FT2 (and deemed sale of FT2's assets), for the reasons
described above with respect to FT1.
(iii) DT recognizes $125 of gain on the deemed sale of the FT1 stock
under paragraph (d)(2) of this section. FT1's $75 of gain on the deemed
sale of the FT2 stock is not recognized under paragraph (c) of this
section. FT2 recognizes $25 of gain on the deemed sale of its assets.
The $125 gain DT recognizes on the deemed sale of the FT1 stock is
included in the income of DT as a dividend in its entirety under the
rules of section 1248, because FT1 and FT2 have sufficient accumulated
and deemed sale earnings and profits for full recharacterization ($50 of
accumulated earnings and profits in FT1, $50 of accumulated earnings and
profits in FT2, and $25 of deemed sale earnings and profits in FT2).
1.338-5T(g). For purposes of sections 901 through 908 of the Code, the
source and foreign tax credit limitation basket of $25 of the
recharacterized gain on the deemed sale of the FT1 stock will be
determined under section 338(h)(16).
(e) Effective date -- (1) In general. This section applies to any
qualified stock purchase for which a section 338 election is made (or
deemed to have been made) on or after March 14, 1991.
(2) Elective application of this section to prior section 338
elections. If an express or deemed election under section 338 was made
before March 14, 1991, for a qualified stock purchase for which the
acquisition date is after December 31, 1986, the purchasing corporation
may elect, to the extent the amendments made by section 631 of the Tax
Reform Act of 1986 apply to such qualified stock purchase, to have this
section apply to such qualified stock purchase by filing an irrevocable
transitional 1.338-6T election in accordance with the procedural rules
in paragraph (g) of this section. Any election made pursuant to this
paragraph will apply to the qualified stock purchase of the target and
all affected targets for which the acquisition date is after December
31, 1986, to the extent the amendments made by section 631 of the Tax
Reform Act of 1986 apply to such qualified stock purchase.
(f) Transitional rules with respect to other elections under section
338 -- (1) In general. This paragraph (f) applies to any qualified
stock purchase for which the acquisition date is after December 31,
1986, to the extent the amendments made by section 631 of the Tax Reform
Act of 1986 apply to such qualified stock purchase.
(2) Extension of time to make an election. Notwithstanding
1.338-1T(c)(1), if neither a section 338(g) election nor a protective
carryover election under 1.338-4T(f)(6) has been made for a qualified
stock purchase and the last date for making either election (without
regard to this sentence) is on or after March 14, 1991, the last day for
making either election will not be earlier then July 12, 1991.
(3) Revocation of certain regular exclusion elections.
Notwithstanding 1.338-5T(c)(2)(v)(A), if a regular exclusion election
under 1.338-5T(c)(2) is made before May 13, 1991, in connection with a
qualified stock purchase, the purchasing corporation may revoke the
regular exclusion election if the purchasing corporation obtains the
consent of the Commissioner.
(4) Revocation of certain protective carryover elections.
Notwithstanding 1.338-4T(f)(6)(i)(A), if a protective carryover
election is made before May 13, 1991, for a qualified stock purchase,
the purchasing corporation may revoke the protective carryover election
and make a simultaneous section 338(g) election if the purchasing
corporation obtains the consent of the Commissioner.
(5) Other qualified stock purchases. If a section 338(g) election
was not made for qualified stock purchase and the last date for making
the election was before March 14, 1991, the purchasing corporation may
make a section 338(g) election for the qualified stock purchase if the
purchasing corporation obtains the consent of the Commissioner.
(6) Consent. The consent required in paragraphs (f) (3), (4) and (5)
of this section will be granted in the discretion of the Commissioner.
Consent will be granted only if the purchasing corporation establishes
to the satisfaction of the Commissioner --
(i) That a regular exclusion election was made or a section 338(g)
election was not made, in either case, primarily because of a concern
about miltiple taxation affecting the buyer or the seller, and
(ii) That application of this section would provide relief from such
multiple taxation.
If consent is granted, this section, including procedural rules
similar to those provided in paragraph (g) of this section, will apply.
A section 338(h)(10) election will not be allowed in connection with any
election under section 338(g) for which consent is granted. Consent
should be applied for in the same manner as an advance ruling from the
Internal Revenue Service, not later than July 12, 1991.
(g) Procedural rules. A transitional 1.338-6T election must --
(1) Contain the name, address, and employer identification number of
the purchasing corporation;
(2) Contain the name, address, and employer identification number of
the original target;
(3) Be filed on or before July 12, 1991;
(4) Be filed where the section 338(g) election was originally filed;
(5) Have attached to it a copy of the previously filed section 338(g)
election, but schedules of information, supplemental statements, and
corrective statements described in 1.338-1T(e)(1) need not be attached;
(6) State that ''this transitional 1.338-6T election is made
pursuant to 1.338-6T'';
(7) Include a list that sets forth each affected target and its
employer identification number, and indicates each original or affected
target that is a 1.338-6T shareholder. The list must indicate for each
affected taxable year (as defined in 1.338-1T(m)(12) whether each such
corporation is required to file amended return(s) and the place of such
filing or (if applicable) whether an amended consolidated return or
combined deemed sale return (see section 338(h)(15) and 1.338-4T(k)(6))
must be filed;
(8) Include a declaration that ''taxpayer agrees to extend the
statute of limitations on assessment for two years from the date of the
filing of this transitional 1.338-6T election, to the extent the period
of limitations would otherwise expire earlier, for any taxable year
affected (within the meaning of 1.338-1T(m)(12)) by the filing of this
election'';
(9) Include a declaration that either ''amended return(s) will be
timely filed by or for each target (including any affected target) for
all affected taxable years, as defined in 1.338-1T(m)(12), unless such
requirement is waived in writing by the District Director or his
delegate'' or ''the original returns are consistent with the provisions
of 1.338-6T''; and
(10) Be signed by a person who states under penalties of perjury that
he or she is authorized to make the transitional 1.338-6T election on
behalf of the purchasing corporation.
(T.D. 8339, 56 FR 11095, March 15, 1991)
26 CFR 1.338(b)-1T Adjusted grossed-up basis (temporary).
(a) Scope. This section provides rules under section 338(b) to
determine the adjusted grossed-up basis of a target for which a section
338 election is made. Adjusted grossed-up basis is allocated among the
assets of target in accordance with 1.338(b)-2T to determine the price
at which the assets of the target are deemed to have been purchased.
Subsequent adjustments to grossed-up basis and the allocation of such
adjustments to target's assets may be made under 1.338(b)-3T. This
section does not apply to transactions to which section 224(d)(5) of the
Tax Equity and Fiscal Responsibility Act of 1982 (as added by section
306(a)(8)(B)(i) of the Technical Corrections Act of 1982) applies. For
rules relating to such transactions, see 1.338-2T.
(b) Nomenclature and definitions -- (1) Nomenclature. The
nomenclature set out in 1.338-4T(b)(1) also applies to this section.
(2) Definitions -- (i) In general. The definitions in section 338
and 1.338-1T and 1.338-4T also apply to this section.
(ii) Adjustment events. ''Adjustment events'' are increases (or
decreases) in the consideration paid for recently or nonrecently
purchased stock, reductions in target's liabilities included in adjusted
grossed-up basis as of the beginning of the day after the acquisition
date, and old target liabilities that become fixed and determinable.
(c) General rule -- (1) Adjusted grossed-up basis. ''Adjusted
grossed-up basis'' is the sum of (i) the grossed-up basis of recently
purchased stock (as defined in paragraph (d) of this section), (ii) the
basis of nonrecently purchased stock (as defined in paragraph (e) of
this section), (iii) the liabilities of target (as defined in paragraph
(f) of this section), and (iv) other relevant items (as defined in
paragraph (g) of this section).
(2) Time when adjusted grossed-up basis determined. Adjusted
grossed-up basis is initially determined at the beginning of the day
after the acquisition date of target. However, adjustment events that
occur during new target's first taxable year are taken into account for
purposes of determining adjusted grossed-up basis and basis of target's
assets as if they had occurred at the beginning of the day after the
acquisition date.
(d) Grossed-up basis of recently purchased stock -- (1) In general.
The term ''grossed-up basis of recently purchased stock'' means the
product of (i) the basis of the recently purchased stock at the
beginning of the day after the acquisition date, multiplied by (ii) the
fraction set forth in section 338(b)(4). For further detail, see
1.338-4T(j)(2) Answer 1 (ii).
(2) Target subsidiary. If a target (T) owns stock in an affected
target (T1), the grossed-up basis of the recently purchased T1 stock is
the product of --
(i) The basis of the T1 stock in the hands of T as of the beginning
of the day after T's acquisition date, multiplied by
(ii) The fraction set forth in section 338(b)(4).
Thus, for example, if T is deemed to purchase 80 percent (by value)
of T1's stock by reason of section 338(h)(3)(B), the grossed-up basis of
recently purchased T1 stock is determined by multiplying 100/80 times
the amount of adjusted grossed-up basis of T's stock allocated to T1's
stock under 1.338(b)-2T. See also 1.338-4T(j)(2) Answer 6.
(e) Basis of nonrecently purchased stock. In the absence of an
election under section 338(b)(3) (''gain recognition election''), the
basis of nonrecently purchased stock is the historic basis in that
stock. See 1.338-4T(j)(2) for rules relating to the gain recognition
election.
(f) Liabilities of target -- (1) In general. The liabilities of
target include its liabilities (and the liabilities to which the
target's assets are subject) as of the beginning of the day after the
acquisition date (other than liabilities that were neither liabilities
of old target nor liabilities to which old target's assets were
subject). Unless an election is made under section 338(h)(10),
liabilities of target also include income tax liabilities resulting from
the deemed sale of its assets under section 338(a)(1).
(2) Excluded obligations -- (i) In general. In order to be included
in adjusted grossed-up basis at the beginning of the day after the
acquisition date, an obligation must be a bona fide liability of target
as of that date which is properly includible in basis under principles
of tax law that would apply if new target had acquired old target's
assets from an unrelated person and, as part of the transaction, had
assumed or taken property subject to the obligation. Thus, for example,
if, as of the beginning of the day after the acquisition date, the
amount of a contingent or speculative obligation of target is not
properly includible in basis under the preceding sentence, the
obligation is not initially included in adjusted grossed-up basis.
(ii) Time when excluded obligations taken into account. Obligations
that, under this subparagraph (2), are initially excluded from adjusted
grossed-up basis, shall be taken into account in redetermining adjusted
grossed-up basis and the basis of target's assets under principles of
tax law that would apply if new target had acquired old target's assets
directly from an unrelated person and, as part of the transaction, had
assumed or taken property subject to those obligations. For the
application of these principles of tax law to certain contingent
liabilities that are initially excluded from adjusted grossed-up basis
under this subparagraph (2), see 1.338(b)-3T.
(3) Liabilities taken into account in determining amount realized on
subsequent disposition. In determining the amount realized on a
subsequent sale or other disposition of property deemed purchased by new
target, the entire amount of any liability included in adjusted
grossed-up basis is considered to be an amount taken into account in
determining new target's basis in property which secures such liability
for purposes of applying 1.1001-2(a). Thus, if a liability is included
in adjusted grossed-up basis, 1.1001-2(a)(3) shall not prevent the
amount of such liability from being treated as discharged within the
meaning of 1.1001-2(a)(4) as a result of new target's sale or
disposition of the property which secures such liability.
(g) Other relevant items -- (1) In general. Adjusted grossed-up
basis may be increased (or decreased) for ''other relevant items.'' For
this purpose, other relevant items may only arise from adjustment events
that occur after the close of new target's first taxable year and
adjustments under paragraph (g)(3) of this section. See 1.338(b)-3T
(relating to the treatment of certain subsequent adjustments to adjusted
grossed-up basis).
(2) Flow-through of relevant item adjustment to target subsidiary.
If the amount of adjusted grossed-up basis of a target (T) allocated to
the stock of an affected target (T1) is subsequently increased (or
decreased) by reason of an other relevant item under this paragraph (g),
the grossed-up basis of the T1 stock (and T1's adjusted grossed-up
basis) is then also increased (or decreased) as if the increase (or
decrease) in the basis of the stock was an adjustment to the purchase
price deemed paid by T for such stock. The resulting increase (or
decrease) in adjusted grossed-up basis of T1 is then allocated among
T1's assets in accordance with 1.338(b)-2T and 1.338(b)-3T.
(3) Adjustments by the Internal Revenue Service -- (i) In general.
In connection with the examination of a return, the District Director
may increase (or decrease) adjusted grossed-up basis for items other
than those described in paragraph (g) (1) and (2) of this section under
the authority of section 338(b)(2) and allocate such amounts to target's
assets under the authority of section 338(b)(5) so that adjusted
gross-up basis and the basis of target's assets properly reflect the
cost to the purchasing corporation of its interest in target's assets.
Such items may include distributions from target to the purchasing
corporation, capital contributions from the purchasing corporation to
target during the 12-month acquisition period, or acquisitions of target
stock by purchasing corporation after the acquisition date from minority
shareholders at an average price lower than the average cost of recently
purchased stock. In determining whether an adjustment is appropriate
when stock is purchased after the acquisition date from minority
shareholders at a price lower than the cost of recently purchased stock,
the District Director will take into account all the facts and
circumstances of the particular case. Relevant facts and circumstances
may include the amount of the price differential and the reason
therefor, the number of shares purchased after the acquisition date, the
timing of the purchase, and the source of the additional shares.
(ii) Examples. The principles of this subparagraph (3) may be
illustrated by the following examples:
Example (1). (i) On January 1, 1988, P purchases one-third of the
sole class of outstanding stock of T for $300,000. T has no
liabilities. On March 1, 1988, T distributes a dividend to all its
shareholders consisting of property with a fair market value of $210,000
of which P receives $70,000. On April 15, 1988, P purchases the
remaining T stock for $480,000 and makes an express election for T.
(ii) In appropriate circumstances, the District Director may decrease
the adjusted grossed-up basis (''AGUB'') of T by $59,500 (the nontaxed
portion of the dividend, as defined in section 1059(b)) in order to
properly reflect the cost to P of its interest in T's assets which P is
deemed to have purchased.
Example (2). (i) T's sole asset is a building worth $100,000. It
has no liabilities. T has 100 shares of a single class of stock
outstanding. On August 1, 1988, P purchases 10 shares of T stock for
$8,000. On June 1, 1989, P purchases 50 shares of T stock for $50,000.
On June 14, 1989, P contributes a tract of land to the capital of T and
receives 10 additional shares of T stock as a result of the
contribution. Both the basis and fair market value of the land at that
time are $10,800. On June 30, 1989, P purchases the remaining 40 shares
of T stock for $40,000 and makes an express election for T.
(ii) In order to prevent the shifting of basis from the contributed
property to other assets of T, the District Director may specifically
allocate part of T's AGUB to the contributed property as shown in
subdivisions (iii) and (iv) of this example.
(iii) The AGUB of T is $108,800.
(iv) $10,800 of the AGUB is allocated to the land, leaving $98,000 to
be allocated among T's other assets, here, only the building.
(T.D. 8072, 51 FR 10623, Mar. 28, 1986)
26 CFR 1.338(b)-2T Allocation of adjusted grossed-up basis among target
assets (temporary).
(a) Introduction -- (1) In general. This section prescribes rules
under section 338(b)(5) for allocating adjusted grossed-up basis among
the assets of a target for which a section 338 election is made.
(2) Nomenclature and definitions -- (i) In general. The nomenclature
set out in 1.338-4T(b)(1) also applies to this section. The
definitions in section 338 and 1.338-1T, 1.338-4T, and 1.338(b)-1T
also apply to this section.
(ii) Fair market value. The ''fair market value'' of an asset is the
gross fair market value of that asset (i.e., fair market value
determined without regard to mortgages, liens, pledges, or other
liabilities).
(3) Transitional allocation election. For elective rules relating to
the allocation of adjusted grossed-up basis for a qualified stock
purchase for which the acquisition date is on or before January 29,
1986, see 1.338(b)-4T.
(b) General rule for allocating adjusted grossed-up basis -- (1) Cash
and other items designated by the Internal Revenue Service. Adjusted
grossed-up basis is first reduced by the amount of Class I assets.
Class I assets are cash, demand deposits and similar accounts in banks,
savings and loan associations (and other similar depository
institutions), and other items designated in the Internal Revenue
Bulletin by the Internal Revenue Service.
(2) Other assets -- (i) In general. Subject to the limitations and
other special rules of paragraph (c) of this section, adjusted
grossed-up basis (as reduced by Class I assets) is allocated among Class
II assets of target held at the beginning of the day after the
acquisition date in proportion to their fair market values at such time,
then among Class III assets so held in such proportion, and finally to
Class IV assets so held in such proportion.
(ii) Class II assets. Class II assets are certificates of deposit,
U.S. Government securities, readily marketable stock or securities
(within the meaning of 1.351-1(c)(3)), foreign currency, and other
items designated in the Internal Revenue Bulletin by the Internal
Revenue Service.
(iii) Class III assets. Class III assets are all assets of target
(other than Class I, II, and IV assets), both tangible and intangible
(whether or not depreciable, depletable, or amortizable).
(iv) Class IV assets. Class IV assets are intangible assets in the
nature of goodwill and going concern value.
(c) Certain limitations and special rules for basis allocable to an
asset -- (1) Basis not to exceed fair market value. The amount of
adjusted grossed-up basis allocated to an asset (other than Class IV
assets) shall not exceed the fair market value of that asset at the
beginning of the day after the acquistion date. In assigning fair
market values to Class II or III assets for purposes of this paragraph
(c), the fact that the target has assets in the nature of goodwill or
going concern value (Class IV assets) must be taken into account. For
modification of this fair market value limitation with respect to
certain contingent income assets, see 1.338(b)-3T(g).
(2) Assets subject to other limitations. The amount of adjusted
grossed-up basis allocated to an asset shall be subject to the
limitations under the provisions of the Internal Revenue Code or
principles of tax law in the same manner as if such asset were acquired
from an unrelated person in a sale or exchange. For example, if the
deemed sale (and purchase) of assets is a transaction described in
section 1056(a) (relating to basis limitation for player contracts
transferred in connection with the sale of a franchise), the amount of
adjusted grossed-up basis allocated to a contract for the services of an
athlete shall not exceed the limitation imposed by that section. For
another example, see 1.338(b)-1T(f)(2), relating to excluded
obigations.
(3) Special rule for allocating adjusted grossed-up basis when
purchasing corporation has nonrecently purchased stock -- (i) Scope.
This paragraph (c)(3) applies if at the beginning of the day after the
acquisition date (A) the purchasing corporation holds nonrecently
purchased stock for which a gain recognition election under section
338(b)(3) and 1.338-4T(j)(2) is not made and (B) the hypothetical
purchase price determined under paragraph (c)(3)(ii) of this section
exceeds the adjusted grossed-up basis determined under
1.338(b)-1T(c)(1). The determinations required under the preceding
sentence shall be made without regard to adjustment events occurring
after the close of new target's first taxable year.
(ii) Determination of hypothetical purchase price. Hypothetical
purchase price is the sum of the grossed-up basis of recently purchased
stock as determined under 1.338-4T(h)(3) Answer 2 (ii) and liabilities
of target.
(iii) Allocation of adjusted grossed-up basis. Subject to the
limitations in paragraph (c) (1) and (2) of this section, adjusted
grossed-up basis (after reduction by the amount of Class I assets) is
allocated among Class II, III, and IV assets of target held at the
beginning of the day after the acquisition date in proportion to their
fair market values at such time. For this purpose, the fair market
value of Class IV assets is deemed to be the excess, if any, of the
hypothetical purchase price over the sum of (A) the amount of the Class
I assets and (B) the fair market values of Class II and III assets.
(d) Examples. The provisions of this section and 1.338(b)-1T may be
illustrated by the following examples:
Example (1). (i) T owns 90% of the only class of outstanding stock
of T1. P purchases 100% of the only class of outstanding stock of T for
$2,000 and makes an express election for T. The express election for T
causes a deemed election for T1 under section 338(f)(1). The grossed-up
basis of the T stock is $2,000 i.e., $2,000 1/1.
(ii) Assume that the liabilities of T as of the beginning of the day
after the acquisition date (including income tax liabilities arising on
the deemed sale of its assets) are as follows:
(iii) The adjusted grossed-up basis (''AGUB'') of T is determined as
follows:
(iv) Assume that, at the beginning of the day after the acquisition
date, T's cash and the fair market values of T's Class II and III assets
are as follows:
(v) Under paragraph (b)(2) of this section the amount of AGUB
allocable to T's Class II and III assets is reduced by the amount of
cash to $2,800, i.e., $3,000^$200. $300 of AGUB is then allocated to
marketable securities. Since the remaining amount of AGUB is $2,500
(i.e., $3,000^($200+$300)), an amount which exceeds the sum of the fair
market values of T's Class III assets, the amount allocated to each
Class III asset is its fair market value:
(vi) The amount allocated to T's Class IV assets (assets in the
nature of goodwill and going concern value) is $150, i.e.,
$2,500^$2,350.
(vii) The grossed-up basis of the T1 stock is $500, i.e., $450 1/.9.
(viii) Assume that the liabilities of T1 as of the beginning of the
day after the acquisition date (including income tax liabilities arising
on the deemed sale of its assets) are as follows:
(ix) The AGUB of T1 is determined as follows:
(x) Assume that at the beginning of the day after the acquisition
date, T1's cash and the fair market values of its Class III assets are
as follows:
(xi) The amount of AGUB allocable to T1's Class III assets is first
reduced by the $50 of cash.
(xii) Since the remaining amount of AGUB ($570) is an amount which
exceeds the sum of the fair market values of T1's Class III assets, the
amount allocated to each Class III asset is its fair market value:
(xiii) The amount allocated to T1's Class IV assets (assets in the
nature of goodwill and going concern value) is $20, i.e., $570^$550.
Example (2). (i) Assume that the facts are the same as in Example
(1) except that P has, for five years, owned 20% of T's stock, which has
a basis in P's hands at the beginning of the day after the acquisition
date of $100, and P purchases the remaining 80% of T's stock for $1,600.
P does not make a gain recognition election under section 338(b)(3).
(ii) Under paragraph (d) of 1.338(b)-1T, the grossed-up basis of
recently purchased T stock is $1,600, i.e., $1,600 (1^.2)/.8.
(iii) The AGUB of T is determined as follows:
(iv) Since P holds nonrecently purchased stock, the hypothetical
purchase price of the T stock must be computed and is determined as
follows:
(v) Since the hypothetical purchase price ($3,000) exceeds the AGUB
(and no gain recognition election is made under section 338(b)(3)), AGUB
is allocated under paragraph (c)(3) of this section.
(vi) The amount of AGUB ($2,700) available to allocate to T's assets
is reduced by the amount of cash to $2,500 i.e., $2,700^$200. This
$2,500 balance is then allocated among the Class II, III, and IV assets
in proportion to, and not in excess of, their fair market values.
(vii) Under paragraph (c)(3) of this section, the fair market value
of Class IV assets is deemed to be $150, i.e., the $3,000 hypothetical
purchase price minus $2,850 (the sum of T's cash, $200, and the fair
market values of its Class II and III assets, $2,650). The allocation
is as follows:
*All numbers rounded for convenience.
(viii) If the AGUB of T is increased (or decreased) as a result of a
subsequent adjustment, the hypothetical purchase price and the deemed
fair market value of the Class IV assets shall be redetermined and the
increase (or decrease) in AGUB shall be allocated among T's acquisition
date assets pursuant to 1.338(b)-3T(f). The increase (or decrease) in
AGUB is allocated pursuant to 1.338(b)-3T(f) even if the hypothetical
purchase price, as redetermined, no longer exceeds AGUB, as
redetermined.
(T.D. 8072, 51 FR 10624, Mar. 28, 1986 as amended by T.D. 8092, 51 FR
23742, July 1, 1986; 51 FR 33033, Sept. 18, 1986)
26 CFR 1.338(b)-3T Subsequent adjustments to adjusted grossed-up basis
(temporary).
(a) Scope -- (1) In general. This section provides rules for
redetermining adjusted grossed-up basis to account for adjustment events
that occur after the close of new target's first taxable year. These
adjustments must be made upon the payment of contingent amounts for
recently or nonrecently purchased stock, the change in a contingent
liability of old target to one which is fixed and determinable,
reductions in the amounts paid for recently or nonrecently purchased
stock, and reductions in liabilities of target (and the liabilities to
which its assets are subject) that were taken into account in
determining adjusted grossed-up basis. Adjusted grossed-up basis is
redetermined under this section only if such an adjustment would be
required, under general principles of tax law, in connection with an
actual asset purchase by new target from an unrelated person. This
section also provides rules for the allocation of such adjustments
subsequent to the close of new target's first taxable year. For the
treatment of adjustments prior to the close of new target's first
taxable year, see 1.338(b)-1T and 1.338(b)-2T.
(2) Exceptions to applicability of section. This section does not
apply to a reduction in indebtedness that is (1) includible in gross
income as discharge of indebtedness income (or would be includible but
for section 108(a)), (2) due to a contribution to capital, (3) payment
of a liability, or (4) the discharge of a liability within the meaning
of 1.1001-2.
(3) Adjustment of aggregate deemed sale price. See paragraph (h) of
this section for certain rules relating to a change in the aggregate
deemed sale price of target's assets.
(b) Nomenclature and definitions -- (1) Nomenclature. The
nomenclature set out in 1.338-4T(b)(1) also applies to this section.
(2) Definitions -- (i) In general. The definitions in section 338
and 1.338-1T, 1.338-4T, 1.338(b)-1T, and 1.338(b)-2T also apply to
this section.
(ii) Contingent liability. A contingent liability is a liability of
target at the beginning of the day after the acquisition date that is
not fixed and determinable by the close of new target's first taxable
year.
(iii) Contingent amount. The term ''contingent amount'' means the
amount of the consideration to be paid for recently or nonrecently
purchased stock that is not fixed and determinable by the close of new
target's first taxable year, plus contingent liabilities of target.
(iv) Reduction amount. The term ''reduction amount'' means a
reduction after the close of new target's first taxable year in either
(A) the consideration paid for recently or nonrecently purchased stock,
or (B) a liability of target (or a liability to which one or more of its
assets are subject) that has been taken into account in determining
adjusted gross-up basis.
(v) Acquisition date asset. The term ''acquisition date asset''
means any asset held by new target at the beginning of the day after the
acquisition date (other than Class I assets).
(c) General rule -- (1) Time when increases in adjusted gross-up
basis taken into account. A contingent amount that is taken into
account for purposes of calculating adjusted grossed-up basis and the
bases of assets of target is taken into account at the time at which
such amount becomes fixed and determinable.
(2) Time when decreases in adjusted grossed-up basis taken into
account. A reduction amount is taken into account for purposes of
calculating adjusted grossed-up basis and the bases of assets of target
when the reduction in the consideration paid or the reduction of the
liability occurs.
(3) Amount of increases and decreases in adjusted grossed-up basis.
The amount of an increase (or decrease) in adjusted grossed-up basis
described in paragraph (c) (1) or (2) of this section is the difference
between (i) adjusted grossed-up basis immediately before the increase
(or decrease) and (ii) adjusted grossed-up basis recomputed by taking
into account the increase (or decrease). For example, if an additional
amount is paid for recently purchased stock of target, grossed-up basis
of recently purchased stock and adjusted grossed-up basis are recomputed
by applying the fraction in section 338(b)(4) to the basis of the
recently purchased stock at the beginning of the day after the
acquisition date, adjusted for additional amounts paid. Any other
adjustments required by a change in grossed-up basis would also be taken
into account in making the recomputation, such as a change in the basis
of nonrecently purchased stock under section 338(b)(3) and, if there has
not been a section 338(h)(10) election, any additional income tax
liabilities of target resulting from the additional payment.
(d) Allocation of increases in adjusted grossed-up basis -- (1) In
general. An increase in adjusted grossed-up basis (as determined under
paragraph (c)(3) of this section) is allocated among target's
acquisition date assets under 1.338(b)-2T. Amounts allocable to an
acquisition date asset (or with respect to a disposed-of acquisition
date asset) are subject to the fair market value limitation and other
limitations in 1.338(b)-2T(c) (1) and (2). Except as provided in
paragraph (g) of this section, for the purpose of applying
1.338(b)-2T(c) (1) and (2), the fair market value is determined at the
beginning of the day after the acquisition date. If adjusted grossed-up
basis was allocated among target's assets pursuant to
1.338(b)-2T(c)(3), an increase in adjusted grossed-up basis (as
determined under paragraph (c)(3) of this section) is accounted for in
accordance with the rules of paragraph (f) of this section.
(2) Effect of disposition or depreciation of acquisition date assets.
If an acquisition date asset has been disposed of, depreciated,
amortized or depleted by new target before a contingent amount is taken
into account in redetermining adjusted grossed-up basis, the contingent
amount otherwise allocable to such asset is treated under principles of
tax law applicable when part of the cost of an asset (not previously
reflected in its basis) is paid after the asset has been disposed of,
depreciated, amortized or depleted.
(e) Allocation of decreases in adjusted grossed-up basis -- (1) In
general. If adjusted grossed-up basis was allocated in accordance with
the rules of 1.338(b)-2T(b)(2), a decrease in adjusted grossed-up basis
(as determined under paragraph (c)(3) of this section) is allocated in
the following order: (i) first, as a reduction in the bases of target's
Class IV acquisition date assets, (ii) second, as a reduction of the
bases of target's Class III acquisition date assets in proportion to
their fair market values at the beginning of the day after the
acquisition date, and (iii) finally, as a reduction of the bases of
target's acquisition date assets that are Class II assets in proportion
to their fair market values at the beginning of the day after the
acquisition date. The decrease in adjusted grossed-up basis allocated
to an asset shall not exceed the adjusted grossed-up basis of target
previously allocated to that asset. If adjusted grossed-up basis was
allocated among target's assets pursuant to 1.338(b)-2T(c)(3), a
decrease in adjusted grossed-up basis (as determined under paragraph
(c)(3) of this section) is accounted for in accordance with the rules of
paragraph (f) of this section.
(2) Effect of disposition of assets or reduction of basis below zero.
If an acquisition date asset has been disposed of, depreciated,
amortized, or depleted by new target before a reduction amount is taken
into account in adjusted grossed-up basis, the decrease in adjusted
grossed-up basis attributable to such reduction amount otherwise
allocable to such asset is treated under principles of tax law
applicable when the cost of an asset (previously reflected in its basis)
is reduced after the asset has been disposed of or depreciated,
amortized, or depleted. For purposes of this subparagraph (2), an asset
is considered to have been disposed of to the extent that its allocable
portion of the decrease in adjusted grossed-up basis would reduce its
basis below zero.
(3) Section 38 property. Section 1.47-2(c) applies to a reduction in
basis of section 38 property under this section.
(f) Special rule for allocation of increases (or decreases) in
adjusted grossed-up basis when hypothetical purchase price was used in
allocating adjusted grossed-up basis. (1) Scope. This paragraph (f)
applies if (i) adjusted grossed-up basis was allocated among new
target's Class II, III, and IV assets in accordance with
1.338(b)-2T(c)(3) and (ii) an adjustment event occurs after the close of
new target's first taxable year.
(2) Allocation of increases (decreases) in adjusted grossed-up basis.
If an adjustment event after the close of new target's first taxable
year increases (or decreases) adjusted grossed-up basis, the following
items shall be redetermined, taking into account such adjustment event:
(i) The hypothetical purchase price, (ii) the deemed fair market value
of Class IV assets, and (iii) the adjusted grossed-up basis allocable to
each acquisition date asset under 1.338(b)-2T(c)(3) (the redetermined
(c)(3) amount). (The redetermination of the deemed fair market value of
Class IV assets under this subparagraph (2) is made by taking into
account the target's Class I assets and the fair market values of its
Class II and III assets at the beginning of the day after the
acquisition date.) If the redetermined (c)(3) amount for an acquisition
date asset exceeds the amount of adjusted grossed-up basis previously
allocated to such asset (taking into account prior adjustments under
this paragraph (f)), an amount of adjusted grossed-up basis equal to
such excess shall be allocated to such asset. If the amount of adjusted
grossed-up basis previously allocated to an acquisition date asset
(taking into account prior adjustments under this paragraph (f)) exceeds
the redetermined (c)(3) amount for that asset, an amount equal to such
excess shall be allocated as a reduction in the basis of such asset.
The rules of paragraph (d)(2) (or (e)(2)) apply for the treatment of
amounts allocable under this paragraph (f) to an acquisition date asset
that has been disposed of, depreciated, amortized, or depleted.
(3) Allocation to contingent income assets. For modification of this
rule with respect to certain assets, see paragraph (g) of this section.
(g) Special rule for allocation of increases (or decreases) in
adjusted grossed-up basis to specific assets -- (1) Patents and similar
property -- (i) Scope. The rules of this paragraph (g)(1) apply for
purposes of allocating an increase (or decrease) in adjusted grossed-up
basis to the extent (A) the contingency that results in the increase (or
decrease) directly relates to income produced by a particular intangible
asset (''contingent income asset''), such as a patent, a secret process,
or a copyright, and (B) the increase (or decrease) is related to such
contingent income asset and not to other target assets. Adjusted
grossed-up basis, as determined under 1.338(b)-1T at the beginning of
the day after the acquisition date, and any increase (or decrease) to
adjusted grossed-up basis to which this paragraph (g) does not apply,
are allocated among target's acquisition date assets (including
contingent income assets) in accordance with the provisions of
1.338(b)-2T and paragraph (d), (e), or (f) of this section.
(ii) Specific allocation. Subject to the fair market value
limitation and other limitations in 1.338(b)-2T(c) (1) and (2), any
increase (or decrease) to adjusted grossed-up basis to which this
paragraph (f) applies is allocated (A) first, specifically to the
contingent income asset to which the increase (or decrease) relates and,
then, (B) in accordance with the provisions of paragraph (d), (e), or
(f) of this section. Solely for purposes of applying the fair market
value limitation and other limitations of 1.338(b)-2T(c) (1) and (2) to
a contingent income asset, the fair market value of such asset at the
beginning of the day after the acquisition date shall (may, in the case
of qualified stock purchases for which the acquisition date is before
September 16, 1988) be redetermined when the contingent amount (or
reduction amount) is taken into account under paragraph (c) of this
section. (For purposes of this redetermination, only those
circumstances that resulted in the increase (or decrease) to adjusted
grossed-up basis are taken into account.) However, the fair market value
limitation and other limitations of 1.338(b)-2T(c) (1) and (2) as they
apply to target's other acquisition date assets are not affected by such
adjustments.
(2) Internal Revenue Service authority. In connection with the
examination of a return, the District Director, in appropriate cases,
may apply the principles of paragraph (g)(1) of this section to allocate
an increase (or decrease) in adjusted grossed-up basis among particular
of target's acquisition date assets to the extent such allocation is
necessary to reflect properly the consideration that relates to each of
those assets.
(h) Changes in old target's aggregate deemed sale price of assets --
(1) General rule -- (i) In general. Pursuant to general principles of
tax law, the price at which old target is deemed to have sold its assets
shall be adjusted to take into account adjustment events occurring after
the acquisition date. In making such an adjustment, recognition of
income (or loss) under this paragraph (h) with respect to the deemed
sale of assets is not precluded because the target is treated as a new
corporation after the acquisition date. To the extent general tax law
principles require seller to account for adjustment events, target (or a
member of the selling consolidated group in the event of an election
under section 338(h)(10)) shall make such an accounting, which may
result in reporting income, loss, or other amount.
(ii) Redetermination of aggregate deemed sale price if the elective
formula under section 338(h)(11) is used. If the elective formula under
section 338(h)(11) is used to determine the aggregate deemed sale price,
that price generally shall be redetermined under 1.338-4T(h) (or
1.338(h)(10)-1T(f)(2) if an election under section 338(h)(10) is in
effect) to take into account, to the extent required by general
principles of tax law, adjustment events occurring after the acquisition
date. For example, the aggregate deemed sale price generally shall be
redetermined to take into account any additional payments made to the
seller for recently purchased stock. If an increase (or decrease) in
adjusted grossed-up basis is specifically allocated to a contingent
income asset (or other asset) under paragraph (g) of this section, then
any redetermination of the fair market value of the asset under that
paragraph (g) is taken into account in making adjustments to the
aggregate deemed sale price allocable to such asset.
(iii) Redetermination of aggregate deemed sale price if the elective
formula under section 338(h)(11) is not used. If the elective formula
under section 338(h)(11) is not used to determine the aggregate deemed
sale price, an adjustment to aggregate deemed sale price may be required
under this paragraph (h) only with respect to assets described in
paragraph (g) (1)(i) and (2) of this section. In such a case, the
adjustment to the portion of the aggregate deemed sale price allocable
to such asset shall be the amount of the increase (or decrease) in
adjusted grossed-up basis specifically allocated to the asset. However,
the amount of the increase (or decrease) allocated to such asset shall
not increase (or decrease) the portion of the aggregate deemed sale
price allocable to the asset (taking into account all previous
adjustments under this paragraph (h)) above or below the fair market
value of such asset as of the date an adjustment under this paragraph
(h) is required.
(2) Procedure for transactions in which section 338(h)(10) is not
elected -- (i) Income or loss included in new target's return. If an
election under section 338(h)(10) is not made, any income, loss, or
other amount of old target resulting from a change in the aggregate
deemed sale price of old target's assets pursuant to paragraph (h)(1) of
this section shall be included in new target's income tax return for new
target's taxable year in which such change occurs. The amount of such
income, loss, or other amount is determined with reference to old
target's deemed sale of assets on the acquisition date. Thus, for
example, if after the acquisition date there is an increase in the
allocable aggregate deemed sale price of section 1245 property for which
the recomputed basis (but not the adjusted basis) exceeded the portion
of the aggregate deemed sale price allocable to that particular asset on
the acquisition date, the additional gain shall be treated as ordinary
income to the extent it does not exceed such excess amount. See
paragraph (h)(2)(ii) for the special treatment of old target's
carryovers and carrybacks. Although included in new target's income tax
return, such income, loss, or other amount is separately accounted for
as an item of old target and may not be offset by income, loss, credit,
or other amount of new target. The amount of tax on income of old
target recognized pursuant to this paragraph (h) is determined as if
such income had been recognized in old target's taxable year ending at
the close of the acquisition date. Any increase (or decrease) in new
target's income tax liability by reason of this paragraph (h)(2)(i)
shall be allocated among new target's acquisition date assets in
accordance with paragraph (d), (e), (f), or (g) of this section when
such liability becomes fixed and determinable.
(ii) Carryovers and carrybacks -- (A) Loss carryovers to new target
taxable years. A net operating loss or net capital loss of old target
may be carried forward to a taxable year of new target, under the
principles of section 172 or 1212, as the case may be, but is allowed as
a deduction only to the extent of any recognized income of old target
for such taxable year, as described in paragraph (h)(2)(i) of this
section. For this purpose, however, taxable years of new target shall
not be taken into account in applying the 15-taxable-year limitation (or
other similar limitation) in section 172(b)(1) or the 5-taxable-year
limitation (or other similar limitation) in section 1212(a)(1)(B). In
applying sections 172(b) and 1212(a)(1), only income, deductions, and
other amounts of old target shall be taken into account. Thus, if old
target has an unexpired net operating loss at the close of its taxable
year in which the deemed asset sale occurred that could be carried
forward to a subsequent taxable year, such loss may be carried forward
until it is absorbed by old target's income.
(B) Loss carrybacks to taxable years of old target. An ordinary loss
or capital loss accounted for as a separate item of old target under
paragraph (h)(2)(i) of this section may be carried back to a taxable
year of old target under the principles of section 172 or 1212, as the
case may be. For this purpose, taxable years of new target shall not be
taken into account in applying the 3-taxable-year limitation (or other
similar limitation) in section 172(b) or 1212(a).
(C) Credit carryovers and carrybacks. The principles described in
paragraph (h)(2)(ii) (A) and (B) of this section apply to carryovers and
carrybacks of amounts for purposes of determining the amount of a credit
allowable under part IV, subchapter A, chapter 1 of the Code. Thus, for
example, credit carryovers of old target may only offset income tax
attributable to items described in paragraph (h)(2)(i) of this section.
(3) Procedure for transactions in which section 338(h)(10) is elected
-- If an election under section 338(h)(10) is made, any income, loss, or
other amount resulting from a change in the aggregate deemed sale price
of old target's assets pursuant to paragraph (h)(1) of this section
shall be accounted for in determining the taxable income (or other
amount) of the member of the selling consolidated group (or other
person) to which such income, loss, or other amount is attributable for
the taxable year in which such change occurs. The amount of such
income, loss, or other amount is determined with reference to old
target's deemed sale of assets on the acquisition date.
(i) (Reserved)
(j) Examples. This section is illustrated by the following examples.
Any contingent amount or reduction amount described in the following
examples is exclusive of interest. For rules characterizing deferred
contingent payments as principal or interest, see regulations under
section 1274 and 1275 (d) or 483.
Example (1). (i) T's assets and their fair market values at the
beginning of the day after the acquisition date are as follows:
T has no liabilities other than a contingent obligation and T does
not use the elective formula under section 338(h)(11).
(ii) On January 1, 1989, P purchases all of the outstanding stock of
T for $270 and makes an express election for T. The grossed-up basis of
the T stock and T's adjusted grossed-up basis (''AGUB'') are both $270.
The AGUB is ratably allocated among T's Class III assets in proportion
to their fair market values as follows:
No amount is allocated to the Class IV assets. New T is a calendar
year taxpayer. Assume that the X stock is a capital asset in the hands
of new T.
(iii) On January 1, 1990, new T sells the X stock and uses the
proceeds of the sale to purchase inventory.
(iv) On June 30, 1991, the contingent liability of old T becomes
fixed and determinable. The amount of the liability is $60.
(v) T's AGUB increases by $60 from $270 to $330. This $60 increase
in AGUB is first allocated among T's acquisition date assets in
accordance with the provisions of 1.338 (b)-2T. Since the redetermined
AGUB for T ($330) exceeds the sum of the fair market values at the
beginning of the day after the acquisition date of the Class III
acquisition date assets ($300), AGUB allocated to those assets is
limited to those fair market values under 1.338(b )-2T(c)(1). The
remaining AGUB of $30 is allocated to goodwill and going concern value
(Class IV assets). The amount of increase in AGUB allocated to each
acquisition date asset is determined as follows:
(vi) Since the X stock was disposed of before the contingent
liability became fixed and determinable, no amount of the increase in
AGUB attributable to such stock may be allocated to any T asset.
Rather, such amount, $20, is allowed as a capital loss to T for the
taxable year 1991 under the principles of Arrowsmith v. Commissioner,
344 U.S. 6 (1952). In addition, the $10 increase in AGUB allocated to
the building is treated as a basis redetermination in 1991. See
paragraph (d)(2) of this section.
Example (2). (i) On January 1, 1988, P purchases all of the
outstanding stock of T and makes an express election for T. T does not
use the elective formula under section 338 (h)(11). Assume that the
AGUB of T is $500 and is allocated among T's acquisition date assets as
follows:
(ii) On June 1, 1994, P filed a claim against the selling
shareholders of T in a court of appropriate jurisdiction alleging fraud
in the sale of the T stock.
(iii) On January 1, 1995, the former shareholders refund part of the
purchase price to P in a settlement of the 1994 lawsuit. This refund
results in a decrease of T's AGUB of $140.
(iv) Under paragraph (e)(1) of this section, the decrease in AGUB is
allocated among T's acquisition date assets. First, assuming the basis
of the goodwill and going concern value on January 1, 1995, is still
$100, then $100 of the decrease in AGUB is allocated to that asset. The
remaining decrease in AGUB ($40) is allocated to the Class III assets in
proportion to their fair market values at the beginning of the day after
the acquisition date. Thus, $15 is allocated to the machinery ($40 x
$150/$400) and $25 to the land ($40 x $250/$400).
(v) Assume that, as a result of deductions under section 168, the
adjusted basis of the machinery immediately before the decrease in AGUB
is zero. The machinery, therefore, is treated as if it were disposed of
before the decrease is taken into account. T recognizes ordinary income
of $15 for the taxable year 1995 under the principles of Arrowsmith v.
Commissioner, 344 U.S. 6 (1952), and the tax benefit rule. No
adjustment to the basis of T's assets is made for any tax paid on this
amount.
(vi) In summary, the basis of T's acquisition date assets, as of
January 1, 1995, is as follows:
Example (3). (i) Assume that the facts are the same as in Example
(2) of 1.338(b)-2T (d) except that the recently purchased stock is
acquired for $1,600 plus certain additional payments which are
contingent upon T's future earnings. Thus, T's AGUB, determined as of
the beginning of the day after the acquisition date (after reduction by
T's cash of $200), is $2,500 and is allocated among T's Class II, III,
and IV acquisition date assets pursuant to 1.338(b)-2T(c)(3)(iii) as
follows:
(ii) Subsequent to the close of new target's first taxable year, P
pays an additional $200 for its recently purchased T stock.
(iii) T's AGUB increases by $200, from $2,700 to $2,900. This $200
increase in AGUB is accounted for in accordance with the provisions of
1.338(b)-2T (c)(3)(iii) and paragraph (f) of this section.
(iv) The hypothetical purchase price of the T stock is redetermined
as follows:
(v) Under 1.338(b)-2T (c)(3) the redetermined fair market value of
Class IV assets is deemed to be $400, i.e., the hypothetical purchase
price, as redetermined, of $3,250 minus $2,850 (the sum of T's cash,
$200, and the fair market values of its Class II and III assets,
$2,650).
(vi) The amount of AGUB available to allocate to T's Class II, III,
and IV acquisition date assets is $2,700 (i.e., redetermined AGUB
reduced by cash). AGUB allocable to each of T's acquisition date assets
(i.e., the redetermined (c)(3) amount) is redetermined using the deemed
fair market value of the Class IV asset from subdivision (v) as follows:
(vii) As illustrated by this example, the application of paragraph
(f) of this section results in a basis increase for some assets and a
basis decrease for other assets. The amount of increase (or decrease)
in AGUB allocated to each acquisition date asset is determined as
follows:
(viii) If P made a gain recognition election under section 338 (b)(3)
with respect to its nonrecently purchased stock, paragraph (f) of this
section would be inapplicable.
Example (4). (i) On January 1, 1987, P purchases all of the
outstanding T stock and makes an express election for T. The fair
market value of T's assets (other than goodwill and going concern value)
as of the beginning of the following day is as follows:
(ii) T has elected the elective ADSP formula, in accordance with
1.338-4T(h)(3) Answer 2 (ii) (B), to determine the aggregate deemed sale
price of old T's assets. Assume that the ADSP as so determined is $700.
Assume also that the AGUB is equal to $700. T has no liabilities.
(iii) The AGUB of $700 is ratably allocated among T's Class III
acquisition date assets in proportion to their fair market values as
follows:
No amount is allocated to goodwill (or going concern value).
(iv) P and T file a consolidated return for 1987 and each following
year with P as the common parent of the affiliated group.
(v) In 1990, a contingent amount of $117 is paid by P for the stock
of old T. As a result, additional income is recognized under section
1245 by old T for 1990 on the deemed sale of old T's assets. This
income must be reported on the consolidated return of new T for 1990,
but it is separately accounted for and may not be absorbed by losses or
deductions of P or of new T. Assume that the tax on this income is $3.
(vi) In 1990, there is an increase in T's AGUB of $120, i.e., $117 +
$3. The amount of this increase allocated to each acquisition date
asset is determined as follows:
Example (5). (i) On June 1, 1990, P purchases all of the stock of T
and makes an express election for T. T has one item of section 38
property whose basis on June 2, 1990 is $100,000. An investment credit
of $8,000 is allowed to new T for the equipment because of an election
under section 48 (q)(4).
(ii) In 1992, part of the purchase price of the T stock is refunded
to P. Assume that the amount of the resulting decrease in AGUB
allocated to the machinery is $7,000. Pursuant to 1.47-2(c), the
machinery ceases to be section 38 property to the extent of $7,000 of
its original basis.
(iii) The additional tax of $560 (8% $7,000) resulting from the
machine ceasing to be section 38 property is reported on T's return for
1992. Such amount is not an adjustment to AGUB.
Example (6). (i) T has three assets (other than goodwill and going
concern value) whose fair market values as of the beginning of the day
after the acquisition date are as follows:
T has no liabilities. Assume that no election under section 338 (h)
(10) or (h) (11) is in effect.
(ii) On January 1, 1989, P purchases all of the outstanding T stock
for $225 plus 50 percent of the net profits generated by the secret
process for each of the next three years, determinable and payable on
January 1 of each following year.
(iii) As of the beginning of January 2, 1989, T's AGUB is $225,
allocated as follows:
(iv) On January 1, 1990, $5 is paid by P for the T stock by reason of
the net profits from the secret process. The payments are not
attributable in any respect to any of T's other acquisition date assets.
As a result, T's AGUB on January 1, 1990, is increased by $5.
(v) Assume that on January 1, 1990, the fair market value of the
secret process is determined to be $52. (For purposes of this
redetermination, only those circumstances that resulted in the increase
to AGUB are taken into account.)
(vi) On January 1, 1990, only $2 of the $5 increase in AGUB is
allocated to the secret process because the increase in AGUB so
allocated cannot increase the basis of the secret process above its
redetermined fair market value ($52). The balance of the increase is
allocated to goodwill and going concern value because the fair market
value limitation of 1.338 (b)-2T(c) (1) precludes allocating additional
AGUB to the Class III assets.
(vii) The price for which old target is deemed to have sold the
secret process is increased to reflect the $2 allocated to its basis to
new target. See 1.338-4T (h) (3) and paragraph (h) (1) of this
section.
(viii) If the fair market value of the secret process as of January
1, 1990, is unchanged from its fair market value as of the beginning of
the day after the acquisition date, then the $5 increase in AGUB is
allocated to T's goodwill and going concern value.
Example (7). (i) The facts are the same as in Example (6) except
that --
(A) The secret process is valued at $75 as of the beginning of the
day after the acquisition date, and,
(B) P pays $250 for the T stock and the former T shareholders agree
to refund a portion of the purchase price to P for each of the three
years that the net income from the secret process is less than $15 per
year, determinable and payable on January 1 of the next year.
(ii) Assume the net income from the process is less than $15 for
1989, and on January 1, 1990, P receives a refund that reduces the stock
purchase price by $3.
(iii) Assume that as of January 1, 1990, the fair market value of the
secret process is redetermined to be $65. (For purposes of this
redetermination, only those circumstances that resulted in the decrease
to AGUB are taken into account.)
(iv) As of January 1, 1990, the AGUB of T is decreased by $3. This
decrease is allocated to the secret process, whose basis becomes $72,
(i.e., $75^$3, assuming no adjustments thereto other than the decrease
in AGUB).
(v) The price for which old target is deemed to have sold the secret
process is decreased to reflect the $3 decrease allocated to its basis
to new target. See 1.338-4T(h)(3) and paragraph (h) of this section.
Example (8). The facts are the same as in Example (6) except that
the intangible Class III asset is a patent instead of a secret process.
The redetermination of the fair market value of the patent on January 1,
1990, is made without regard to the decrease in the remaining life of
the patent because that is not a circumstance that resulted in the
increase in AGUB.
(T.D. 8072, 51 FR 10626, Mar. 28, 1986, as amended by T.D. 8215, 53
FR 27043, July 18, 1988)
26 CFR 1.338(b)-4T Transitional allocation election under section 338
(temporary).
(a) In general -- (1) Scope. This section provides a transitional
allocation election relating to the allocation of adjusted grossed-up
basis under section 338(b)(5) and 1.338 (b)-2T. For consequences of a
transitional allocation election, see generally paragraph (e) of this
section.
(2) Eligibility to make a transitional allocation election. A
transitional allocation election may only be made for an original target
(and applies to any affected target described in paragraph (e)(1) of
this section) for which the acquisition date is --
(i) On or after September 1, 1982, and on or before January 29, 1986,
or
(ii) After January 29, 1986, but pursuant to a contract of sale, or
an offer to purchase, that is binding on the purchasing corporation on
that date and at all times thereafter.
(3) Nomenclature and definitions. The nomenclature set out in
1.338-4T(b)(1) also applies to this section. The definitions in
1.338(b)-3T(b)(2) also apply to this section.
(b) Time and manner of making election -- (1) In general. P makes a
transitional allocation election for an original target by filing a
transitional allocation election statement prescribed by paragraph
(c)(1) of this section with the District Director (Attention: Chief of
Examination) for the internal revenue district in which the purchasing
corporation's income tax return would be filed if 1.6091-2(b) applied.
If two or more corporations that are members of an affiliated group make
a qualified stock purchase in the aggregate (see 1.338-1T(d)(3)), then
a copy of the transitional allocation election statement prescribed by
paragraph (c)(1) of this section must be filed with the District
Director (Attention: Chief of Examination) in such internal revenue
district for each purchasing corporation. The transitional allocation
election statement must be filed on or before the later of (i) the due
date, including extensions of time, for filing the first return of the
original target as new target or (ii) November 3, 1986. The special
rules in 1.338-1T(k) (1) and (2) apply to making the transitional
allocation election for foreign corporations.
(2) Additional filing requirements. Pursuant to 1.338-1T(e)(2)(vi),
a copy of the transitional allocation election statement also must be
attached to the first return (or amended return) of the original target
(and each affected target) as new target. Pursuant to
1.338-1T(e)(2)(vi), a supplemental transitional allocation election
statement prescribed by paragraph (c)(3) of this section must be
attached to the first return (or amended return) as new target of each
affected target identified in that statement.
(c) Contents of transitional allocation election statement -- (1) In
general. The transitional allocation election statement must:
(i) Be identified prominently as a ''Transitional Allocation Election
Statement Under 1.338(b)-4T''.
(ii) Contain the name, address, and employer identification number of
the purchasing corporation(s) and the original target.
(iii) Indicate the date on which an express election was made for the
original target.
(iv) State the date on which the first return (and, if applicable,
the amended return) of the original target (and of each affected target)
as a new target was filed. (If the first return of a target has not
been filed, state the due date, including extensions of time, for filing
such return or, if appropriate, indicate that new target is a foreign
corporation that is not required to file a United States income tax
return for its first taxable year as new target.)
(v) Have attached to it a photocopy of any extension, consent, or
other document previously entered into or filed which extended the
statute of limitations on assessment for the first taxable year of the
original target (or any affected target) as new target.
(vi) With respect to the original target and with respect to each
affected target, state that (A) ''New target's adjusted grossed-up basis
(exceeds by $(insert amount of the excess)) (does not exceed) the sum of
the fair market values of its assets, including goodwill and going
concern value, at the beginning of the day after the acquisition date''
or (B) ''It has not yet been determined whether new target's adjusted
grossed-up basis exceeds the sum of the fair market values of its
assets, including goodwill and going concern value, at the beginning of
the day after the acquisition date and therefore P will file a
supplemental transitional alllocation election statement as required by
1.338(b)-4T(c)(3)''.
(vii) With respect to the original target and with respect to each
affected target (A) list (for each of asset classes I, II, III, and IV)
(1) the aggregate fair market value of the assets in the class and (2)
the aggregate amount of adjusted grossed-up basis allocated to the
assets in the class or (B) state ''The information required under
1.338(b)-4T(c)(2)(vii)(A) has not yet been determined and therefore P
will file a supplemental transitional allocation election statement as
required by 1.338(b)-4T(c)(3)''.
(viii) Be signed (in the manner prescribed in 1.338-IT(d)(1)(vi)) by
a person authorized to act on behalf of the purchasing corporation.
(2) Special rules -- (i) Time of determination. The information
required by paragraph (c)(1) (vi)(A) and (vii)(A) of this section must
be determined no later than the date on which the first return (or
amended return) of the particular new target as new target is filed.
(ii) References to more than one target. The statements required
under paragraph (c)(1) (vi) and (vii) of this section may, in
appropriate cases, be modified to apply to more than one target if the
particular targets to which the statement applies are clearly and
unambiguously identified.
(3) Supplemental statements -- (i) In general. If the information
required under paragraph (c)(1) (vi)(A) and (vii)(A) of this section for
any target has not been determined as of the date the transitional
allocation election statement is filed, P is required to file (at the
place prescribed in paragraph (b) of this section) a supplemental
transitional allocation election statement no later than the date the
first return of that target as a new target is filed. The supplemental
transitional allocation election statement must:
(A) Be identified prominently as a ''Supplemental Transitional
Allocation Election Statement Under 1.338(b)-4T for (insert name of
target or targets for which the statement is being filed)''.
(B) Contain the information required under paragraph (c)(1) (vi)(A)
and (vii)(A) of this section.
(C) Have attached to it a copy of the transitional allocation
election statement that was filed for the original target.
(D) State the dates on which all previously filed supplemental
transitional allocation election statements were filed.
(E) Be signed (in the manner prescribed in 1.338-1T(d)(1) (vi)) by a
person authorized to act on behalf of the purchasing corporation.
(ii) Failure to timely file a valid supplemental statement. If a
supplemental transitional allocation election statement is required to
be filed, then the transitional allocation election is not effective
unless the purchasing corporation timely files a valid supplemental
statement. A supplemental transitional allocation election statement
that does not contain the information required under paragraph
(c)(1)(vi)(A) and (vii)(A) of this section is invalid. The District
Director or his delegate may, at any time in connection with the
examination of any Federal income tax return that would be affected by a
transitional allocation election, waive the requirement of filing a
valid supplemental statement.
(d) Irrevocability. A transitional allocation election under this
section, once made, is irrevocable.
(e) Certain consequences of transitional allocation election -- (1)
Consistency rule. A transitional allocation election for an original
target shall apply to each affected target that would be eligible under
paragraph (a)(2) of this section to make a transitional allocation
election if it were an original target. Thus, if a transitional
allocation election is made, then neither the original target nor any
affected target may rely upon 1.338(b)-2T(b) for the purpose of
allocating adjusted grossed-up basis. For rules relating to the
exclusion of a transitional target affiliate, see 1.338-5T(j) (relating
to international aspects of section 338).
(2) Allocation of adjusted grossed-up basis. A corporation to which
a transitional allocation election applies shall allocate adjusted
grossed-up basis pursuant to the rules of Federal income tax law that
apply to the purchase on the acquisition date of a combination of assets
for a lump sum. The following table sets forth the subunits of
1.338(b)-2T and indicates whether each is applicable or inapplicable if
a transitional allocation election is made.
(3) Allocation of subsequent adjustments to adjusted grossed-up
basis. If adjusted grossed-up basis is allocated under paragraph (e)(2)
of this section and adjusted grossed-up basis is redetermined to take
into account adjustment events that occur after the close of new
target's first taxable year, the amount of the increase (or decrease),
determined under 1.338(b)-3T(c)(3), shall be allocated among target's
acquisition date assets pursuant to the method used to allocate adjusted
grossed-up basis. The following table sets forth the subunits of
1.338(b)-3T and indicates whether each is applicable or inapplicable if
a transitional allocation election is made.
(4) Careful scrutiny of allocation. The transitional allocation
election statement identifies taxpayers that allocate to any asset an
amount of adjusted grossed-up basis that exceeds the asset's fair market
value. The Internal Revenue Service will subject such allocations to
careful scrutiny.
(5) Coordination with allocation of ADSP. If the elective formula
under section 338(h)(11) is used to determine the aggregate deemed sale
price for old target's assets, the allocable ADSP amount (as defined in
1.338-4T(h)(2)(iii)) for each asset must be determined pursuant to the
method used to allocate adjusted grossed-up basis among the assets of
new target. Additional rules for determining the allocable ADSP amount
if a transitional allocation election is made are contained in
1.338-4T(h) (2) and (3).
(T.D. 8092, 51 FR 23742, July 1, 1986; 51 FR 33033, Sept. 18, 1986;
51 FR 34469, Sept. 29, 1986)
26 CFR 1.338(h)(10)-1T Elective recognition by selling consolidated
group of deemed sale gain or loss on target's assets (temporary).
(a) Scope. This section sets forth the requirements, conditions, and
consequences of a section 338(h)(10) election if a target corporation is
acquired in a qualified stock purchase from a selling consolidated
group. Subject to the detailed rules in paragraphs (e) and (j) of this
section, the primary effects of a section 338(h)(10) election are a
deemed taxable sale by target of all its assets followed by a deemed
complete liquidation to which section 332 applies. In addition, gain or
loss on the actual sale of target stock by a member of the selling group
to a member of the purchasing group included in the qualified stock
purchase is ignored.
(b) Definitions and nomenclature. For purposes of this section (and
except as otherwise provided in this section) --
(1) In general. The definitions set forth in 1.338-1T(b) and
1.338-4T(b)(2) also apply to this section. The nomenclature in
1.338-4T(b)(1) does not apply to this section.
(2) Section 338(h)(10) target. A corporation is a ''section
338(h)(10) target'' if it is an original target that is included in the
selling group's consolidated return for the taxable period that includes
the acquisition date.
(3) Selling consolidated group. The ''selling consolidated group''
is the affiliated group (as defined in section 1504) which for the
taxable period that includes the acquisition date --
(i) Includes the section 338(h)(10) target,
(ii) Filed a consolidated return or is required to file a
consolidated return, and
(iii) Has as its common parent a corporation for which a section 338
election by the purchasing corporation does not apply.
(4) Section 338(h)(10) target affiliate. A ''section 338(h)(10)
target affiliate'' is any member of the selling consolidated group that
is an affected target.
(5) Nomenclature. (i) The S group is a selling consolidated group.
(ii) T is a section 338(h)(10) target.
(iii) T1, T2, etc. are section 338(h)(10) target affiliates.
(iv) S1, S2, etc. are members of the S group other than T, T1, T2,
etc.
(v) P, P1, P2, etc. are members of the purchasing group. When the
context requires, a reference to P refers to the purchasing corporation
or corporations. See section 338(h)(8).
(vi) K is a shareholder of T other than a member of the S group or a
member of the purchasing group.
(6) Examples. The provisions of this paragraph (b) may be
illustrated by the following examples:
Example (1). T is a wholly-owned subsidiary of S1. T1 is a
wholly-owned subsidiary of S2. T2 is a wholly-owned subsidiary of T1.
S1, S2, T, T1, and T2 are all members of an affiliated group that files
a consolidated return for calendar year 1986 with S1 as its common
parent. On June 1, 1986, P1 purchases all of the outstanding stock of T
and an express election and a section 338(h)(10) election are made for
T. On July 1, 1986, P2 purchases all the outstanding stock of T1. Both
T1 and T2 are section 338(h)(10) target affiliates.
Example (2). Assume the same facts as in Example (1). Assume
further that P1 purchases all of the stock of S1 on July 10, 1986.
Since the express election for T causes a deemed election for S1 (an
affected target), a section 338 (h)(10) election may not be made for S1,
T, T1, or T2 because there is no selling consolidated group.
(c) Eligibility for section 338(h)(10) election. A section
338(h)(10) election may be made for T if --
(1) P makes a qualified stock purchase of T stock,
(2) The acquisition date with respect to the stock of T or of any
section 338(h)(10) target affiliate is after January 12, 1983, and
(3) An express election is made for T.
(d) Time and manner of making section 338(h)(10) election -- (1)
Simultaneous joint election requirement. Except as provided for a
delayed election in paragraph (d)(7) of this section, the section
338(h)(10) election is made jointly by P and the S group on Form 8023 in
accordance with the instructions to the Form.
(2) Election irrevocable. Once made, a section 338(h)(10) election
is irrevocable.
(3) Annotation on required schedule. Section 1.338-1T(e)(1)(i)(D)
requires that the schedule required by 1.338-1T(e)(1) must indicate
which of the listed corporations is subject to a section 338(h)(10)
election, including corporations subject to deemed section 338(h)(10)
elections under paragraph (h) of this section. This indication is made
by clearly identifying such corporations, such as by a footnote system.
(4) Attachments to target returns and additional filings. Under
1.338-1T(e)(2)(v)(A), a copy of the statement of section 338 election
that is filed with the return of the S group for the taxable period
which includes the acquisition date is considered filed with the last
return of old target.
(5) Consequence of failure to comply with requirements of
1.338-1T(e) (1) and (2). For consequences of failure to comply with the
requirements of 1.338-1T(e) (1) and (2), see 1.338-1T(e)(3). Thus, an
election and failure to comply with these requirements will not
invalidate a section 338(h)(10) election and will have no effect on the
applicability of paragraph (h) of this section.
(6) Interim procedures -- (i) In general. If Form 8023 and
accompanying instructions do not prescribe making the statement of
section 338(h)(10) election on the face of Form 8023, then a separate
statement of section 338(h)(10) election must be attached to the Form
8023 filed for T. For purposes of 1.338-1T(e) and paragraph (d)(4) of
this section (relating to attachments to target returns and additional
filings), this attached statement of section 338(h)(10) election is
treated as an integral part of the Form 8023.
(ii) Contents of separate section 338(h)(10) election statement. The
separate statement of section 338(h)(10) election must --
(A) Contain the name, address, and employer identification number of
each of P, T, and the common parent of the S group,
(B) Identify the election as an election under section 338(h)(10) of
the Code,
(C) Indicate the date and Service Center where the S group filed its
consolidated return for the taxable period that includes the acquisition
date or for the last taxable period for which one was filed, and
(D) Be signed by both a person for P and a person for the common
parent of the S group each of whom states under penalties of perjury
that he or she is authorized to make the section 338(h)(10) election on
behalf of P or the S group (as the case may be).
(7) Delayed elections -- (i) In general. In lieu of the simultaneous
election requirement of paragraph (d)(1) of this section, a delayed
section 338(h)(10) statement of election (''delayed election'') may be
filed with the Internal Revenue Service Centers with which P and the S
group file their respective annual income tax returns in the following
two situations:
(A) An express election was made before July 15, 1986 (''transitional
election''),
(B) An express election was made before the date the target became a
section 338(h)(10) target, i.e., before the date that the affiliated
group of which the target was a member filed or was required to file a
consolidated return (''pre-section 338(h)(10) target election'').
(ii) Time for filing -- (A) Transitional election. A transitional
section 338(h)(10) election must be filed on or before July 15, 1986.
(B) Pre-section 338(h)(10) target election. A pre-section 338(h)(10)
target election must be filed on or before the date that is the earlier
of (1) the 30th day after the day the affiliated group of which the
target is a member files a consolidated return for the period that
includes the target's acquisition date or (2) the 15th day of the 4th
month following the close of the S group's taxable year in which the
acquisition date occurs.
(iii) Contents of delayed statement. The delayed section 338(h)(10)
statement of election must contain the same information as required for
a separate statement of section 338(h)(10) election by paragraph
(d)(6)(ii) of this section except that the election must be prominently
identified as a ''delayed section 338(h)(10) statement of election on
account of a transitional election'' or ''delayed section 338(h)(10)
statement of election on account of a pre-section 338(h)(10) target
election'' (as the case may be).
(iv) Attachments to delayed statement. There must be attached to the
delayed statement of election copies of both the Form 8023 filed for T
and the schedule required under 1.338-1T(e)(1) properly annotated in
accordance with paragraph (d)(3) of this section.
(v) Application of certain provisions. The delayed section
338(h)(10) statement of election is treated as an integral part of Form
8023 for purposes of 1.338-1T(e) and paragraph (d)(4) of this section
as of the day such delayed statement of election is filed.
(vi) Operating rule. Beginning with the date an express election is
made and until a delayed section 338(h)(10) statement of election is
filed for T, all parties shall treat the transaction as if a section
338(h)(10) election is not made. Thus, for example, until the delayed
election is made, any recapture gain (as defined in 1.338-4T(h)(2)(iv))
recognized by old T is reported, pursuant to 1.338-1T(f)(3), by old T
in its last return.
(8) Coordination with consolidated returns regulations. On or after
the day that a section 338(h)(10) election is made for a former member
of the S group, the group may not withdraw its consolidated return for
the taxable period that includes the acquisition date or for certain
periods elect to discontinue filing consolidated returns. See
1.1502-75T.
(9) Special rules. See 1.338-1T(m)(11) for special rules applicable
to certain statements of section 338 election filed on or after December
9, 1985, and on or before July 15, 1986.
(e) Detailed consequences of section 338(h)(10) election. If a
section 338(h)(10) election is made, the following consequences apply:
(1) Taxable sale of all target assets. Old T recognizes gain or loss
as if, while a member of the S group, it sold all of its assets in a
single transaction as of the close of the acquisition date. For
determination of deemed selling price, see paragraph (f) of this
section. For coordination with sections 337 and 338(h)(12), see
paragraph (j) of this section.
(2) Nonrecognition treatment for target stock -- (i) General rule.
For purposes of chapter 1 of the Code, gain or loss on the actual sale
or exchange by the S group to P of stock of T or of a section 338(h)(10)
target affiliate included in a qualified stock purchase is ignored.
Likewise, gain or loss on the deemed sale of the stock of a section
338(h)(10) target affiliate that is a subsidiary of T is ignored.
(ii) Example. The provisions of this subparagraph (2) may be
illustrated by the following example:
Example. S1 owns all of the outstanding stock of T and T1. T1 owns
all of the outstanding stock of T2. On March 1, 1986, P purchases all
of the outstanding stock of each of T and T1. An express election and a
section 338(h)(10) election are made for T. Thus, a deemed election and
a deemed section 338(h)(10) election, under paragraph (h) of this
section, are caused for T1 and T2. Gain or loss realized by S1 on the
actual sale of the T and T1 stock is ignored as is the gain or loss on
the deemed sale of T2 stock by old T1. Thus, for example, gain or loss
realized on the sale of the T and T1 stock is not taken into account in
S1's earnings and profits.
(3) Deemed section 332 liquidation for target -- (i) In general.
Except as otherwise provided in this section, the target corporation is
treated as if (at the close of the acquisition date but after the deemed
sale of its assets) it distributed all its assets in a complete
liquidation to which section 332 applies.
(ii) Cross-references. (A) For treatment of T stock retained by K
and the S group, see paragraph (e)(4) of this section.
(B) For deemed gain recognition election with respect to nonrecently
purchased T stock held by P, see paragraph (e)(5) of this section.
(C) For carryovers of old T's tax attributes (e.g., earnings and
profits and net operating loss carryovers) to certain members of the S
group that owned T stock, see section 381.
(4) Treatment of unacquired target stock -- (i) Nonrecognition
treatment. No gain or loss shall be recognized by K or the members of
the S group with respect to their shares of T stock that are not
acquired by P as part of the qualified stock purchase (''unacquired
stock'').
(ii) Basis to K. K's basis for its new T stock is the same as K's
basis for its unacquired old T stock.
(iii) Basis to S group. The basis of the unacquired T stock held by
members of the S group shall be equal to the net fair market value of
the portion of the new T assets that such members would receive were new
T to completely liquidate at the beginning of the day after the
acquisition date.
(iv) Net fair market value. For purposes of this subparagraph (4),
the net fair market value of new T's assets is the excess of their fair
market value over new T's liabilities as of the beginning of the day
after the acquisition date.
(v) Fair market value. For purposes of paragraph (e)(4)(iv) of this
section, the fair market value of new T assets is determined in the same
manner as is the deemed sale price of old T assets under paragraph (f)
of this section except that, if the S group elects the MADSP formula to
determine the deemed selling price of old T assets, then the fair market
value of new T assets is the MADSP amount determined under paragraph
(f)(2)(i) of this section for old T assets.
(vi) Example. For an example illustrating S1's basis in unacquired T
shares if the MADSP formula is not used, see Example (4) in paragraph
(g) of this section.
(5) Deemed gain recognition election. If P owns shares of
nonrecently purchased T stock (as defined in section 338(b)(6)(B)) on
the acquisition date, then P shall be deemed to have made a gain
recognition election with respect to these shares and to have sold those
shares under 1.338-4T (j) (2) Answer 2 (i).
(6) Adjusted grossed-up basis -- (i) In general. P's adjusted
grossed-up basis of T is the sum of --
(A) P's grossed-up basis in recently purchased T stock,
(B) The basis amount (as set forth in section 338 (b)(3)(B)) of P's
nonrecently purchased T stock,
(C) The liabilities of new T as of the beginning of the day after the
acquisition date (other than liabilities that were not liabilities of
old T), and
(D) Other relevant items.
(ii) Allocation. P's adjusted grossed-up basis for the T stock shall
be allocated as basis among the T assets in accordance with section 338
(b)(5).
(7) Effect on consolidated returns -- (i) General rule. The deemed
sale and liquidation rules of paragraph (e)(1) and (3) of this section
apply for purposes of the consolidated return regulations.
Illustrations of the preceding sentence are set forth in the remainder
of this subparagraph (7).
(ii) Investment credit recapture. Any section 38 property deemed
sold by T on the close of the acquisition date may be subject to section
47(a) (relating to dispositions of section 38 property). Any increase
in tax is added to the tax liability of the S group under 1.1502-2 for
the taxable period that includes the acquisition date. See 1.1502-3
(f)(1).
(iii) Deferred intercompany transactions -- (A) Target as selling
member. In general, in the case of an acquisition to which section
381(a) applies, under 1.1503-13 (c)(6), the transferee inherits the
entire remaining balance of the deferred gain or loss of the transferor.
Thus, the member or members of the S group that would be subject to
1.1502-13 (d), (e), and (f) (relating to restoration of deferred gain or
loss) with respect to T's entire remaining balance of deferred gain or
loss as of the close of the acquisition date had T actually liquidated
under section 332 are thereafter subject to such provisions as a result
of the deemed liquidation under section 332.
(B) Target as owning member. Deferred gain or loss is taken into
account under 1.1502-13 (f)(1) as of the close of the acquisition date
by selling members of the S group with respect to any items which T (as
the owning member) is deemed to have sold.
(iv) Cross-references. See 1.1502-75T (a) for prohibition on
selling consolidated group withdrawing a consolidated return on or after
the day that a section 338(h)(10) election is made for a former member
of the group. See 1.1502-75T (b) for prohibition on selling
consolidated group electing to discontinue filing consolidated returns
on or after the day that a section 338(h)(10) election is made for a
former member of the group.
(8) Coordination with 1.338-1T and 1.338-4T -- (i) References to
1.338-1T. The following table sets forth the subunits of 1.338-1T and
indicates whether each is applicable or irrelevant to this section and
section 338(h)(10).
(ii) References to 1.338-4T. The following table sets forth the
subunits of 1.338-4T and whether each is applicable or irrelevant to
this section and section 338(h)(10).
(f) Deemed sale price -- (1) General rule. The price at which each
asset of old T is deemed to have been sold is its fair market value as
of the close of the acquisition date.
(2) Elective MADSP formula. Under the authority of section
338(h)(11), in lieu of the general rule, the S group may elect to
determine the price at which each asset of old T is deemed sold by --
(i) Determining modified ADSP (''MADSP'') and
(ii) Then determining the deemed selling price by allocating MADSP
among the assets of old T as follows:
(A) If the acquisition date is on or before July 1, 1986, or after
that date but pursuant to a contract of sale that is binding on both the
purchaser and the seller as of that date, the allocation to each asset
shall be made in proportion to its relative fair market value.
(B) If the allocation under paragraph (f)(2)(ii)(A) of this section
is not permitted, the allocation to each asset shall be made in
accordance with the rules in 1.338(b)-2T (without regard to
1.338(b)-2T(c)(2)).
(3) Formula. The elective formula is:
For purposes of this formula:
(i) ''G'' is the grossed-up basis of P's recently purchased T stock
as set forth in 1.338-4T (h)(3) Answer 2 (ii).
(ii) ''L'' is the sum of new T's liabilities as of the beginning of
the day after the acquisition date (other than liabilities that were not
liabilities of old T).
(iii) ''X'' is other relevant items.
(4) Procedure for electing MADSP formula and revoking that election.
The election to apply the MADSP formula is made by attaching to the
consolidated Federal income tax return of the S group (including an
amended return) for the taxable period in which the acquisition date
falls (the ''taxable period return'') a statement containing the
following, or substantially similar, declaration: ''this return
reflects a madsp formula election for t under section 338(h)(10) and
1.338(h)(10)-1T(f)''. The MADSP election is revoked by attaching to an
amended consolidated Federal income tax return of the S group for that
taxable period the following, or substantially similar, declaration:
''this return does not reflect a madsp formula election for t under
section 338(h)(10) and 1.338(h)(10)-1T(f)''. In addition, a MADSP
election may be made or revoked in connection with the examination of
the taxable period return. A MADSP election made for T also applies to
all section 338(h)(10) target affiliates as does the revocation for T.
A MADSP election may not be made or revoked if the period within which
to make an assessment of tax has expired for any return that would be
affected by the election or revocation. For this purpose, a return
would be affected by the election (or revocation) if the election (or
revocation) would have the effect, directly or indirectly, of increasing
the tax liability reported in that return. If a MADSP election is made
or revoked, members of the S group shall make proper adjustment to the
basis of their unacquired T stock referred to in paragraph (e)(4)(iii)
of this section. If such unacquired T stock has been disposed of before
the adjustment to its basis is made, the members of the S group shall
treat the adjustment under principles of tax law that apply when the
purchase price of an asset is changed after the asset has been disposed
of.
(5) Cross-reference. See 1.338(b)-3T(h) for adjustments to the
aggregate deemed sale price of old target's assets because of events
occurring after the acquisition date.
(g) Examples. The provisions of paragraphs (e) and (f) of this
section may be illustrated by the following examples:
Example (1). (i) T is a member of the S group which uses the
calendar year. T uses the accrual method of accounting. T has only one
class of stock, all of which is owned by S1. On March 1, 1986, S1 sells
all of its T stock to P for $80,000 and both an express election and a
section 338(h)(10) election are made for T. The S group does not elect
the MADSP formula. On that date, assume the following facts:
(ii) The deemed selling price of each old T asset, as determined
under the general rule of paragraph (f)(1) of this section, is as
follows:
(iii) Under paragraph (e)(1) of this section, old T recognizes
$25,000 gain on the deemed sale of the land, i.e., $75,000 -- $50,000,
and ordinary income under section 1245 of $30,000 on the deemed sale of
the equipment, i.e., (the lower of fair market value, $60,000, or
recomputed basis, $70,000) less adjusted basis, $30,000.
Example (2). (i) Assume the same facts as in Example (1), except
that the S group elects the MADSP formula.
(ii) Under paragraph (f)(3) of this section, the MADSP is as follows:
MADSP=G+L+X
MADSP=$80,000+$40,000+0
MADSP=$120,000
(iii) The portion of MADSP allocated to each asset is determined
under paragraph (f)(2)(ii)(A) of this section as follows:
Gain on the deemed sale of the land is $16,667, i.e., $66,667 --
$50,000. Ordinary income under section 1245 on the deemed sale of the
equipment is $23,333, i.e., (the lower of the amount deemed realized,
$53,333, or the recomputed basis, $70,000) minus adjusted basis,
$30,000.
(iv) This example illustrates allocation of MADSP pursuant to the
method described in paragraph (f)(2)(ii)(A) of this section. In this
example, the same result also obtains using the method described in
paragraph (f)(2)(ii)(B) because T has only Class III assets and MADSP
does not exceed the sum of the fair market values of T's assets.
Example (3). (i) The facts are the same as in Example (1). In
addition, assume the following:
(A) As of the close of the acquisition date, old T's current earnings
and profits, other than those generated from the deemed sale of its
assets, are $21,950. As of the close of 1985, old T had neither
accumulated earnings and profits nor a deficit.
(B) Other than earnings and profits, old T has no items described in
section 381(c).
(ii) The consequences that obtain to P, T, and S1 include the
following:
(A) As determined in Example (1), old T recognizes $25,000 of gain on
the deemed sale of the land and $30,000 of ordinary income under section
1245 on the deemed sale of the equipment. Thus, earnings and profits
attributable to the deemed sale of all of old T's assets are $55,000.
(B) P's basis in new T stock is P's cost for the stock, $80,000.
(C) The adjusted grossed-up basis of new T is $120,000, i.e., P's
cost for the old T stock ($80,000) plus T's liability (note payable,
$40,000). (Assume there are no other relevant items.) This adjusted
grossed-up basis is allocated as basis among the new T assets under
section 338(b)(5).
(D) Assume that, under 1.1502-33(d), old T's allocable share of the
S group's consolidated tax liability for 1986 (all of which is
attributable to the deemed sale of T's assets) is $11,950.
(E) As of the close of the acquisition date but after the deemed sale
of its assets, old T's earnings and profits are $65,000, i.e., $21,950
+$55,000^$11,950.
(F) S1 succeeds to and takes into account old T's earnings and
profits of $65,000, determined as of the close of the acquisition date
but after the deemed sale.
(G) S1 does not recognize gain or loss upon its sale of the old T
stock to P.
Example (4). (i) Assume the same facts as in Example (3) except that
S1 sells 80 percent of the old T stock to P for $64,000.
(ii) The consequences that obtain to P, T, and S1 include the
following:
(A) P's basis for the new T stock is P's cost for the stock, $64,000.
(B) The adjusted grossed-up basis of new T is $120,000 as in Example
(3). The calculation (which is different) is not shown.
(C) S1 does not recognize gain or loss with respect to the retained
stock in T.
(D) Under paragraph (e)(4)(iii) of this section, the basis of the T
stock retained by S1 is $19,000, calculated as follows:
(E) S1 succeeds to and takes into account old T's earnings and
profits of $65,000 as in Example (3).
(F) The other consequences are the same as in Example (3), except to
the extent inconsistent with this subdivision (ii).
Example (5). (i) Assume the same facts as in Example (4) except that
K owns 20 percent of the outstanding T stock and these shares are not
purchased by P. K's basis in its T shares is $5,000.
(ii) The consequences that obtain to P, T, and S1 include the
following:
(A) Section 1.381 (c) (2)-1 (c) (2) requires that T's earnings and
profits be computed by taking into account the amount of its earnings
and profits properly applicable to distributions to minority
shareholders. Hence, S1 succeeds to and takes into account 80 percent
of T's earnings and profits of $65,000, or $52,000, as a result of the
deemed distribution of 80 percent of old T's assets to S1 in the deemed
liquidation to which section 332 applies.
(B) K recognizes no gain or loss.
(C) K's basis in its T stock remains at $5,000.
(D) The other consequences are the same as in Example (4), except to
the extent inconsistent with this subdivision (ii). The consequences in
Example (4) with respect to stock retained by S1 are inapplicable.
Example (6). (i) Assume that S1 sells all of its T stock to P and
that all of the other facts are the same as in Example (3) except that
the equipment is held by T1, a wholly-owned subsidiary of T.
(ii) In addition, assume the following:
(A) T1 has no liabilities other than its share of the S group's
consolidated tax liability generated by the deemed sale of the
equipment, its sole asset.
(B) As of the close of the acquisition date, but before the deemed
sale of the equipment, T1 has none of the attributes listed in section
381 (c).
(iii) The consequences that obtain to T1 include the following:
(A) The deemed selling price of the equipment, under the general rule
of paragraph (f)(1) of this section, is $60,000.
(B) Under paragraph (e)(1) of this section, T1 recognizes ordinary
income under section 1245 of $30,000 on the deemed sale of the equipment
as determined in Example (1).
(C) Assume that, under 1.1502-33 (d), T1's allocable share of the S
group's consolidated tax liability for 1986 is $4,950.
(D) As of the close of the acquisition date, but after the deemed
sale of the equipment, T1's earnings and profits are $25,050, i.e., $0 +
$30,000 ^ $4,950.
(iv) The consequences that obtain to T include the following:
(A) Old T does not recognize gain or loss upon its deemed sale of the
T1 stock.
(B) The deemed selling price of the land, under the general rule of
paragraph (f)(1) of this section, is $75,000.
(C) Gain on the deemed sale of the land is $25,000, the same amount
as T recognizes in Example (1).
(D) Assume that, under 1.1502-33 (d), old T's allocable share of the
S group's consolidated tax liability for 1986 is $7,000.
(E) Old T succeeds to and takes into account old T1's earnings and
profits of $25,050, determined as of the close of the acquisition date
but after the deemed sale by T1 of its asset.
(F) As of the close of the acquisition date, but after the deemed
sale of its assets, old T's earnings and profits are $65,000, i.e.,
$21,950 + $25,050 + ($25,000 ^ $7,000). (Note that T's current earnings
and profits, other than those generated by the deemed sale of its
assets, are $21,950, as set forth in subdivision (i) (A) of Example
(3).)
(v) The consequences that obtain to S1 include the following:
(A) S1 does not recognize gain or loss upon its sale of the old T
stock to P.
(B) S1 succeeds to and takes into account old T's earnings and
profits of $65,000, determined as of the close of the acquisition date
but after the deemed sale of old T's assets.
(iv) P's basis in the new T stock is P's cost for the old T stock,
$80,000.
Example (7). (i) The facts are the same as in Example (6) except
that S1 elects to use the MADSP formula and P already owns 20 percent of
the T stock which constitutes nonrecently purchased stock. Assume
further that P's basis in these shares of nonrecently purchased T stock
is $6,000, that P paid $64,000 for the 80 percent of old T stock
purchased from S1, and that the fair market value of the T1 stock is
$60,000.
(ii) The gain recognized by old T on the deemed sale of its assets is
calculated as follows:
(A) Under paragraph (f) (3) of this section, the MADSP for the T
assets is as follows:
MADSP=G+L+X
MADSP=$64,000/.8+$40,000+0
MADSP=$80,000+$40,000+0
MADSP=$120,000
(B) The portion of MADSP allocated to each T asset is determined
under paragraph (f)(2)(ii)(A) of this section as follows:
(C) Old T recognizes gain of $16,667 on the deemed sale of the land,
i.e., the same amount as T recognizes in Example (2).
(D) Old T does not recognize gain or loss upon its deemed sale of the
old T1 stock.
(iii) The gain recognized by T1 on the deemed sale of its asset
(equipment) is calculated as follows:
(A) Under paragraph (f)(3) of this section, the MADSP for the T1
asset (equipment) is as follows:
MADSP=G+L+X
MADSP=$53,333+0+0
MADSP=$53,333
(B) Under paragraph (e)(1) of this section, T1 recognizes ordinary
income under section 1245 of $23,333 on the deemed sale of the
equipment, i.e., (the lower of the amount deemed realized, $53,333, or
the recomputed basis, $70,000) minus adjusted basis, $30,000.
(iv) The additional consequences to T1 include the following:
(A) Assume that, under 1.1502-33(d), old T1's share of the S group's
consolidated tax liability (all of which is attributable to the deemed
sale of old T1's equipment) for 1986 is $3,733.
(B) As of the close of the acquisition date, but after the deemed
sale of its asset, T1's earnings and profits are $19,600, i.e., $23,333
-- $3,733.
(v) The additional consequences that obtain to T include the
following:
(A) Assume that, under 1.1502-33(d), old T's allocable share of the
S group's consolidated tax liability for 1986 (all of which is
attributable to the deemed sale of old T's land) is $4,667.
(B) Old T succeeds to and takes into account old T1's earnings and
profits of $19,600, determined as of the close of the acquisition date
but after the deemed sale by T1 of its asset.
(C) As of the close of the acquisition date, but after the deemed
sale of its assets, old T's earnings and profits are $53,550, i.e.,
$21,950 + $19,600 + ($16,667 ^ $4,667).
(vi) The additional consequences that obtain to S1 include the
following:
(A) S1 does not recognize gain or loss upon its sale to P of old T
stock (that is recently purchased stock).
(B) S1 succeeds to and takes into account 80 percent of old T's
earnings and profits of $53,550, or $42,840, determined as of the close
of the acquisition date but after the deemed sale of the T and T1
assets. See 1.381 (c) (2)-1 (c) (2).
(vii) P is deemed to have made a gain recognition election for its
nonrecently purchased T stock. As a result, it recognizes gain of
$10,000, calculated under paragraph (e) (5) of this section as follows:
(A) P's grossed-up basis for its recently purchased T stock is
64,000, i.e., the basis of the recently purchased T stock, $64,000,
multiplied by the fraction in section 338 (b) (4), (1-.2)/(.8).
(B) P's basis amount for its nonrecently purchased T stock is
$16,000, i.e., the grossed-up basis in the recently purchased T stock,
$64,000, multiplied by the fraction in section 338(b)(3)(B),
(.2)/(1.0-.2).
(C) The recognized gain is $10,000, i.e., the basis amount, $16,000,
minus P's basis, $6,000.
(viii) As a result of the deemed gain recognition election, P's basis
in the nonrecently purchased T stock is increased from $6,000 to
$16,000. P's basis in all the T stock is $80,000, i.e., $64,000 plus
$16.000.
(ix) This example illustrates allocation of MADSP pursuant to the
method described in paragraph (f)(2)(ii)(A) of this section. In this
example, the same result also obtains using the method described in
paragraph (f)(2)(ii)(B) because T has only Class III assets and MADSP
does not exceed the sum of the fair market values of T's assets.
(h) Deemed section 338(h)(10) election -- (1) In general. P and S
shall be treated as having made a section 338(h)(10) election for any
section 338(h)(10) target affiliate if --
(i) P makes an express election for T and
(ii) P and S make a section 338(h)(10) election for T.
(2) Example. The provisions of this paragraph (h) may be illustrated
by the following examples:
Example (1). On January 1, 1986, and February 1, 1986, P purchases
directly from S1 the stock of T and T1, respectively. An express
election and a section 338(h)(10) election are made for T. P and S are
treated as having made a section 338(h)(10) election for T1.
Example (2). T1 is a wholly-owned subsidiary of T. On March 1,
1987, P purchases all the T stock from S1. An express election and a
section 338(h)(10) election are made for T. P and S are treated as
having made a section 338 (h) (10) election for T1.
(i) (Reserved)
(j) Coordination with sections 337 and section 338(h)(12) -- (1)
General rule. If all the conditions set forth in paragraph (j)(2) of
this section are met, then --
(i) Old T is treated as having distributed all of its assets as of
the close of the acquisition date for purposes of section 337 and
provisions that relate to section 337 and
(ii) Any item reportable for old T for its last taxable period are
included in the S group's consolidated return for the taxable period
that includes the acquisition date.
(2) Conditions. The conditions referred to in paragraph (j)(1) of
this section are as follows:
(i) A section 338(h)(10) election is made for T.
(ii) The provisions of section 338(h)(12) (relating to tandem section
337-338 transactions) are satisfied.
(iii) The provisions of section 337 (c)(3) (relating to section 337
chain liquidations) are met.
(3) Exception for section 338(c)(1) percentage. If the general rule
of this paragraph (j) applies, then, under 1.338-4T(k)(1) Answer 3
(ii), T nevertheless recognizes gain or loss on both actual and deemed
sales (that would otherwise be subject to the nonrecognition rule of
section 337) to the extent of the section 338(c)(1) percentage.
(4) Deemed gain recognition election. The provisions of paragraph
(e) (5) of this section (relating to deemed gain recognition election)
apply to transactions described in this paragraph (j).
(5) Examples. The provisions of this paragraph (j) may be
illustrated by the following examples:
Example (1). (i) Individual A owns all of the stock of S1, S1 owns
all of the stock of S2, and S2 owns all of the stock of T. These
corporations constitute an affiliated group. T has two assets. Asset
No. 1, a capital asset, has a basis of $200 and a fair market value of
$300. Asset No. 2, which is section 1245 property, has a basis of $50
and a fair market value of $75. Its recomputed basis is $60. On
January 1, 1986, plans of complete liquidation are adopted for all
members of the group, including T. On June 1, 1986, members of the
group sell property, including all of the T stock, to P. At no time is
the plan for T's liquidation rescinded before June 1, 1986 (the
acquisition date). An express election and a section 338(h)(10)
election are made for T. On October 1, 1986, all of the members of the
S group, other than T, distribute their respective assets in complete
liquidation.
(ii) The following consequences obtain to the members of the S group,
T, and A:
(A) Under section 337(a), no gain or loss is recognized to the
members of the S group (including T) upon the actual sale of property
(as defined in section 337(b)) including the sale of T stock by S2.
(B) T realizes gain of $125, i.e., ($300-$200) + ($75-$50), on the
deemed sale of its assets. Since section 337(a) applies, T recognizes
only $10 of this gain which is ordinary income under section 1245, i.e.,
(the lower of the fair market value, $75, or recomputed basis, $60)
minus adjusted basis, $50. This ordinary income under section 1245 is
reported on the consolidated return of the S group for the taxable
period that includes the acquisition date. The remaining realized gain
of $115 (i.e., $125-$10) is not recognized under section 337.
(C) Pursuant to section 332, no gain or loss is recognized to S1 upon
the complete liquidation of S2.
(D) Pursuant to section 331, gain or loss is recognized to A upon the
complete liquidation of S1.
Example (2). Assume the same facts as in Example (1), except that K
owns 20 percent of the outstanding T stock and such shares are not
disposed of in the transaction. Thus, the section 338(c)(1) percentage
(within the meaning of 1.338-4T(h)(2)(v)) is 20 percent. The
consequences are the same as in Example (1), except that T recognizes
capital gain of $20 on the deemed sale of Asset No. 1, i.e., 20 percent
of $100, and section 1231 gain of $3 on the deemed sale of Asset No. 2,
i.e., 20 percent of $15.
Example (3). Assume the same facts as in Example (2), except that T
makes an actual sale of Asset No. 2 on May 15, 1986, to individual C
for $75. The consequences are the same as in Example (2).
(k) Miscellaneous procedural matters -- (1) Inapplicability of
provisions. The provisions of section 6043 and 1.332-6 (relating to
information returns and recordkeeping requirements for corporate
liquidations) shall not apply to the constructive section 332
liquidation of T as provided by paragraph (e) (3) of this section.
However, these provisions apply to transactions to which paragraph (j)
of this section applies.
(2) Mooted section 338(h)(9) return -- (i) Transitional rule. A
deemed sale return for T (as defined in 1.338-1T(f)(3)(i)) that is
subsequently mooted by a section 338(h)(10) election shall be considered
a return within the meaning of section 6011 for purposes of section 6513
(relating to time return deemed filed and tax considered paid) and
section 6611 (relating to interest on overpayment of tax).
(ii) Example. The provisions of this subparagraph (2) may be
illustrated by the following example:
Example. On January 1, 1984, P purchases all of the outstanding T
stock from S1 and makes an express election for T. Old T's final tax
return is filed on April 15, 1984 and the tax due of $10,000 is paid at
that time. Subsequently, a delayed statement of a section 338(h)(10)
election is filed for T pursuant to the provisions of paragraph (d)(7)
of this section. As a result, section 338(h)(10) is elected for T. T
is entitled to a refund of $10,000 plus interest thereon from April 15,
1984.
(T.D. 8068, 51 FR 743, Jan. 8, 1986, as amended by T.D. 8074, 51 FR
5196, Feb. 12, 1986; T.D. 8068, 51 FR 10540, Mar. 27, 1986; T.D.
8072, 51 FR 10623, Mar. 28, 1986; T.D. 8088, 51 FR 17936, May 16, 1986;
T.D. 8092, 51 FR 23744, July 1, 1986)
26 CFR 1.338(h)(10)-1T collapsible corporations; foreign personal holding companies
26 CFR 1.341-1 Collapsible corporations; in general.
Subject to the limitations contained in 1.341-4 and the exceptions
contained in 1.341-6 and 1.341-7(a), the entire gain from the actual
sale or exchange of stock of a collapsible corporation, (b) amounts
distributed in complete or partial liquidation of a collapsible
corporation which are treated, under section 331, as payment in exchange
for stock, and (c) a distribution made by a collapsible corporation
which, under section 301(c)(3), is treated, to the extent it exceeds the
basis of the stock, in the same manner as a gain from the sale or
exchange of property, shall be considered as ordinary income.
(T.D. 7655, 44 FR 68459, Nov. 29, 1979)
26 CFR 1.341-2 Definitions.
(a) Determination of collapsible corporation. (1) A collapsible
corporation is defined by section 341(b)(1) to be a corporation formed
or availed of principally (i) for the manufacture, construction, or
production of property, (ii) for the purchase of property which (in the
hands of the corporation) is property described in section 341(b)(3), or
(iii) for the holding of stock in a corporation so formed or availed of,
with a view to (a) the sale or exchange of stock by its shareholders
(whether in liquidation or otherwise), or a distribution to its
shareholders, prior to the realization by the corporation manufacturing,
constructing, producing, or purchasing the property of a substantial
part of the taxable income to be derived from such property, and (b) the
realization by such shareholders of gain attributable to such property.
See 1.341-5 for a description of the facts which will ordinarily be
considered sufficient to establish whether or not a corporation is a
collapsible corporation under the rules of this section. See paragraph
(d) of 1.341-5 for examples of the application of section 341.
(2) Under section 341(b)(1) the corporation must be formed or availed
of with a view to the action therein described, that is, the sale or
exchange of its stock by its shareholders, or a distribution to them
prior to the realization by the corporation manufacturing, constructing,
producing, or purchasing the property of a substantial part of the
taxable income to be derived from such property, and the realization by
the shareholders of gain attributable to such property. This
requirement is satisfied in any case in which such action was
contemplated by those persons in a position to determine the policies of
the corporation, whether by reason of their owning a majority of the
voting stock of the corporation or otherwise. The requirement is
satisfied whether such action was contemplated, unconditionally,
conditionally, or as a recognized possibility. If the corporation was
so formed or availed of, it is immaterial that a particular shareholder
was not a shareholder at the time of the manufacture, construction,
production, or purchase of the property, or if a shareholder at such
time, did not share in such view. Any gain of such a shareholder on his
stock in the corporation shall be treated in the same manner as gain of
a shareholder who did share in such view. The existence of a bona fide
business reason for doing business in the corporate form does not, by
itself, negate the fact that the corporation may also have been formed
or availed of with a view to the action described in section 341(b).
(3) A corporation is formed or availed of with a view to the action
described in section 341(b) if the requisite view existed at any time
during the manufacture, production, construction, or purchase referred
to in that section. Thus, if the sale, exchange, or distribution is
attributable solely to circumstances which arose after the manufacture,
construction, production, or purchase (other than circumstances which
reasonably could be anticipated at the time of such manufacture,
construction, production, or purchase), the corporation shall, in the
absence of compelling facts to the contrary, be considered not to have
been so formed or availed of. However, if the sale, exchange or
distribution is attributable to circumstances present at the time of the
manufacture, construction, production, or purchase, the corporation
shall, in the absence of compelling facts to the contrary, be considered
to have been so formed or availed of.
(4) The property referred to in section 341(b) is that property or
the aggregate of those properties with respect to which the requisite
view existed. In order to ascertain the property or properties as to
which the requisite view existed, reference shall be made to each
property as to which, at the time of the sale, exchange, or distribution
referred to in section 341(b) there has not been a realization by the
corporation manufacturing, constructing, producing, or purchasing the
property of a substantial part of the taxable income to be derived from
such property. However, where any such property is a unit of an
integrated project involving several properties similar in kind, the
determination whether the requisite view existed shall be made only if a
substantial part of the taxable income to be derived from the project
has not been realized at the time of the sale, exchange, or
distribution, and in such case the determination shall be made by
reference to the aggregate of the properties constituting the single
project.
(5) A corporation shall be deemed to have manufactured, constructed,
produced, or purchased property if it (i) engaged in the manufacture,
construction, or production of property to any extent, or (ii) holds
property having a basis determined, in whole or in part, by reference to
the cost of such property in the hands of a person who manufactured,
constructed, produced, or purchased the property, or (iii) holds
property having a basis determined, in whole or in part, by reference to
the cost of property manufactured, constructed, produced, or purchased
by the corporation. Thus, under subdivision (i) of this subparagraph,
for example, a corporation need not have originated nor have completed
the manufacture, construction, or production of the property. Under
subdivision (ii) of this subparagraph, for example, if an individual
were to transfer property constructed by him to a corporation in
exchange for all of the capital stock of such corporation, and such
transfer qualifies under section 351, then the corporation would be
deemed to have constructed the property, since the basis of the property
in the hands of the corporation would, under section 362 be determined
by reference to the basis of the property in the hands of the
individual. Under subdivision (iii) of this subparagraph, for example,
if a corporation were to exchange property constructed by it for
property of like kind constructed by another person, and such exchange
qualifies under section 1031(a), then the corporation would be deemed to
have constructed the property received by it in the exchange, since the
basis of the property received by it in the exchange would, under
section 1031(d), be determined by reference to the basis of the property
constructed by the corporation.
(6) In determining whether a corporation is a collapsible corporation
by reason of the purchase of property, it is immaterial whether the
property is purchased from the shareholders of the corporation or from
persons other than such shareholders. The property, however, must be
property which, in the hands of the corporation, is property of a kind
described in section 341(b)(3). The determination whether property is
of a kind described in section 341(b)(3) shall be made without regard to
the fact that the corporation is formed or availed of with a view to the
action described in section 341(b)(1).
(7) Section 341 is applicable whether the shareholder is an
individual, a trust, an estate, a partnership, a company, or a
corporation.
(b) Section 341 assets. For the purposes of this section, the term
''section 341 assets'' means the following listed property if held for
less than 3 years:
(1) Stock in trade of the corporation, or other property of a kind
which would properly be included in the inventory of the corporation if
on hand at the close of the taxable year.
(2) Property held primarily for sale to customers in the ordinary
course of a trade or business.
(3) Property used in a trade or business as defined in section
1231(b) and held for less than 3 years, except property that is or has
been used in connection with the manufacture, construction, production
or sale of property described in subparagraphs (1) and (2) of this
paragraph.
(4) Unrealized receivables or fees pertaining to property listed in
this paragraph. The term ''unrealized receivables or fees'' means any
rights (contractual or otherwise) to payment for property listed in
subparagraphs (1), (2), and (3) of this paragraph which has been
delivered or is to be delivered and rights to payments for services
rendered or to be rendered, to the extent such rights have not been
included in the income of the corporation under the method of accounting
used by it. In determining whether the assets referred to in this
paragraph have been held for 3 years, the time such assets were held by
a transferor shall be taken into consideration (section 1223). However,
no such period shall begin before the date the manufacture,
construction, production, or purchase of such assets is completed.
26 CFR 1.341-3 Presumptions.
(a) Unless shown to the contrary a corporation shall be considered to
be a collapsible corporation if at the time of the transactions
described in 1.341-1 the fair market value of the section 341 assets
held by it constitutes 50 percent or more of the fair market value of
its total assets and the fair market value of the section 341 assets is
120 percent or more of the adjusted basis of such assets. In
determining the fair market value of the total assets, cash, obligations
which are capital assets in the hands of the corporation, governmental
obligations, and stock in any other corporation shall not be taken into
consideration. The failure of a corporation to meet the requirements of
this paragraph, shall not give rise to the presumption that the
corporation was not a collapsible corporation.
(b) The following example will illustrate the application of this
section:
Example. A corporation, filing its income tax returns on the accrual
basis, on July 31, 1955, owned assets with the following fair market
values: Cash, $175,000; note receivable held for investment, $130,000;
stocks of other corporations, $545,000; rents receivable, $15,000;
and a building constructed by the corporation in 1953 and held
thereafter as rental property, $750,000. The adjusted basis of the
building on that date was $600,000. The only debt outstanding was a
$500,000 mortgage on the building. On July 31, 1955, the corporation
liquidated and distributed all of its assets to its shareholders. In
computing whether the fair market value of the section 341 assets (only
the building) is 50 percent or more of the fair market value of the
total assets, the cash, note receivable, and stocks of other
corporations are not taken into account in determining the value of the
total assets, with the result that the fair market value of the total
assets was $765,000 ($750,000 (building) plus $15,000 rents receivable).
Therefore, the value of the building is 98 percent of the total assets
($750,000 $765,000). The value of the building is also 125 percent of
the adjusted basis of the building ($750,000 $600,000). In view of the
above facts, there arises a presumption that the corporation is a
collapsible corporation.
26 CFR 1.341-4 Limitations on application of section.
(a) General. This section shall apply only to the extent that the
recognized gain of a shareholder upon his stock in a collapsible
corporation would be considered, but for the provisions of this section,
as gain from the sale or exchange of a capital asset held for more than
1 year (6 months for taxable years before 1977; 9 months for taxable
years beginning in 1977). Thus, if a taxpayer sells at a gain stock of
a collapsible corporation which he had held for six months or less, this
section would not, in any event, apply to such gain. Also, if it is
determined, under provisions of law other than section 341, that a sale
or exchange at a gain of stock of a collapsible corporation which has
been held for more than 1 year (6 months for taxable years before 1977;
9 months for taxable years beginning in 1977) results in ordinary income
rather than long-term capital gain, then this section (including the
limitations contained herein) has no application whatsoever to such
gain.
(b) Stock ownership rules. (1) This section shall apply in the case
of gain realized by a shareholder upon his stock in a collapsible
corporation only if the shareholder, at any time after the actual
commencement of the manufacture, construction, or production of the
property, or at the time of the purchase of the property described in
section 341(b)(3) or at any time thereafter, (i) owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation, or (ii) owned stock which was considered as
owned at such time by another shareholder who then owned, or was
considered as owning, more than 5 percent in value of the outstanding
stock of the corporation.
(2) The ownership of stock shall be determined in accordance with the
rules prescribed by section 544(a) (1), (2), (3), (5), and (6), except
that, in addition to the persons prescribed by section 544(a)(2), the
family of an individual shall include the spouses of that individual's
brothers and sisters, whether such brothers and sisters are by the whole
or the half blood, and the spouses of that individual's lineal
descendants.
(3) For the purpose of this limitation, treasury stock shall not be
considered as outstanding stock.
(4) It is possible, under this limitation, that a shareholder in a
collapsible corporation may have gain upon his stock in that corporation
treated differently from the gain of another shareholder in the same
collapsible corporation.
(c) Seventy-percent rule. (1) This section shall apply to the gain
recognized during a taxable year upon the stock in a collapsible
corporation only if more than 70 percent of such gain is attributable to
the property referred to in section 341(b)(1). If more than 70 percent
of such gain is so attributable, then all of such gain is subject to
this section, and, if 70 percent or less of such gain is so
attributable, then none of such gain is subject to this section.
(2) For the purpose of this limitation, the gain attributable to the
property referred to in section 341(b)(1) is the excess of the
recognized gain of the shareholder during the taxable year upon his
stock in the collapsible corporation over the recognized gain which the
shareholder would have if the property had not been manufactured,
constructed, produced, or purchased. In the case of gain on a
distribution in partial liquidation or a distribution described in
section 301(c)(3)(A), the gain attributable to the property shall not be
less than an amount which bears the same ratio to the gain on such
distribution as the gain which would be attributable to the property if
there had been a complete liquidation at the time of such distribution
bears to the total gain which would have resulted from such complete
liquidation.
(3) Gain may be attributable to the property referred to in section
341(b)(1) even though such gain is represented by an appreciation in the
value of property other than that manufactured, constructed, produced,
or purchased. Where, for example, a corporation owns a tract of land
and the development of one-half of the tract increases the value of the
other half, the gain attributable to the developed half of the tract
includes the increase in the value of the other half.
(4) The following example will illustrate the application of the 70
percent rule:
Example: On January 2, 1954, A formed the Z Corporation and
contributed $1,000,000 cash in exchange for all of the stock thereof.
The Z Corporation invested $400,000 in one project for the purpose of
building and selling residential houses. As of December 31, 1954, the
residential houses in this project were all sold, resulting in a profit
of $100,000 (after taxes). Simultaneously with the development of the
first project and in connection with a second and separate project the Z
Corporation invested $600,000 in land for the purpose of subdividing
such land into lots suitable for sale as home sites and distributing
such lots in liquidation before the realization by the corporation of a
substantial part of the taxable income to be realized from this second
project. As of December 31, 1954, Corporation Z had derived $60,000 in
profits (after taxes) from the sale of some of the lots. On January 2,
1955, the Z Corporation made a distribution in complete liquidation to
shareholder A who received:
(i) $560,000 in cash and notes, and
(ii) Lots having a fair market value of $940,000.
The gain recognized to shareholder A upon the liquidation is $500,000
($1,500,000 minus $1,000,000). The gain which would have been
recognized to A if the second project had not been undertaken is
$100,000 ($1,100,000 minus $1,000,000). Therefore, the gain
attributable to the second project which is property referred to in
section 341(b)(1), is $400,000 ($500,000 minus $100,000). Since this
gain ($400,000) is more than 70 percent of the entire gain ($500,000)
recognized to A on the liquidation, the entire gain so recognized is
gain subject to section 341(a).
(d) Three-year rule. This section shall not apply to that portion of
the gain of a shareholder that is realized more than three years after
the actual completion of the manufacture, construction, production, or
purchase of the property referred to in section 341(b)(1) to which such
portion is attributable. However, if the actual completion of the
manufacture, construction, production, or purchase of all of such
property occurred more than 3 years before the date on which the gain is
realized, this section shall not apply to any part of the gain realized.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6738, 29
FR 7671, June 16, 1964; T.D. 7728, 45 FR 72650, Nov. 3, 1980)
26 CFR 1.341-5 Application of section.
(a) Whether or not a corporation is a collapsible corporation shall
be determined under the regulations of 1.341-2 and 1.341-3 on the
basis of all the facts and circumstances in each particular case. The
following paragraphs of this section set forth those facts which will
ordinarily be considered sufficient to establish that a corporation is
or is not a collapsible corporation. The facts set forth in the
following paragraphs of this section are not exclusive of other facts
which may be controlling in any particular case. For example, if the
facts in paragraph (b) of this section, but not the facts in paragraph
(c) of this section, are present, the corporation may nevertheless not
be a collapsible corporation if there are other facts which clearly
establish that the regulations of 1.341-2 and 1.341-3 are not
satisfied. Similarly, if the facts in paragraph (c) of this section are
present, the corporation may nevertheless be a collapsible corporation
if there are other facts which clearly establish that the corporation
was formed or availed of in the manner described in 1.341-2 and
1.341-3 or if the facts in paragraph (c) of this section are not
significant by reason of other facts, such as the fact that the
corporation is subject to the control of persons other than those who
were in control immediately prior to the manufacture, construction,
production, or purchase of the property. See 1.341-4 for provisions
which make section 341 inapplicable to certain shareholders of
collapsible corporations.
(b) The following facts will ordinarily be considered sufficient
(except as otherwise provided in paragraph (a) of this section and
paragraph (c) of this section) to establish that a corporation is a
collapsible corporation:
(1) A shareholder of the corporation sells or exchanges his stock, or
receives a liquidating distribution, or a distribution described in
section 301(c)(3)(A),
(2) Upon such sale, exchange, or distribution, such shareholder
realizes gain attributable to the property described in subparagraphs
(4) and (5) of this paragraph, and
(3) At the time of the manufacture, construction, production, or
purchase of the property described in subparagraphs (4) and (5) of this
paragraph, such activity was substantial in relation to the other
activities of the corporation which manufactured, constructed, produced,
or purchased such property.
The property referred to in subparagraphs (2) and (3) of this
paragraph is that property or the aggregate of those properties which
meet the following two requirements:
(4) The property is manufactured, constructed, or produced by the
corporation or by another corporation stock of which is held by the
corporation, or is property purchased by the corporation or by such
other corporation which (in the hands of the corporation holding such
property) is property described in section 341(b)(3), and
(5) At the time of the sale, exchange, or distribution described in
subparagraph (1) of this paragraph, the corporation which manufactured,
constructed, produced, or purchased such property has not realized a
substantial part of the taxable income to be derived from such property.
In the case of property which is a unit of an integrated project
involving several properties similar in kind, the rules of this
subparagraph shall be applied to the aggregate of the properties
constituting the single project rather than separately to such unit.
Under the rules of this subparagraph, a corporation shall be considered
a collapsible corporation by reason of holding stock in other
corporations which manufactured, constructed, produced, or purchased the
property only if the activity of the corporation in holding stock in
such other corporations is substantial in relation to the other
activities of the corporation.
(c) The absence of any of the facts set forth in paragraph (b) of
this section or the presence of the following facts will ordinarily be
considered sufficient (except as otherwise provided in paragraph (a) of
this section) to establish that a corporation is not a collapsible
corporation:
(1) In the case of a corporation subject to paragraph (b) of this
section only by reason of the manufacture, construction, production, or
purchase (either by the corporation or by another corporation the stock
of which is held by the corporation) of property which is property
described in section 341(b)(3) (A) and (B), the amount (both in quantity
and value) of such property is not in excess of the amount which is
normal --
(i) For the purpose of the business activities of the corporation
which manufactured, constructed, produced, or purchased the property if
such corporation has a substantial prior business history involving the
use of such property and continues in business, or
(ii) For the purpose of an orderly liquidation of the business if the
corporation which manufactured, constructed, produced, or purchased such
property has a substantial prior business history involving the use of
such property and is in the process of liquidation.
(2) In the case of a corporation subject to paragraph (b) of this
section with respect to the manufacture, construction, or production
(either by the corporation or by another corporation the stock of which
is held by the corporation) of property, the amount of the unrealized
taxable income from such property is not substantial in relation to the
amount of the taxable income realized (after the completion of a
material part of such manufacture, construction, or production, and
prior to the sale, exchange, or distribution referred to in paragraph
(b)(1) of this section) from such property and from other property
manufactured, constructed, or produced by the corporation.
(d) The following examples will illustrate the application of this
section:
Example (1). (i) On January 2, 1954, A formed the W Corporation and
contributed $50,000 cash in exchange for all of the stock thereof. The
W Corporation borrowed $900,000 from a bank and used $800,000 of such
sum in the construction of an apartment house on land which it purchased
for $50,000. The apartment house was completed on December 31, 1954.
On December 31, 1954, the corporation, having determined that the fair
market value of the apartment house, separate and apart from the land,
was $900,000, made a distribution (permitted under the applicable State
law) to A of $100,000. At this time, the fair market value of the land
was $50,000. As of December 31, 1954, the corporation has not realized
any earnings and profits. In 1955, the corporation began the operation
of the apartment house and received rentals therefrom. The corporation
has since continued to own and operate the building. The corporation
reported on the basis of the calendar year and cash receipts and
disbursements.
(ii) Since A received a distribution and realized a gain attributable
to the building constructed by the corporation, since, at the time of
such distribution, the corporation has not realized a substantial part
of the taxable income to be derived from such building, and since the
construction of the building was a substantial activity of the
corporation, the W Corporation is considered a collapsible corporation
under paragraph (b) of 1.341-5. The provisions of section 341(d) do not
prohibit the application of section 341(a). Therefore, the
distribution, if and to the extent that it may be considered long-term
capital gain rather than ordinary income without regard to section 341,
will be considered ordinary income under section 341(a).
(iii) In the event of the existence of additional facts and
circumstances in the above case, the corporation, notwithstanding the
above facts, might not be considered a collapsible corporation. See
1.342-2 and paragraph (a) of 1.341-5.
Example (2). (i) On January 2, 1954, B formed X Corporation and
became its sole shareholder. In August 1954, the corporation completed
construction of an office building. It immediately sold this building
at a gain of $50,000, included this entire gain in its return for 1954,
and distributed this entire gain (less taxes) to B. In June 1955, the
corporation completed construction of a second office building. In
August 1955, B sold the entire stock of X Corporation at a gain of
$12,000, which gain is attributable to the second building.
(ii) X Corporation is a collapsible corporation under section 341(b)
for the following reasons: The gain realized through the sale of the
stock of X Corporation was attributable to the second office building;
the construction of that building was a substantial activity of X
Corporation during the time of construction and, at the time of sale,
the corporation had not realized a substantial part of the taxable
income to be derived from such building. Since the provisions of
section 341(d) do not prohibit the application of section 341 (a) to B,
the gain of $12,000 to B is, accordingly, considered ordinary income.
Example (3). The facts are the same as in example (2), except that
the following facts are shown: B was the president of the X Corporation
and active in the conduct of its business. The second building was
constructed as the first step in a project of the X Corporation for the
development for rental purposes of a large suburban center involving the
construction of several buildings by the corporation. The sale of the
stock by B was caused by his retiring from all business activity as a
result of illness arising after the second building was constructed.
Under these additional facts, the corporation is not considered a
collapsible corporation. See 1.341-2 and paragraph (a) of 1.341-5.
Example (4). (i) On January 2, 1948, C formed the Y Corporation and
became the sole shareholder thereof. The Y Corporation has been engaged
solely in the business of producing motion pictures and licensing their
exhibition. On January 2, 1955, C sold all of the stock of the Y
Corporation at a gain. The Y Corporation has produced one motion
picture each year since its organization and before January 2, 1955, it
has realized a substantial part of the taxable income to be derived from
each of its motion pictures except the last one made in 1954. This last
motion picture was completed September 1, 1954. As of January 2, 1955,
no license had been made for its exhibition. The fair market value on
January 2, 1955, of this last motion picture exceeds the cost of its
production by $50,000. A material part of the production of this last
picture was completed on January 1, 1954, and between that date and
January 2, 1955, the corporation had realized taxable income of $500,000
from other motion pictures produced by it. The corporation has
consistently distributed to its shareholder its taxable income when
received (after adjustment for taxes).
(ii) Although the corporation is within paragraph (b) of this section
with respect to the production of property, the amount of the unrealized
income from such property ($50,000) is not substantial in relation to
the amount of the income realized, after the completion of a material
part of the production of such property and prior to sale of the stock,
from such property and other property produced by the corporation
($500,000). Accordingly, the Y Corporation is within paragraph (c)(2)
of this section, and is not considered a collapsible corporation.
Example (5). The facts are the same as in example (4) except that C
sold all of his stock to D on February 1, 1954. On January 2, 1955, D
sold all of the Y Corporation stock at a gain, the gain being
attributable to the picture completed September 1, 1954, and not
released by the corporation for exhibition. In view of the change of
control of the corporation, the provisions of paragraph (c)(2) of this
section are not significant at the time of the sale by D, and the Y
Corporation would be considered a collapsible corporation on January 2,
1955. See 1.341-2 and paragraph (a) of 1.341-5.
26 CFR 1.341-6 Exceptions to application of section.
(a) In general -- (1) Transactions excepted. Section 341(e) excepts
4 types of transactions from the application of the collapsible
corporation provisions. These exceptions, where applicable, eliminate
the necessity of determining whether a corporation is a collapsible
corporation within the meaning of section 341(b) or whether any of the
limitations of section 341(d) are applicable. Under section 341(e) (1)
and (2), there are 2 exceptions which are designed to allow the
shareholders of a corporation either to sell or exchange their stock or
to receive distributions in certain complete liquidations without having
any gain considered under section 341(a) (1) or (2) as gain from the
sale or exchange of property which is not a capital asset. Under
section 341(e)(3), a third exception is designed to permit the
shareholders of a corporation to make use of section 333, relating to
elections as to recognition of gain in certain complete liquidations
occurring within one calendar month. Under section 341(e)(4), the
fourth exception permits a corporation to make use of section 337,
relating to nonrecognition of gain or loss on sales or exchanges of
property by a corporation following the adoption of a plan of complete
liquidation. Section 341(e) does not apply to distributions in partial
liquidation or in redemption of stock (other than any such distribution
pursuant to a plan of complete liquidation), or to distributions
described in section 301(c)(3)(A).
(2) Effective date. The exceptions in section 341(e) (1), (2), and
(3) apply only with respect to taxable years of shareholders beginning
after December 31, 1957, and only with respect to sales or exchanges of
stock and distributions of property occurring after September 2, 1958.
The exception in section 341(e)(4) applies only with respect to taxable
years of corporations beginning after December 31, 1957, and only if all
sales or exchanges of property, and all liquidating distributions, made
by the corporation under the plan of complete liquidation occur after
September 2, 1958.
(3) Definition of constructive shareholder and attribution rules.
(i) For purposes of this section, the term constructive shareholder
means a person who does not actually own any stock but who is considered
to own stock by reason of the application of subdivision (ii) of this
subparagraph.
(ii) For purposes of this section (other than paragraph (k), relating
to definition of related person) a person shall be considered to own the
stock he actually owns plus any stock which is attributed to him by
reason of applying the rules prescribed in paragraph (b) (2) and (3) of
1.341-4. See section 341(e)(10).
(iii) As an example of this subparagraph, if a husband does not
actually own any stock in a corporation but his wife is the actual owner
of 5 shares in the corporation, then the husband is a constructive
shareholder who is considered to own 5 shares in the corporation.
(4) General corporate test. No exception provided in section 341(e)
applies unless a general corporate test and, where applicable, a
specific shareholder test are satisfied. Under the general corporate
test no taxpayer may utilize the provisions of section 341(e) unless the
net increase in value (called ''net unrealized appreciation'') in the
corporation's ''subsection (e) assets'' does not exceed 15 percent of
the corporation's net worth. Subsection (e) assets are, in general,
those assets of the corporation which, if sold at a gain by the
corporation or by any actual or constructive shareholder who is
considered to own more than 20 percent in value of the outstanding
stock, would result in the realization of ordinary income. See
paragraph (b) of this section for the definition of subsection (e)
assets, and paragraph (h) of this section for definition of net
unrealized appreciation. This subparagraph may be illustrated by the
following examples:
Example (1). X Corporation is in the business of selling whiskey.
The net unrealized appreciation in its whiskey is $20,000 and the net
worth of the corporation is $100,000. Since the corporation's whiskey
is a subsection (e) asset and since the net unrealized appreciation in
subsection (e) assets ($20,000) exceeds 15 percent of net worth
($15,000), the general corporate test is not satisfied and section
341(e) is inapplicable to the corporation or its shareholders.
Example (2). Assume the same facts as in example (1) except that X
Corporation is not in the business of selling whiskey. Assume further
that an actual shareholder who owns more than 20 percent in value of the
outstanding X stock (or a person who is considered to own such actual
shareholder's stock, such as his spouse) is in the business of selling
whiskey. The result is the same as in example (1).
(5) Specific shareholder test. Even if the general corporate test is
met, a shareholder selling or exchanging his stock or receiving a
distribution with respect to his stock (referred to as a ''specific
shareholder'') who is considered to own more than 5 percent in value of
the outstanding stock of the corporation may not utilize the benefits of
the exception in section 341(e)(1) (or the exception in section
341(e)(2)) unless he satisfies the applicable specific shareholder test.
In general, the specific shareholder test is satisfied if the net
unrealized appreciation in subsection (e) assets of the corporation,
plus the net unrealized appreciation in certain other assets of the
corporation which would be subsection (e) assets in respect of the
specific shareholder under the following circumstances, does not exceed
15 percent of the corporation's net worth:
(i) If the specific shareholder is considered to own more than 5
percent but not more than 20 percent in value of the outstanding stock,
he must take into account the net unrealized appreciation in assets of
the corporation which would be subsection (e) assets if he was
considered to own more than 20 percent in value of the outstanding stock
(see paragraph (c)(3)(i) of this section);
(ii) In addition, if the specific shareholder is considered to own
more than 20 percent in value of the outstanding stock, he must also
take into account the net unrealized appreciation in assets of the
corporation which would be subsection (e) assets under section
341(e)(5)(A) (i) and (iii) if his ownership within the preceding 3 years
of stock in certain ''related'' corporations were taken into account in
the manner prescribed in paragraphs (c)(3)(ii) and (d) of this section.
(b) Subsection (e) asset defined -- (1) General. The benefits of
section 341(e) are unavailable if the net unrealized appreciation (as
defined in paragraph (h) of this section) in certain assets of the
corporation (hereinafter called ''subsection (e) assets'') exceeds 15
percent of the corporation's net worth. In determining whether property
is a subsection (e) asset, it is immaterial whether the property is
described in section 341(b), and there shall not be taken into account
sections 617(d) (relating to gain from dispositions of certain mining
property), 1245 and 1250 (relating to gain from dispositions of certain
depreciable property), 1251 (relating to gain from disposition of farm
property where farm losses offset nonfarm income), and 1252 (relating to
gain from disposition of farm land).
(2) Categories of subsection (e) assets. The term ''subsection (e)
assets'', as defined in section 341(e)(5)(A) (i), (ii), (iii), and (iv),
means the following categories of property held by a corporation:
(i) The first category is property (except property described in
section 1231(b), without regard to any holding period prescribed
therein) which in the hands of the corporation is, or in the hands of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of the outstanding stock of the corporation
would be, property gain from the sale or exchange of which would under
any provision of chapter 1 of the Code (other than section 617(d), 1245,
1250, 1251, or 1252) be considered in whole or in part as gain from the
sale or exchange of property which is neither a capital asset nor
property described in section 1231(b). For example, included in this
category is property held by a corporation which in its hands is stock
in trade, inventory, or property held by it primarily for sale to
customers in the ordinary course of its trade or business regardless of
whether such property is appreciated or depreciated in value. Also
included in this category is property held by a corporation which is a
capital asset in its hands but which, in the hands of any actual or
constructive shareholder who is considered to own more than 20 percent
in value of the outstanding stock, would be stock in trade, inventory,
or property held by such actual or constructive shareholder primarily
for sale to customers in the ordinary course of his trade or business.
For additional rules relating to whether property is a subsection (e)
asset under this subdivision, see subparagraphs (3), (4), and (5) of
this paragraph.
(ii) The second category of subsection (e) assets is property which
in the hands of the corporation is property described in section 1231(b)
(without regard to any holding period prescribed therein), but only if
there is net unrealized depreciation (within the meaning of paragraph
(h)(2) of this section) on all such property. This subdivision may be
illustrated by the following example:
Example. X Corporation owns only the following section 1231(b)
property (determined without regard to holding period).
Since with respect to such property the unrealized depreciation in
property on which there is unrealized depreciation ($9,000) exceeds the
unrealized appreciation in property on which there is unrealized
appreciation ($2,000), all such property is included in subsection (e)
assets under clause (ii) of section 341(e)(5)(A).
(iii) The third category of subsection (e) assets exists only if
there is net unrealized appreciation on all property which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). In such case, any
such section 1231(b) property (whether appreciated or depreciated) is a
subsection (e) asset of the third category if, in the hands of an actual
or constructive shareholder who is considered to own more than 20
percent in value of the outstanding stock of the corporation, such
property would be property gain from the sale or exchange of which would
under any provision of chapter 1 of the Code (other than section 617(d),
1245, 1250, 1251, or 1252) be considered in whole or in part as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). Included in this category,
for example, is property which in the hands of the corporation is
property described in section 1231(b) (without regard to any holding
period prescribed therein), but which in the hands of an actual or
constructive more-than-20-percent shareholder would be property used in
his trade or business held for not more than 1 year (6 months for
taxable years beginning before 1977; 9 months for taxable years
beginning in 1977), stock in trade, inventory, or property held by such
shareholder primarily for sale to customers in the ordinary course of
his trade or business. For additional rules relating to whether
property is a subsection (e) asset under this subdivision, see
subparagraphs (3) and (4) of this paragraph. This subdivision may be
further illustrated by the following example:
Example. Assume the same facts as stated in the example under
subdivision (ii) of this subparagraph, except that in addition to the
oil leaseholds the corporation also owns land which has a fair market
value of $30,000 and an adjusted basis of $20,000 and which in the hands
of the corporation is property described in section 1231(b) (without
regard to any holding period prescribed therein). Assume further that A
is a constructive shareholder of the corporation who is considered to
own 25 percent in value of its outstanding stock and that A holds land
primarily for sale to customers in the ordinary course of his trade or
business, and that no actual or constructive shareholder who is
considered to own more than 20 percent in value of the stock of
corporation X so holds oil leases. Since with respect to the
corporation's section 1231(b) property the unrealized appreciation in
such property on which there is unrealized appreciation ($12,000)
exceeds the unrealized depreciation in such property on which there is
unrealized depreciation ($9,000), then clause (iii), and not clause
(ii), of section 341(e)(5)(A) is applicable. Therefore, no oil lease of
the corporation is a subsection (e) asset. However, since in the hands
of A, a more-than-20-percent constructive shareholder, the land would be
property gain from the sale or exchange of which would be considered as
gain from the sale or exchange of property which is neither a capital
asset nor property described in section 1231(b), the land is a
subsection (e) asset. Consequently, the net unrealized appreciation on
subsection (e) assets of the corporation is $10,000 since the net
unrealized depreciation on the oil leases is not taken into account.
(iv) The fourth category of subsection (e) assets is property (unless
included under subdivision (i), (ii), or (iii) of this subparagraph)
which consists of a copyright, a literary, musical, or artistic
composition, a letter or memorandum, or similar property, or any
interest in any such property, if the property was created in whole or
in part by the personal efforts of, or, in the case of a letter,
memorandum, or property similar to a letter or memorandum, was prepared,
or produced in whole or in part, for, any individual actual or
constructive shareholder who is considered to own more than 5 percent in
value of the outstanding stock of the corporation. For items included
in the phrase ''similar property'' see paragraph (c) of 1.1221-1. In
general, property is created in whole or in part by the personal efforts
of an individual if such individual performs literary, theatrical,
musical, artistic, or other creative or productive work which
affirmatively contributes to the creation of the property, or if such
individual directs and guides others in the performance of such work.
An individual, such as a corporate executive, who merely has
administrative control of writers, actors, artists, or personnel and who
does not substantially engage in the direction and guidance of such
persons in the performance of their work, does not create property by
his personal efforts. However, a letter or memorandum, or property
similar to a letter or memorandum, which is prepared by personnel who
are under the administrative control of an individual, such as a
corporate executive, shall be deemed to have been prepared or produced
for him whether or not such letter, memorandum, or similar property is
reviewed by him. In addition, a letter, memorandum, or property similar
to a letter or memorandum, addressed to an individual shall be
considered as prepared or produced for him. In the case of a letter,
memorandum, or property similar to a letter or memorandum, this
subdivision applies only to sales and other dispositions occurring after
July 25, 1969.
(3) Manner of determination. For purposes of determining whether
property is a subsection (e) asset under subparagraph (2) (i) or (iii)
of this paragraph, the determination as to whether property of a
corporation in the hands of the corporation is, or in the hands of an
actual or constructive shareholder of the corporation would be, property
gain from the sale or exchange of which would under any provision of
chapter 1 of the Code (other than section 617(d), 1245, 1250, 1251, or
1252) be considered in whole or in part as gain from the sale or
exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made as if all property of the
corporation had been sold or exchanged to one person in one transaction.
For example, if a corporation whose sole asset is an interest in a gas
well has entered into a long-term contract for the future delivery of
gas from the well, the ownership of which will pass to the buyer only
after extraction or severance from the well, the determination as to
whether such contract is a subsection (e) asset shall be made as if the
contract were sold or exchanged to one person in one transaction
together with such corporation's interest in the well. An assumed sale
under this subparagraph does not affect the character of property which
is held for sale to customers in the ordinary course of a person's trade
or business or the character of a transaction which would be an
anticipatory assignment of income. Thus, for example, if a corporation
holds subdivided lots for sale to customers in the ordinary course of
its trade or business, this subparagraph shall not be applied to change
the manner in which the lots are held.
(4) Shareholder reference test. For purposes of subparagraph (2) (i)
and (iii) of this paragraph, in determining whether any property of the
corporation would, in the hands of a particular actual or constructive
shareholder, be property gain from the sale or exchange of which would
be considered in whole or in part as gain from the sale or exchange of
property which is neither a capital asset nor property described in
section 1231(b), all the facts and circumstances of the direct and
indirect activities of the shareholder must be taken into account. If
the particular shareholder holds property primarily for sale to
customers in the ordinary course of his trade or business and if similar
property is held by the corporation, then in the hands of the
shareholder such corporate property will be treated as held primarily
for sale to customers in the ordinary course of his trade or business.
Moreover, even if the shareholder does not presently so hold property
which is similar to property held by the corporation, it may be
determined under the particular facts and circumstances (taking into
account an assumed sale of such corporate property by the shareholder,
all his other direct and indirect activities, and, if applicable, the
fact that he previously so held similar property) that he would hold the
corporate property primarily for sale to customers in the ordinary
course of his trade or business. See also paragraph (d) of this
section, pertaining to effect of stock in related corporations.
(5) Special rule for stock in shareholder's investment account. If
--
(i) A dealer in stock or securities is an actual shareholder
(considered to own more than 20 percent of the outstanding stock of a
corporation) and holds such stock which he actually owns in his
investment account pursuant to section 1236(a), or
(ii) A dealer in stock or securities is a constructive shareholder
who is considered to own more than 20 percent of the outstanding stock
of a corporation,
then stock or securities held by such corporation shall not be
considered subsection (e) assets under subparagraph (2)(i) of this
paragraph solely because such actual or constructive shareholder is a
dealer in stock or securities. However, stock held by such corporation
shall be considered as a subsection (e) asset if, in the hands of any
more-than-20-percent actual or constructive shareholder of the
corporation, the gain (or any portion thereof) upon a sale of such stock
would (if it were held for more than 1 year (6 months for taxable years
beginning before 1977; 9 months for taxable years beginning in 1977),
constitute, by reason of the application of section 341, gain from the
sale of property which is not a capital asset. This subparagraph may be
illustrated by the following example:
Example. Jones, a more-than-20-percent actual shareholder in
corporation X holds his X stock in an investment account in the manner
prescribed in section 1236(a). Jones is a dealer in stock and
securities and holds land for sale to customers in the ordinary course
of his trade or business. No other actual or constructive shareholder
is a dealer in stock and securities or so holds land. X holds all of
the stock in corporation Y, a collapsible corporation within the meaning
of section 341(b). Y's sole asset is land on which unrealized
appreciation exceeds 15 percent of Y's net worth. Since Jones holds his
X stock in an investment account pursuant to section 1236(a), the Y
stock cannot be considered a subsection (e) asset of the X Corporation
merely because Jones is a dealer in stock and securities. Nevertheless,
the Y stock is a subsection (e) asset of the X Corporation because if
Jones were treated as having sold the Y stock, his gain would be treated
as gain from the sale of property which is not a capital asset by reason
of the application of section 341. If, however, the net unrealized
appreciation on Y's land did not exceed 15 percent of Y's net worth the
Y stock would not be a subsection (e) asset since section 341(e)(1)
would except such sale from the application of section 341.
(c) Sales or exchanges of stock -- (1) General. Section 341(e)(1)
provides that, if certain requirements are satisfied, the provisions of
section 341(a)(1) shall in no event apply to certain sales or exchanges
of stock by a shareholder. See subparagraph (5) of this paragraph for
sales or exchanges of stock which do not qualify under section
341(e)(1). Section 341(e)(1) applies to a sale or exchange of stock by
a shareholder only if, at the time of such sale or exchange, the general
corporate test and, if applicable, the specific shareholder test are
satisfied.
(2) General corporate test. The general corporate test is satisfied
if the net unrealized appreciation in subsection (e) assets of the
corporation does not exceed an amount equal to 15 percent of the net
worth of the corporation. See paragraphs (h), (b), and (j) of this
section for the definition of ''net unrealized appreciation,''
''subsection (e) assets,'' and ''net worth.''
(3) Specific shareholder test. The specific shareholder test (if
applicable) is satisfied if the following conditions are met:
(i) If the shareholder selling or exchanging the stock is considered
to own more than 5 percent but not more than 20 percent in value of the
outstanding stock, the sum of the net unrealized appreciation in the
following assets of the corporation must not exceed an amount equal to
15 percent of the net worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
(b) The other assets of the corporation which would be subsection (e)
assets under section 341(e)(5)(A) (i) and (iii) if such shareholder were
considered to own more than 20 percent in value of the outstanding
stock.
(ii) If the shareholder selling or exchanging the stock is considered
to own more than 20 percent in value of the outstanding stock, the sum
of the net unrealized appreciation in the following assets of the
corporation must not exceed an amount equal to 15 percent of the net
worth of the corporation:
(a) The subsection (e) assets of the corporation, plus
(b) The other assets of the corporation which would be subsection (e)
assets under section 341(e)(5)(A) (i) and (iii) if the shareholder's
ownership of stock in certain related corporations were taken into
account in the manner prescribed in paragraph (d) of this section.
(4) Example. Subparagraph (3) of this paragraph may be illustrated
by the following example:
Example. Assume an individual, A, and his grandfather, G, each
actually owns 3 percent in value of the stock of corporation X, a
corporation holding apartment houses used in its trade or business on
which net unrealized appreciation exceeds 15 percent of X's net worth.
A, but not G, holds apartment houses primarily for sale to customers in
the ordinary course of trade or business. Assume that X satisfies the
general corporate test. A and G desire to sell their stock and to take
advantage of section 341(e)(1). Since a grandfather and grandson are
each considered to own the other's stock under paragraph (a)(3)(ii) of
this section, A and G are each considered to own 6 percent in value of
corporation X's outstanding stock. Therefore, A cannot avail himself of
section 341(e)(1) since he does not satisfy the specific shareholder
test prescribed in subparagraph (3)(i) of this paragraph. G, however,
who is considered to own 6 percent in value of the stock, does not hold
apartment houses for sale to customers in the ordinary course of trade
or business. Therefore, G satisfies the specific shareholder test and
may benefit from section 341(e)(1).
(5) Nonqualifying sales or exchanges. Section 341(e)(1) does not
apply to any sale or exchange of stock to the issuing corporation.
Thus, stock redemptions (including distributions in complete or partial
liquidation) cannot qualify under section 341(e)(1). In addition,
section 341(e)(1) does not apply in any case where a shareholder who is
considered to own more than 20 percent in value of the outstanding stock
sells or exchanges stock to any person related (within the meaning of
paragraph (k) of this section) to such shareholder. A sale or exchange
of stock of the corporation by a shareholder to which section 341(e) (1)
does not apply because of this subparagraph shall have no effect on the
application of this section to other sales or exchanges of stock of the
corporation.
(6) Example. For an illustration of the application of this
paragraph, see example (2) in paragraph (o) of this section.
(d) Stock in related corporations -- (1) General. This paragraph
provides rules for applying the specific shareholder test prescribed in
paragraph (c)(3)(ii) of this section for purposes of determining whether
section 341(e)(1) (relating to sales or exchanges of stock of a
corporation) or section 341(e)(2) (relating to distributions in complete
liquidation of a corporation) applies to an actual shareholder who is
considered as owning more than 20 percent in value of the corporation's
outstanding stock. In general, if such a more-than-20-percent
shareholder of such corporation (referred to as a ''first'' corporation)
owns, or at any time during the preceding 3 years has owned, more than
20 percent in value of the outstanding stock of a ''related''
corporation (see subparagraph (2) of this paragraph), then certain
transactions in respect of the stock of the related corporation are
taken into account in the manner prescribed in subparagraph (3) of this
paragraph. By taking such transactions into account, such shareholder
of the first corporation may be deemed to hold primarily for sale to
customers in the ordinary course of trade or business property similar
or related in service or use to property owned by the first corporation
where his other activities, direct and indirect, are insufficient to
treat him as so holding such property. See section 341(e) (1)(C) and
(2)(C). The transactions in respect of stock in a related corporation
are taken into account solely for the purpose of determining the extent
to which assets (other than subsection (e) assets) of the first
corporation are treated as subsection (e) assets under the shareholder
reference tests of section 341(e)(5)(A) (i) and (iii). For purposes of
this paragraph, the term ''similar or related in service or use'' shall
have the same meaning as such term has in section 1033 (relating to
involuntary conversions), without regard to subsection (g) thereof.
(2) Related corporation defined. (i) A corporation (referred to as a
''second'' corporation) is ''related'' to another corporation (referred
to as a ''first'' corporation) if the stock ownership test specified in
subdivision (ii) of this subparagraph and the more-than-70-percent-asset
comparison test specified in subdivision (iii) of this subparagraph are
met.
(ii) The stock ownership test specified in this subdivision is met --
(a) In the case of a sale or exchange referred to in paragraph (c)(1)
of this section, if the shareholder in the first corporation is
considered to own on the date of such sale or exchange more than 20
percent in value of the outstanding stock of the first corporation, and
if on such date (or at any time during the 3-year period preceding such
date) such shareholder in the first corporation is an actual or
constructive shareholder in the second corporation who was considered to
own more than 20 percent in value of the outstanding stock of the second
corporation, or
(b) In the case of a distribution pursuant to the adoption by the
first corporation of a plan of complete liquidation referred to in
paragraph (e) of this section, if the shareholder in the first
corporation is considered to own on any date after the adoption of such
plan more than 20 percent in value of the outstanding stock of the first
corporation, and if on such date (or at any time during the 3-year
period preceding such date) such shareholder in the first corporation
was an actual or constructive shareholder in the second corporation who
was considered to own more than 20 percent in value of the outstanding
stock of the second corporation.
(iii) The more-than-70-percent-asset comparison test specified in
this subdivision is met if more than 70 percent in value of the assets
of the second corporation (at any of the applicable times determined
under subdivision (ii) of this subparagraph during which the shareholder
of the first corporation is or was considered to own more than 20
percent in value of the outstanding stock of the second corporation)
are, or were, assets similar or related in service or use to assets
comprising more than 70 percent in value of the assets of the first
corporation (at any of the times determined under subdivision (ii) of
this subparagraph during which the shareholder of the first corporation
is or was considered to own more than 20 percent in value of the
outstanding stock of the first corporation).
(iv) This subparagraph may be illustrated by the following example:
Example. X is a first corporation and Y is a second corporation. On
January 15, 1960, Jones purchased 21 percent in value of the outstanding
stock of X, which he sold on January 1, 1961. On January 15, 1955,
Jones had purchased 21 percent in value of the outstanding stock of Y
which he sold on December 15, 1959. Since Jones owned 21 percent of the
outstanding X stock on January 1, 1961 (the date he sold his X stock)
and also owned 21 percent of the outstanding Y stock at some time during
the 3-year period preceding January 1, 1961, the stock ownership test
specified in subdivision (ii) (a) of this subparagraph is met. Assume
that more than 70 percent in value of the assets of Y were apartment
houses held for rental purposes at some time between January 1, 1958,
and December 15, 1959 (the portion of the 3-year period preceding the
date Jones sold his X stock during which he was a more-than-20-percent
shareholder in Y) and that more than 70 percent in value of the assets
of X were apartment houses held for rental purposes at some time during
the period January 15, 1960, to January 1, 1961, inclusive (the portion
of the 3-year period preceding the date he sold his X stock during which
he was a more-than-20-percent shareholder in X). Thus, the
more-than-70-percent-asset comparison test specified in subdivision
(iii) of this subparagraph is met. Accordingly, corporation Y is
related to corporation X within the meaning of this subparagraph.
(3) Manner of taking into account. If an actual shareholder in a
first corporation who is considered to own more than 20 percent of the
first corporation's stock, owns or has owned stock in a related
corporation, then --
(i) Any sale or exchange by such shareholder, during the applicable
period specified in subparagraph (2)(ii) of this paragraph, of stock in
the related corporation shall be treated as a sale or exchange by him of
his proportionate share of the assets of the related corporation, if
immediately before such sale or exchange he was an actual shareholder of
the related corporation who was considered to own more than 20 percent
in value of the outstanding stock of the related corporation. A
shareholder's proportionate share of the assets of a related corporation
shall be that percent of each asset of the related corporation as the
fair market value of the stock of the related corporation which he
actually sold or exchanged bears, immediately before such sale or
exchange, to the total fair market value of the outstanding stock of
such related corporation; and
(ii) Any sale or exchange of property by the related corporation
during the applicable period specified in subparagraph (2)(ii) of this
paragraph, gain or loss on which was not recognized to the related
corporation by reason of the application of section 337(a), shall be
treated as a sale or exchange by him of his proportionate share of the
related corporation's property sold or exchanged, if at the time of such
sale or exchange he was an actual or constructive shareholder of the
related corporation who was considered to own more than 20 percent in
value of the outstanding stock of such related corporation. A
shareholder's proportionate share of such related corporation's property
sold or exchanged shall be that percent of each such property sold or
exchanged as the fair market value of the stock which he was considered
to own in the related corporation immediately before such sale or
exchange bears to the total fair market value of the outstanding stock
of such related corporation at such time.
(4) Example. This paragraph may be illustrated by the following
example:
Example. (i) A owns 25 percent in value of the outstanding stock of Z
Corporation. On December 31, 1959, he sells all his stock in the
corporation and desires to take advantage of section 341(e)(1). The
only asset of Z Corporation is an appreciated apartment house held for
rental purposes but which is not a subsection (e) asset. However,
during the preceding 3-year period A sold 25 percent in value of the
outstanding stock of each of 3 related corporations. More than 70
percent in value of the assets of each related corporation consisted of
an apartment house.
(ii) In determining whether the apartment house owned by Z
Corporation would be a subsection (e) asset under the shareholder
reference test of section 341(e)(5)(A)(iii), A is treated as having sold
a one-fourth interest in each of 3 apartment houses during the preceding
3-year period and these sales must be taken into account, together with
all other facts and circumstances, in determining whether the apartment
house owned by Z Corporation would be, in the hands of A, property gain
from the sale or exchange of which would under any provision of chapter
1 of the Code (other than section 1245 or 1250) be considered as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). However, A's sales of
related corporation stock are not taken into account in determining
whether section 341(e) (1) or (2) would be applicable to sales or
exchanges of stock by (or liquidating distributions to) other
shareholders of Z Corporation.
(e) Distributions in certain liquidations pursuant to section 337 --
(1) In general. Section 341(e)(2) provides that, if certain
requirements are met, the provisions of section 341(a)(2) shall in no
event apply to certain distributions in complete liquidation of a
corporation. Section 341(e)(2) applies with respect to any distribution
to a shareholder pursuant to a plan of complete liquidation if the
following 3 requirements are satisfied:
(i) By reason of the application of section 341(e)(4) and paragraph
(g) of this section, section 337(a) applies to sales or exchanges of
property by the corporation within the 12-month period beginning on the
date of the adoption of such plan. Thus, for example, section 341(e)(2)
is not applicable in any case where depreciable, amortizable, or
depletable property is distributed after the date of adoption of the
plan or if the corporation does not sell substantially all of the
properties held by it on such date within such 12-month period, since
such a distribution, or the failure to make such a sale, makes section
337(a) inapplicable under section 341(e)(4).
(ii) At all times within such 12-month period the general corporate
test of paragraph (c)(2) of this section is satisfied.
(iii) In respect of the shareholder who receives the distribution --
(a) At all times within such 12-month period while such shareholder
is considered to own more than 5 percent but not more than 20 percent in
value of the outstanding stock of the corporation, the shareholder must
satisfy the specific shareholder test of paragraph (c)(3)(i) of this
section, and
(b) At all times within such 12-month period while such shareholder
is considered to own more than 20 percent in value of the outstanding
stock of the corporation, the shareholder must satisfy the specific
shareholder test of paragraph (c)(3)(ii) of this section.
(2) Illustration. For an illustration of this paragraph, see example
(4) in paragraph (o) of this section.
(f) Recognition of gain in certain liquidations under section 333.
Section 341(e)(3) provides that, for purposes of section 333 (relating
to elections as to recognition of gain in certain complete liquidations
occurring within one calendar month), a corporation is considered not to
be a collapsible corporation if, at all times after the adoption of the
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation. For purposes of the
preceding sentence, the determination of subsection (e) assets shall be
made in accordance with paragraph (b) of this section except that
subparagraph (2) (i) and (iii) of such paragraph (b) shall apply in
respect of any actual or constructive shareholder who is considered to
own more than 5 percent in value of the outstanding stock (in lieu of
any actual or constructive shareholder who is considered to own more
than 20 percent in value of such stock). Thus, no shareholder of the
corporation can qualify under paragraph (3) of section 341(e) for use of
section 333 if, because of any actual or constructive shareholder who is
considered to own more than 5 percent in value of the stock, this
modified general corporate test is not satisfied. On the other hand,
once this modified general corporate test is satisfied, all the
shareholders can use section 333 (assuming that the requirements of that
section are satisfied) since there is no specific shareholder test. For
an illustration of this paragraph, see example (3) in paragraph (o) of
this section.
(g) Gain or loss on sales or exchanges in connection with certain
liquidations, pursuant to section 337 -- (1) General. Section 341(e)(4)
provides that solely for purposes of section 337, a corporation is
considered not to be a collapsible corporation if (i) at all times
within the 12-month period beginning on the date of the adoption of a
plan of complete liquidation, the net unrealized appreciation in
subsection (e) assets of the corporation does not exceed an amount equal
to 15 percent of the net worth of the corporation; (ii) within the
12-month period beginning on the date of the adoption of such plan, the
corporation sells substantially all of the properties held by it on such
date; and (iii) following the adoption of such plan, no distribution is
made of any property which in the hands of the corporation or in the
hands of the distributee is property in respect of which a deduction for
exhaustion, wear and tear, obsolescence, amortization, or depletion is
allowable. Thus, if at the time of the adoption of the plan of
liquidation the corporation is a collapsible corporation within the
meaning of section 341(b) and if the preceding requirements are
satisfied, then except as provided in subparagraph (2) of this paragraph
section 337(a) will apply to such corporation but the corporation will
continue to be a collapsible corporation within the meaning of section
341(b) (including for purposes of section 341(e)(2)) with the result
that each shareholder must still satisfy all the tests in paragraph (e)
of this section before he can utilize the benefits of section 341(e)(2).
(2) Exception to section 337 treatment. Section 341(e)(4) shall not
apply with respect to any sale or exchange of property by the
corporation to any actual or constructive shareholder who is considered
to own more than 20 percent in value of the outstanding stock of the
corporation or to any person related (within the meaning of paragraph
(k) of this section) to such actual or constructive shareholder if such
property in the hands of the corporation, or in the hands of such
shareholder or such related person, is property in respect of which a
deduction for exhaustion, wear and tear, obsolescence, amortization, or
depletion is allowable. Thus, gain or loss will be recognized on such
sales or exchanges.
(3) Cross references. For effective date of section 341(e)(4) and
this paragraph, see paragraph (a)(2) of this section. For an
illustration of this paragraph, see example (4) in paragraph (o) of this
section.
(h) Net unrealized appreciation and depreciation defined -- (1) Net
unrealized appreciation. For purposes of this section, the term ''net
unrealized appreciation'' means, with respect to the assets of a
corporation, the amount by which --
(i) The unrealized appreciation in such assets on which there is
unrealized appreciation, exceeds
(ii) The unrealized depreciation in such assets on which there is
unrealized depreciation.
(2) Net unrealized depreciation. For purposes of paragraph
(b)(2)(ii) of this section, there is net unrealized depreciation on all
property of a corporation which in its hands is property described in
section 1231(b) (without regard to any holding period prescribed
therein) if --
(i) The unrealized depreciation in such property on which there is
unrealized depreciation, exceeds
(ii) The unrealized appreciation in such property on which there is
unrealized appreciation.
(3) Unrealized appreciation or depreciation. For purposes of this
paragraph --
(i) The term unrealized appreciation means (except as provided in
subparagraph (4) of this paragraph), with respect to any asset, the
amount by which (a) the fair market value of such asset, exceeds (b) the
adjusted basis for determining gain from the sale or other disposition
of such asset; and
(ii) The term unrealized depreciation means, with respect to any
asset, the amount by which (a) the adjusted basis for determining gain
from the sale or other disposition of such asset, exceeds (b) the fair
market value of such asset.
(4) Special rule. For purposes of determining whether the net
unrealized appreciation in subsection (e) assets of a corporation
exceeds an amount equal to 15 percent of the corporation's net worth
under the tests of section 341(e) (1), (2), (3), and (4), in the case of
any asset on the sale or exchange of which only a portion of the gain
would under any provision of chapter 1 of the Code (other than section
617(d), 1245, 1250, 1251, or 1252) be considered as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b), there shall be taken into account only an
amount equal to the unrealized appreciation in such asset which is equal
to such portion of the gain. This subparagraph shall have no effect on
whether paragraph (b)(2) (ii) or (iii) of this section applies for
purposes of identifying the subsection (e) assets of the corporation.
(i) (Reserved)
(j) Net worth defined. For purposes of this section, the net worth
of a corporation, as of any day, is the amount by which --
(1) The fair market value of all its assets at the close of such day,
plus the amount of any distribution (taken into account at fair market
value on the date of such distribution) in complete liquidation made by
it on or before such day, exceeds
(2) All its liabilities at the close of such day.
In computing the fair market value of all the assets of a corporation
at the close of such day, there shall be excluded any amount
attributable to money or property received by it during the one-year
period ending on such day for stock, or as a contribution to capital or
as paid-in surplus, if it appears that there was not a bona fide
business purpose for the transaction in respect of which such money or
property was received.
(k) Related person defined -- (1) General. For purposes of
paragraphs (c)(5) and (g)(2) of this section, the following persons are
considered to be related to a shareholder:
(i) If the shareholder is an individual --
(a) His spouse, ancestors, and lineal descendants, and
(b) Any corporation which is controlled by him.
(ii) If the shareholder is a corporation --
(a) A corporation which controls, or is controlled by, such
shareholder, and
(b) If more than 50 percent in value of the outstanding stock of such
shareholder is owned by any person, any corporation more than 50 percent
in value of the outstanding stock of which is owned by the same person.
(2) Control. For purposes of this paragraph, control means the
ownership of stock possessing at least 50 percent of the total combined
voting power of all classes of stock entitled to vote or at least 50
percent of the total value of shares of all classes of stock of the
corporation.
(3) Constructive ownership rules. In determining the ownership of
stock for purposes of this paragraph, the constructive ownership rules
of section 267(c) shall apply, except that the family of an individual
shall include only his spouse, ancestors, and lineal descendants.
(l) (Reserved)
(m) Corporations and shareholders not meeting requirements. In
determining whether the provisions of section 341 (a) through (d) apply
with respect to any corporation, the fact that such corporation, or such
corporation with respect to any of its shareholders, does not meet the
requirements of section 341(e) (1), (2), (3), or (4) shall not be taken
into account, and such determination shall be made as if section 341(e)
had not been enacted.
(n) Determinations without regard to sections 617(d), 1245, 1250,
1251, and 1252. For purposes of this section, the determination of
whether gain from the sale or exchange of property would under any
provision of chapter 1 of the Code be considered as gain from the sale
or exchange of property which is neither a capital asset nor property
described in section 1231(b) shall be made without regard to the
application of sections 617(d)(1) (relating to gain from dispositions of
certain mining property), 1245(a) and 1250(a) (relating to gain from
dispositions of certain depreciable property), 1251(c) (relating to gain
from the disposition of farm property where farm losses offset nonfarm
income), and 1252(a) (relating to gain from disposition of farm land).
(o) Illustrations. The operation of section 341(e) may be
illustrated by the following examples:
Example (1). (i) The outstanding stock of X Corporation is actually
owned, on the basis of value, 75 percent by A, 15 percent by B, and 10
percent by C. None of the stock actually owned by one is attributed to
another under the constructive ownership rules of paragraph (a)(3) of
this section. The corporation owns no property which, in its hands, is
property gain from the sale or exchange of which would be considered
(without regard to section 617(d), 1245 or 1250, 1251, or 1252) as gain
from the sale or exchange of property which is neither a capital asset
nor property described in section 1231(b). The corporation owns no
property described in section 1231(b) except an apartment house on which
the unrealized appreciation is $20,000 and which in the hands of A would
be property held primarily for sale to customers in the ordinary course
of trade or business. The corporation owns no property of the type
described in clause (iv) of section 341(e)(5)(A). The net worth of the
corporation is $100,000.
(ii) Although the apartment house in the hands of the corporation is
section 1231(b) property, in the hands of A, a more-than-20-percent
shareholder, the apartment house would be ordinary-income type property.
Therefore, the apartment house is a subsection (e) asset under clause
(iii) of section 341(e)(5)(A). Accordingly, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), the general corporate test is not satisfied and
section 341(e) is unavailable to the corporation or its shareholders.
Example (2). (i) Assume the same facts as in example (1), except
that in the hands of B, but not in the hands of A or C, the apartment
house would be property held primarily for sale to customers in the
ordinary course of trade or business.
(ii) Since B does not own more than 20 percent in value of the
outstanding stock, the fact that the apartment house owned by the
corporation would, in his hands, be property held primarily for sale to
customers in the ordinary course of trade or business does not make the
apartment house owned by the corporation a subsection (e) asset.
Therefore, since the net unrealized appreciation in subsection (e)
assets (zero) does not exceed 15 percent of net worth, the general
corporate test is satisfied. C may sell his stock to anyone (other than
X Corporation) and will qualify under section 341(e)(1). However, a
sale by A of his stock to persons related to A within the meaning of
paragraph (k) of this section will not so qualify.
(iii) B, however, since he owns more than 5 percent but not more than
20 percent in value of the outstanding stock, must take into account not
only the net unrealized appreciation in subsection (e) assets but also
the net unrealized appreciation in any other assets of the corporation
which would be subsection (e) assets under section 341(e)(5)(A) if he
owned more than 20 percent in value of the outstanding stock.
Therefore, since the apartment house owned by the corporation would be,
in B's hands, property held primarily for sale to customers in the
ordinary course of trade or business, and since the net unrealized
appreciation in such property ($20,000) exceeds 15 percent of net worth
($15,000), B does not satisfy the specific shareholder test and
therefore cannot avail himself of section 341(e)(1).
Example (3). (i) Assume the same facts as in example (1), except
that in the hands of B, but not in the hands of A or C, the apartment
house of the corporation would be property held primarily for sale to
customers in the ordinary course of trade or business. Assume further
that the shareholders of X Corporation wish to avail themselves of
section 333.
(ii) For purposes of section 341(e)(3), section 341(e)(5)(A)(iii)
applies in respect of any shareholder who owns more than 5 percent
(instead of more than 20 percent) in value of the outstanding stock.
Since in the hands of B, a more-than-5-percent shareholder, the
apartment house would be held primarily for sale to customers in the
ordinary course of trade or business, the corporation's apartment house
is a subsection (e) asset. Therefore, since the net unrealized
appreciation in subsection (e) assets ($20,000) exceeds 15 percent of
net worth ($15,000), no shareholder of the corporation may qualify under
section 341(e)(3) for use of section 333. However, if B were not a
more-than-5-percent shareholder of the corporation, or if, in his hands,
the apartment house would not be held primarily for sale to customers in
the ordinary course of trade or business, then all shareholders of the
corporation could qualify under section 341(e)(3) for use of section 333
since the apartment house would not be a subsection (e) asset.
Example (4). (i) Assume the same facts as in example (1), except
that in the hands of no shareholder of the corporation would the
apartment house be deemed property held primarily for sale to customers
in the ordinary course of trade or business (such determination,
however, having been made without regard to A's ownership of stock of
related corporations). Assume further that (a) X Corporation adopts a
plan of complete liquidation, (b) within the 12-month period beginning
on the date of such adoption X Corporation sells substantially all the
property held by it on such date and distributes all its assets in
complete liquidation, (c) following the adoption of such plan, no
distribution is made of any property which in the hands of the
corporation or in the hands of the distributee is property in respect of
which a deduction for exhaustion, wear and tear, obsolescence,
amortization, or depletion is allowable, and (d) following the adoption
of such plan no property is sold or exchanged to A, to a constructive
owner of A's stock, or to a person ''related'' (within the meaning of
paragraph (k) of this section) to A or such constructive owner.
(ii) Since, under the above-stated facts, the requirements of section
341(e)(4) are satisfied, section 337(a) will apply to sales or exchanges
of property by the corporation within the 12-month period beginning on
the date of the adoption of the plan of liquidation.
(iii) Any distribution in complete liquidation to B and C, who own 15
and 10 percent, respectively, in value of the outstanding stock, will
qualify under section 341(e)(2) because (a) by reason of the application
of section 341(e)(4), section 337(a) applies to sales or exchanges of
property by the corporation, and (b) at all times within the 12-month
period beginning on the date of the adoption of the plan of complete
liquidation the general corporate test is satisfied and B and C each
satisfy the specific shareholder test of paragraph (e)(1)(iii) (a) of
this section.
(iv) Any distribution in complete liquidation to A, who owns 75
percent in value of the outstanding stock, will qualify under section
341(e)(2) if, at all times within the 12-month period beginning on the
date of the adoption of the plan of complete liquidation, and after
taking into account A's ownership of stock in related corporations in
the manner prescribed in paragraph (d) of this section, A satisfies the
specific shareholder test of paragraph (e)(1)(iii) (b) of this section.
(T.D. 6806, 30 FR 2845, Mar. 5, 1965, as amended by T.D. 7369, 40 FR
29840, July 16, 1975; T.D. 7418, 41 FR 18811, May 7, 1976; T.D. 7728,
45 FR 72650, Nov. 3, 1980)
26 CFR 1.341-7 Certain sales of stock of consenting corporations.
(a) In general. (1) Under section 341(f)(1), if a corporation
consents (in the manner provided in paragraph (b) of this section) to
the application of section 341(f)(2) with respect to dispositions by it
of its subsection (f) assets (as defined in paragraph (g) of this
section), then section 341(a)(1) does not apply to any sales of stock of
such consenting corporation (other than sale to such corporation) made
by any of its shareholders within the 6-month period beginning on the
date on which such consent is filed.
(2) For purposes of section 341(f)(1) and (5) -- (i) The term
''sale'' means a sale of exchange of stock at a gain, but only if such
gain would be recognized as long-term capital gain were section 341 not
a part of the Code. Thus, a sale or exchange of stock is not a ''sale''
within the meaning of section 341(f)(1) and (5) if there is no gain on
the transaction, or if the sale or exchange gives rise to ordinary
income under a provision of the Code other than section 341, or if gain
on the transaction is not recognized under any provisions of subtitle A
of the Code.
(ii) A sale of stock in a corporation does not include any
disposition of such stock by a shareholder, if, by reason of section
341(d)(1), section 341(a) could not have applied to that disposition.
(Under section 341(d)(1), section 341(a) does not apply except to more
than 5-percent shareholders.) Except as otherwise provided in paragraph
(a)(2)(i) of this section, the term ''sale'' included a disposition of
stock in a corporation by a more-than-5-percent shareholders described
in section 341(d)(1), even though section 341(d)(1), even though section
341(a) did not apply to the dispostion because the corporation was not
collapsible or by reason of the application of section 341(d)(2), (3),
or (e).
(3) A corporation which consents to the application of section
341(f)(2) does not thereby become noncollapsible, and the fact that a
corporation consents to the application of section 341(f)(2) does not
affect the determination as to whether it is a collapsible corporation.
(4) For limitation on the application of section 341(f)(1) see
section 341(f)(5) and (6) and paragraphs (h) and (j) of this section.
(b) Statement of consent. (1) The consent of a corporation referred
to in paragraph (a)(1) or (j)(1) of this section shall be given by means
of a statement, signed by any officer who is duly authorized to act on
behalf of the consenting corporation stating that the corporation
consents to have the provisions of section 341(f)(2) apply to any
disposition by it of its subsection (f) assets. The statement shall be
filed with the district director having jurisdiction over the income tax
return of the consenting corporation for the taxable year during which
the statement is filed.
(2)(i) The statement shall contain the name, address, and employer
identification number of any corporation 5 percent or more in value of
the outstanding stock of which is owned directly by the consenting
corporation, and of any other corporation connected to the consenting
corporation through a chain of stock ownership described in paragraph
(j)(4) of this section. The statement shall also indicate where such
5-percent-or-more corporation (or such ''connected'' corporation) has
consented within the 6-month period ending on the date on which the
statement filed to the application of section 341 (f)(2) with respect to
any dispositions of its subsection (f) assets (see paragraph (j) of this
section), and, if so, the district director with whom such consent was
filed and the date on which such consent was filed.
(ii) If, during the 6-month period beginning on the date on which the
statement is filed, the consenting corporation becomes the owner of 5
percent or more in value of the outstanding stock of another corporation
or becomes connected to another corporation through a chain of stock
ownership described in paragraph (j)(4) of this section, then the
consenting corporation shall, within 5 days after such occurance, notify
the district director with whom it filed the statement of the name,
address and employer identification numbger of such corporation.
(3) A consent under section 341(f)(1) may be filed at any time and
there is no limit as to the number of such consents that may be filed.
If a consent is filed by a corporation under section 341(f)(1) and if a
shareholder sells stock (i) in such corporation, or (ii) in another
corporation a sale of whose stock is treated under section 341(f)(6) as
a sale of stock in such corporation, at any time during the applicable
6-month period, then the consent cannot thereafter be revoked or
withdrawn by the corporation. However, a consent may be revoked or
withdrawn at any time prior to a sale during the applicable 6-month
period. If no sale is make during such period, the consent will have no
effect on the corporation. See paragraph (g) of this section.
(c) Consenting corporation. (1) A consenting corporation at the time
that is filed a consent under section 341(f)(10 shal notify its
shareholders that such consent is being filed. In addition, the
consenting corporation shall, at the request of any shareholder,
promptly supply the shareholder with a copy of the consent.
(2) A consenting corporation shall maintain records adequate to
permit identification of its subsection (F) assets.
(d) Shareholders of consenting corporation. (1) A shareholder who
sells stock in a consenting corporation within the 6-month period
beginning on the date on which the consent is filed shall --
(i) Notify the corporation, within 5 days after such sale, of the
date on which such sale is made, and
(ii) Attach a copy of the corporation's consent to the shareholder's
income tax return for the taxable year in which the sale is made.
(2) If the sale of stock in a consenting corporation is treated under
section 341(f)(6) as the sale of stock in any other corporation, the
consenting corporation shall notify such other corporation, within 5
days after receiving notification of a sale of its stock, of the date on
which such sale was made.
(e) Recognition of gain under section 341(f)(2). (1) Under section
341(f)(2), if a subsection (f) asset (as defined in paragraph (g) of
this section) is disposed of any time by a consenting corporation, then,
except as provided in section 341(f)(3) and paragraph (f) of this
section, the amount by which --
(i) The amount realized (in the case of a sale, exchange, or
involuntary conversion), or
(ii) The fair market value of such asset (in the case of any other
disposition), exceeds the adjusted base of such asset is treated as gain
from the sale of exchange of such asset. Such gain is recognized
notwithstanding any contrary non-recognition provisions of subtitle A of
the Code, but only to the extent such gain is not recognized under any
other provisions of subtitle A of the Code (for example, section 1245
(a)(1) or 1250(a)). Gain recognized under section 341(f)(2) with
respect to a disposition of a subsection (f) asset has the same
character (i.e., ordinary income or capital gain) that such gain would
have if it arose from a sale of such asset.
(2) The nonrecognition provisions of subtitle A of the Code which
section 341(f)(2) override include, but are not limited to, sections
311(a), 332(c), 336, 337, 351, 361, 371(a), 374(a), 721, 1031, 1033,
1071, and 1081.
(3) In the case of a foreign corporation which files a statement of
consent pursuant to paragraph (b) of this section, such statement, in
addition to the information required in paragraph (b) of this section,
shall also contain a declaration that the corporation consents that any
gain upon the disposition of a subsection (f) asset which would
otherwise be recognized under section 341(f)(2) will, for purposes of
section 882(a)(2), be considered as gross income which is effectively
connected with the conduct of a trade or business which is conducted
through a permanent establishment within the United States.
(4) The provisions of subparagraphs (1) and (2) of this paragraph may
be illustrated by the following examples:
Example (1). Corporation X, a consenting corporation, distributes a
subsection (f) asset to its shareholders in complete or partial
liquidation of the corporation. The asset, at the line of the
distribution, is held by the corporation primarily for sale to customers
in the ordinary course of business and has an adjusted basis of $1,000
and a fair market value of $2,000. Under section 341(f)(2), the excess
of the fair market value of the asset over its adjusted basis, or $1,000
is treated as ordinary income. Assuming the gain is not recognized by
corporation X under another provision of the Code, corporation X
recognizes the $1,000 gain as ordinary income under section 341(f)(2)
even though, in the absence of section 341(f)(2), section 336 would
preclude the recognition of such gain.
Example (2). Corporation Y, a consenting corporation, distributes a
subsection (f) asset to its shareholders as a dividend. The asset at
the time of the distribution is property described in section 1231 and
has an adjusted basis, of $6,000 and a fair market value of $8,000.
Assuming that no other section of the Code would require recognition of
gain, under section 341(f)(2) the excess of the fair market value of the
asset over its adjusted basis, or $2,000, is recognized by corporation Y
as gain from the sale or exchange of property described in section 1231
even though, in the absence of section 341(f)(2), section 311(a) would
preclude the recognition of such gain.
Example (3). Assume the same facts as in example (2) except that the
subsection (f) asset is section 1245 property having a ''recomputed
basis'' (as defined in section 1245(a)(2)) or $7,200. Since the
recomputed basis of the asset is lower than its fair market value, the
excess of the recomputed basis over the adjusted basis, or $1,200, is
recognized as ordinary income under section 1245(a)(1). The remaining
amount, or $800, is recognized under section 341(f)(2) as gain from the
sale or exchange or property described in section 1231.
(5) The provisions of section 341(f)(2) apply whether or not (i) on
the date on which a consent is filed or at any time thereafter, the
consenting corporation was in fact a collapsible corporation within the
meaning of section 341(b), or (ii) on the date of any sale of stock of
the consenting corporation, the purchaser of such stock was aware that a
consent had been filed under section 341(f)(1) within the 6-month period
ending on the date of such sale.
(6) Section 341(f)(2) does not apply to losses. Thus, section
341(f)(2) does not apply if a loss is realized upon a sale, exahnger or
involuntary conversion of a subsection (f) asset nor does the section
appy to a disposition other than by way of sale, exchange, or
involuntary conversion if at the time of the disposition the fair market
value of such property is not greater than its adjusted basis.
(7) For purposes of this paragraph, the term ''disposition'' includes
an abandonment or retirement, a gift, a sale in a sale-and-leasback
transaction, and a transfer upon the foreclosure of a security interest.
Such term, however, does not include a mere transfer of title to a
creditor upon creation of a security interest or to a debtor upon
termination of a security interest. Thus, for example, a disposition
occurs upon a sale of property prusuant to a conditional sales contract
even though the seller retains legal title to the propoerty for purposes
of security, but a disposition does not occur when the seller ultimately
gives up his security interest following payment by the purchaser.
(8) The amount of gain required to be recognized by section 341(f)(2)
shall be determined separately for each subsection (f) asset disposed of
by the corporation. For purposes of applying section 341(f)(2), the
facts and circumstances of each disposition shall be considered in
determining whether the transactions involves more than one subsection
(f) asset or involves both subsection (f) and nonsubsection (f) assets.
In appropriate cases, several subsection (f) assets may be treated as a
single asset as long as it is reasonably clear, from the best estimates
obtainable on the basis of all the facts and circumstances, that the
amount of gain required to be recognized by section 341(f)(2) is not
less than the total gain under section 341(f)(2) whish would be computed
separately for each subsection (f) asset.
(9) In the case of a sale, exchange, or involuntary conversion of a
subsection (f) asset and a nonsubsection (f) asset in one transaction,
the total amount realized upon the disposition shall be allocated
between the subsection (f) asset any arm's length agreement between the
buyer and the seller will establish the allocation. In the absence of
such an agreement, the allocation shall be made by taking into account
the appropriate facts and circumstances. Some of the facts and
circumstances which shall be taken into account to the extent
appropriate included, but are not limited to, a comparision between the
subsection (f) asset and all property disposed of in such transaction of
(i) the original costs and reproduction costs of construction, erection,
or production, (ii) the remaining economic useful life, (ii) state of
obsolencence, and (iv) anticipated expenditures to maintain, renovate,
or modernize.
(10) See paragraph (c)(1) of 1.1502-14 for the deferall of gain
recognized upon a distribution other than in complete liquidation made
by one member of a group which files a consolidated return to another
such members.
(f) Exception for certain tax-free transactions. (1) Under section
341(f)(3), no gain is taken into account under section 341(f)(2) by a
transferor corporation on the transfer of a subsection (f) asset to
another corporation (other than a corporation exempt from tax imposed by
chapter 1 of the Code) if --
(i) The basis of such asset in the hands of the transferee
corporation is determined by reference to its basis in the hands of the
transferor by reason of the application of section 332 (relating to
distributions in liquidation of an 80-percent-or-more controlled
subsidairy corporation), section 351 (relating to transfers to a
corporation controlled by the transferor), section 361 (relating to
exchanges pursuant to certain reorganizations), section 371(a) (relating
to exchanges pursuant to certain receivership and bankruptcy
proceedings), or section 374 (a) (relating to exchanges pursuant to
certain railroad reorganizations), and
(ii) The transferee corporation agrees (as provided in subparagraph
(3) of this paragraph) to have the provisiions of section 341(f)(2)
apply to any disposition by it of such asset.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following examples:
Example (1). Corporation M. in exchange for its voting stock worth
$20,000 and $1,000 in cash, acquires the entire property of corporation
N (an unencumbered apartment building) in a transaction which is
described in section 368(a)(2)(B) and which, therefore, qualifies as a
reorganization under section 368(a)(1)(C). The apartment building,
which in the hands of corporation N. a consenting corporation, is a
subsection (f) asset, has an adjusted basis of $15,000 and a fair market
value of $21,000. The basis of the apartment house in the hands of
corporation M is determined by reference to its basis in the hands of
corporation N by reason of the application of section 361. Thus, under
section 341(f)(3), if corporation M agrees to have the provisions of
section 341(f)(2) apply to any disposition by it of the apartment house,
then corporation N will recognize no gain under section 341(f)(2) but
will recognize $1,000 gain under section 361(b) (assuming the cash it
receives is not distributed in pursuance of the plan of reorganization).
However, if corporation M does not so agree, the gain recognized by
corporation N will be $6,000, that is, the gain of $1,000 recognized
under section 361(b) plus $5,000 gain recognized under section
341(f)(2). In either case, if section 1245, 1250, or 1251 applies, some
or all of the gain may be recognized under sections in lieu of sections
341(f)(2) and 361(b).
Example (2). Corporation Y, a consenting corporation, is a wholly
owned subsidiary of corporation X. In the complete liquidation of Y it
distributes to X a subsection (f) asset which is section 1245 property.
The asset at the time of the distribution has an adjusted basis of
$10,000, a recomputed basis of $14,000, and a fair market value of
$10,000. The basis of the asset in the hands of X is determined by
reference to its basis in the hands of corporation Y by reason of the
application of section 332. Thus, under section 341(f)(3), if
corporation X agrees to have the provisions of section 341(f)(2) apply
to any disposition by it of the subsection (f) asset, then Y will
recognize no gain under section 341(f)(2) and will recognize no gain
under section 1245(a)(1) by reason of the application of section
1245(b)(3). Under section 334(b)(1), the basis of the subsection (f)
asset to corporation X will be the same as it would be in the hands of
Y, or $10,000. However, if corporation X does not so agree, then under
section 341(f)(2) $6,000 (the excess of the fair market value of the
asset over its adjusted basis) will be treated as gain from the sale or
exchange of the asset. Moreover, under section 1245(a)(1) $4,000 (the
excess of the recomputed basis over the adjusted basis) of the $6,000
will be recognized as ordinary income. The basis of the asset to
corporation X is $16,000, i.e., the same as it would be in the hands of
Y ($10,000) increased in the amount of gain recognized by Y on the
distribution ($6,000).
(3) The agreement of a transferee corporation referred to in
subparagraph (1) of this paragraph shall be filed, on or before the date
on which the subsection (f) assets are transferred, with the district
director having jurisdiction over its income tax return for the taxable
year during which the transfer is to be made. The agreement shall be
signed by any officer who is duly authorized to act on behalf of the
transferee corporation (if the transaxtion is one to which section
371(a) or 374(a) applies, the fiduciary for the transferee corporation,
in appropriate cases, may sign the agreement) and shall apply to all the
subsection (f) assets to be transferred pursuant to the applicable
transaction described in section 341(f)(3). The agreement shall
identify the transaction by which the subsection (f) assets will be
acquired, including the names, addresses, and employer identification
numbers of the transferor and transferee corporations, and shall contain
a schedule of the subsection (f) assets to be acquired. The agreement
shall also state that the transferee corporation (i) agrees to have the
provisions of section 341(f)(2) apply to any disposition by it of the
subsection (f) assets acquired, and (ii) agrees to maintain records
adequate to permit identification of such subsection (f) assets.
(4) The transferor corporation shall attach a copy of the agreement
to its income tax return for the taxable year in which the subsection
(f) assets are transferred.
(g) Subsection (f) asset defined. (1) Under section 341(f)(4), a
subsection (f) asset is any property which, as of the date of any sale
of stock to which paragraph (a) or (j)(3) of this section applies, is
not a capital asset and is property owned by, or subject to a binding
contract or an option to acquire held by, the consenting corporation.
Land or any interest in real property (other than a security interest)
is treated as property which is not a capital asset. Also, unrealized
receivables or fees (as defined in section 341(b)(4)) are treated as
property which are not capital assets.
(2) If, with respect to any property described in subparagraph (1) of
this paragraph, manufacture, construction, or production has been
commenced by either the consenting corporation or another person before
any date of sale of stock described in subparagraph (1) of this
paragraph, a consenting corporation's subsection (f) assets include any
property resulting from such manufacture, construction, or production.
Thus, for example, if, on the date of any sale of stock within the
6-month period, manufacture, construction, or production has been
commended on a tract of land to be used for residential housing or on a
television series, the term ''subsection (f) asset'' includes the
residential homes of the television tapes resulting from such
manufacture, construction, or production by the consenting corporation
(or by a transferee corporation which has agreed to the application of
section 341(f)(2)). If land or any interest in real property (other
than a security interest) is owned or held under an option by the
consenting corporation on the date of any sale of stock described in
subparagraph (1) of this paragraph, the term ''subsection (f) asset''
includes any improvements resulting from construction with respect to
such property (by the consenting corporation or by a transferee
corporation which has agreed to the application of section 341(f)(2)) if
such construction is commenced within 2 years after the date of any such
sale. The property or improvements resulting from any manufacture,
construction, or production is a question to be determined on the basis
of the particular facts and circumstances of each individual case.
Thus, for example, a building which is a part of an integrated project
is a subsection (f) asset if construction of the project commenced
before the date of sale or within 2 years thereafter even if
construction of the building commenced more than 2 years thereafter.
Similarly a television tape which is part of a series is a subsection
(i) asset if production of the series was commenced on the date of sale
even if production of the tape commenced after the sale.
(3) The provisions of subparagraphs (1) and (2) of this paragraph may
be illustrated by the following examples:
Example (1). Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1985. Shareholder A owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 5 percent of the stock on January 2, 1965, 10 percent on
February 10, 1963, and 1 percent on May 1, 1965. No other sales of X
stock were made during the 6-month period beginning on January 1, 1965.
On such date X owns an apartment building and on March 1 X purchases an
office building. X's subsection (f) assets include the apartment
building owned on January 1 and the office building purchased on March
1.
Example (2). Assume the same facts as in example (1) except that on
January 1, 1965, X also owns a tract of raw land. On April 1, 1965,
construction of a residential housing project is commenced on the tract
of land. Corporation X's subsection (i) assets will include the tract
of land plus the resulting improvements to the land. This result would
not be changed if construction of the residential housing project were
not commenced until July 1, 1966, since the construction would have been
commenced within 2 years after May 1, 1965.
Example (3). Corporation X files a consent to the application of
section 341(f)(2) on January 1, 1965. Shareholder B owns 100 percent of
the outstanding stock of the consenting corporation on January 1, 1965,
and sells 10 percent of the stock on June 1, 1965. On April 1, 1965, Y
acquires an option to purchase a motion picture when completed. On May
1, 1965, production is started on the motion picture. On February 1,
1967, production is completed, and Y exercises its option. Y holds the
option and the motion picture for use in its trade or business. Y's
subsection (f) assets initially include the option and ultimately
include the motion picture. However the exercise of the option is not a
disposition of the option within the meaning of section 341(f)(2).
(h) Five-year limitation as to shareholder. Under section 341(f)(5),
section 341(f)(1) does not apply to the sale of stock of a consenting
corporation if, during the 5-year period ending on the date of such
sale, such shareholder (or any person related to such shareholder within
the meaning of section 341(e)(8)(A)) made a sale (as defined in
paragraph (a)(2) of this section) of any stock of another consenting
corporation within any 6-month period beginning on a date on which a
consent was filed under section 341(f)(1) by such other corporation.
Section 341(f)(5) does not prevent a shareholder of a consenting
corporation from receiving the benefit of section 341(f)(1) on the sale
of additional shares of the stock of the same consenting corporation.
(i) (Reserved)
(j) Special rule for stock ownership in other corporations. -- (1)
Section 341(f)(6) provides a special rule applicable to a consenting
corporation which owns 5 percent or more in value of the outstanding
stock of another corporation. In such a case, a consent filed by the
consenting corporation shall not be valid with respect to a sale of its
stock during the applicable 6-month period unless each corporation, 5
percent or more in value of the outstanding stock of which is owned by
the consenting corporation on the date of such sale, file (within the
6-month period ending on the date of such sale) a valid consent under
section 341(f)(1) with respect to sales of its own stock.
(2) The provisions of subparagraph (1) of this paragraph may be
illustrated by the following example:
Example: Corporation X files a consent under section 341(f)(1) on
November 1, 1965. On January 1, 1966, the date on which a shareholder
of corporation X sells stock of X. X owns 80 percent in value of the
outstanding stock of corporation Y. In order for the consent filed by
corporation X to be valid with respect to the sale of its stock on
January 1, 1966, corporation Y must have filed, during the 6-month
period ending on January 1, 1966, a valid consent under section
341(f)(1) with respect to sales of its stock.
(3) For purposes of applying section 341(f)(4) (relating to the
definition of a subsection (f) asset) to a corporation 5 percent or more
in value of the outstanding stock of which is owned by the consenting
corporation, a sale of stock of the consenting corporation to which
section 341(f)(1) applies shall be treated as a sale of stock of such
other corporation. Thus, in the example in subparagraph (2) of this
paragraph, the subsection (f) assets of corporation Y would include
property described in section 341(f)(4) owned by or held under an option
by corporation Y on January 1, 1966.
(4) In the case of a chain of corporations connected by the 5-percent
ownership requirement described in subparagraph (1) of this paragraph,
rules similar to the rules described in subparagraphs (2) and (3) of
this paragraph shall apply. Thus, in the example in subparagraph (2) of
this paragraph, if corporation Y owned 5 percent or more of the stock of
corporation Z on January 1, 1966, then Z must have filed a valid consent
during the 6-month period ending January 1, 1966, in order for the
consent filed by X to be valid with respect to the sale of its stock on
January 1, 1966. In such case any of stock of either X or Y is treated
as a sale of stock of Z for purposes of applying section 341(f)(4) to Z.
(5) If a corporation is a member of an affiliated group (as defined
in section 1504(a)) that files a consolidated return, a corporation will
be considered to have filed a consent if a consent is filed on its
behalf by the common parent under 1.1502-77(a).
(k) Effective date. Paragraphs (b), (c), (e)(3), and (f)(3) of this
section apply only with respect to statements and notifications filed
more than 30 days after July 6, 1977. Paragraph (d) applies only with
respect to sales of stock made more than 30 days after July 6, 1977.
All other provisions of this section appy with respect to transactions
after August 22, 1964.
(T.D. 7655, 44 FR 68460, Nov. 29, 1979; 45 FR 17982, Mar. 20, 1980;
45 FR 20464, Mar. 28, 1980)
26 CFR 1.342-1 General.
The determination of whether a foreign corporation was a foreign
personal holding company with respect to a taxable year beginning on or
before, and ending after August 26, 1937, shall be made under section
331 of the Revenue Act of 1936 (50 Stat. 818) and the regulations
thereunder. For the purpose of section 342(a), a liquidation may be
completed before the actual dissolution of the liquidating corporation.
However, no liquidation shall be considered as completed until the
liquidating corporation and the receiver (or trustees in liquidation)
are finally divested of all the property, whether tangible or
intangible.
26 CFR 1.342-1 definition
26 CFR 1.346-1 Partial liquidation.
(a) General. This section defines a partial liquidation. If amounts
are distributed in partial liquidation such amounts are treated under
section 331(a)(2) as received in part or full payment in exchange for
the stock. A distribution is treated as in partial liquidation of a
corporation if:
(1) The distribution is one of a series of distributions in
redemption of all of the stock of the corporation pursuant to a plan of
complete liquidation, or
(2) The distribution:
(i) Is not essentially equivalent to a dividend,
(ii) Is in redemption of a part of the stock of the corporation
pursuant to a plan, and
(iii) Occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year.
An example of a distribution which will qualify as a partial
liquidation under subparagraph (2) of this paragraph and section 346(a)
is a distribution resulting from a genuine contraction of the corporate
business such as the distribution of unused insurance proceeds recovered
as a result of a fire which destroyed part of the business causing a
cessation of a part of its activities. On the other hand, the
distribution of funds attributable to a reserve for an expansion program
which has been abandoned does not qualify as a partial liquidation
within the meaning of section 346(a). A distribution to which section
355 applies (or so much of section 356 as relates to section 355) is not
a distribution in partial liquidation within the meaning of section
346(a).
(b) Special requirements on termination of business. A distribution
which occurs within the taxable year in which the plan is adopted or
within the succeeding taxable year and which meets the requirements of
subsection (b) of section 346 falls within paragraph (a)(2) of this
section and within section 346(a)(2). The requirements which a
distribution must meet to fall within subsection (b) of section 346 are:
(1) Such distribution is attributable to the corporation's ceasing to
conduct, or consists of assets of, a trade or business which has been
actively conducted throughout the five-year period immediately before
the distribution, which trade or business was not acquired by the
corporation within such period in a transaction in which gain or loss
was recognized in whole or in part, and
(2) Immediately after such distribution by the corporation it is
actively engaged in the conduct of a trade or business, which trade or
business was actively conducted throughout the five-year period ending
on the date of such distribution and was not acquired by the corporation
within such period in a transaction in which gain or loss was recognized
in whole or in part.
A distribution shall be treated as having been made in partial
liquidation pursuant to section 346(b) if it consists of the proceeds of
the sale of the assets of a trade or business which has been actively
conducted for the five-year period and has been terminated, or if it is
a distribution in kind of the assets of such a business, or if it is a
distribution in kind of some of the assets of such a business and of the
proceeds of the sale of the remainder of the assets of such a business.
In general, a distribution which will qualify under section 346(b) may
consist of, but is not limited to:
(i) Assets (other than inventory or property described in subdivision
(ii) of this subparagraph) used in the trade or business throughout the
five-year period immediately before the distribution (for this purpose
an asset shall be considered used in the trade or business during the
period of time the asset which it replaced was so used), or
(ii) Proceeds from the sale of assets described in subdivision (i) of
this subparagraph, and, in addition,
(iii) The inventory of such trade or business or property held
primarily for sale to customers in the ordinary course of business, if:
(a) The items constituting such inventory or such property were
substantially similar to the items constituting such inventory or
property during the five-year period immediately before the
distribution, and
(b) The quantity of such items on the date of distribution was not
substantially in excess of the quantity of similar items regularly on
hand in the conduct of such business during such five-year period, or
(iv) Proceeds from the sale of inventory or property described in
subdivision (iii) of this subparagraph, if such inventory or property is
sold in bulk in the course of termination of such trade or business and
if with respect to such inventory the conditions of subdivision (iii)
(a) and (b) of this subparagraph would have been met had such inventory
or property been distributed on the date of such sale.
(c) Active conduct of a trade or business. For the purpose of
section 346(b)(1), a corporation shall be deemed to have actively
conducted a trade or business immediately before the distribution, if:
(1) In the case of a business the assets of which have been
distributed in kind, the business was operated by such corporation until
the date of distribution, or
(2) In the case of a business the proceeds of the sale of the assets
of which are distributed, such business was actively conducted until the
date of sale and the proceeds of such sale were distributed as soon
thereafter as reasonably possible.
The term ''active conduct of a trade or business'' shall have the
same meaning in this section as in paragraph (c) of 1.355-1.
26 CFR 1.346-2 Treatment of certain redemptions.
If a distribution in a redemption of stock qualifies as a
distribution in part or full payment in exchange for the stock under
both section 302(a) and this section, then only this section shall be
applicable. None of the limitations of section 302 shall be applicable
to such redemption.
26 CFR 1.346-3 Effect of certain sales.
The determination of whether assets sold in connection with a partial
liquidation are sold by the distributing corporation or by the
shareholder is a question of fact to be determined under the facts and
circumstances of each case.
26 CFR 1.346-3 Corporate Organizations and Reorganizations
26 CFR 1.346-3 corporate organizations
26 CFR 1.351-1 Transfer to corporation controlled by transferor.
(a)(1) Section 351(a) provides, in general, for the nonrecognition of
gain or loss upon the transfer by one or more persons of property to a
corporation solely in exchange for stock or securities in such
corporation, if immediately after the exchange, such person or persons
are in control of the corporation to which the property was transferred.
As used in section 351, the phrase ''one or more persons'' includes
individuals, trusts, estates, partnerships, associations, companies, or
corporations (see section 7701(a)(1)). To be in control of the
transferee corporation, such person or persons must own immediately
after the transfer stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled to vote and at
least 80 percent of the total number of shares of all other classes of
stock of such corporation (see section 368(c)). In determining control
under this section, the fact that any corporate transferor distributes
part or all of the stock which it receives in the exchange to its
shareholders shall not be taken into account. The phrase ''immediately
after the exchange'' does not necessarily require simultaneous exchanges
by two or more persons, but comprehends a situation where the rights of
the parties have been previously defined and the execution of the
agreement proceeds with an expedition consistent with orderly procedure.
For purposes of this section --
(i) Stock or securities issued for services rendered or to be
rendered to or for the benefit of the issuing corporation will not be
treated as having been issued in return for property, and
(ii) Stock or securities issued for property which is of relatively
small value in comparison to the value of the stock and securities
already owned (or to be received for services) by the person who
transferred such property, shall not be treated as having been issued in
return for property if the primary purpose of the transfer is to qualify
under this section the exchanges of property by other persons
transferring property.
For the purpose of section 351, stock rights or stock warrants are
not included in the term ''stock or securities.''
(2) The application of section 351(a) is illustrated by the following
examples:
Example (1). C owns a patent right worth $25,000 and D owns a
manufacturing plant worth $75,000. C and D organize the R Corporation
with an authorized capital stock of $100,000. C transfers his patent
right to the R Corporation for $25,000 of its stock and D transfers his
plant to the new corporation for $75,000 of its stock. No gain or loss
to C or D is recognized.
Example (2). B owns certain real estate which cost him $50,000 in
1930, but which has a fair market value of $200,000 in 1955. He
transfers the property to the N Corporation in 1955 for 78 percent of
each class of stock of the corporation having a fair market value of
$200,000, the remaining 22 percent of the stock of the corporation
having been issued by the corporation in 1940 to other persons for cash.
B realized a taxable gain of $150,000 on this transaction.
Example (3). E, an individual, owns property with a basis of $10,000
but which has a fair market value of $18,000. E also had rendered
services valued at $2,000 to Corporation F. Corporation F has
outstanding 100 shares of common stock all of which are held by G.
Corporation F issues 400 shares of its common stock (having a fair
market value of $20,000) to E in exchange for his property worth $18,000
and in compensation for the services he has rendered worth $2,000.
Since immediately after the transaction, E owns 80 percent of the
outstanding stock of Corporation F, no gain is recognized upon the
exchange of the property for the stock. However, E realized $2,000 of
ordinary income as compensation for services rendered to Corporation F.
(b) (1) Where property is transferred to a corporation by two or more
persons in exchange for stock or securities, as described in paragraph
(a) of this section, it is not required that the stock and securities
received by each be substantially in proportion to his interest in the
property immediately prior to the transfer. However, where the stock
and securities received are received in disproportion to such interest,
the entire transaction will be given tax effect in accordance with its
true nature, and in appropriate cases the transaction may be treated as
if the stock and securities had first been received in proportion and
then some of such stock and securities had been used to make gifts
(section 2501 and following), to pay compensation (section 61(a)(1)), or
to satisfy obligations of the transferor of any kind.
(2) The application of paragraph (b)(1) of this section may be
illustrated as follows:
Example (1). Individuals A and B, father and son, organize a
corporation with 100 shares of common stock to which A transfers
property worth $8,000 in exchange for 20 shares of stock, and B
transfers property worth $2,000 in exchange for 80 shares of stock. No
gain or loss will be recognized under section 351. However, if it is
determined that A in fact made a gift to B, such gift will be subject to
tax under section 2501 and following. Similarly, if B had rendered
services to A (such services having no relation to the assets
transferred or to the business of the corporation) and the disproportion
in the amount of stock received constituted the payment of compensation
by A to B, B will be taxable upon the fair market value of the 60 shares
of stock received as compensation for services rendered, and A will
realize gain or loss upon the difference between the basis to him of the
60 shares and their fair market value at the time of the exchange.
Example (2). Individuals C and D each transferred, to a newly
organized corporation, property having a fair market value of $4,500 in
exchange for the issuance by the corporation of 45 shares of its capital
stock to each transferor. At the same time, the corporation issued to
E, an individual, 10 shares of its capital stock in payment for
organizational and promotional services rendered by E for the benefit of
the corporation. E transferred no property to the corporation. C and D
were under no obligation to pay for E's services. No gain or loss is
recognized to C or D. E received compensation taxable as ordinary
income to the extent of the fair market value of the 10 shares of stock
received by him.
(c) (1) The general rule of section 351 does not apply, and
consequently gain or loss will be recognized, where property is
transferred to an investment company after June 30, 1967. A transfer of
property after June 30, 1967, will be considered to be a transfer to an
investment company if --
(i) The transfer results, directly or indirectly, in diversification
of the transferors' interests, and
(ii) The transferee is (a) a regulated investment company, (b) a real
estate investment trust, or (c) a corporation more than 80 percent of
the value of whose assets (excluding cash and nonconvertible debt
obligations from consideration) are held for investment and are readily
marketable stocks or securities, or interests in regulated investment
companies or real estate investment trusts.
(2) The determination of whether a corporation is an investment
company shall ordinarily be made by reference to the circumstances in
existence immediately after the transfer in question. However, where
circumstances change thereafter pursuant to a plan in existence at the
time of the transfer, this determination shall be made by reference to
the later circumstances.
(3) Stocks and securities will be considered readily marketable if
(and only if) they are part of a class of stock or securities which is
traded on a securities exchange or traded or quoted regularly in the
over-the-counter market. For purposes of subparagraph (1)(ii) (c) of
this paragraph, the term ''readily marketable stocks or securities''
includes convertible debentures, convertible preferred stock, warrants,
and other stock rights if the stock for which they may be converted or
exchanged is readily marketable. Stocks and securities will be
considered to be held for investment unless they are (i) held primarily
for sale to customers in the ordinary course of business, or (ii) used
in the trade or business of banking, insurance, brokerage, or a similar
trade or business.
(4) In making the determination required under subparagraph (1)(ii)
(c) of this paragraph, stock and securities in subsidiary corporations
shall be disregarded and the parent corporation shall be deemed to own
its ratable share of its subsidiaries' assets. A corporation shall be
considered a subsidiary if the parent owns 50 percent or more of (i) the
combined voting power of all classes of stock entitled to vote, or (ii)
the total value of shares of all classes of stock outstanding.
(5) A transfer ordinarily results in the diversification of the
transferors' interests if two or more persons transfer nonidentical
assets to a corporation in the exchange. For this purpose, if any
transaction involves one or more transfers of nonidentical assets which,
taken in the aggregate, constitute an insignificant portion of the total
value of assets transfered, such transfers shall be disregarded in
determining whether diversification has occurred. If there is only one
transferor (or two or more transferors of identical assets) to a newly
organized corporation, the transfer will generally be treated as not
resulting in diversification. If a transfer is part of a plan to
achieve diversification without recognition of gain, such as a plan
which contemplates a subsequent transfer, however delayed, of the
corporate assets (or of the stock or securities received in the earlier
exchange) to an investment company in a transaction purporting to
qualify for nonrecognition treatment, the original transfer will be
treated as resulting in diversification.
(6) The application of subparagraph (5) of this paragraph may be
illustrated as follows:
Example (1). Individuals A, B, and C organize a corporation with 101
shares of common stock. A and B each transfers to it $10,000 worth of
the only class of stock of corporation X, listed on the New York Stock
Exchange, in exchange for 50 shares of stock. C transfers $200 worth of
readily marketable securities in corporation Y for one share of stock.
In determining whether or not diversification has occurred, C's
participation in the transaction will be disregarded. There is,
therefore, no diversification, and gain or loss will not be recognized.
Example (2). A, together with 50 other transferors, organizes a
corporation with 100 shares of stock. A transfers $10,000 worth of
stock in corporation X, listed on the New York Stock Exchange, in
exchange for 50 shares of stock. Each of the other 50 transferors
transfers $200 worth of readily marketable securities in corporations
other than X in exchange for one share of stock. In determining whether
or not diversification has occurred, all transfers will be taken into
account. Therefore, diversification is present, and gain or loss will
be recognized.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6942, 32
FR 20977, Dec. 29, 1967)
26 CFR 1.351-2 Receipt of property.
(a) If an exchange would be within the provisions of section 351(a)
if it were not for the fact that the property received in exchange
consists not only of property permitted by such subsection to be
received without the recognition of gain, but also of other property or
money, then the gain, if any, to the recipient shall be recognized, but
in an amount not in excess of the sum of such money and the fair market
value of such other property. No loss to the recipient shall be
recognized.
(b) See section 357 and the regulations pertaining to that section
for applicable rules as to the treatment of liabilities as ''other
property'' in cases subject to section 351, where another party to the
exchange assumes a liability, or acquires property subject to a
liability.
(c) See sections 358 and 362 and the regulations pertaining to those
sections for applicable rules with respect to the determination of the
basis of stock, securities, or other property received in exchanges
subject to section 351.
(d) See part I (section 301 and following), subchapter C, chapter 1
of the Code, and the regulations thereunder for applicable rules with
respect to the taxation of dividends where a distribution by a
corporation of its stock or securities in connection with an exchange
subject to section 351(a) has the effect of the distribution of a
taxable dividend.
26 CFR 1.351-3 Records to be kept and information to be filed.
(a) Every person who received the stock or securities of a controlled
corporation, or other property as part of the consideration, in exchange
for property under section 351, shall file with his income tax return
for the taxable year in which the exchange is consummated a complete
statement of all facts pertinent to such exchange, including --
(1) A description of the property transferred, or of his interest in
such property, together with a statement of the cost or other basis
thereof, adjusted to the date of transfer.
(2) With respect to stock of the controlled corporation received in
the exchange, a statement of --
(i) The kind of stock and preferences, if any;
(ii) The number of shares of each class received; and
(iii) The fair market value per share of each class at the date of
the exchange.
(3) With respect to securities of the controlled corporation received
in the exchange, a statement of --
(i) The principal amount and terms; and
(ii) The fair market value at the date of exchange.
(4) The amount of money received, if any.
(5) With respect to other property received --
(i) A complete description of each separate item;
(ii) The fair market value of each separate item at the date of
exchanges; and
(iii) In the case of a corporate shareholder, the adjusted basis of
the other property in the hands of the controlled corporation
immediately before the distribution of such other property to the
corporate shareholder in connection with the exchange.
(6) With respect to liabilities of the transferors assumed by the
controlled corporation, a statement of --
(i) The nature of the liabilities;
(ii) When and under what circumstances created;
(iii) The corporate business reason for assumption by the controlled
corporation; and
(iv) Whether such assumption eliminates the transferor's primary
liability.
(b) Every such controlled corporation shall file with its income tax
return for the taxable year in which the exchange is consummated --
(1) A complete description of all the property received from the
transferors.
(2) A statement of the cost or other basis thereof in the hands of
the transferors adjusted to the date of transfer.
(3) The following information with respect to the capital stock of
the controlled corporation --
(i) The total issued and outstanding capital stock immediately prior
to and immediately after the exchange, with a complete description of
each class of stock;
(ii) The classes of stock and number of shares issued to each
transferor in the exchange, and the number of shares of each class of
stock owned by each transferor immediately prior to and immediately
after the exchange, and
(iii) The fair market value of the capital stock as of the date of
exchange which was issued to each transferor.
(4) The following information with respect to securities of the
controlled corporation --
(i) The principal amount and terms of all securities outstanding
immediately prior to and immediately after the exchange,
(ii) The principal amount and terms of securities issued to each
transferor in the exchange, with a statement showing each transferor's
holdings of securities of the controlled corporation immediately prior
to and immediately after the exchange,
(iii) The fair market value of the securities issued to the
transferors on the date of the exchange, and
(iv) A statement as to whether the securities issued in the exchange
are subordinated in any way to other claims against the controlled
corporation.
(5) The amount of money, if any, which passed to each of the
transferors in connection with the transaction.
(6) With respect to other property which passed to each transferor --
(i) A complete description of each separate item;
(ii) The fair market value of each separate item at the date of
exchange, and
(iii) In the case of a corporate transferor, the adjusted basis of
each separate item in the hands of the controlled corporation
immediately before the distribution of such other property to the
corporate transferor in connection with the exchange.
(7) The following information as to the transferor's liabilities
assumed by the controlled corporation in the exchange --
(i) The amount and a description thereof,
(ii) When and under what circumstances created, and
(iii) The corporate business reason or reasons for assumption by the
controlled corporation.
(c) Permanent records in substantial form shall be kept by every
taxpayer who participates in the type of exchange described in section
351, showing the information listed above, in order to facilitate the
determination of gain or loss from a subsequent disposition of stock or
securities and other property, if any, received in the exchange.
26 CFR 1.351-3 effects on shareholders and security holders
26 CFR 1.354-1 Exchanges of stock and securities in certain
reorganizations.
(a) Section 354 provides that under certain circumstances no gain or
loss is recognized to a shareholder who surrenders his stock in exchange
for other stock or to a security holder who surrenders his securities in
exchange for stock. Section 354 also provides that under certain
circumstances a security holder may surrender securities and receive
securities in the same principal amount or in a lesser principal amount
without the recognition of gain or loss to him. The exchanges to which
section 354 applies must be pursuant to a plan of reorganization as
provided in section 368(a) and the stock and securities surrendered as
well as the stock and securities received must be those of a corporation
which is a party to the reorganization. Section 354 does not apply to
exchanges pursuant to a reorganization described in section 368(a)(1)(D)
unless the transferor corporation --
(1) Transfers all or substantially all of its assets to a single
corporation, and
(2) Distributes all of its remaining properties (if any) and the
stock, securities and other properties received in the exchange to its
shareholders or security holders in pursuance of the plan of
reorganization. The fact that properties retained by the transferor
corporation, or received in exchange for the properties transferred in
the reorganization, are used to satisfy existing liabilities not
represented by securities and which were incurred in the ordinary course
of business before the reorganization does not prevent the application
of section 354 to an exchange pursuant to a plan of reorganization
defined in section 368(a)(1)(D).
(b) Except as provided in section 354 (c) and (d), section 354 is not
applicable to an exchange of stock or securities if a greater principal
amount of securities is received than the principal amount of securities
the recipient surrenders, or if securities are received and the
recipient surrenders no securities. See, however, section 356 and
regulations pertaining to such section. See also section 306 with
respect to the receipt of preferred stock in a transaction to which
section 354 is applicable.
(c) An exchange of stock or securities shall be subject to section
354(a)(1) even though --
(1) Such exchange is not pursuant to a plan of reorganization
described in section 368(a), and
(2) The principal amount of the securities received exceeds the
principal amount of the securities surrendered or if securities are
received and no securities are surrendered --
if such exchange is pursuant to a plan of reorganization for a
railroad corporation as defined in section 77(m) of the Bankruptcy Act
(11 U.S.C. 205(m)) and is approved by the Interstate Commerce Commission
under section 77 of such act or under section 20b of the Interstate
Commerce Act (49 U.S.C. 20b) as being in the public interest. Section
354 is not applicable to such exchanges if there is received property
other than stock or securities. See, however, section 356 and
regulations pertaining to such section.
(d) The rules of section 354 may be illustrated by the following
examples:
Example (1). Pursuant to a reorganization under section 368(a) to
which Corporations T and W are parties, A, a shareholder in Corporation
T, surrenders all his common stock in Corporation T in exchange for
common stock of Corporation W. No gain or loss is recognized to A.
Example (2). Pursuant to a reorganization under section 368(a) to
which Corporations X and Y (which are not railroad corporations) are
parties, B, a shareholder in Corporation X, surrenders all his stock in
X for stock and securities in Y. Section 354 does not apply to this
exchange. See, however, section 356.
Example (3). C, a shareholder in Corporation Z (which is not a
railroad corporation), surrenders all his stock in Corporation Z in
exchange for securities in Corporation Z. Whether or not this exchange
is in connection with a recapitalization under section 368(a)(1)(E),
section 354 does not apply. See, however, section 302.
(e) For the purpose of section 354, stock rights or stock warrants
are not included in the term ''stock or securities''.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44
FR 26869, May 8, 1979)
26 CFR 1.355-0 In order to facilitate the use of 1.355-1 through
1.355-6, this section lists the paragraphs, subparagraphs, and
subdivisions in those sections.
(a) Effective date of certain sections.
(b) Application of section.
(a) Property distributed.
(b) Independent business purpose.
(1) Independent business purpose requirement.
(2) Corporate business purpose.
(3) Business purpose for distribution.
(4) Business purpose as evidence of nondevice.
(5) Examples.
(c) Continuity of interest requirement.
(1) Requirement.
(2) Examples.
(d) Device for distribution of earnings and profits.
(1) In general.
(2) Device factors.
(i) In general.
(ii) Pro rata distribution.
(iii) Subsequent sale or exchange of stock.
(A) In general.
(B) Sale or exchange negotiated or agreed upon before the
distribution.
(C) Sale or exchange not negotiated or agreed upon before the
distribution.
(D) Negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization.
(iv) Nature and use of assets.
(A) In general.
(B) Assets not used in a trade or business meeting the requirement of
section 355(b).
(C) Related function.
(3) Nondevice factors.
(i) In general.
(ii) Corporate business purpose.
(iii) Distributing corporation publicly traded and widely held.
(iv) Distribution to domestic corporate shareholders.
(4) Examples.
(5) Transactions ordinarily not considered as a device.
(i) In general.
(ii) Absence of earnings and profits.
(iii) Section 303(a) transactions.
(iv) Section 302(a) transactions.
(v) Examples.
(e) Stock and securities distributed.
(1) In general.
(2) Additional rules.
(f) Principal amount of securities.
(1) Securities received.
(2) Only stock received.
(g) Period of ownership.
(1) Other property.
(2) Example.
(h) Active conduct of a trade or business.
(a) General requirements.
(1) Application of section 355.
(2) Examples.
(b) Active conduct of a trade or business defined.
(1) In general.
(2) Active conduct or a trade or business immediately after
distribution.
(i) In general.
(ii) Trade or business.
(iii) Active conduct.
(iv) Limitations.
(3) Active conduct for five-year period preceding distribution.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(i) In general.
(ii) Example.
(iii) Gain or loss recognized in certain transactions.
(iv) Affiliated group.
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988).
(c) Examples.
(T.D. 8238, 54 FR 289, Jan. 5, 1989)
26 CFR 1.355-1 Distribution of stock and securities of a controlled
corporation.
(a) Effective date of certain sections. Sections 1.355-1 through
1.355-4 apply to transactions occurring after February 6, 1989. For
transactions occurring on or before that date, see 26 CFR 1.355-1
through 1.355-4 (revised as of April 1, 1987). Sections 1.355-1 through
1.355-4 do not reflect the amendments to section 355 made by the Revenue
Act of 1987 and the Technical and Miscellaneous Revenue Act of 1988.
(b) Application of section. Section 355 provides for the separation,
without recognition of gain or loss to (or the inclusion in income of)
the shareholders and security holders, of one or more existing
businesses formerly operated, directly or indirectly, by a single
corporation (the ''distributing corporation''). It applies only to the
separation of existing businesses that have been in active operation for
at least five years (or a business that has been in active operation for
at least five years into separate businesses), and which, in general,
have been owned, directly or indirectly, for at least five years by the
distributing corporation. A separation is achieved through the
distribution by the distributing corporation of stock, or stock and
securities, of one or more subsidiaries (the ''controlled
corporations'') to its shareholders with respect to its stock or to its
security holders in exchange for its securities. The controlled
corporations may be preexisting or newly created subsidiaries.
Throughout the regulations under section 355, the term ''distribution''
refers to a distribution by the distributing corporation of stock, or
stock and securities, of one or more controlled corporations, unless the
context indicates otherwise. Section 355 contemplates the continued
operation of the business or businesses existing prior to the
separation. See 1.355-4 for types of distributions that may qualify
under section 355, including pro rata distributions and non pro rata
distributions. For purposes of section 355, stock rights and stock
warrants are not included in the term ''stock and securities.''
(T.D. 8238, 54 FR 289, Jan. 5, 1989)
26 CFR 1.355-2 Limitations.
(a) Property distributed. Section 355 applies to a distribution only
if the property distributed consists solely of stock, or stock and
securities, of a controlled corporation. If additional property
(including an excess principal amount of securities received over
securities surrendered) is received, see section 356.
(b) Independent business purpose -- (1) Independent business purpose
requirement. Section 355 applies to a transaction only if it is carried
out for one or more corporate business purposes. A transaction is
carried out for a corporate business purpose if it is motivated, in
whole or substantial part, by one or more corporate business purposes.
The potential for the avoidance of Federal taxes by the distributing or
controlled corporations (or a corporation controlled by either) is
relevant in determining the extent to which an existing corporate
business purpose motivated the distribution. The principal reason for
this business purpose requirement is to provide nonrecognition treatment
only to distributions that are incident to readjustments of corporate
structures required by business exigencies and that effect only
readjustments of continuing interests in property under modified
corporate forms. This business purpose requirement is independent of
the other requirements under section 355.
(2) Corporate business purpose. A corporate business purpose is a
real and substantial non Federal tax purpose germane to the business of
the distributing corporation, the controlled corporation, or the
affiliated group (as defined in 1.355-3(b)(4)(iv)) to which the
distributing corporation belongs. A purpose of reducing non Federal
taxes is not a corporate business purpose if (i) the transaction will
effect a reduction in both Federal and non Federal taxes because of
similarities between Federal tax law and the tax law of the other
jurisdiction and (ii) the reduction of Federal taxes is greater than or
substantially coextensive with the reduction of non Federal taxes. See
examples (7) and (8) of paragraph (b)(5) of this section. A shareholder
purpose (for example, the personal planning purposes of a shareholder)
is not a corporate business purpose. Depending upon the facts of a
particular case, however, a shareholder purpose for a transaction may be
so nearly coextensive with a corporate business purpose as to preclude
any distinction between them. In such a case, the transaction is
carried out for one or more corporate business purposes. See example
(2) of paragraph (b)(5) of this section.
(3) Business purpose for distribution. The distribution must be
carried out for one or more corporate business purposes. See example
(3) of paragraph (b)(5) of this section. If a corporate business
purpose can be achieved through a nontaxable transaction that does not
involve the distribution of stock of a controlled corporation and which
is neither impractical nor unduly expensive, then, for purposes of
paragraph (b)(1) of this section, the separation is not carried out for
that corporate business purpose. See examples (3) and (4) of paragraph
(b)(5) of this section. For rules with respect to the requirement of a
business purpose for a transfer of assets to a controlled corporation in
connection with a reorganization described in section 368(a)(1)(D), See
1.368-1(b).
(4) Business purpose as evidence of nondevice. The corporate
business purpose or purposes for a transaction are evidence that the
transaction was not used principally as a device for the distribution of
earnings and profits within the meaning of section 355(a)(1)(B). See
paragraph (d)(3)(ii) of this section.
(5) Examples. The provisions of this paragraph (b) may be
illustrated by the following examples:
Example (1). Corporation X is engaged in the production,
transportation, and refining of petroleum products. In 1985, X acquires
all of the properties of corporation Z, which is also engaged in the
production, transportation, and refining of petroleum products. In
1991, as a result of antitrust litigation, X is ordered to divest itself
of all of the properties acquired from Z. X transfers those properties
to new corporation Y and distributes the stock of Y pro rata to X's
shareholders. In view of the divestiture order, the distribution is
carried out for a corporate business purpose. See paragraph (b)(1) of
this section.
Example (2). Corporation X is engaged in two businesses: The
manufacture and sale of furniture and the sale of jewelry. The
businesses are of equal value. The outstanding stock of X is owned
equally by unrelated individuals A and B. A is more interested in the
furniture business, while B is more interested in the jewelry business.
A and B decide to split up the businesses and go their separate ways. A
and B anticipate that the operations of each business will be enhanced
by the separation because each shareholder will be able to devote his
undivided attention to the business in which he is more interested and
more proficient. Accordingly, X transfers the jewelry business to new
corporation Y and distributes the stock of Y to B in exchange for all of
B's stock in X. The distribution is carried out for a corporate
business purpose, notwithstanding that it is also carried out in part
for shareholder purposes. See paragraph (b)(2) of this section.
Example (3). Corporation X is engaged in the manufacture and sale of
toys and the manufacture and sale of candy. The shareholders of X wish
to protect the candy business from the risks and vicissitudes of the toy
business. Accordingly, X transfers the toy business to new corporation
Y and distributes the stock of Y to X's shareholders. Under applicable
law, the purpose of protecting the candy business from the risks and
vicissitudes of the toy business is achieved as soon as X transfers the
toy business to Y. Therefore, the distribution is not carried out for a
corporate business purpose. See paragraph (b)(3) of this section.
Example (4). Corporation X is engaged in a regulated business in
State T. X owns all of the stock of corporation Y, a profitable
corporation that is not engaged in a regulated business. Commission C
sets the rates that X may charge its customers, based on its total
income. C has recently adopted rules according to which the total
income of a corporation includes the income of a business if, and only
if, the business is operated, directly or indirectly, by the
corporation. Total income, for this purpose, includes the income of a
wholly owned subsidiary corporation but does not include the income of a
parent or ''brother/sister'' corporation. Under C's new rule, X's total
income includes the income of Y, with the result that X has suffered a
reduction of the rates that it may charge its customers. It would not
be impractical or unduly expensive to create in a nontaxable transaction
(such as a transaction qualifying under section 351) a holding company
to hold the stock of X and Y. X distributes the stock of Y to X's
shareholders. The distribution is not carried out for the purpose of
increasing the rates that X may charge its customers because that
purpose could be achieved through a nontaxable transaction, the creation
of a holding company, that does not involve the distribution of stock of
a controlled corporation and which is neither impractical nor unduly
expensive. See paragraph (b)(3) of this section.
Example (5). The facts are the same as in example (4), except that C
has recently adopted rules according to which the total income of a
corporation includes not only the income included in example (3), but
also the income of any member of the affiliated group to which the
corporation belongs. In order to avoid a reduction in the rates that it
may charge its customers, X distributes the stock of Y to X's
shareholders. The distribution is carried out for a corporate business
purpose. See paragraph (b)(3) of this section.
Example (6). (i) Corporation X owns all of the one class of stock of
corporation Y. X distributes the stock of Y pro rata to its five
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b) (1) and (2) of this section.
(ii) The facts are the same as in Example 6(i), except that the
business of Y is operated as a division of X. X transfers this division
to new corporation Y and distributes the stock of Y pro rata to its
shareholders, all of whom are individuals, for the sole purpose of
enabling X and/or Y to elect to become an S corporation. The
distribution does not meet the corporate business purpose requirement.
See paragraph (b) (1) and (2) of this section.
Example (7). The facts are the same as in example (6)(i), except
that the distribution is made to enable X to elect to become an S
corporation both for Federal tax purposes and for purposes of the income
tax imposed by State M. State M has tax law provisions similar to
subchapter S of the Internal Revenue Code of 1986. An election to be an
S corporation for Federal tax purposes will effect a substantial
reduction in Federal taxes that is greater than the reduction of State M
taxes pursuant to an election to be an S corporation for State M
purposes. The purpose of reducing State M taxes is not a corporate
business purpose. The distribution does not meet the corporate business
purpose requirements. See paragraph (b) (1) and (2) of this section.
Example (8). The facts are the same as Example (7), except that the
distribution also is made to enable A, a key employee of Y, to acquire
stock of Y without investing in X. A is considered to be critical to
the success of Y and he has indicated that he will seriously consider
leaving the company if he is not given the opportunity to purchase a
significant amount of stock of Y. As a matter of state law, Y could not
issue stock to the employee while it was a subsidiary of X. As in
Example (7), the purpose of reducing State M taxes is not a corporate
business purpose. In order to determine whether the issuance of stock
to the key employee, in fact, motivated the distribution of the Y stock,
the potential avoidance of Federal taxes is a relevant factor to take
into account. If the facts and circumstances establish that the
distribution was substantially motivated by the need to issue stock to
the employee, the distribution will meet the corporate business purpose
requirement.
(c) Continuity of interest requirement -- (1) Requirement. Section
355 applies to a separation that effects only a readjustment of
continuing interests in the property of the distributing and controlled
corporations. In this regard section 355 requires that one or more
persons who, directly or indirectly, were the owners of the enterprise
prior to the distribution or exchange own, in the aggregate, an amount
of stock establishing a continuity of interest in each of the modified
corporate forms in which the enterprise is conducted after the
separation. This continuity of interest requirement is independent of
the other requirements under section 355.
(2) Examples.
Example (1). For more than five years, corporation X has been
engaged directly in one business, and indirectly in a different business
through its wholly owned subsidiary, S. The businesses are equal in
value. At all times, the outstanding stock of X has been owned equally
by unrelated individuals A and B. For valid business reasons, A and B
cause X to distribute all of the stock of S to B in exchange for all of
B's stock in X. After the transaction, A owns all the stock of X and B
owns all the stock of S. The continuity of interest requirement is met
because one or more persons who were the owners of X prior to the
distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example (2). Assume the same facts as in Example (1), except that
pursuant to a plan to acquire a stock interest in X without acquiring,
directly or indirectly, an interest in S, C purchased one-half of the X
stock owned by A and immediately thereafter X distributed all of the S
stock to B in exchange for all of B's stock in X. After the
transactions, A owns 50 percent of X and B owns 100 percent of S. The
distribution by X of all of the stock of S to B in exchange for all of
B's stock in X will satisfy the continuity of interest requirement for
section 355 because one or more persons who were the owners of X prior
to the distribution (A and B) own, in the aggregate, an amount of stock
establishing a continuity of interest in each of X and S after the
distribution.
Example (3). Assume the same facts as in Examples (1) and (2),
except that C purchased all of the X stock owned by A. After the
transactions, neither A nor B own any of the stock of X, and B owns all
the stock of S. The continuity of interest requirement is not met
because the owners of X prior to the distribution (A and B) do not, in
the aggregate, own an amount of stock establishing a continuity of
interest in each of X and S after the distribution, i.e., although A and
B collectively have retained 50 percent of their equity interest in the
former combined enterprise, they have failed to continue to own the
minimum stock interest in the distributing corporation, X, that would be
required in order to meet the continuity of interest requirement.
Example (4). Assume the same facts as in Examples (1) and (2),
except that C purchased 80 percent of the X stock owned by A. After the
transactions, A owns 20 percent of the stock of X, B owns no X stock,
and B owns 100 percent of the S stock. The continuity of interest
requirement is not met because the owners of X prior to the distribution
(A and B) do not, in the aggregate, have a continuity of interest in
each of X and S after the distribution, i.e., although A and B
collectively have retained 60 percent of their equity interest in the
former combined enterprise, the 20 percent interest of A in X is less
than the minimum equity interest in the distributing corporation, X,
that would be required in order to meet the continuity of interest
requirement.
(d) Device for distribution of earnings and profits -- (1) In
general. Section 355 does not apply to a transaction used principally
as a device for the distribution of the earnings and profits of the
distributing corporation, the controlled corporation, or both (a
''device''). Section 355 recognizes that a tax-free distribution of the
stock of a controlled corporation presents a potential for tax avoidance
by facilitating the avoidance of the dividend provisions of the Code
through the subsequent sale or exchange of stock of one corporation and
the retention of the stock of another corporation. A device can include
a transaction that effects a recovery of basis. In this paragraph (d),
''exchange'' includes transactions, such as redemptions, treated as
exchanges under the Code. Generally, the determination of whether a
transaction was used principally as a device will be made from all of
the facts and circumstances, including, but not limited to, the presence
of the device factors specified in paragraph (d)(2) of this section
(''evidence of device''), and the presence of the nondevice factors
specified in paragraph (d)(3) of this section (''evidence of
nondevice''). However, if a transaction is specified in paragraph
(d)(5) of this section, then it is ordinarily considered not to have
been used principally as a device.
(2) Device factors -- (i) In general. The presence of any of the
device factors specified in this subparagraph (2) is evidence of device.
The strength of this evidence depends on the facts and circumstances.
(ii) Pro rata distribution. A distribution that is pro rata or
substantially pro rata among the shareholders of the distributing
corporation presents the greatest potential for the avoidance of the
dividend provisions of the Code and, in contrast to other types of
distributions, is more likely to be used principally as a device.
Accordingly, the fact that a distribution is pro rata or substantially
pro rata is evidence of device.
(iii) Subsequent sale or exchange of stock -- (A) In general. A sale
or exchange of stock of the distributing or the controlled corporation
after the distribution (a ''subsequent sale or exchange'') is evidence
of device. Generally, the greater the percentage of the stock sold or
exchanged after the distribution, the stronger the evidence of device.
In addition, the shorter the period of time between the distribution and
the sale or exchange, the stronger the evidence of device.
(B) Sale or exchange negotiated or agreed upon before the
distribution. A subsequent sale or exchange pursuant to an arrangement
negotiated or agreed upon before the distribution is substantial
evidence of device.
(C) Sale or exchange not negotiated or agreed upon before the
distribution. A subsequent sale or exchange not pursuant to an
arrangement negotiated or agreed upon before the distribution is
evidence of device.
(D) Negotiated or agreed upon before the distribution. For purposes
of this subparagraph (2), a sale or exchange is always pursuant to an
arrangement negotiated or agreed upon before the distribution if
enforceable rights to buy or sell existed before the distribution. If a
sale or exchange was discussed by the buyer and the seller before the
distribution and was reasonably to be anticipated by both parties, then
the sale or exchange will ordinarily be considered to be pursuant to an
arrangement negotiated or agreed upon before the distribution.
(E) Exchange in pursuance of a plan of reorganization. For purposes
of this subparagraph (2), if stock is exchanged for stock in pursuance
of a plan of reorganization, and either no gain or loss or only an
insubstantial amount of gain is recognized on the exchange, then the
exchange is not treated as a subsequent sale or exchange, but the stock
received in the exchange is treated as the stock surrendered in the
exchange. For this purpose, gain treated as a dividend pursuant to
sections 356(a)(2) and 316 shall be disregarded.
(iv) Nature and use of assets -- (A) In general. The determination
of whether a transaction was used principally as a device will take into
account the nature, kind, amount, and use of the assets of the
distributing and the controlled corporations (and corporations
controlled by them) immediately after the transaction.
(B) Assets not used in a trade or business meeting the requirement of
section 355(b). The existence of assets that are not used in a trade or
business that satisfies the requirements of section 355(b) is evidence
of device. For this purpose, assets that are not used in a trade or
business that satisfies the requirements of section 355(b) include, but
are not limited to, cash and other liquid assets that are not related to
the reasonable needs of a business satisfying such section. The
strength of the evidence of device depends on all the facts and
circumstances, including, but not limited to, the ratio for each
corporation of the value of assets not used in a trade or business that
satisfies the requirements of section 355(b) to the value of its
business that satisfies such requirements. A difference in the ratio
described in the preceding sentence for the distributing and controlled
corporation is ordinarily not evidence of device if the distribution is
not pro rata among the shareholders of the distributing corporation and
such difference is attributable to a need to equalize the value of the
stock distributed and the value of the stock or securities exchanged by
the distributees.
(C) Related function. There is evidence of device if a business of
either the distributing or controlled corporation (or a corporation
controlled by it) is (1) a ''secondary business'' that continues as a
secondary business for a significant period after the separation, and
(2) can be sold without adversely affecting the business of the other
corporation (or a corporation controlled by it). A secondary business
is a business of either the distributing or controlled corporation, if
its principal function is to serve the business of the other corporation
(or a corporation controlled by it). A secondary business can include a
business transferred to a newly-created subsidiary or a business which
serves a business transferred to a newly-created subsidiary. The
activities of the secondary business may consist of providing property
or performing services. Thus, in example (11) of 1.355-3(c), evidence
of device would be presented if the principal function of the coal mine
(satisfying the requirements of the steel business) continued after the
separation and the coal mine could be sold without adversely affecting
the steel business. Similarly, in example (10) of 1.355-3(c), evidence
of device would be presented if the principal function of the sales
operation after the separation is to sell the output from the
manufacturing operation and the sales operation could be sold without
adversely affecting the manufacturing operation.
(3) Nondevice factors -- (i) In general. The presence of any of the
nondevice factors specified in this subparagraph (3) is evidence of
nondevice. The strength of this evidence depends on all of the facts
and circumstances.
(ii) Corporate business purpose. The corporate business purpose for
the transaction is evidence of nondevice. The stronger the evidence of
device (such as the presence of the device factors specified in
paragraph (d)(2) of this section), the stronger the corporate business
purpose required to prevent the determination that the transaction was
used principally as a device. Evidence of device presented by the
transfer or retention of assets not used in a trade or business that
satisfies the requirements of section 355(b) can be outweighed by the
existence of a corporate business purpose for those transfers or
retentions. The assessment of the strength of a corporate business
purpose will be based on all of the facts and circumstances, including,
but not limited to, the following factors:
(A) The importance of achieving the purpose to the success of the
business;
(B) The extent to which the transaction is prompted by a person not
having a proprietary interest in either corporation, or by other outside
factors beyond the control of the distributing corporation; and
(C) The immediacy of the conditions prompting the transaction.
(iii) Distributing corporation publicly traded and widely held. The
fact that the distributing corporation is publicly traded and has no
shareholder who is directly or indirectly the beneficial owner of more
than five percent of any class of stock is evidence of nondevice.
(iv) Distribution to domestic corporate shareholders. The fact that
the stock of the controlled corporation is distributed to one or more
domestic corporations that, if section 355 did not apply, would be
entitled to a deduction under section 243(a)(1) available to
corporations meeting the stock ownership requirements of section 243(c),
or a deduction under section 243(c) (2) or (3) or 245(b) is evidence of
nondevice.
(4) Examples. The provisions of paragraph (d) (1) through (3) of
this section may be illustrated by the following examples:
Example (1). Individual A owns all of the stock of corporation X,
which is engaged in the warehousing business. X owns all of the stock
of corporation Y, which is engaged in the transportation business. X
employs individual B, who is extremely knowledgeable of the warehousing
business in general and the operations of X in particular. B has
informed A that he will seriously consider leaving the company if he is
not given the opportunity to purchase a significant amount of stock of
X. Because of his knowledge and experience, the loss of B would
seriously damage the business of X. B cannot afford to purchase any
significant amount of stock of X as long as X owns Y. Accordingly, X
distributes the stock of Y to A and A subsequently sells a portion of
his X stock to B. However, X could have issued additional shares to B
sufficient to give B an equivalent ownership interest in X. There is no
other evidence of device or evidence of nondevice. In light of the fact
that X could have issued additional shares to B, the sale of X stock by
A is substantial evidence of device. The transaction is considered to
have been used principally as a device. See paragraph (d) (1), (2)
(ii), (iii) (A) (B) and (D), and (3) (i) and (ii) of this section.
Example (2). Corporation X owns and operates a fast food restaurant
in State M and owns all of the stock of corporation Y, which owns and
operates a fast food restaurant in State N. X and Y operate their
businesses under franchises granted by D and E, respectively. X owns
cash and marketable securities that exceed the reasonable needs of its
business but whose value is small relative to the value of its business.
E has recently changed its franchise policy and will no longer grant or
renew franchises to subsidiaries (or other members of the same
affiliated group) of corporations operating businesses under franchises
granted by its competitors. Thus, Y will lose its franchise if it
remains a subsidiary of X. The franchise is about to expire.
Accordingly, X distributes the stock of Y pro rata among X's
shareholders. X retains its business and transfers cash and marketable
securities to Y in an amount proportional to the value of Y's business.
There is no other evidence of device or evidence of nondevice. The
transfer by X to Y and the retention by X of cash and marketable
securities is relatively weak evidence of device because after the
transfer X and Y hold cash and marketable securities in amounts
proportional to the values of their businesses. The fact that the
distribution is pro rata is evidence of device. A strong corporate
business purpose is relatively strong evidence of nondevice.
Accordingly, the transaction is considered not to have been used
principally as a device. See paragraph (d) (1), (2) (ii), (iv) (A), and
(B) and (3) (i) and (ii) (A), (B) and (C) of this section.
Example (3). Corporation X is engaged in a regulated business in
State M and owns all of the stock of corporation Y, which is not engaged
in a regulated business in State M. State M has recently amended its
laws to provide that affiliated corporations operating in M may not
conduct both regulated and unregulated businesses. X transfers cash not
related to the reasonable needs of the business of X or Y to Y and then
distributes the stock of Y pro rata among X's shareholders. As a result
of the transfer of cash, the ratio of the value of its assets not used
in a trade or business that satisfies the requirements of section 355(b)
to the value of its business is substantially greater for Y than for X.
There is no other evidence of device or evidence of nondevice. The
transfer of cash by X to Y is relatively strong evidence of device
because after the transfer Y holds disproportionately many assets that
are not used in a trade or business that satisfies the requirements of
section 355(b). The fact that the distribution is pro rata is evidence
of device. The strong business purpose is relatively strong evidence of
nondevice, but it does not pertain to the transfer. Accordingly, the
transaction is considered to have been used principally as a device.
See paragraph (d) (1), (2) (ii), (iv) (A) and (B), and (3) and (i) and
(ii) of this section.
Example (4). The facts are the same as in example (3), except that,
instead of transferring cash to Y, X purchases operating assets
unrelated to the business of Y and transfers them to Y prior to the
distribution. There is no other evidence of device or evidence of
nondevice. The transaction is considered to have been used principally
as a device. See paragraph (d) (1), (2) (ii), (iv) (A) and (B), and (3)
(i) and (ii) of this section.
(5) Transactions ordinarily not considered as a device -- (i) In
general. This subparagraph (5) specifies three distributions that
ordinarily do not present the potential for tax avoidance described in
paragraph (d)(1) of this section. Accordingly, such distributions are
ordinarily considered not to have been used principally as a device,
notwithstanding the presence of any of the device factors described in
paragraph (d)(2) of this section. A transaction described in paragraph
(d)(5) (iii) or (iv) of this section is not protected by this
subparagraph (5) from a determination that it was used principally as a
device if it involves the distribution of the stock of more than one
controlled corporation and facilitates the avoidance of the dividend
provisions of the Code through the subsequent sale or exchange of stock
of one corporation and the retention of the stock of another
corporation.
(ii) Absence of earnings and profits. A distribution is ordinarily
considered not to have been used principally as a device if --
(A) The distributing and controlled corporations have no accumulated
earnings and profits at the beginning of their respective taxable years,
(B) The distributing and controlled corporations have no current
earnings and profits as of the date of the distribution, and
(C) No distribution of property by the distributing corporation
immediately before the separation would require recognition of gain
resulting in current earnings and profits for the taxable year of the
distribution.
(iii) Section 303(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 303(a) applied.
(iv) Section 302(a) transactions. A distribution is ordinarily
considered not to have been used principally as a device if, in the
absence of section 355, with respect to each shareholder distributee,
the distribution would be a redemption to which section 302(a) applied.
For purposes of the preceding sentence, section 302(c)(2)(A) (ii) and
(iii) shall not apply.
(v) Examples. The provisions of this subparagraph (5) may be
illustrated by the following examples:
Example (1). The facts are the same as in example (3) of paragraph
(d)(4) of this section, except that X and Y had no accumulated earnings
and profits at the beginning of its taxable year, X and Y have no
current earnings and profits as of the date of the distribution, and no
distribution of property by X immediately before the separation would
require recognition of gain that would result in earnings and profits
for the taxable year of the distribution. The transaction is considered
not to have been used principally as a device. See paragraph (d)(5) (i)
and (ii) of this section.
Example (2). Corporation X is engaged in three businesses: a hotel
business, a restaurant business, and a rental real estate business.
Individuals A, B, and C own all of the stock of X. X transfers the
restaurant business to new corporation Y and transfers the rental real
estate business to new corporation Z. X then distributes the stock of Y
and Z pro rata between B and C in exchange for all of their stock in X.
In the absence of section 355, the distribution would be a redemption to
which section 302(a) applied. Since this distribution involves the
stock of more than one controlled corporation and facilitates the
avoidance of the dividend provisions of the Code through the subsequent
sale or exchange of stock in one corporation and the retention of the
stock of another corporation, it is not protected by paragraph (d)(5)
(i) and (iv) of this section from a determination that it was used
principally as a device. Thus, the determination of whether the
transaction was used principally as a device must be made from all the
facts and circumstances, including the presence of the device factors
and nondevice factors specified in paragraph (d) (2) and (3) of this
section.
(e) Stock and securities distributed -- (1) In general. Section 355
applies to a distribution only if the distributing corporation
distributes --
(i) All of the stock and securities of the controlled corporation
that it owns, or
(ii) At least an amount of the stock of the controlled corporation
that constitutes control as defined in section 368(c). In such a case,
all, or any part, of the securities of the controlled corporation may be
distributed, and paragraph (e)(2) of this section shall apply.
(2) Additional rules. Where a part of either the stock or the
securities of the controlled corporation is retained under paragraph
(e)(1)(ii) of this section, it must be established to the satisfaction
of the Commissioner that the retention by the distributing corporation
was not in pursuance of a plan having as one of its principal purposes
the avoidance of Federal income tax. Ordinarily, the corporate business
purpose or purposes for the distribution will require the distribution
of all of the stock and securities of the controlled corporation. If
the distribution of all of the stock and securities of a controlled
corporation would be treated to any extent as a distribution of ''other
property'' under section 356, this fact tends to establish that the
retention of stock or securities is in pursuance of a plan having as one
of its principal purposes the avoidance of Federal income tax.
(f) Principal amount of securities -- (1) Securities received.
Section 355 does not apply to a distribution if, with respect to any
shareholder or security holder, the principal amount of securities
received exceeds the principal amount of securities surrendered, or
securities are received but no securities are surrendered. In such
cases, see section 356.
(2) Only stock received. If only stock is received in a distribution
to which section 355(a)(1)(A) applies, the principal amount of the
securities surrendered, if any, and the par value or stated value of the
stock surrendered, if any, are not relevant to the application of that
section.
(g) Period of ownership -- (1) Other property. For purposes of
section 355(a)(1)(A), stock of a controlled corporation acquired in a
transaction in which gain or loss was recognized in whole or in part
(other than a transaction described in 1.355-3(b)(4)(iii)) within the
five-year period ending on the date of the distribution shall not be
treated as stock of the controlled corporation but shall be treated as
''other property.'' See section 356. However, for purposes of section
355(a)(1)(D), the stock so acquired is stock of the controlled
corporation.
(2) Example. Paragraph (g)(1) of this section may be illustrated by
the following example:
Example. Corporation X has held 85 of the 100 outstanding shares of
the stock of corporation Y for more than five years on the date of the
distribution. Six months before that date, X purchased ten more shares.
If X distributes all of its 95 shares of the stock of Y, so much of
section 356 as relates to section 355 may apply to the transaction and
the ten newly acquired shares are treated as other property. On the
other hand, if X retains ten of the shares of the stock of Y then the
application of paragraph (e) of this section must take into account all
of the stock of Y, including the ten shares newly acquired by X and the
five shares owned by others. Similarly, if, by the use of any agency, X
acquired any of the stock of Y within the five-year period ending on the
date of the distribution in a transaction in which gain or loss was
recognized in whole or in part (for example, where another subsidiary of
X purchased stock of Y), then that stock is treated as other property.
If X had held only 75 of the 100 outstanding shares of the stock of Y
for more than five years on the date of the distribution and had
purchased the remaining 25 shares six months before that date, then
neither section 355 nor section 356 would apply to the distribution.
(h) Active conduct of a trade or business. Section 355 applies to a
distribution only if the requirements of 1.355-3 (relating to the
active conduct of a trade or business) are satisfied.
(T.D. 8238, 54 FR 290, Jan. 5, 1989; 54 FR 5577, Feb. 3, 1989)
26 CFR 1.355-3 Active conduct of a trade or business.
(a) General requirements -- (1) Application of section 355. Under
section 355(b)(1), a distribution of stock, or stock and securities, of
a controlled corporation qualifies under section 355 only if --
(i) The distributing and the controlled corporations are each engaged
in the active conduct of a trade or business immediately after the
distribution (section 355(b)(1)(A)), or
(ii) Immediately before the distribution, the distributing
corporation had no assets other than stock or securities of the
controlled corporations, and each of the controlled corporations is
engaged in the active conduct of a trade or business immediately after
the distribution (section 355(b)(1)(B)). A de minimis amount of assets
held by the distributing corporation shall be disregarded for purposes
of this paragraph (a)(1)(ii).
(2) Examples. Paragraph (a)(1) of this section may be illustrated by
the following examples:
Example (1). Prior to the distribution, corporation X is engaged in
the active conduct of a trade or business and owns all of the stock of
corporation Y, which also is engaged in the active conduct of a trade or
business. X distributes all of the stock of Y to X's shareholders, and
each corporation continues the active conduct of its trade or business.
The active business requirement of section 355(b)(1)(A) is satisfied.
Example (2). The facts are the same as in example (1), except that X
transfers all of its assets other than the stock of Y to a new
corporation in exchange for all of the stock of the new corporation and
then distributes the stock of both controlled corporations to X's
shareholders. The active business requirement of section 355(b)(1)(B)
is satisfied.
(b) Active conduct of a trade or business defined -- (1) In general.
Section 355(b)(2) provides rules for determining whether a corporation
is treated as engaged in the active conduct of a trade or business for
purposes of section 355(b)(1). Under section 355(b)(2)(A), a
corporation is treated as engaged in the active conduct of a trade or
business if it is itself engaged in the active conduct of a trade or
business or if substantially all of its assets consist of the stock, or
stock and securities, of a corporation or corporations controlled by it
(immediately after the distribution) each of which is engaged in the
active conduct of a trade or business.
(2) Active conduct of a trade or business immediately after
distribution -- (i) In general. For purposes of section 355(b), a
corporation shall be treated as engaged in the ''active conduct of a
trade or business'' immediately after the distribution if the assets and
activities of the corporation satisfy the requirements and limitations
described in paragraph (b)(2) (ii), (iii), and (iv) of this section.
(ii) Trade or business. A corporation shall be treated as engaged in
a trade or business immediately after the distribution if a specific
group of activities are being carried on by the corporation for the
purpose of earning income or profit, and the activities included in such
group include every operation that forms a part of, or a step in, the
process of earning income or profit. Such group of activities
ordinarily must include the collection of income and the payment of
expenses.
(iii) Active conduct. For purposes of section 355(b), the
determination whether a trade or business is actively conducted will be
made from all of the facts and circumstances. Generally, the
corporation is required itself to perform active and substantial
management and operational functions. Generally, activities performed
by the corporation itself do not include activities performed by persons
outside the corporation, including independent contractors. A
corporation may satisfy the requirements of this subdivision (iii)
through the activities that it performs itself, even though some of its
activities are performed by others. Separations of real property all or
substantially all of which is occupied prior to the distribution by the
distributing or the controlled corporation (or by any corporation
controlled directly or indirectly by either of those corporations) will
be carefully scrutinized with respect to the requirements of section
355(b) and this 1.355-3.
(iv) Limitations. The active conduct of a trade or business does not
include --
(A) The holding for investment purposes of stock, securities, land,
or other property, or
(B) The ownership and operation (including leasing) of real or
personal property used in a trade or business, unless the owner performs
significant services with respect to the operation and management of the
property.
(3) Active conduct for five-year period preceding distribution.
Under section 355(b)(2)(B), a trade or business that is relied upon to
meet the requirements of section 355(b) must have been actively
conducted throughout the five-year period ending on the date of the
distribution. For purposes of this subparagraph (3) --
(i) Activities which constitute a trade or business under the tests
described in paragraph (b)(2) of this section shall be treated as
meeting the requirement of the preceding sentence if such activities
were actively conducted throughout the 5-year period ending on the date
of distribution, and
(ii) The fact that a trade or business underwent change during the
five-year period preceding the distribution (for example, by the
addition of new or the dropping of old products, changes in production
capacity, and the like) shall be disregarded, provided that the changes
are not of such a character as to constitute the acquisition of a new or
different business. In particular, if a corporation engaged in the
active conduct of one trade or business during that five-year period
purchased, created, or otherwise acquired another trade or business in
the same line of business, then the acquisition of that other business
is ordinarily treated as an expansion of the original business, all of
which is treated as having been actively conducted during that five-year
period, unless that purchase, creation, or other acquisition effects a
change of such a character as to constitute the acquisition of a new or
different business.
(4) Special rules for acquisition of a trade or business (Prior to
the Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988) -- (i) In general. Under section 355(b)(2)(C), a trade or
business relied upon to meet the requirements of section 355(b) must not
have been acquired by the distributing corporation, the controlled
corporation, or another member of the affiliated group during the
five-year period ending on the date of the distribution unless it was
acquired in a transaction in which no gain or loss was recognized.
Similarly, under section 355(b)(2)(D), the trade or business must not
have been indirectly acquired by any of those corporations (or a
predecessor in interest of any of those corporations) during that
five-year period in a transaction in which gain or loss was recognized
in whole or in part and which consisted of the acquisition of control of
the corporation directly engaged in the trade or business, or the
indirect acquisition of control of that corporation through the direct
or indirect acquisition of control of one or more other corporations. A
trade or business acquired, directly or indirectly, within the five-year
period ending on the date of the distribution in a transaction in which
the basis of the assets acquired was not determined in whole or in part
by reference to the transferor's basis does not qualify under section
355(b)(2), even though no gain or loss was recognized by the
transferror.
(ii) Example. Paragraph (b)(4)(i) of this section may be illustrated
by the following example:
Example. In 1985, corporation X, which operates a business and has
cash and other liquid assets, purchases all of the stock of corporation
Y, which is engaged in the active conduct of a trade or business. Later
in the same year, X merges into Y in a ''downstream'' statutory merger.
In 1986, Y transfers the business assets formerly owned by X to a new
subsidiary, corporation Z, and then distributes the stock of Z to Y's
shareholders. Section 355 does not apply to the distribution of the
stock of Z because the trade or business of Y was indirectly acquired by
X, a predecessor in interest of Y, during the five-year period preceding
the distribution.
(iii) Gain or loss recognized in certain transactions. The
requirements of section 355(b)(2) (C) and (D) are intended to prevent
the direct or indirect acquisition of a trade or business by a
corporation in anticipation of a distribution by the corporation of that
trade of business in a distribution to which section 355 would otherwise
apply. A direct or indirect acquisition of a trade or business by one
member of an affiliated group from another member of the group is not
the type of transaction to which section 355(b)(2) (C) and (D) is
intended to apply. Therefore, in applying section 355(b)(2) (C) or (D),
such an acquisition, even though taxable, shall be disregarded.
(iv) Affiliated group. For purposes of this subparagraph (4), the
term ''affiliated group'' means an affiliated group as defined in
section 1504(a) (without regard to section 1504(b)), except that the
term ''stock'' includes nonvoting stock described in section 1504(a)(4).
(5) Special rules for acquisition of a trade or business (After the
Revenue Act of 1987 and Technical and Miscellaneous Revenue Act of
1988). (Reserved)
(c) Examples. The following examples illustrate section 355(b)(2)
(A) and (B) and paragraph (b) (1), (2), and (3) of this section.
However, a transaction that satisfies these active business requirements
will qualify under section 355 only if it satisfies the other
requirements of section 355 (a) and (b).
Example (1). Corporation X is engaged in the manufacture and sale of
soap and detergents and also owns investment securities. X transfers
the investment securities to new subsidiary Y and distributes the stocks
of Y to X's shareholders. Y does not satisfy the requirements of
section 355(b) because the holding of investment securities does not
constitute the active conduct of a trade or business. See paragraph
(b)(2)(iv)(A) of this section.
Example (2). Corporation X owns, manages, and derives rental income
from an office building and also owns vacant land. X transfers the land
to new subsidiary Y and distributes the stock of Y to X's shareholders.
Y will subdivide the land, install streets and utilities, and sell the
developed lots to various homebuilders. Y does not satisfy the
requirements of section 355(b) because no significant development
activities were conducted with respect to the land during the five-year
period ending on the date of the distribution. See paragraph (b)(3) of
this section.
Example (3). Corporation X owns land on which it conducts a ranching
business. Oil has been discovered in the area, and it is apparent that
oil may be found under the land on which the ranching business is
conducted. X has engaged in no significant activities in connection
with its mineral rights. X transfers its mineral rights to new
subsidiary Y and distributes the stock of Y to X's shareholders. Y will
actively pursue the development of the oil producing potential of the
property. Y does not satisfy the requirements of section 355(b) because
X engaged in no significant exploitation activities with respect to the
mineral rights during the five-year period ending on the date of the
distribution. See paragraph (b)(3) of this section.
Example (4). For more than five years, corporation X has conducted a
single business of constructing sewage disposal plants and other
facilities. X transfers one-half of its assets to new subsidiary Y.
These assets include a contract for the construction of a sewage
disposal plant in State M, construction equipment, cash, and other
tangible assets. X retains a contract for the construction of a sewage
disposal plant in State N, construction equipment, cash, and other
intangible assets. X then distributes the stock of Y to one of X's
shareholders in exchange for all of his stock of X. X and Y both
satisfy the requirements of section 355(b). See paragraph (b)(3)(i) of
this section.
Example (5). For the past six years, corporation X has owned and
operated two factories devoted to the production of edible pork skins.
The entire output of one factory is sold to one customer, C, while the
output of the second factory is sold to C and a number of other
customers. To eliminate errors in packaging, X opens a new factory.
Thereafter, orders from C are processed and packaged at the two original
factories, while the new factory handles only orders from other
customers. Eight months after opening the new factory, X transfers it
and related business assets to new subsidiary Y and distributes the
stock of Y to X's shareholders. X and Y both satisfy the requirements
of section 355(b). See paragraph (b)(3) (i) and (ii) of this section.
Example (6). Corporation X has owned and operated a men's retail
clothing store in the downtown area of the City of G for nine years and
has owned and operated another men's retail clothing store in a suburban
area of G for seven years. X transfers the store building, fixtures,
inventory, and other assets related to the operations of the suburban
store to new subsidiary Y. X also transfers to Y the delivery trucks
and delivery personnel that formerly served both stores. Henceforth, X
will contract with a local public delivery service to make its
deliveries. X retains the warehouses that formerly served both stores.
Henceforth, Y will lease warehouse space from an unrelated public
warehouse company. X then distributes the stock of Y to X's
shareholders. X and Y both satisfy the requirements of section 355(b).
See paragraph (b)(3)(i) of this section.
Example (7). For the past nine years, corporation X has owned and
operated a department store in the downtown area of the City of G.
Three years ago, X acquired a parcel of land in a suburban area of G and
constructed a new department store on it. X transfers the suburban
store and related business assets to new subsidiary Y and distributes
the stock of Y to X's shareholders. After the distribution, each store
has its own manager and is operated independently of the other store. X
and Y both satisfy the requirements of section 355(b). See paragraph
(b)(3) (i) and (ii) of this section.
Example (8). For the past six years, corporation X has owned and
operated hardware stores in several states. Two years ago, X purchased
all of the assets of a hardware store in State M, where X had not
previously conducted business. X transfers the State M store and
related business assets to new subsidiary Y and distributes the stock of
Y to X's shareholders. After the distribution, the State M store has
its own manager and is operated independently of the other stores. X
and Y both satisfy the requirements of section 355(b). See paragraph
(b)(3) (i) and (ii) of this section.
Example (9). For the past eight years, corporation X has engaged in
the manufacture and sale of household products. Throughout this period,
X has maintained a research department for use in connection with its
manufacturing activities. The research department has 30 employees
actively engaged in the development of new products. X transfers the
research department to new subsidiary Y and distributes the stock of Y
to X's shareholders. After the distribution, Y continues its research
operations on a contractual basis with several corporations, including
X. X and Y both satisfy the requirements of section 355(b). See
paragraph (b)(3)(i) of this section. The result in this example is the
same if, after the distribution, Y continues its research operations but
furnishes its services only to X. See paragraph (b)(3)(i) of this
section. However, see 1.355-2 (d)(2)(iv)(C) (related function device
factor) for possible evidence of device.
Example (10). For the past six years, corporation X has processed
and sold meat products. X derives income from no other source. X
separates the sales function from the processing function by
transferring the business assets related to the sales function and cash
for working capital to new subsidiary Y. X then distributes the stock
of Y to X's shareholders. After the distribution, Y purchases for
resale the meat products processed by X. X and Y both satisfy the
requirements of section 355(b). See paragraph (b)(3)(i) of this
section. However, see 1.355-2(d)(2)(iv)(C) (related function device
factor) for possible evidence of device.
Example (11). For the past eight years, corporation X has been
engaged in the manufacture and sale of steel and steel products. X owns
all of the stock of corporation Y, which, for the past six years, has
owned and operated a coal mine for the sole purpose of supplying X's
coal requirements in the manufacture of steel. X distributes the stock
of Y to X's shareholders. X and Y both satisfy the requirements of
section 355 (b). See paragraph (b) (3) (i) of this section. However,
see 1.355-2 (d) (2) (iv) (C) (related function device factor) for
possible evidence of device.
Example (12). For the past seven years, corporation X, a bank, has
owned an eleven-story office building, the ground floor of which X has
occupied in the conduct of its banking business. The remaining ten
floors are rented to various tenants. Throughout this seven-year
period, the building has been managed and maintained by employees of the
bank. X transfers the building to new subsidiary Y and distributes the
stock of Y to X's shareholders. Henceforth, Y will manage the building,
negotiate leases, seek new tenants, and repair and maintain the
building. X and Y both satisfy the requirements of section 355 (b).
See paragraph (b) (3) of this section.
Example (13). For the past nine years, corporation X, a bank, has
owned a two-story building, the ground floor and one half of the second
floor of which X has occupied in the conduct of its banking business.
The other half of the second floor has been rented as storage space to a
neighboring retail merchant. X transfers the building to new subsidiary
Y and distributes the stock of Y to X's shareholders. After the
distribution, X leases from Y the space in the building that it formerly
occupied. Under the lease, X will repair and maintain its portion of
the building and pay property taxes and insurance. Y does not satisfy
the requirements of section 355 (b) because it is not engaged in the
active conduct of a trade or business immediately after the
distribution. See paragraph (b) (2) (iv) (A) of this section. This
example does not address the question of whether the activities of X
with respect to the building prior to the separation would constitute
the active conduct of a trade or business.
(T.D. 8238, 54 FR 294, Jan. 5, 1989)
26 CFR 1.355-4 Non pro rata distributions, etc.
Section 355 provides for nonrecognition of gain or loss with respect
to a distribution whether or not (a) the distribution is pro rata with
respect to all of the shareholders of the distributing corporation, (b)
the distribution is pursuant to a plan of reorganization within the
meaning of section 368 (a) (1) (D), or (c) the shareholder surrenders
stock in the distributing corporation. Under section 355, the stock of
a controlled corporation may consist of common stock or preferred stock.
(See, however, section 306 and the regulations thereunder.) Section 355
does not apply, however, if the substance of a transaction is merely an
exchange between shareholders or security holders of stock or securities
in one corporation for stock or securities in another corporation. For
example, if two individuals, A and B, each own directly 50 percent of
the stock of corporation X and 50 percent of the stock of corporation Y,
section 355 would not apply to a transaction in which A and B transfer
all of their stock of X and Y to a new corporation Z, for all of the
stock of Z, and Z then distributes the stock of X to A and the stock of
Y to B.
(T.D. 8238, 54 FR 296, Jan. 5, 1989)
26 CFR 1.355-5 Records to be kept and information to be filed.
(a) Every corporation that makes a distribution of stock or
securities of a controlled corporation, as described in section 355,
shall attach to its return for the year of the distribution a detailed
statement setting forth such data as may be appropriate in order to show
compliance with the provisions of such section.
(b) Every taxpayer who receives a distribution of stock or securities
of a corporation that was controlled by a corporation in which he holds
stock or securities shall attach to his return for the year in which
such distribution is received a detailed statement setting forth such
data as may be appropriate in order to show the applicability of section
355. Such statement shall include, but shall not be limited to, a
description of the stock and securities surrendered (if any) and
received, and the names and addresses of all of the corporations
involved in the transaction.
26 CFR 1.355-6 Certain distributions qualifying under section 355 made
ineligible for norecognition of gain to the distributing corporation
under 337(d). (Reserved)
(T.D. 8238, 54 FR 296, Jan. 5, 1989)
26 CFR 1.356-1 Receipt of additional consideration in connection with
an exchange.
(a) If in any exchange to which the provisions of section 354 or
section 355 would apply except for the fact that there is received by
the shareholders or the security holders other property (in addition to
property permitted to be received without recognition of gain by such
sections) or money, then --
(1) The gain, if any, to the taxpayer shall be recognized in an
amount not in excess of the sum of the money and the fair market value
of the other property, but,
(2) The loss, if any, to the taxpayer from the exchange or
distribution shall not be recognized to any extent.
(b) If the distribution of such other property or money by or on
behalf of a corporation has the effect of the distribution of a
dividend, then there shall be chargeable to each distributee (either an
individual or a corporation) --
(1) As a dividend, such an amount of the gain recognized as is not in
excess of the distributee's ratable share of the undistributed earnings
and profits of the corporation accumulated after February 28, 1913, and
(2) As a gain from the exchange of property, the remainder of the
gain so recognized.
(c) This section may be illustrated by the following examples:
Example (1). In an exchange to which the provisions of section 356
apply and to which section 354 would apply but for the receipt of
property not permitted to be received without the recognition of gain or
loss, A (either an individual or a corporation), received the following
in exchange for a share of stock having an adjusted basis to him of $85:
Example (2). If, in example (1), A's stock had an adjusted basis to
him of $200, he would have realized a loss of $25 on the exchange, which
loss would not be recognized.
(d) Section 301(b)(1)(B) and section 301(d)(2) do not apply to a
distribution of ''other property'' to a corporate shareholder if such
distribution is within the provisions of section 356.
(e) See paragraph (1) of 1.301-1 for certain transactions which are
not within the scope of section 356.
26 CFR 1.356-2 Receipt of additional consideration not in connection
with an exchange.
(a) If, in a transaction to which section 355 would apply except for
the fact that a shareholder (individual or corporate) receives property
permitted by section 355 to be received without the recognition of gain,
together with other property or money, without the surrender of any
stock or securities of the distributing corporation, then the sum of the
money and the fair market value of the other property as of the date of
the distribution shall be treated as a distribution of property to which
the rules of section 301 (other than section 301(b) and section 301(d))
apply. See section 358 for determination of basis of such other
property.
(b) Paragraph (a) of this section may be illustrated by the following
examples:
Example (1). Individuals A and B each own 50 of the 100 outstanding
shares of common stock of Corporation X. Corporation X owns all of the
stock of Corporation Y, 100 shares. Corporation X distributes to each
shareholder 50 shares of the stock of Corporation Y plus $100 cash
without requiring the surrender of any shares of its own stock. The
$100 cash received by each is treated as a distribution of property to
which the rules of section 301 apply.
Example (2). If, in the above example, Corporation X distributes 50
shares of stock of Corporation Y to A and 30 shares of such stock plus
$100 cash to B without requiring the surrender of any of its own stock,
the amount of cash received by B is treated as a distribution of
property to which the rules of section 301 apply.
26 CFR 1.356-3 Rules for treatment of securities as ''other property''.
(a) As a general rule, for purposes of section 356, the term ''other
property'' includes securities. However, it does not include securities
permitted under section 354 or section 355 to be received tax free.
Thus, when securities are surrendered in a transaction to which section
354 or section 355 is applicable, the characterization of the securities
received as ''other property'' does not include securities received
where the principal amount of such securities does not exceed the
principal amount of securities surrendered in the transaction. If a
greater principal amount of securities is received in an exchange
described in section 354 (other than subsection (c) or (d) thereof) or
section 355 over the principal amount of securities surrendered, the
term ''other property'' includes the fair market value of such excess
principal amount as of the date of the exchange. If no securities are
surrendered in exchange, the term ''other property'' includes the fair
market value, as of the date of receipt, of the entire principal amount
of the securities received.
(b) The following examples illustrate the application of the above
regulations:
Example (1). A, an individual, exchanged 100 shares of stock for 100
shares of stock and a security in the principal amount of $1,000 with a
fair market value of $990. The amount of $990 is treated as ''other
property.''
Example (2). B, an individual, exchanged 100 shares of stock and a
security in the principal amount of $1,000 for 300 shares of stock and a
security in the principal amount of $1,500. The security had a fair
market value on the date of receipt of $1,575. The fair market value of
the excess principal amount, or $525, is treated as ''other property.''
Example (3). C, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $900. No part of the security received is treated as ''other
property.''
Example (4). D, an individual, exchanged a security in the principal
amount of $1,000 for 100 shares of stock and a security in the principal
amount of $1,200 with a fair market value of $1,100. The fair market
value of the excess principal amount, or $183.33, is treated as ''other
property.''
Example (5). E, an individual, exchanged a security in the principal
amount of $1,000 for another security in the principal amount of $1,200
with a fair market value of $1,080. The fair market value of the excess
principal amount, or $180, is treated as ''other property.''
Example (6). F, an individual, exchanged a security in the principal
amount of $1,000 for two different securities each in the principal
amount of $750. One of the securities had a fair market value of $750,
the other had a fair market value of $600. One-third of the fair market
value of each security ($250 and $200) is treated as ''other property.''
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44
FR 26869, May 8. 1979)
26 CFR 1.356-4 Exchanges for section 306 stock.
If, in a transaction to which section 356 is applicable, other
property or money is received in exchange for section 306 stock, an
amount equal to the fair market value of the property plus the money, if
any, shall be treated as a distribution of property to which section 301
is applicable. The determination of whether section 306 stock is
surrendered for other property (including money) is a question of fact
to be decided under all of the circumstances of each case. Ordinarily,
the other property (including money) received will first be treated as
received in exchange for any section 306 stock owned by a shareholder
prior to such transaction. For example, if a shareholder who owns a
share of common stock (having a basis to him of $100) and a share of
preferred stock which is section 306 stock (having a basis to him of
$100) surrenders both shares in a transaction to which section 356 is
applicable for one share of common stock having a fair market value of
$80 and one $100 bond having a fair market value of $100, the bond will
be deemed received in exchange for the section 306 stock and it will be
treated as a distribution to which section 301 is applicable to the
extent of its entire fair market value ($100).
26 CFR 1.356-5 Transactions involving gift or compensation.
With respect to transactions described in sections 354, 355, or 356,
but which --
(a) Result in a gift, see section 2501 and following, and the
regulations pertaining thereto, or
(b) Have the effect of the payment of compensation, see section
61(a)(1), and the regulations pertaining thereto.
26 CFR 1.357-1 Assumption of liability.
(a) General rule. Section 357(a) does not affect the rule that
liabilities assumed are to be taken into account for the purpose of
computing the amount of gain or loss realized under section 1001 upon an
exchange. Section 357(a) provides, subject to the exceptions and
limitations specified in section 357 (b) and (c), that --
(1) Liabilities assumed are not to be treated as ''other property or
money'' for the purpose of determining the amount of realized gain which
is to be recognized under section 351, 361, 371, or 374, if the
transactions would, but for the receipt of ''other property or money''
have been exchanges of the type described in any one of such sections;
and
(2) If the only type of consideration received by the transferor in
addition to that permitted to be received by section 351, 361, 371, or
374, consists of an assumption of liabilities, the transaction, if
otherwise qualified, will be deemed to be within the provisions of
section 351, 361, 371, or 374.
(b) Application of general rule. The application of paragraph (a) of
this section may be illustrated by the following example:
Example. A, an individual, transfers to a controlled corporation
property with an adjusted basis of $10,000 in exchange for stock of the
corporation with a fair market value of $8,000, $3,000 cash, and the
assumption by the corporation of indebtedness of A amounting to $4,000.
A's gain is $5,000, computed as follows:
Assuming that the exchange falls within section 351 as a transaction
in which the gain to be recognized is limited to ''other property or
money'' received, the gain recognized to A will be limited to the $3,000
cash received, since, under the general rule of section 357(a), the
assumption of the $4,000 liability does not constitute ''other
property.''
(c) Tax avoidance purpose. The benefits of section 357(a) do not
extend to any exchange involving an assumption of liabilities where it
appears that the principal purpose of the taxpayer with respect to such
assumption was to avoid Federal income tax on the exchange, or, if not
such purpose, was not a bona fide business purpose. In such cases, the
total amount of liabilities assumed or acquired pursuant to such
exchange (and not merely a particular liability with respect to which
the tax avoidance purpose existed) shall, for the purpose of determining
the amount of gain to be recognized upon the exchange in which the
liabilities are assumed or acquired, be treated as money received by the
taxpayer upon the exchange. Thus, if in the example set forth in
paragraph (b) of this section, the principal purpose of the assumption
of the $4,000 liability was to avoid tax on the exchange, or was not a
bona fide business purpose, then the amount of gain recognized would be
$5,000. In any suit or proceeding where the burden is on the taxpayer
to prove that an assumption of liabilities is not to be treated as
''other property or money'' under section 357, which is the case if the
Commissioner determines that the taxpayer's purpose with respect thereto
was a purpose to avoid Federal income tax on the exchange or was not a
bona fide business purpose, and the taxpayer contests such determination
by litigation, the taxpayer must sustain such burden by the clear
preponderance of the evidence. Thus, the taxpayer must prove his case
by such a clear preponderance of all the evidence that the absence of a
purpose to avoid Federal income tax on the exchange, or the presence of
a bona fide business purpose, is unmistakable.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26
FR 399, Jan. 19, 1961)
26 CFR 1.357-2 Liabilities in excess of basis.
(a) Section 357(c) provides in general that in an exchange to which
section 351 (relating to a transfer to a corporation controlled by the
transferor) is applicable, or to which section 361 (relating to the
nonrecognition of gain or loss to corporations) is applicable by reason
of a section 368(a)(1)(D) reorganization, if the sum of the amount of
liabilities assumed plus the amount of liabilities to which the property
is subject exceeds the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a capital asset or of
property which is not a capital asset as the case may be. Thus, if an
individual transfers, under section 351, properties having a total basis
in his hands of $20,000, one of which has a basis of $10,000 but is
subject to a mortgage of $30,000, to a corporation controlled by him,
such individual will be subject to tax with respect to $10,000, the
excess of the amount of the liability over the total adjusted basis of
all the properties in his hands. The same result will follow whether or
not the liability is assumed by the transferee. The determination of
whether a gain resulting from the transfer of capital assets is
long-term or short-term capital gain shall be made by reference to the
holding period to the transferor of the assets transferred. An
exception to the general rule of section 357(c) is made (1) for any
exchange as to which under section 357(b) (relating to assumption of
liabilities for tax-avoidance purposes) the entire amount of the
liabilities is treated as money received and (2) for an exchange to
which section 371 (relating to reorganizations in certain receivership
and bankruptcy proceedings) or section 374 (relating to gain or loss not
recognized in certain railroad reorganizations) is applicable.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example (1). If all such assets transferred are capital assets and
if half the assets (ascertained by reference to their fair market value
at the time of the transfer) have been held for less than 1 year (6
months for taxable years beginning before 1977; 9 months for taxable
years beginning in 1977), and the remaining half for more than 1 year (6
months for taxable years beginning before 1977; 9 months for taxable
years beginning in 1977), half the excess of the amount of the liability
over the total of the adjusted basis of the property transferred
pursuant to the exchange shall be treated as short-term capital gain,
and the remaining half shall be treated as long-term capital gain.
Example (2). If half of the assets (ascertained by reference to
their fair market value at the time of the transfer) transferred are
capital assets and half are assets other than capital assets, then half
of the excess of the amount of the liability over the total of the
adjusted basis of the property transferred pursuant to the exchange
shall be treated as capital gain, and the remaining half shall be
treated as gain from the sale or exchange of assets other than capital
assets.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6528, 26
FR 399, Jan. 19, 1961; T.D. 7728, 45 FR 72650, Nov. 3, 1980)
26 CFR 1.358-1 Basis to distributees.
(a) In the case of an exchange or distribution to which section 354,
355, or 371(b) applies in which, under the law applicable to the year in
which the exchange is made, only nonrecognition property is received,
the sum of the basis of all of the stock and securities in the
corporation whose stock and securities are exchanged or with respect to
which the distribution is made, held immediately after the transaction,
plus the basis of all stock and securities received in the transaction
shall be the same as the basis of all the stock and securities in such
corporation held immediately before the transaction allocated in the
manner described in 1.358-2. In the case of an exchange to which
section 351, 361, or 374 applies in which, under the law applicable to
the year in which the exchange was made, only nonrecognition property is
received, the basis of all the stock and securities received in the
exchange shall be the same as the basis of all property exchange
therefor. If in an exchange or distribution to which section 351, 356,
361, 371(b), or 374 applies both nonrecognition property and ''other
property'' are received, the basis of all the property except ''other
property'' held after the transaction shall be determined as described
in the preceding two sentences decreased by the sum of the money and the
fair market value of the ''other property'' (as of the date of the
transaction) and increased by the sum of the amount treated as a
dividend (if any) and the amount of the gain recognized on the exchange,
but the term ''gain'' as here used does not include any portion of the
recognized gain that was treated as a dividend. In any case in which a
taxpayer transfers property with respect to which loss is recognized,
such loss shall be reflected in determining the basis of the property
received in the exchange. The basis of the ''other property'' is its
fair market value as of the date of the transaction.
(b) The application of paragraph (a) of this section may be
illustrated by the following example:
Example. A purchased a share of stock in Corporation X in 1935 for
$150. Since that date he has received distributions out of other than
earnings and profits (as defined in section 316) totalling $60, so that
his adjusted basis for the stock is $90. In a transaction qualifying
under section 356, A exchanged this share for one share in Corporation
Y, worth $100, cash in the amount of $10, and other property with a fair
market value of $30. The exchanging had the effect of the distribution
of a dividend. A's ratable share of the earnings and profits of
Corporation X accumulated after February 28, 1913, was $5. A realized a
gain of $50 on the exchange, but the amount recognized is limited to
$40, the sum of the cash received and the fair market value of the other
property. Of the gain recognized, $5 is taxable as a dividend, and $35
as a gain from the exchange of property. The basis to A of the one
share of stock of Corporation Y is $90. that is, the adjusted basis of
the one share of stock Corporation X ($90), decreased by the sum of the
cash received ($10) and the fair market value of the other property
received ($30) and increased by the sum of the amount treated as a
dividend ($5) and the amount treated as a gain from the exchange of
property ($35). The basis of the other property received is $30.
(T.D. 6500, 25 FR 11607. Nov. 26, 1960, as amended by T.D. 6533, 26
FR 404, Jan. 19, 1965; T.D. 7616, 44 FR 26869, May 8, 1979)
26 CFR 1.358-2 Allocation of basis among nonrecognition property.
(a)(1) As used in this paragraph the term ''stock'' means stock which
is not ''other property'' under section 356 or 371(b), stock with
respect to which a distribution is made, and, in the case of a surrender
of part of the stock of a particular class, the retained part of such
stock. The term ''securities'' means securities (including, where
appropriate, fractional parts of securities) which are not ''other
property'' under section 356 or 371(b) and in the case of a surrender of
part of the securities of a particular class, the retained part of such
securities. Stock, or securities, as the case may be, which differ
either because they are in different corporations or because the rights
attributable to them differ (although they are in the same corporation)
are considered different classes of stock or securities, as the case may
be, for purposes of this section.
(2) If as the result of an exchange or distribution under the terms
of section 354, 355, 356 or 371(b) a shareholder who owned stock of only
one class before the transaction owns stock of two or more classes after
the transaction, then the basis of all the stock held before the
transaction (as adjusted under 1.358-1) shall be allocated among the
stock of all classes (whether or not such stock was received in the
transaction) held immediately after the transaction in proportion to the
fair market values of the stock of each class.
(3) If as the result of an exchange under the terms of section 354,
355, 356 or 371(b) a security holder who owned only securities, all of
one class, before the transaction, owns securities or stock of more than
one class, or owns both stock and securities, then the basis of all the
securities held before the transaction (as adjusted under 1.358-1)
shall be allocated among all the stock and securities (whether or not
received in the transaction) held immediately after the transaction in
proportion to the fair market values of the stock of each class and the
securities of each class.
(4) In every case in which, before the transactions, a person owned
stock of more than one class or securities of more than one class or
owned both stock and securities, a determination must be made, upon the
basis of all the facts, of the stock or securities received with respect
to stock and securities of each class held (whether or not surrendered).
The allocation described in subparagraph (2) of this paragraph shall be
separately made as to the stock of each class with respect to which
there is an exchange or distribution and the allocation described in
subparagraph (3) of this paragraph shall be separately made with respect
to the securities of each class, part or all of which are surrendered in
the exchange.
(5) Notwithstanding the provisions of subparagraphs (2), (3), and (4)
of this paragraph, in any case in which a plan of recapitalization under
section 368(a)(1)(E) provides that each holder of stock or securities of
a particular class shall have an option to surrender some or none of
such stock or securities in exchange for stock or securities, and a
shareholder or security holder exchanges an identifiable part of his
stock or securities, the basis of the part of the stock or securities
retained shall remain unchanged and shall not be taken into account in
determining the basis of the stock or securities received.
(b) (1) As used in this paragraph the term ''stock'' refers only to
stock which is not ''other property'' under section 351, 361, or 374 and
the term ''securities'' refers only to securities which are not ''other
property'' under section 351, 361, or 374.
(2) If in an exchange to which section 351 or 361 applies property is
transferred to a corporation and the transferor receives stock or
securities of more than one class or receives both stock and securities,
then the basis of the property transferred (as adjusted under 1.358-1)
shall be allocated among all of the stock and securities received in
proportion to the fair market values of the stock of each class and the
securities of each class.
(c) The application of paragraphs (a) and (b) of this section may be
illustrated by the following examples:
Example (1). A, an individual, owns stock in Corporation X with an
adjusted basis of $1,000. In a transaction qualifying under section 356
(so far as such section relates to section 354), he exchanged this stock
for 20 shares of stock of Corporation Y worth $1,200 and securities of
Corporation Y worth $400. A realizes a gain of $600 of which $400 is
recognized. The adjusted basis in A's hands of each share of the stock
of Corporation Y is $50 determined by allocating the basis of the stock
of Corporation X ratably to the stock of Corporation Y received in the
exchange. The securities of Corporation Y have a basis in the hands of
A of $400.
Example (2). B, an individual, owns a security in the principal
amount of $10,000 with a basis of $5,000. In a transaction to which
section 354 is applicable, he exchanges this security for four
securities in the principal amount of $750 each, worth $800 each, four
securities in the principal amount of $750 each, worth $600 each, class
A common stock worth $1,000, and class B common stock worth $400. B
realizes a gain of $2,000 none of which is recognized. The basis of his
original security, $5,000, will be allocated 32/70ths to the four
securities worth $800, 24/70ths to the four securities worth $600,
10/70ths to the class A common stock, and 4/70ths to the class B common
stock.
Example (3). C, an individual, owns stock of Corporation Y with a
basis of $5,000 and owns a security issued by Corporation Y in the
principal amount of $5,000 with a basis of $5,000. In a transaction to
which section 354 is applicable, he exchanges the stock of Corporation Y
for stock of Corporation Z with a value of $6,000, and he exchanges the
security of Corporation Y for stock of Corporation Z worth $1,500 and a
security of Corporation Z in the principal amount of $4,500 worth
$4,500. No gain is recognized to C on either exchange. The basis of
the stock of Corporation Z received for the stock of Corporation Y is
$5,000. The bases of the stock and security of Corporation Z received
in exchange for the security of Corporation Y are $1,250 and $3,750,
respectively.
Example (4). D, an individual, owns stock in Corporation M with a
basis of $15,000, worth $40,000, and owns a security issued by
Corporation M in the principal amount of $5,000 with a basis of $4,000.
In a transaction qualifying under section 356 (so far as such section
relates to section 355), he exchanges the security of Corporation M for
a security of Corporation O (a controlled corporation) in the principal
amount of $5,000, worth $5,000, and exchanges one-half of his stock of
Corporation M for stock of Corporation O worth $15,000 and a security of
Corporation O in the principal amount of $5,000, worth $5,000. All of
the stock and securities of Corporation O are distributed pursuant to
the transaction. D realizes a gain of $12,500 on the exchange of the
stock of Corporation M for the stock and security of Corporation O of
which $5,000 is recognized. D also realizes a gain of $1,000 on the
exchange of a security of Corporation M for a security of Corporation O,
none of which is recognized. The basis of his stock of Corporation M
held before the transaction is allocated 20/35ths to the stock of
Corporation M held after the transaction and 15/35ths to the stock of
Corporation O. The basis of the security of Corporation O received in
exchange for his security of Corporation M is $4,000, the basis of the
security of Corporation M exchanged. The basis of the security of
Corporation O received with respect to D's stock of Corporation M is
$5,000, its fair market value.
(d) See 1.358-5 for rules relating to the allocation of basis in the
case of an exchange to which section 354(d) (or so much of section 356
as related to section 354(d)) or section 374(c) applies.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7616, 44
FR 26869, May 8, 1979)
26 CFR 1.358-3 Treatment of assumption of liabilities.
(a) For purposes of section 358, where a party to the exchange
assumes a liability of a distributee or acquires from him property
subject to a liability, the amount of such liability is to be treated as
money received by the distributee upon the exchange, whether or not the
assumption of liabilities resulted in a recognition of gain or loss to
the taxpayer under the law applicable to the year in which the exchange
was made.
(b) The application of paragraph (a) of this section may be
illustrated by the following examples:
Example (1). A, an individual, owns property with an adjusted basis
of $100,000 on which there is a purchase money mortgage of $25,000. On
December 1, 1945, A organizes Corporation X to which he transfers the
property in exchange for all the stock of Corporation X and the
assumption by Corporation X of the mortgage. The capital stock of the
Corporation X has a fair market value of $150,000. Under sections 351
and 357, no gain or loss is recognized to A. The basis in A's hands of
the stock of Corporation X is $75,000, computed as follows:
Example (2). A, an individual, owns property with an adjusted basis
of $25,000 on which there is a mortgage of $50,000. On December 1,
1954, A organizes Corporation X to which he transfers the property in
exchange for all the stock of Corporation X and the assumption by
Corporation X of the mortgage. The stock of Corporation X has a fair
market value of $50,000. Under sections 351 and 357, gain is recognized
to A in the amount of $25,000. The basis in A's hands of the stock of
Corporation X is zero, computed as follows:
26 CFR 1.358-4 Exceptions.
(a) Plan of reorganization adopted after October 22, 1968. In the
case of a plan of reorganization adopted after October 22, 1968, section
358 does not apply in determining the basis of property acquired by a
corporation in connection with such reorganization by the exchange of
its stock or securities (or by the exchange of stock or securities of a
corporation which is in control of the acquiring corporation) as the
consideration in whole or in part for the transfer of the property to
it. See section 362 and the regulations pertaining to that section for
rules relating to basis to corporations of property acquired in such
cases.
(b) Plan of reorganization adopted before October 23, 1968. In the
case of a plan of reorganization adopted before October 23, 1968,
section 358 does not apply in determining the basis of property acquired
by a corporation in connection with such reorganization by the issuance
of stock or securities of such corporation (or by the issuance of stock
or securities of another corporation which is in control of such
corporation) as the consideration in whole or in part for the transfer
of the property to it. The term ''issuance of stock or securities''
includes any transfer of stock or securities, including stock or
securities which were purchased or were acquired as a contribution to
capital. See section 362 and the regulations pertaining to that section
for rules relating to basis to corporations of property acquired in such
cases.
(T.D. 7422, 41 FR 26569, June 28, 1976)
26 CFR 1.358-5 Certain exchanges involving ConRail.
(a) In general. In applying the allocation of basis rules of
1.358-2 to an exchange to which section 354(d) (or so must of section
356 as related to section 354(d)) or 374(c) applies, each certificate of
value of the United States Railway Association and the amount of stock
of the Consolidated Rail Corporation which related to each certificate
shall, so long as they are held by the same person, be treated as one
unit of property.
(b) Transfer of certificates, stock, or both. If a certificate of
value and the amount of stock related to it (see paragraph (c) of this
section) are transferred together by a person who received the property
in an exchange to which section 354(d) (or so much of section 356 as
related to section 354(d)) or 374(c) applies, the tranferror shall be
treated as transferring a single unit of property. If, however, a
certificate of value is transferred without the amount of stock related
to it or if a share or shares of the stock are transferred without the
related certificate of value, the basis allocated to the certificate and
shares of stock as a single unit of property shall be reallocated among
each share of stock and the certificate in proporation to the fair
market value of each on the date of the transfer.
(c) Amount of stock related to a certificate of value. For purposes
of this section, the amount of stock of the Consolidated Rail
Corporation related to a certificate of value of the United States
Railway Association shall be the number of shares of series B preferred
stock and common stock applicable to each certificate of value under
section 610(b) of the Railroad Revitalization and Regulatory Reform Act
of 1976 (45 U.S.C. 746(c)(3)).
(d) Illustration. The application of paragraphs (a), (b) and (c), of
this section may be illustrated by the following example:
Example. (a) In an exchange to which section 374(c)(1) applies
corporation X transfers rail properties with an adjusted basis of $9,000
to the Consolidated Rail Corporation in exchange for 10 certificates of
value of the United States Railway Association, 10 shares of series B
preferred stock of the Consolidated Rail Corporation and 20 shares of
common stock of the Consolidated Rail Corporation. Under 1.358-2(b)
the basis of $9,000 in the rail properties transferred by X must be
allocated among the nonrecognition properties received by X. X is
considered for purposes of allocating basis as having received 10 units
of property each consisting of one certificate of value, one share of
series B preferred stock and two shares of common stock. The basis to X
of each unit of property is $900.
(b) Corporation X sells two certificates of value, three shares of
series B preferred stock and six shares of common stock for their
respective fair market values in a single transaction. X receives $400
for each certificate, $100 for each share of series B preferred stock
and $50 for each share of common stock and $50 for each share of common
stock. For purposes of determining gain or loss, X is considered to
have sold two units of property (each consisting of one certificate of
value, one share of series B preferred stock and two shares of common
stock), plus one share of series B preferred stock and two shares of
common stock. The basis of each of the two units of property is $900.
The basis of the share of preferred stock is $150, the basis of each
share of common stock is $75 and the basis of the certificate of value
retained by X is $600 determined by reallocating the basis of $900 in a
unit of property (consisting of one certificate of value, one share of
common stock) among the shares of stock sold and certificate of value
retained in proportion to their fair market values on the date of the
transfer.
(e) Records to be kept. The taxpayer shall keep records of the
basis, as reallocated under paragraph (b) of this section, of each
certificate of value or share of stock retained. If the later transfer
by the taxpayer of a certificate of value or share of stock is not
treated under paragraph (b) of this section as the transfer of a single
unit of property (consisting of a certificate of value and stock), the
taxpayer shall identify from among the certificates of value and shares
of stock that have reallocated bases, the particular certificate of
value or share of stock so transferred.
(T.D. 7616, 44 FR 26869, May 8, 1979)
26 CFR 1.358-5 effects on corporation
26 CFR 1.361-1 Nonrecognition of gain or loss to corporations.
Section 361 provides the general rule that no gain or loss shall be
recognized if a corporation, a party to a reorganization, exchanges
property in pursuance of the plan of reorganization solely for stock or
securities in another corporation, a party to the reorganization. This
provision includes only stock and securities received in connection with
a reorganization defined in section 368(a). It also includes nonvoting
stock and securities in a corporation, a party to a reorganization,
received in a transaction to which section 368(a)(1)(C) is applicable
only by reason of section 368(a)(2)(B).
26 CFR 1.362-1 Basis to corporations.
(a) In general. Section 362 provides, as a general rule, that if
property was acquired on or after June 22, 1954, by a corporation (1) in
connection with a transaction to which section 351 (relating to transfer
of property to corporation controlled by transferor) applies, (2) as
paid-in surplus or as a contribution to capital, or (3) in connection
with a reorganization to which Part III, subchapter C, Chapter 1 of the
Code applies, then the basis shall be the same as it would be in the
hands of the transferor, increased in the amount of gain recognized to
the transferor on such transfer. (See also 1.362-2.)
(b) Exceptions. (1) In the case of a plan of reorganization adopted
after October 22, 1968, section 362 does not apply if the property
acquired in connection with such reorganization consists of stock or
securities in a corporation a party to the reorganization, unless
acquired by the exchange of stock or securities of the transferee (or of
a corporation which is in control of the transferee) as the
consideration in whole or in part for the transfer.
(2) In the case of a plan of reorganization adopted before October
23, 1968, section 362 does not apply if the property acquired in
connection with such reorganization consists of stock or securities in a
corporation a party to the reorganization, unless acquired by the
issuance of stock or securities of the transferee (or, in the case of
transactions occurring after December 31, 1963, of a corporation which
is in control of the transferee) as the consideration in whole or in
part for the transfer. The term ''issuance of stock or securities''
includes any transfer of stock or securities, including stock or
securities which were purchased or were acquired as a contribution to
capital.
(T.D. 7422, 41 FR 26569, June 28, 1976)
26 CFR 1.362-2 Certain contributions to capital.
The following regulations shall be used in the application of section
362(c):
(a) Property deemed to be acquired with contributed money shall be
that property, if any, the acquisition of which was the purpose
motivating the contribution;
(b) In the case of an excess of the amount of money contributed over
the cost of the property deemed to be acquired with such money (as
defined in paragraph (a) of this section) such excess shall be applied
to the reduction of the basis (but not below zero) of other properties
held by the corporation, on the last day of the 12-month period
beginning on the day the contribution is received, in the following
order --
(1) All property of a character subject to an allowance for
depreciation (not including any properties as to which a deduction for
amortization is allowable),
(2) Property with respect to which a deduction for amortization is
allowable,
(3) Property with respect to which a deduction for depletion is
allowable under section 611 but not under section 613, and
(4) All other remaining properties.
The reduction of the basis of each of the properties within each of
the above categories shall be made in proportion to the relative bases
of such properties.
(c) With the consent of the Commissioner, the taxpayer may, however,
have the basis of the various units of property within a particular
category adjusted in a manner different from the general rule set forth
in paragraph (b) of this section. Variations from such rule may, for
example, involve adjusting the basis of only certain units of the
taxpayer's property within a given category. A request for variations
from the general rule should be filed by the taxpayer with its return
for the taxable year for which the transfer of the property has
occurred.
26 CFR 1.367(a)-1T Transfers to foreign corporations subject to section
367(a): In general (temporary).
(a) Purpose and scope of regulations. These regulations set forth
rules relating to the provisions of section 367(a) concerning certain
transfers of property to foreign corportions. This section provides
general rules explaining the effect of section 367(a)(1) and describing
the transfers of property that are subject to the rule of that section.
Section 1.367(a)-2T provides rules concerning the exception from the
rule of section 367(a)(1) for transfers of property to be used in the
active conduct of a trade or business outside of the United States.
Rules concerning the application of section 367(a)(1) to transfers of
stock or securities are provided in 1.367(a)-3T, while 1.367(a)-4T
provides special rules regarding other specified transfers of property.
Section 1.367(a)-5T describes types of property that are subject to the
rule of section 367(a)(1) regardless of whether they are transferred for
use in a trade or business. Section 1.367(a)-6T provides rules
concerning the application of section 367(a) to the transfer of a branch
with previously deducted losses. Finally, 1.367(a)-7T contains
transitional rules concerning transfers of intangible property to
foreign corporations made after June 6, 1984 and before January 1, 1985.
Rules explaining the operation of section 367(d), concerning transfers
of intangible property pursuant to an exchange described in section 351
or 361, are provided in 1.367(d)-1T. Rules concerning the reporting
requirements of section 6038B are provided in 1.6038B-1T.
(b) General rules -- (1) Foreign corporation not considered a
corporation for purposes of certain transfers. If a U.S. person
transfers property to a foreign corporation in connection with an
exchange described in section 332, 351, 354, 355, 356, or 361, then
pursuant to section 367(a)(1) the foreign corporation shall not be
considered to be a corporation for purposes of determining the extent to
which gain shall be recognized on the transfer. Section 367(a)(1)
denies nonrecognition treatment only to transfers of items of property
on which gain is realized. Thus, the amount of gain recognized because
of section 367(a)(1) is unaffected by the transfer of items of property
on which loss is realized (but not recognized). The transfers of
property that are subject to section 367(a)(1) are further described in
paragraph (c) of this section, and relevant definitions are provided in
paragraph (d) of this section.
(2) Cases in which foreign corporate status is not disregarded.
Section 367(a)(1) shall not apply, and a foreign corporate transferee
shall, thus, be considered to be a corporation, in the case of any of
the following:
(i) The transfer of stock or securities of a foreign corporation
which is a party to the exchange or reorganization (as defined in
section 368 (b));
(ii) The transfer of property for use in the active conduct of a
trade or business outside of the United States in accordance with the
rules of 1.367(a)-2T through 1.367(a)-6T; or
(iii) Certain other transfers of property described in 1.367(a)-2T
through 1.367(a)-6T.
For the treatment of a transfer of stock or securities of a foreign
corporation which is a party to the exchange or reorganization, see
1.367(a)-3T(b)(1), 7.367(b)-4, and 7.367(b)-7.
(3) Limitation of gain required to be recognized -- (i) In general.
If a U.S. person transfers property to a foreign corporation in a
transaction on which gain is required to be recognized under section
367(a) and regulations thereunder, then the gain required to be
recognized by the U.S. person shall in no event exceed the gain that
would have been recognized on a taxable sale of those items of property
if sold individually and without offsetting individual losses against
individual gains.
(ii) Losses. No loss may be recognized by reason of the operation of
section 367.
(iii) Ordinary income and capital gain. If section 367(a) and
regulations thereunder require the recognition of ordinary income and
capital gain in excess of the limitation described in paragraph
(b)(3)(i) of this section, then the limitation shall be imposed by
making proportionate reductions in the amounts or ordinary income and
capital gain, regardless of the character of the gain that would have
been recognized on a taxable sale of the property.
(4) Character, source, and adjustments -- (i) In general. If a U.S.
person is required to recognize gain under section 367 upon a transfer
of property to a foreign corporation, then --
(A) The character and source of such gain shall be determined as if
the property had been disposed of in a taxable exchange with the
transferee foreign corporation (unless otherwise provided by
regulation); and
(B) Appropriate adjustments to earnings and profits, basis, and other
affected items shall be made according to otherwise applicable rules,
taking into account the gain recognized because of section 367(a)(1).
Any increase in the basis of the property received by the foreign
corporation resulting from the application of section 367(a) and section
362 (a) or (b) shall be allocated over the transferred property with
respect to which gain is recognized in proportion to the amount realized
by the U.S. person on the transfer of each item of that property. See
paragraph (c)(3) of this section for special rules applicable to
transfers of partnership interests.
(ii) Example. The rules of this paragraph (b)(4) are illustrated by
the following example.
Example. Domestic corporation DC transfers inventory with a fair
market value of $1 million and adjusted basis of $800,000 to foreign
corporation FC in an exchange for stock of FC that is described in
section 351 (a). Title passes within the U.S. Pursuant to section
367(a), DC is required to recognize gain of $200,000 upon the transfer.
Under the rule of this paragraph (b)(4), such gain shall be treated as
ordinary income (sections 1201 and 1221) from sources within the U.S.
(section 861) arising from a taxable exchange with FC. Appropriate
adjustments to earnings and profits, basis, etc., shall be made as if
the transfer were subject to section 351. Thus, for example, DC's basis
in the FC stock received, and FC's basis in the transferred inventory,
will each be increased by the $200,000 gain recognized by DC, pursuant
to sections 358(a)(1) and 362(a), respectively.
(c) Transfers described in section 367(a)(1) -- (1) In general. A
transfer described in section 367(a)(1) is any transfer of property by a
U.S. person to a foreign corporation pursuant to an exchange described
in section 332, 351, 354, 355, 356, or 361. Section 367(a)(1) applies
to such a transfer whether it is made directly, indirectly, or
constructively. Indirect or constructive transfers that are described
in section 367(a)(1) include the transfers described in subparagraphs
(2) through (7) of this paragraph (c). See 1.367(a)-3T(b)(1) for rules
relating to the transfer of stock or securities of a foreign corporation
that is a party to the exchange or the reorganization.
(2) Indirect transfers in certain reorganizations -- (i) Mergers
described in section 368(a)(1)(A) -- (A) In general. A transfer in
connection with a reorganization described in section 368(a)(1)(A) to
which either section 368(a)(2) (D) or (E) applies may be an indirect
transfer described in section 367(a)(1) if the reorganization involves
the merger of two domestic corporations and if stock of a foreign
corporation which controls one of such domestic corporations is
exchanged in the reorganization. The transfers in connection with such
a reorganization that are described in section 367(a)(1) are specified
in subdivisions (B) and (C) of this paragraph (c)(2)(i). If a transfer
in connection with such a reorganization is described in section
367(a)(1), then the rules of 1.367(a)-3T shall apply to determine
whether the U.S. transferor is required to recognize gain with respect
to the transfer.
(B) Mergers to which section 368(a)(2)(D) applies. A U.S.
shareholder of a domestic corporation shall be considered to make a
transfer of stock that is described in section 367(a)(1) if --
(1) The domestic corporation transfers substantially all of its
properties to another domestic corporation in connection with a
reorganization described in section 368(a)(1)(A) to which section
368(a)(2)(D) applies; and
(2) The controlling corporation (within the meaning of section
368(a)(2)(D)) is a foreign corporation.
The indirect transfer of stock by the shareholder shall be subject to
the provisions of 1.367(a)-3T.
Example. F, a foreign corporation, owns all the stock of S, a
domestic corporation. In a reorganization described in section
368(a)(1)(A) to which section 368(a)(2)(D) applies, S acquires
substantially all the properties of W, a domestic corporation, in a
merger of W into S. The stock of F is used as consideration. The
reorganization is considered to constitute a transfer of stock described
in section 367(a)(1) by the shareholders of W that are U.S. persons.
(C) Mergers described in section 368(a)(1)(A) to which section
368(a)(2)(E) applies. A shareholder of a domestic corporation that is a
U.S. person shall be considered to make a transfer of stock that is
described in section 367(a)(1) if --
(1) The domestic corporation acquires substantially all of the
properties of another domestic corporation in connection with a
reorganization described in section 368(a)(1)(A) to which section
368(a)(2)(E) applies; and
(2) The controlling corporation (within the meaning of section
368(a)(2)(E)) is a foreign corporation.
The indirect transfer of stock by the shareholder shall be subject to
the provisions of 1.367(a)-3T.
(ii) Reorganizations described in section 368(a)(1)(B). If, in
connection with a reorganization described in section 368(a)(1)(B), a
U.S. person exchanges stock of a domestic corporation for voting stock
of a foreign corporation that is in control (as defined in section
368(c)) of the domestic acquiring corporation, then that U.S. person is
considered to make a transfer of stock that is subject to section
367(a)(1). The rule of this paragraph (c)(2)(ii) is illustrated by the
following example.
Example. F, a foreign corporation, owns all the stock of S, a
domestic corporation. In a reorganization described in section
368(a)(1)(B), S acquires all the stock of domestic corporation Y, and
the shareholders of Y receive voting stock of F. The reorganization
includes an indirect stock transfer described in section 367(a)(1) by
those shareholders of Y who are U.S. persons.
(iii) Reorganization described in section 368(a)(1)(C). A U.S.
shareholder of a domestic corporation shall be considered to make a
transfer of stock that is subject to section 367(a)(1) if --
(A) The domestic corporation transfers substantially all of its
properties to another domestic corporation in connection with a
reorganization described in section 368(a)(1)(C); and
(B) The domestic corporation receives voting stock in a foreign
corporation that is in control (as defined in section 368(c)) of the
acquiring corporation (and distributes the stock to its shareholders in
accordance with section 368(a)(2)(G)).
The rule of this paragraph (c)(2)(iii) is illustrated by the
following example.
Example. F, a foreign corporation, owns all of the stock of S, a
domestic corporation. In a reorganization described in section
368(a)(1)(C), S acquires substantially all of the properties of Z, a
domestic corporation, and Z receives voting stock of F (and distributes
the stock to its shareholders). The reorganization is considered to
include an indirect transfer of stock described in section 367(a)(1) by
the shareholders of Z that are U.S. persons.
(3) Indirect transfers involving partnerships and interests therein
-- (i) Transfer by partnership treated as transfer by partners -- (A) In
general. If a partnership (whether foreign or domestic) transfers
property to a foreign corporation in an exchange described in section
367(a)(1), then a U.S. person that is a partner in the partnership shall
be treated as having transferred a proportionate share of the property
in an exchange described in section 367(a)(1). A U.S. person's
proportionate share of partnership property shall be determined under
the rules and principles of sections 701 through 761 and the regulations
thereunder. The rule of this paragraph (c)(3)(i)(A) is illustrated by
the following example.
Example. P is a partnership having five equal general partners, two
of whom are United States persons. P transfers property to F, a foreign
corporation, in connection with an exchange described in section 351.
The exchange includes an indirect transfer of property by the partners
to F. The transfers of property attributable to those partners who are
United States persons, that is, 40 percent of each asset transferred to
F, are transfers described in section 367(a)(1). The gain (if any)
recognized on the transfer of 40 percent of each asset to F is
attributable to the two partners who are United States persons.
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of this paragraph (c)(3)(i) as having transferred a
proportionate share of the property of a partnership in an exchange
described in section 367(a), and is therefore required to recognize gain
upon the transfer, then --
(1) The U.S. person's basis in the partnership shall be increased by
the amount of gain recognized by him;
(2) Solely for purposes of determining the basis of the partnership
in the stock of the transferee foreign corporation, the U.S. person
shall be treated as having newly acquired an interest in the partnership
(for an amount equal to the gain recognized), permitting the partnership
to make an optional adjustment to basis pursuant to sections 743 and
754; and
(3) The transferee foreign corporation's basis in the property
acquired from the partnership shall be increased by the amount of gain
recognized by U.S. persons under this paragraph (c)(3)(i).
(ii) Transfer of partnership interest treated as transfer of
proportionate share of assets -- (A) In general. If a U.S. person
transfers an interest as a partner in a partnership (whether foreign or
domestic) in an exchange described in section 367(a)(1), then that
person shall be treated as having transferred a proportionate share of
the property of the partnership in an exchange described in section
367(a)(1). Accordingly, the applicability of the exception to section
367(a)(1) provided in 1.367(a)-2T shall be determined with reference to
the property of the partnership rather than the partnership interest
itself. A U.S. person's proportionate share of partnership property
shall be determined under the rules and principles of sections 701
through 761 and the regulations thereunder.
(B) Special adjustments to basis. If a U.S. person is treated under
the rule of paragraph (c)(3)(ii)(A) of this section as having
transferred a proportionate share of the property of a partnership in an
exchange described in section 367(a), and is therefore required to
recognize gain upon the transfer, then --
(1) The U.S. person's basis in the stock of the transferee foreign
corporation shall be increased by the amount of gain so recognized by
that person;
(2) The transferee foreign corporation's basis in the transferred
partnership interest shall be increased by the amount of gain recognized
by the U.S. person; and
(3) Solely for purposes of determining the partnership's basis in the
property held by it, the U.S. person shall be treated as having newly
acquired an interest in the partnership (for an amount equal to the gain
recognized), permitting the partnership to make an optional adjustment
to basis pursuant to sections 743 and 754.
(C) Limited partnership interest. The transfer by a U.S. person of
an interest in a partnership shall not be subject to the rules of
paragraph (c)(3)(ii) (A) and (B) if --
(1) The interest transferred is a limited partnership interest; and
(2) Such interest is regularly traded on an established securities
market.
Instead, the transfer of such an interest shall be treated in the
same manner as a transfer of stock or securities. Thus, the
consequences of such a transfer shall be determined under the rules of
1.367(a)-3T. For purposes of this section, a limited partnership
interest is an interest as a limited partner in a partnership that is
organized under the laws of any State of the United States or the
District of Columbia. Whether such an interest is regularly traded on
an established securities market shall be determined under the
provisions of paragraph (c)(3)(ii)(D) of this section.
(D) Regularly traded on an established securities market -- (1)
Established securities market. For purposes of this paragraph
(c)(3)(ii), an established securities market is --
(i) A national securities exchange which is registered under section
6 of the Securities Exchange Act of 1934 (15 USC 78f);
(ii) A foreign national securities exchange which is officially
recognized, sanctioned, or supervised by governmental authority; and
(iii) An over-the-counter market. An over-the-counter market is any
market reflected by the existence of an inter-dealer quotation system.
An inter-dealer quotation system is any system of general circulation to
brokers and dealers which regularly disseminates quotations of stock and
securities by identified brokers or dealers, other than by quotation
sheets which are prepared and distributed by a broker or dealer in the
regular course of business and which contain only quotations of such
broker or dealer.
(2) Regularly traded. A class of interests that is traded on an
established securities market is considered to be regularly traded if it
is regularly quoted by brokers or dealers making a market in such
interests. A class of interests shall be presumed to be regularly
traded if the entity has a total of 500 or more interest-holders.
(4) Transfers by trusts and estates -- (i) In general. For purposes
of section 367(a), a transfer of property by an estate or trust shall be
treated as a transfer by the entity itself and not as an indirect
transfer by its beneficiaries. Thus, a transfer of property by a
foreign trust or estate (as defined in section 7701(a)(31)) is not
described in section 367(a)(1), regardless of whether the beneficiaries
of the trust or estate are U.S. persons. Similarly, a transfer of
property by a domestic trust or estate may be described in section
367(a)(1), regardless of whether the beneficiaries of the trust or
estate are foreign persons.
(ii) Grantor trusts. A transfer of a portion or all of the assets of
a foreign or domestic trust to a foreign corporation in an exchange
described in section 367(a)(1) is considered a transfer by any U.S.
person who is treated as the owner of any such portion or all of the
assets of the trust under sections 671 through 679.
(5) Termination of election under section 1504(d). Section 367(A)
applies to the constructive reorganization and transfer of property from
a domestic corporation to a foreign corporation that occurs upon the
termination of an election under section 1504(d), which permits the
treatment of certain contiguous country corporations as domestic
corporations. The rule of this paragraph (c)(5) is illustrated by the
following example.
Example. Domestic corporation Y previously made a valid election
under section 1504(d) to have its wholly owned Canadian subsidiary, C,
treated as a domestic corporation. On July, 1, 1986, C fails to
continue to qualify for the election under section 1504 (d). A
constructive reorganization described in section 368(a)(1)(D) occurs.
The resulting constructive transfer of assests by ''domestic''
corporation C to Canadian corporation C upon the termination of the
election is a transfer of property described in section 367(a)(1).
(6) Changes in classification of an entity. If a foreign entity is
classified as an entity other than an association taxable as a
corporation for United States tax purposes, and subsequently a change is
made in the governing documents, articles, or agreements of the entity
so that the entity is thereafter classified as an association taxable as
a corporation, the change in classification is considered a transfer of
property to a foreign corporation in connection with an exchange
described in section 351. For purposes of section 367(a)(1), the
transfer of property is considered as made by the persons determined
under the rules set forth in paragraph (c)(3) of this section with
respect to partnerships, and paragraph (c)(4) (i) or (ii), with respect
to trusts and estates, and the rules of such paragraphs apply
determining whether a transfer described in section 367(a)(1) has been
made.
(7) Contributions to capital. For rules with respect tothe treatment
of a contribution to the capital of a foreign corporation as a transfer
described in section 367(a)(1), see section 367(c)(2) and the
regulations thereunder.
(d) Definitions. The following definitions apply for purposes of
this section and 1.367(d)-1T.
(1) United States person. The term ''United States person'' includes
those persons described in section 7701(a)(30). The term includes a
citizen or resident of the United States, a domestic partnership, a
domestic corporation, and any estate or trust other than a foreign
estate or trust. (For definitions of these terms, see section 7701 and
regulations thereunder.) For purposes of this section, an individual
with respect to whom an election has been made under section 6013 (g) or
(h) is considered to be a resident of the United States while such
election is in effect. A nonresident alien or a foreign corporation
will not be considered a United States person because of its actual or
deemed conduct of a trade or business within the United States during a
taxable year.
(2) Foreign corporation. The term ''foreign corporation'' has the
meaning set forth in section 7701(a) (3) and (5) and 301.7701-5.
(3) Transfer. For purposes of section 367 and regulations
thereunder, the term ''transfer'' means any transaction that constitutes
a transfer for purposes of sections 332, 351, 354, 355, 356, or 361, as
applicable. A person's entering into a bona fide cost-sharing
arrangement under 1.482-2(d)(4) or acquiring rights to intangible
property under such an arrangement shall not be considered a transfer of
property described in section 367(a)(1). See 1.6038B-1T(b)(3) for the
date on which the transfer is considered to be made.
(4) Property. For purposes of section 367 and regulations
thereunder, the term ''property'' means any item that constitutes
property for purposes of sections 332, 351, 354, 355, 356, or 361, as
applicable.
(5) Intangible property -- (i) In general. For purposes of section
367 and regulations thereunder, the term ''intangible property'' means
knowledge, rights, documents, and any other intangible item within the
meaning of section 936(h)(3)(B) that constitutes property for purposes
of sections 332, 351, 354, 355, 356, or 361, as applicable. Such
property shall be treated as intangible property for purposes of section
367 (a) and (d) and the regulations thereunder without regard to whether
it is used or developed in the United States or in a foreign country and
without regard to whether it is used in manufacturing activities or in
marketing activities. A working interest in oil and gas properties
shall not be considered to be intangible property for purposes of
section 367 and the regulations thereunder.
(ii) Operating intangibles. An operating intangible is any
intangible property of a type not ordinarily licensed or otherwise
transferred in transactions between unrelated parties for consideration
contingent upon the licensee's or transferee's use of the property.
Examples of operating intangibles may include long-term purchase or
supply contracts, surveys, studies, and customer lists.
(iii) Foreign goodwill or going concern value. Foreign goodwill or
going concern value is the residual value of a business operation
conducted outside of the United States after all other tangible and
intangible assets have been identified and valued. For purposes of
section 367 and regulations thereunder the value of the right to use a
corporate name in a foreign country shall be treated as foreign goodwill
or going concern value.
(iv) Transitional rule for certain marketing intangibles. For
transfers occurring after December 31, 1984, and before May 16, 1986,
for foreign trademarks, tradenames, brandnames, and similar marketing
intangibles developed by a foreign branch shall be treated as foreign
goodwill or going concern value.
(e) Close of taxable year in certain section 368(a)(1)(F)
reorganizations. If a domestic corporation is the transferor
corporation in a reorganization described in section 368(a)(1)(F) after
March 30, 1987, in which the acquiring corporation is a foreign
corporation, then the taxable year of the transferor corporation shall
end with the close of the date of the transfer and the taxable year of
the acquiring corporation shall end with the close of the date on which
the transferor's taxable year would have ended but for the occurrence of
the transfer. With regard to the consequences of the closing of the
taxable year, see section 381 and the regulations thereunder.
(f) Exchanges under sections 354(a) and 361(a) in certain section
368(a)(1)(F) reorganizations. In every reorganization under section
368(a)(1)(F), where the transferor corporation is a domestic corporation
and the acquiring corporation is a foreign corporation, there is
considered to exist --
(1) A transfer of assets by the transferor corporation to the
acquiring corporation under section 361(a) in exchange for stock of the
acquiring corporation and the assumption by the acquiring corporation of
the transferor corporation's liabilities;
(2) A distribution of the stock (or stock and securities) of the
acquiring corporation by the transferor corporation to the shareholders
(or shareholders and security holders) of the transferor corporation;
and
(3) An exchange by the transferor corporation's shareholders (or
shareholders and security holders) of the stock of the transferor
corporation for stock (or stock and securities) of the acquiring
corporation under section 354(a).
For this purpose, it shall be immaterial that the applicable foreign
or domestic law treats the acquiring corporation as a continuance of the
transferor corporation.
(g) Effective date of certain section -- (1) In general. Except as
specifically provided to the contrary elsewhere in these sections,
1.367(a)-1T through 1.367(a)-6T apply to transfers occurring after
December 31, 1984.
(2) Private rulings. The taxpayer may rely on a private ruling under
section 367(a) received by him before June 16, 1986.
(3) Certain indirect transfers. Sections 1.367(a)-1T(c)(2) (i) and
(iii) and 1.367(a)-1T(c)(3) apply to transfers made after June 16, 1986.
For transfers made before that date, see 26 CFR 1.367(a)-1(b) (revised
as of April 1, 1986).
(T.D. 8087, 51 FR 17938, May 16, 1986, as amended at T.D. 8280, 55 FR
1408, Jan. 16, 1990)
26 CFR 1.367(a)-2T Exception for transfers of property for use in the
active conduct of a trade or business (temporary).
(a) In general. Section 367(a)(1) shall not apply to property
transferred to a foreign corporation if --
(1) Such property is transferred for use by that corporation in the
active conduct of a trade or business outside of the United States; and
(2) The U.S. person that transfers the property complies with the
reporting requirements of section 6038B and regulations thereunder.
Where these conditions are satisifed, the foreign corporate
transferee of the property shall be considered to be a corporation for
purposes of determining the extent to which gain or loss is required to
be recognized upon the transfer pursuant to section 332, 351, 354
(reserved as to section 355 or so much of section 356 as relates to
section 355), 356, or 361. Paragraph (b) of this section provides rules
concerning the requirement that property be transferred for use in the
active conduct of a trade or business outside of the United States,
while paragraph (c) concerns the application of the requirement where
the transferee itself re-transfers the property. In addition,
1.367(a)-3T provides rules concerning the treatment of stock or
securities transferred to a foreign corporation in an exchange described
in section 367(a)(1), and 1.367(a)-4T provides special rules concerning
the treatment of other specified types of property. Finally,
1.367(a)-5T and 1.367(a)-6T provide rules concerning certain transfers
of property that are subject to section 367(a)(1) regardless of whether
the property is used in the active conduct of a trade or business.
(b) Active conduct of a trade or business outside the United States
-- (1) In general. Property qualifies for the exception provided by
this section if it is transferred to a foreign corporation for use in
the active conduct of a trade or business outside of the United States.
Therefore, to determine whether property is subject to the exception
provided by this section, four factual determinations must be made:
(i) What is the trade or business of the transferee;
(ii) Do the activities of the transferee constitute the active
conduct of that trade or business;
(iii) Is the trade or business conducted outside of the United
States; and
(iv) Is the transferred property used or held for use in the trade or
business?
Rules concerning these four determinations are provided in paragraphs
(b) (2), (3), (4), and (5) of this section.
(2) Trade or business. Whether the activities of a foreign
corporation constitute a trade or business must be determined under all
the facts and circumstances. In general, a trade or business is a
specific unified group of activities that constitute (or could
constitute) an independent economic enterprise carried on for profit.
For example, the activities of a foreign selling subsidiary could
constitute a trade or business if they could be independently carried on
for profit, even though the subsidiary acts exclusively on behalf of,
and has operations fully integrated with, its parent corporation. To
constitute a trade or business, a group of activities must ordinarily
include every operation which forms a part of, or a step in, a process
by which an enterprise may earn income or profit. In this regard, one
or more of such activities may be carried on by independent contractors
under the direct control of the foreign corporation. (However, see
paragraph (b)(3) of this section.) The group of activities must
ordinarily include the collection of income and the payment of expenses.
If the activities of a foreign corporation do not constitute a trade or
business, then the exception provided by this section does not apply,
regardless of the level of activities carried on by the corporation.
The following activities are not considered to constitute by themselves
a trade or business for purposes of this section:
(i) Any activity giving rise to expenses that would be deductible
only under section 212 if the activities were carried on by an
individual; or
(ii) The holding for one's own account of investments in stock,
securities, land, or other property, including casual sales thereof.
(3) Active conduct. Whether a trade or business is actively
conducted must be determined under all the facts and circumstances. In
general, a corporation actively conducts a trade or business only if the
officers and employees of the corporation carry out substantial
managerial and operational activities. A corporation may be engaged in
the active conduct of a trade or business even though incidental
activities of the trade or business are carried out on behalf of the
corporation by independent contractors. In determining whether the
officers and employees of the corporation carry out substantial
managerial and operational activities, however, the activities of
independent contractors shall be disregarded. On the other hand, the
officers and employees of the corporation are considered to include the
officers and employees of related entities who are made available to and
supervised on a day-to-day basis by, and whose salaries are paid by (or
reimbursed to the lending related entity by), the transferee foreign
corporation. Whether a trade or business that produces rents or
royalties is actively conducted shall be determined under the principles
of 1.954-2(d)(1) (but without regard to whether the rents or royalties
are received from an unrelated person). The rule of this paragraph
(b)(3) is illustrated by the following example.
Example. X, a domestic corporation, and Y, a foreign corporation not
related to X, transfer property to Z, a newly formed foreign corporation
organized for the purpose of combining the research activities of X and
Y. Z contracts all of its operational and research activities to Y for
an arm's-length fee. Z's activities do not constitute the active
conduct of a trade or business.
(4) Outside of the United States. Whether a foreign corporation
conducts a trade or business outside of the United States must be
determined under all the facts and circumstances. Generally, the
primary managerial and operational activities of the trade or business
must be conducted outside the United States and immediately after the
transfer the transferred assets must be located outside the United
States. Thus, the exception provided by this section would not apply to
the transfer of the assets of a domestic business to a foreign
corporation if the domestic business continued to operate in the United
States after the transfer. In such a case, the primary operational
activities of the business would continue to be conducted in the United
States. Moreover, the transferred assets would be located in the United
States. However, it is not necessary that every item of property
transferred be used outside of the United States. As long as the
primary managerial and operational activities of the trade or business
are conducted outside of the United States and substantially all of the
transferred assets are located outside the United States, incidental
items of transferred property located in the United States may be
considered to have been transferred for use in the active conduct of a
trade or business outside of the United States.
(5) Use in the trade or business. Whether property is used or held
for use in a trade or business must be determined under all the facts
and circumstances. In general, property is used or held for use in a
foreign corporation's trade or business if it is --
(i) Held for the principal purpose of promoting the present conduct
of the trade or business;
(ii) Acquired and held in the ordinary course of the trade or
business; or
(iii) Otherwise held in a direct relationship to the trade or
business. Property is considered held in a direct relationship to a
trade or business if it is held to meet the present needs of that trade
or business and not its anticipated future needs.
Thus, property will not be considered to be held in a direct
relationship to a trade or business if it is held for the purpose of
providing for future diversification into a new trade or business,
future expansion of trade or business activities, future plant
replacement, or future business contingencies.
(c) Property transferred by transferee corporation -- (1) General
rule. If a foreign corporation receives property in an exchange
described in section 367(a)(1) and as part of the same transaction
transfers the property to another person, then the exception provided by
this section shall not apply to the initial transfer. For purposes of
the preceding sentence, a subsequent transfer within six months of the
initial transfer shall be considered to be part of the same transaction,
and a subsequent transfer more than six months after the initial
transfer may be considered to be part of the same transaction upon the
application of step-transaction principles.
(2) Exception. Notwithstanding paragraph (c)(1) of this section, the
active conduct exception provided by this section shall apply to the
initial transfer if --
(i) The initial transfer is followed by one or more subsequent
transfers described in section 351 or 721; and
(ii) Each subsequent transferee is either a partnership in which the
preceding transferor is a general partner or a corporation in which the
preceding transferor owns common stock; and
(iii) The ultimate transferee uses the property in the active conduct
of a trade or business outside the United States.
(d) Transitional rule. Notwithstanding any other provision of this
section, property shall be considered to have been transferred for use
in the active conduct of a trade or business outside of the United
States, if --
(1) The property was transferred after December 31, 1984, and before
June 16, 1986;
(2) The property was, or would have been, considered to be
transferred for use by the transferee foreign corporation in the active
conduct, in any foreign country, or a trade or business, under the
principles of section 3.02(1) of Revenue Procedure 68-23, 1968-1 C.B.
821; and
(3) Based on all of the facts and circumstances, it was, or would
have been, determined under section 2.02 of Revenue Procedure 68-23 that
tax avoidance was not one of the principal purposes of the transaction.
(T.D. 8087, 51 FR 17942, May 16, 1986)
26 CFR 1.367(a)-3T Treatment of transfers of stock or securities to
foreign corporations (temporary).
(a) In general. This section provides rules concerning the transfer
of stock or securities to a foreign corporation in an exchange described
in section 367(a)(1). In general, a transfer of stock or securities by
a U.S. person to a foreign corporation in connection with any exchange
described in section 332, 351, 354 (reserved as to section 355 and so
much of section 356 as relates to section 355), 356, or 361, is subject
to section 367(a)(1) (and, therefore, treated as a taxable exchange)
unless one of the exceptions set forth in this section applies to the
transfer. Paragraph (b) of this section specifies certain transactions
that are not subject to section 367(a)(1), while paragraph (c) provides
rules concerning the treatment of transfers of stock or securities of
domestic corporations pursuant to any exchange described in section
367(a)(1). Paragraph (d) of this section provides rules concerning the
transfer of stock of a foreign corporation to another foreign
corporation pursuant to section 332 or 351 (reserved as to section 355
and so much of section 356 as relates to section 355). Finally,
paragraphs (e), (f), and (g) provide detailed rules applicable to
certain transfers decribed above and paragraph (h) sets forth anti-abuse
rules.
(b) Transfers to which section 367(a)(1) does not apply -- (1)
Transfers in certain reorganizations of stock or securities of foreign
corporations. If, pursuant to an exchange described in section 354,
361, or so much of section 356 as relates to section 354, a U.S. person
transfers to a foreign corporation stock or securities of a foreign
corporation that is a party to the reorganization, then section 367(a)
shall not apply to the transfer, by reason of the operation of section
367(a)(2) and 1.367(a)-1T(b)(2)(i). Thus, section 367(a)(1) shall not
apply to a transfer of stock of a foreign corporation by a U.S. person
to another foreign corporation pursuant to a reorganization described in
section 368(a)(1)(B) because the foreign corporation whose stock is
transferred is a party to the reorganization. This result follows even
though that foreign corporation may not be a party to other types of
reorganizations or exchanges for which the transaction also qualifies.
For rules concerning the treatment of certain transfers that are
described in section 351 as well as one of the above-cited sections, see
7.367(b)-4 and 7.367(b-7.
(2) Compulsory transfers. For rules regarding a transfer of property
(including stock or securities) that is compelled by foreign government
action, see 1.367(a)-4T(f).
(c) Transfer of stock or securities of domestic corporation -- (1) In
general. The transfer of stock or securities of a domestic corporation
to a foreign corporation (in an exchange described in section 367(a)(1))
shall be subject to section 367(a)(1) and shall therefore be treated as
a taxable exchange, except in the circumstances set forth in paragraphs
(c) (2), (3), (4), (5), and (6) of this section.
(2) Active conduct of a trade or business. Section 367(a)(1) shall
not apply to a transfer of stock or securities of a domestic corporation
if --
(i) The transfer is described in paragraph (e)(2) of this section;
and
(ii) The transferor files an agreement to recognize gain upon the
transferee's later disposition of the transferred interest in accordance
with the provisions of paragraph (g) of this section.
In general, paragraph (e)(2) of this section describes certain
transfers of stock or securities for use by the transferee in the active
conduct of a trade or business outside of the United States.
(3) U.S. transferors obtain limited interest in transferee. Section
367(a)(1) shall not apply to a transfer of stock or securities of a
domestic corporation if the transfer is described in paragraph (f) of
this section. In general, paragraph (f) of this section describes
transfers in which the U.S. transferors of stock or securities obtain
only a limited interest in the transferee foreign corporation.
(4) Transferor files agreement to recognize gain upon later
disposition. Section 367(a)(1) shall not apply to a transfer of stock
or securities of a domestic corporation if --
(i) Immediately after the transfer all U.S. transferors own in the
aggregate less than fifty percent of both the total voting power and the
total value of the stock of the transferee foreign corporation; and
(ii) The subject transferor files an agreement to recognize gain upon
the transferee's later disposition of the transferred interest in
accordance with the provisions of paragraph (g) of this section.
(5) Certain transfers in connection with performance of services.
Section 367(a)(1) shall not apply to a domestic corporation's transfer
of its own stock or securities in connection with the performance of
services, if the transfer is considered to be to a foreign corporation
solely by reason of 1.83-6(d)(1).
(6) Transfers pursuant to section 355 or so much of section 356 as
related to section 355. (Reserved)
(d) Transfer of stock or securities of foreign corporation pursuant
to section 332 or 351 (reserved as to section 355 and so much of section
356 as relates to section 355) -- (1) In general. If a U.S. person
transfers stock or securities of a foreign corporation to another
foreign corporation in an exchange described in section 332 or 351
(reserved as to section 355 or so much of section 356 as relates to
section 355) then section 367(a)(1) shall apply to the transfer (which
is therefore treated as a taxable exchange), except in the circumstances
set forth in paragraphs (d) (2), (3), (4), (5), and (6) of this section.
Transfers described in section 351 that are also described in section
368(a)(1)(B) shall be subject to the rules set forth in 7.367(b)-4 and
7.367(b)-7 and shall not be subject to the rules of this paragraph (d).
(2) Active conduct of a trade or business. Section 367(a)(1) shall
not apply to a transfer of stock or securities of a foreign corporation
if --
(i) The transfer is described in paragraph (e) (2) or (3) of this
section; and
(ii) The transferor files an agreement to recognize gain upon the
transferee's later disposition of the transferred interest in accordance
with the provisions of paragraph (g) of this section.
In general, paragraph (e) describes transfers of stock or securities
for use by the transferee corporation in the active conduct of a trade
or business outside of the United States.
(3) Transfer of stock or securities of foreign corporation to another
corporation organized in same country. Section 367(a)(1) shall not
apply to a transfer of stock or securities of a foreign corporation if
--
(i) The transferred corporation and the transferee corporation are
created or organized under the laws of the same foreign country;
(ii) At least 50 percent of the assets used in the trade or business
of the transferred corporation are located in that same foreign country;
(iii) Prior to the transfer, more than 50 percent of the total
combined voting power of all classes of stock entitled to vote of the
transferred corporation was held by U.S. persons;
(iv) After the transfer, the transferee corporation holds more than
50 percent of the total combined voting power of all classes of stock
entitled to vote of the transferred corporation;
(v) After the transfer, the U.S. persons that controlled the
transferred corporation before the transfer hold at least 50 percent of
the total combined voting power of all classes of stock entitled to vote
of the transferee corporation;
(vi) After the transfer, the transferee corporation is a controlled
foreign corporation within the meaning of section 957(a); and
(vii) The transferor files an agreement to recognize gain upon the
transferee's later disposition of the transferred interest in accordance
with the provisions of paragraph (g) of this section.
The provisions of this paragraph (d)(3) shall apply to transfers
occurring after June 16, 1986. For other transfers, see section
3.02(1)(a)(iii)(B) of Revenue Procedure 68-23.
(4) U.S. transferors obtain limited interest in transferee. Section
367(a)(1) shall not apply to a transfer of stock or securities of a
foreign corporation if the transfer is described in paragraph (f) of
this section. In general, paragraph (f) of this section describes
transfers in which the U.S. transferors of stock or securities obtain
only a limited interest in the transferee foreign corporation.
(5) Transferor files agreement to recognize gain upon later
disposition. Section 367(a)(1) shall not apply to a transfer of stock
or securities of a foreign corporation if --
(i) Immediately after the transfer all U.S. transferors own in the
aggregate less than fifty percent of both the total voting power and the
total value of the stock of the transferee foreign corporation; and
(ii) The subject transferor files an agreement to recognize gain upon
the transferee's later disposition of the transferred interest in
accordance with the provisions of paragraph (g) of this section.
(6) Transfer pursuant to section 355 or so much of section 356 as
relates to section 355. (Reserved)
(e) Transfer for use in the active conduct of a trade or business
outside of the United States -- (1) In general. Section 367(a) shall
not apply to a transfer of stock or securities of a corporation if --
(i) The transfer is described in paragraph (e) (2) or (3) of this
section; and
(ii) The transferor files an agreement to recognize gain upon the
transferee's later disposition of the transferred interest in accordance
with the provisions of paragraph (g) of this section.
(2) Stock constituting operating asset. A transfer of stock or
securities of a foreign or domestic corporation to a foreign corporation
shall be considered to be for use in the active conduct of a trade or
business outside of the United States if the stock or securities are
essentially operating assets in the hands of the transferor because
ownership of the stock or securities grants material rights to acquire
for use in the transferor's trade or business outside the United States
products produced by the transferred corporation outside the United
States. See Kaiser Aluminum Chemical Corp. V. Comm'r, 76 T.C. 325
(1981).
(3) Consolidation of integrated business -- (i) In general. A
transfer of stock or securities of a foreign corporation to a foreign
corporation shall be considered to be for use in the active conduct of a
trade or business outside of the United States if --
(A) Immediately after the transfer, the transferee foreign
corporation holds more than 50 percent of the total voting power and
more than 50 percent of the total value of stock of the transferred
corporation; and
(B) Both immediately before and immediately after the transfer, the
transferred corporation and the transferee foreign corporation
constitute an integrated business in accordance with the provisions of
paragraph (e)(2)(ii) of this section.
(ii) Integrated business. For purposes of this paragraph (e)(2), the
transferred and transferee corporations shall be considered to
constitute an integrated business only if --
(A) Each corporation is engaged, directly or indirectly, in
substantial business operations beyond the mere provision of general
managerial, financial, or similar services to the other corporation;
and
(B) Either the business operations of one corporation are
substantially identical to all or the principal part of the operations
of the other, or the operations of the two corporations constitute in
principal part complementary and mutually interdependent steps in the
production and sale or lease of a product or products or in the
provision of a service. Substantial identity of business operations
requires that the two corporations engage in substantially the same
production (or service) and marketing processes or activities for
generally the same or similar products (or services).
(f) U.S. transferors obtain limited interest in transferee -- (1) In
general. A transfer of stock or securities of a foreign or domestic
corporation by a U.S. person to a foreign corporation shall not be
subject to section 367(a)(1) if immediately after the transfer --
(i) All U.S. transferors own in the aggregate less than twenty
percent of both the total voting power and the total value of the stock
of the transferee foreign corporation; or
(ii)(A) All U.S. transferors own in the aggregate twenty percent or
more of either the total voting power or the total value of the stock of
the transferee foreign corporation, but less than fifty percent of that
total voting power and that total value; and
(B) The subject U.S. transferor owns less than five percent of both
the total voting power and the total value of the stock of the
transferee foreign corporation.
(2) Attribution. Section 958 shall apply in determining the
ownership of stock for purposes of this paragraph (f).
(3) Rule not applicable to stock of holding companies. The rule of
paragraph (f)(1) of this section shall not apply if the assets of the
transferred corporation consist principally of stock or securities held
as portfolio investments. Stock of securities of a given entity held by
the transferred corporation shall be presumed not to constitute a
portfolio investment if the transferred corporation holds ten percent or
more by value of the outstanding stock and securities of that entity.
This presumption may be rebutted by evidence that the stock was held by
the transferred corporation as a passive, portfolio investment.
(g) Transferor's agreement to recognize gain upon later disposition
by transferee -- (1) In general. A transfer of stock or securities
shall not be subject to section 367(a)(1) if --
(i) The transferor complies with the reporting requirements of
section 6038B and any regulations thereunder;
(ii) The transferor files a binding agreement to recognize gain upon
the transferee corporation's later disposition of the transferred stock
or securities, in accordance with the rules of this section; and
(iii) The transfer is described in paragraph (d)(3) or (e) of this
section or, immediately after the transfer, all U.S. transferors own in
the aggregate less than 50 percent of both the total voting power and
the total value of the stock of the transferee foreign corporation.
(2) Agreement to recognize gain: in general. A transferor's
agreement to recognize gain must be attached to, and filed by the due
date of, the information return required under section 6038B.
In general, the return must be filed with the transferor's tax return
for the taxable year that includes the date of the transfer. However,
pursuant to 1.6038B-1T(b)(1), returns with respect to transfers that
took place prior to June 16, 1986. are not required to be filed until
September 16, 1986. Therefore, an agreement to recognize gain under the
rules of this section with respect to any such transfer may be timely
filed until that date. The agreement must be signed under penalties of
perjury by a trustee, executor, or equivalent fiduciary in the case of a
trust or estate, by a responsible officer in the case of a corporation,
by a debtor in possession or trustee in a bankruptcy case under Title
11, United States Code, and in the case of an individual, including a
partner who is treated as a transferor by virtue of 1.367-1T(c)(3), by
the individual himself. An agreement may also be signed by an agent
authorized to do so under a general or specific power of attorney. The
agreement must set forth the following materials, preferably in
paragraphs labeled to correspond with the subparagraphs set forth below:
(i) A statement that the document submitted constitutes the
transferor's agreement to recognize gain, in accordance with the
requirements of 1.367(a)-3T(g);
(ii) A description of the stock or securities transferred, an
estimate of fair market value as of the date of the transfer, and a
statement of cost or other basis and any adjustments thereto;
(iii) The transferor's agreement to recognize gain, as described in
subparagraph (3) of this paragraph (g);
(iv) A waiver of the period of limitations, as described in
subparagraph (4) of this paragraph (g); and
(v) An agreement to file with the transferor's tax returns for the 5
years following the year of the transfer a certification and waiver as
described in subparagraph (5) of this paragraph (g).
(3) Terms of agreement -- (i) Recognition of gain. The transferor
must agree that if, prior to the close of the fifth taxable year
following the taxable year of the transfer, the transferee foreign
corporation disposes of the transferred stock in any manner (other than
in a liquidation of the transferred corporation), then by the 90th day
thereafter the transferor will file an amended return for the year of
the transfer and recognize thereon the gain realized but not recognized
upon the initial transfer. Such gain shall be computed as if there had
been a sale of the stock or securities at fair market value at the time
of the initial transfer. Net operating losses or credits against tax
that were available in the year of the initial transfer and that have
expired unused may be applied (respectively) against any gain recognized
or tax owed by reason of this provision, but no other adjustments shall
be made with respect to any other items of income or deduction in the
year of the transfer or other years. If additional tax is required to
be paid, then interest must be paid on that amount at the rates
determined under section 6621, with respect to the period between the
date that was prescribed for filing the transferor's income tax return
for the year of the transfer and the date on which the additional tax
for that year is paid. For special rules applicable to nonrecognition
transfers, see subparagraph (7) of this paragraph (g). For special
rules applicable when a U.S. transferor that enters into an agreement
under this paragraph (g) ceases to exist, see subparagraph (9) of this
paragraph (g).
(ii) Partial disposition. If the transferee foreign corporation
disposes of only a portion of the stock or securities of the transferred
corporation, then the U.S. transferor shall be required to recognize a
proportionate amount of the gain realized but not recognized upon the
initial transfer. The proportion required to be recognized shall be
determined by reference to the fair market value of the stock or
securities disposed of an the fair market value of those retained. The
rule of this paragraph (g)(3)(ii) is illustrated by the following
example.
Example. A is a U.S. citizen who owns 100 percent of the outstanding
stock of foreign corporation X. In a transaction described in section
351, A exchanges his stock in X for 25 percent of the outstanding stock
of foreign corporation Y. A submits an agreement under the rules of
this section to recognize gain upon a later disposition. In the
following year, Y disposes of 50 percent of the fair market value of the
stock of X. Therefore, A is required to recognize 50 percent of the
gain he realized but did not recognize upon the initial transfer of the
shares of X.
(iii) Disposition of assets by transferred corporation. For purposes
of paragraph (g)(3) (i) and (ii) of this section, a disposition not in
the ordinary course of business by the transferred corporation of all or
a substantial portion of its assets (other than a distribution,
including a liquidating distribution, to the transferee foreign
corporation) shall be treated as a disposition by the transferee foreign
corporation of a proportionate amount of stock of the transferred
corporation.
(iv) Disposition of assets after distribution by transferred
corporation. For purposes of paragraph (g)(3) (i) and (ii) of this
section, a disposition not in the ordinary course of business by the
transferee foreign corporation of all or a substantial portion of the
assets received by it in a distribution, including a liquidating
distribution, from the transferred corporation shall be treated as a
disposition by the transferee foreign corporation of a proportionate
amount of stock of the transferred corporation.
(4) Waiver of period of limitation. The transferor must file a
waiver of the period of limitation on assessment of tax upon the gain
realized on the transfer. The waiver shall be executed on such forms as
are prescribed therefor by the Commissioner and shall extend the period
for assessment of such tax to a date not earlier than the close of the
eighth taxable year following the taxable year of the transfer. Such
waiver shall also contain such other terms with respect to assessment as
may be considered by the Commissioner to be necessary to ensure the
assessment and collection of the correct tax liability for each year for
which the waiver is required. The waiver must be signed by a person
authorized to sign the agreement pursuant to the provisions of paragraph
(g)(2) of this section.
(5) Annual certification and waiver -- (i) Certification. The
transferor must agree to file with its income tax return for each of the
five taxable years following the taxable year of the transfer a
certification that the stock or securities transferred have not been
disposed by the transferee in a transaction that is considered to be a
disposition for purposes of this paragraph. If either a disposition
qualifying under paragraph (g)(1) of this section or a nonrecognition
transfer subject to paragraph (g)(7) of this section has occurred, the
transferor's certification must provide the information required under
the rules of the subject paragraph. The annual certification pursuant
to this paragraph (g)(5) must be signed under penalties of perjury by a
person authorized to sign the agreement pursuant to the provisions of
paragraph (g)(2) of this section. The certification must identify the
transfer with respect to which it is given by setting forth the date of
the transfer and a description of the stock or securities transferred.
If a taxpayer has made more than one transfer subject to the rules of
this paragraph (g), the certifications for those transfers may be
combined in a single document, but each transfer must be separately
identified.
(ii) Waiver. The transferor must agree to file with its income tax
return for each of the eight taxable years following the taxable year of
the transfer a waiver of the period of limitations on assessment as
described in paragraph (g)(4) of this section. For the rule extending
the period of limitations upon a failure to comply with the reporting
requirements of section 6038B and regulations thereunder, see
1.6038B-1T(f)(1)(iii).
(6) Warranty of information regarding disposition. The transferor
must warrant that arrangements have been made in connection with the
transfer of stock or securities to ensure that the transferor will be
informed of any subsequent disposition of stock, securities, or assets
that would require the recognition of gain under the agreement.
(7) Treatment of nonrecognition transfers. If, during the period the
agreement is in force, the transferee foreign corporation disposes of
the stock or securities of the transferred corporation in a transaction
on which gain or loss would not be required to be recognized under U.S.
income tax principles, then the U.S. transferor shall not be required to
recognize gain under paragraph (g)(3)(i) of this section, provided that
the U.S. transferor complies with the requirements of subdivisions (i),
(ii), and (iii) of this paragraph (g)(7).
(i) The U.S. transferor must provide a notice of the transfer with
its next annual certification under paragraph (g)(5) of this section,
setting forth --
(A) A description of the transfer;
(B) The applicable nonrecognition provision; and
(C) The name, address, and identifying number (if any) of the new
transferee of the stock or securities of the transferred corporation.
(ii) The U.S. transferor must provide a new agreement to recognize
gain (in accordance with the rules of paragraph (g) (2) and (3)(i) of
this section) if, prior to the close of the fifth taxable year following
the taxable year of the initial transfer, either --
(A) The initial transferee foreign corporation disposes of the
interest which it received in exchange for the stock or securities of
the transferred corporation (other than in a disposition which itself
qualifies under the rules of this paragraph (g)(7)); or
(B) The person that obtained the stock or securities of the
transferred corporation disposes of that stock or those securities
(other than in a disposition which itself qualifies under the rules of
this paragraph (g)(7)).
If a disposition that triggers the recognition of gain under the
rules of this paragraph is only a partial disposition of the property,
then the U.S. transferor shall be required to recognize a proportionate
amount of the gain realized but not recognized upon the initial
transfer. The proportion required to be recognized shall be determined
by reference to the fair market value of the stock or securities
disposed of and the fair market value of those retained as of the date
of the disposition.
(iii) The U.S. transferor must warrant that arrangements have been
made, in connection with the nonrecognition transfer, ensuring that the
U.S. transferor will be informed of any subsequent disposition with
respect to which recognition of gain would be required under the
agreement.
(8) Special rules for indirect transfers -- (i) Transfers covered.
If a U.S. person that holds an interest in an entity is considered to
make an indirect transfer of stock or securities described in section
367(a) under the provisions of 1.367(a)-1T(c), then the rules of this
paragraph (g)(8) shall apply to the transfer.
(ii) Applicable rules. For purposes of this paragraph (g), the
foreign corporation that issued the stock or securities received by the
U.S. transferor shall be considered to be the transferee foreign
corporation. Any agreement entered into under this paragraph (g) with
respect to such a transfer shall require the recognition of gain by the
transferor if --
(A) That transferee foreign corporation disposes of the corporation
that it controls (regardless of whether that corporation is the
transferred corporation itself or another corporation that obtained the
stock, securities, or assets of the transferred corporation); or
(B) The corporation that holds the assets of the transferred
corporation disposes of all or a substantial portion of those assets
other than in the ordinary course of business.
The rules of paragraph (g)(7) of this section shall apply if gain or
loss would not be required to be recognized under U.S. income tax
principles with respect to such a transfer.
(9) U.S. transferor goes out of existence. If a U.S. corporation,
trust, or estate that has entered into an agreement under this paragraph
(g) goes out of existence, and that corporation, trust, or estate is not
required to recognize gain under section 367 upon its liquidating
transfer of the stock of the transferee foreign corporation, or if an
individual transferor that has entered into an agreement under this
paragraph (g) dies, then either --
(i) The person winding up the affairs of the transferor must retain
assets to meet any possible liability of the transferor under the
agreement;
(ii) The person winding up the affairs of the transferor must provide
security under subparagraph (10) of this paragraph (g) for any possible
liability of the transferor under the agreement; or
(iii) Each person that obtains the stock of the transferee foreign
corporation from the transferor must enter into an agreement under this
paragraph (g) having the same terms as the agreement entered into by the
transferor (but only with respect to that person's proportionate share
of the gain realized but not recognized upon the transferor's initial
transfer of stock to the transferee foreign corporation).
(10) Use of security. The transferor may be required to furnish a
bond or other security that satisfies the requirements of 301.7101-1 if
the district director determines that such security is necessary to
ensure the payment of any tax upon the gain realized upon the transfer.
Such bond or security will generally be required only if the stock or
securities transferred are the principal asset of the tranferor and the
director has reason to believe that a disposition of the stock or
securities may be contemplated. In addition, if a tranferor
corporation, trust, or estate ceases to exist, or if an individual
transferor dies, then the person winding up the affairs of the
transferor (such as a trustee in bankruptcy or an executor) may choose
to supply security pursuant to paragraph (g)(9) of this section for the
performance of the transferor's obligations under an agreement entered
into under this paragraph (g).
(11) Failure to comply. If a person that has entered into an
agreement under this paragraph (g) fails at any time to comply in any
material respect with the requirements of this section or with the terms
of any agreement submitted pursuant thereto, then the rule of paragraph
(g)(1) of this section shall not apply. Thus, the initial transfer of
the stock or securities will become subject to section 367(a)(1) (unless
otherwise excepted under the rules of this section) and will be treated
as a taxable exchange in the year of the initial transfer. Such a
material failure to comply shall extend the period for assessment of tax
until three years after the date on which the Internal Revenue Service
receives actual notice of the failure to comply.
(12) Availability of forms. Any agreement, certification, waiver, or
other document required to be filed pursuant to the provisions of this
paragraph (g) shall use such forms as may be prescribed therefore by the
Commissioner (or a similar statement providing the same information).
Until such time as forms are published, all necessary filings may be
accomplished by providing the required information to the Service in
accordance with the rules of this paragraph.
(13) Basis adjustments -- (i) If a U.S. transferor is required to
recognize gain under this paragraph (g), then in determining for U.S.
income tax purposes any gain or loss recognized by the transferee
foreign corporation upon its subsequent dispositon of the transferred
stock or securities, its basis in such interests shall be increased by
the amount of gain required to be recognized (but not by any tax or
interest required to be paid on such amount).
(ii) If a U.S. transferor is required to recognize gain under this
paragraph (g), then the U.S. transferor's basis in the stock of the
transferee foreign corporation shall be increased by the amount of gain
required to be recognized (but not by any tax or interest required to be
paid on such amount).
(h) Anti-abuse rules -- (1) Coordination with Subpart F.
Notwithstanding the provisions of paragraph (d) (2) or (3) of this
section, section 367(a)(1) shall apply to a transfer of stock or
securities of a foreign corporation if either:
(i) The transferred corporation was a controlled foreign corporation
within the meaning of section 957(a), and the transferee corporation is
not a controlled foreign corporation; or
(ii) Both the transferred and the transferee corporations are
controlled foreign corporations within the meaning of section 957(a) but
the transferor was a U.S. shareholder of the transferred corporation
within the meaning of section 951(b) and is not a U.S. shareholder of
the transferee corporation, within the meaning of section 951(b).
However, section 367(a)(1) shall not apply to such a transfer if the
transferor enters into an agreement to recognize gain under paragraph
(g) of this section.
(2) Incorporation of property to avoid section 367(a)(1).
Notwithstanding any other provision of this section, section 367(a)(1)
shall apply to a transfer of stock or securities of a domestic
corporation if:
(i) The domestic corporation holds property that would be subject to
section 367(a)(1) if it were transferred directly to a foreign
corporation;
(ii) A U.S. person transferred that property to the domestic
corporation in a transaction on which gain or loss was not required to
be recognized, and
(iii) One of the principal purposes of the incorporation and transfer
was avoidance of the provisions of section 367(a).
A transfer of property shall be presumed to have been made to avoid
the provisions of section 367(a) if the transfer to the domestic
corporation occurred less than two years before the transfer of the
stock of the domestic corporation to the foreign corporation, or if it
otherwise appears that the transfer of stock to the foreign corporation
was planned or contemplated at the time of the transfer of the property
to the domestic corporation. The presumption created by the previous
sentence may be rebutted by evidence establishing that avoidance of the
provisions of section 367(a) was not one of the principal purposes of
the incorporation and subsequent transfer.
(T.D. 8087, 51 FR 17943, May 16, 1986)
26 CFR 1.367 (a)-4T Special rules applicable to specified transfers of
property (temporary).
(a) In general. This section provides special rules for determining
the applicability of section 367(a)(1) to specified transfers of
property. Paragraph (b) of this section provides a special rule
requiring the recapture of depreciation upon the transfer abroad of
property previously used in the United States. Paragraphs (c) through
(f) of this section provide rules for determining whether certain types
of property are transferred for use in the active conduct of a trade or
business outside of the United States. Paragraph (g) excepts certain
transfers to FSCs from the operation of section 367(a)(1). The
treatment of any transfer of property described in this section shall be
determined exclusively under the rules of this section.
(b) Depreciated property used in the U.S. -- (1) In general. If a
U.S. person transfers U.S. depreciated property (as defined in paragraph
(b)(2) of this section) to a foreign corporation in an exchange
described in section 367(a)(1), then that person shall include in its
gross income for the taxable year in which the transfer occurs ordinary
income equal to the gain realized that would have been includible in the
transferor's gross income as ordinary income under section 617(d)(1),
1245(a), 1250(a), 1252(a), or 1254(a), whichever is applicable, if at
the time of the transfer the transferor had sold the property at its
fair market value. Recapture of depreciation under this paragraph (b)
shall be required regardless of whether any exception to section
367(a)(1) (such as the exception for property transferred for use in the
active conduct of a foreign trade or business) would otherwise apply to
the transfer. However, any applicable exception shall apply with
respect to realized gain that is not included in ordinary income
pursuant to this paragraph (b).
(2) U.S. depreciated property. U.S. depreciated property subject to
the rules of this paragraph (b) is any property that --
(i) Is either mining property (as defined in section 617(f)(2)),
section 1245 property (as defined in section 1245(a)(3)), section 1250
property (as defined in section 1250(c)), farm land (as defined in
section 1252(a)(2)), or oil, gas, or geothermal property (as defined in
section 1254(a)(3)); and
(ii) Has been used in the United States or has qualified as section
38 property by virtue of section 48(a)(2)(B) prior to its transfer.
(3) Property used within and without the U.S. If U.S. depreciated
property has been used partly within and partly without the United
States, then the amount required to be included in ordinary income
pursuant to this paragraph (b) shall be reduced to an amount determined
in accordance with the following formula:
For purposes of the above fraction, the ''full recapture amount'' is
the amount that would otherwise be included in the transferor's income
under paragraph (b)(1) of this section. ''U.S. use'' is the number of
months that the property either was used within the United States or
qualified as section 38 property by virtue of section 48(a)(2)(B), and
was subject to depreciation by the transferor or a related person.
''Total use'' is the total number of months that the property was used
(or available for use), and subject to depreciation, by the transferor
or a related person. For purposes of this paragraph (b)(3), property
shall not be considered to have been in use outside of the United States
during any period in which such property was, for purposes of section 48
or 168, treated as property not used predominantly outside the United
States pursuant to the provisions of section 48(a)(2)(B). For purposes
of this paragraph (b)(3) the term ''related person'' shall have the
meaning set forth in 1.367(d)-1T(h).
(4) Transfer followed by section 338 election. For purposes of
paragraph (b)(1) of this section, property that is transferred by a U.S.
corporation to a foreign corporation in a transfer described in the
section 367(a)(1) shall be treated as U.S. depreciated property at the
time of the transfer if --
(i) The transferee foreign corporation was a member of the U.S.
transferor's affiliated group (determined without regard to the
exceptions contained in section 1504(b)) at the time of the transfer;
and
(ii) Within three years after the transfer, a purchasing corporation
files an express election under section 338(g) for any member of the
U.S. corporation's affiliated group (determined without regard to the
exceptions contained in section 1504(b)) and files a regular exclusion
election under 1.338-5T(c)(2)(v) by virtue of which the transferee
foreign corporation is excluded from the status of target affiliate.
(5) Effective date. This paragraph (b) applies to transfers
occurring on or after June 16, 1986.
(c) Property to be leased -- (1) Leasing business of transferee.
Tangible property transferred to a foreign corporation that will be
leased to other persons by the foreign corporation shall be considered
to be transferred for use in the active conduct of a trade or business
outside of the United States only if --
(i) The transferee's leasing of the property constitutes the active
conduct of a leasing business;
(ii) The lessee of the property is not expected to, and does not, use
the property in the United States; and
(iii) The transferee has need for substantial investment in assets of
the type transferred.
The active conduct of a leasing business requires that the employees
of the foreign corporation perform substantial marketing, customer
service, repair and maintenance, and other substantial operational
activities with respect to the transferred property outside of the
United States. Tangible property subject to the rules of this paragraph
(c) includes real property located outside of the United States. The
rules of 1.367(a)-5T(b) shall apply to transfers of property described
in that section regardless of satisfaction of the rules of this
paragraph (c).
(2) De minimis leasing by transferee. Tangible property transferred
to a foreign corporation that will be leased to other persons by the
foreign corporation and that does not satisfy the conditions of
paragraph (b)(1) of this section shall, nevertheless, be considered to
be transferred for use in the active conduct of a trade or business if
either --
(i) The property transferred will be used by the transferee foreign
corporation in the active conduct of a trade or business but will be
leased during occasional brief periods when the property would otherwise
be idle, such as an airplane leased during periods of excess capacity;
or
(ii) The property transferred is real property located outside the
United States and --
(A) The property will be used primarily in the active conduct of a
trade or business of the transferee foreign corporation; and
(B) Not more than ten percent of the square footage of the property
will be leased to others.
(d) Property to be sold. Property shall not be considered to be
transferred for use in the active conduct of a trade or business and a
transfer of stock or securities shall not be excepted from section
367(a)(1) under the rules of 1.367(a)-3T if, at the time of the
transfer, it is reasonable to believe that, in the reasonably
foreseeable future, the transferee will sell or otherwise dispose of any
material portion of the transferred stock, securities, or other property
other than in the ordinary course of business.
(e) Oil and gas working interests -- (1) In general. A working
interest in oil and gas properties shall be considered to be transferred
for use in the active conduct of a trade or business if --
(i) The transfer satisfies the conditions of paragraph (e)(2) of this
section;
(ii) At the time of the transfer, the transferee has no intention to
farmout or otherwise transfer any part of the transferred working
interest; and
(iii) During the first three years after the transfer there are no
farmouts or other transfers of any part of the transferred working
interest as a result of which the transferee retains less than a 50
percent share of the transferred working interest.
(2) Active use of working interest. Working interests in oil and gas
properties shall be considered to be transferred for use in the active
conduct of a trade or business if --
(i) The transferor is regularly and substantially engaged in
exploration for and extraction of minerals, either directly or through
working interests in joint ventures, other than by reason of the
property that is transferred;
(ii) The terms of the working interest transferred were actively
negotiated among the joint venturers;
(iii) The working interest transferred constitutes at least a five
percent working interest;
(iv) Prior to and at the time of the transfer, through its own
employees or officers, the transferor was regularly and actively engaged
in --
(A) Operating the working interest, or
(B) Analyzing technical data relating to the activities of the
venture;
(v) Prior to and at the time of the transfer, through its own
employees or officers, the transferor was regularly and actively
involved in decisionmaking with respect to the operations of the
venture, including decisions relating to exploration, development,
production, and marketing; and
(vi) After the transfer, the transferee foreign corporation will for
the foreseeable future satisfy the requirements of subdivisions (iv) and
(v) of this paragraph (d)(2).
(3) Start-up operations. Working interests in oil and gas properties
that do not satisfy the requirements of paragraph (e)(2) of this section
shall, nevertheless, be considered to be transferred for use in the
active conduct of a trade or business if --
(i) The working interest was acquired by the transferor immediately
prior to the transfer and for the specific purpose of transferring it to
the transferee foreign corporation;
(ii) The requirements of paragraph (e)(2) (ii) and (iii) of this
section are satisfied; and
(iii) The transferee foreign corporation will for the foreseeable
future satisfy the requirements of paragraph (e)(2) (iv) and (v) of this
section.
(4) Other applicable rules. Oil and gas interests not described in
this paragraph (e) may nonetheless qualify for the exception to section
367(a)(1) contained in 1.367(a)-2T, relating to transfers of property
for use in the active conduct of a trade or business outside of the
United States. However, a mere royalty interest in oil and gas
properties will not be treated as transferred for use in the active
conduct of a trade or business outside the United States. Moreover, a
royalty or similar interest that constitutes intangible property will be
subject to the rules of 1.367(d)-1T, relating to transfers of
intangible property.
(f) Compulsory transfers. Property shall be presumed to be
transferred for use in the active conduct of a trade or business outside
of the United States, if --
(1) The property was previously in use in the country in which the
transferee foreign corporation is organized; and
(2) The transfer is either:
(i) Legally required by the foreign government as a necessary
condition of doing business in that country; or
(ii) Compelled by a genuine threat of immediate expropriation by the
foreign government.
(g) Relationship to other sections. The rules of 1.367(a)-5T,
1.367(a)-6T, and 1.367(d)-1T apply to transfers of property whether or
not the property is transferred for use in the active conduct of a trade
or business outside the United States. See 1.367(d)-1T(g)(2)(ii) for a
special election with respect to compulsory transfers of intangible
property.
(h) Transfers of certain property to FSCs -- (1) In general. The
provisions of section 367 (a) and (d) and the regulations thereunder
shall not apply to a transfer of property by a U.S. person to a foreign
corporation that constitutes a FSC, as defined in section 922(a), if --
(i) The transferee FSC uses the property to generate exempt foreign
trade income, as defined in section 923(a);
(ii) The property is not excluded property, as defined in section
927(a)(2); and
(iii) The property consists of a corporate name or tangible property
that is appropriate for use in the operation of a FSC office.
(2) Exception. The general rule in paragraph (g)(1) of this section
shall not apply if, within three years after the original transfer, the
original transferee FSC (or a subsequent transferee FSC) disposes of the
property other than in the ordinary course of business or through a
transfer to another FSC. Thus, the U.S. transferor may recognize gain
in the taxable year in which the original transfer occurred through the
application of section 367 and the regulations thereunder.
(T.D. 8087, 51 FR 17947, May 16, 1986)
26 CFR 1.367(a)-5T Property subject to section 367(a)(1) regardless of
use in trade or business (temporary).
(a) In general. Section 367(a)(1) shall apply to a transfer of
property described in this section regardless of whether the property is
transferred for use in the active conduct of a trade or business.
Certain exceptions to the operation of this rule are provided in this
section, and a special gain limitation rule is provided in paragraph
(e). A transfer of property described in this section is subject to
section 367(a)(1) even if the transfer is a compulsory transfer
described in 1.367(a)-4T(f).
(b) Inventory, etc. Regardless of use in an active trade or
business, section 367(a)(1) shall apply to the transfer of --
(1) Stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand
at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of its trade or
business; and
(2) A copyright, a literary, musical, or artistic composition, a
letter or memorandum, or similar property, held by --
(i) A taxpayer whose personal efforts created such property;
(ii) In the case of a letter, memorandum, or similar property, a
taxpayer from whom such property was prepared or produced; or
(iii) A taxpayer in whose hands the basis of such property is
determined, for purposes of determining gain from a sale or exchange, in
whole or part by reference to the basis of such property in the hands of
a taxpayer described in subdivision (i) or (ii) of this paragraph
(b)(2).
For purposes of this section, the term ''inventory'' includes raw
materials and supplies, partially completed goods, and finished
products.
(c) Installment obligations, etc. Regardless of use in an active
trade or business, section 367(a)(1) shall apply to the transfer of
installment obligations, accounts receivable, or similar property, but
only to the extent that the principal amount of any such obligation has
not previously been included by the taxpayer in its taxable income.
(d) Foreign currency, etc. -- (1) In general. Regardless of use in
an active trade or business, section 367(a)(1) shall apply to the
transfer of foreign currency or other property denominated in foreign
currency, including installment obligations, futures contracts, forward
contracts, accounts receivable, or any other obligation entitling its
payee to receive payment in a currency other than U.S. dollars.
(2) Exception for certain obligations. If transferred property
denominated in a foreign currency --
(i) Is denominated in the currency of the country in which the
transferee foreign corporation is organized; and
(ii) Was acquired in the ordinary course of the business of the
transferor that will be carried on by the transferee foreign
corporation,
then section 367(a)(1) shall apply to the transfer only to the extent
that gain is required to be recognized with respect to previously
realized income reflected in installment obligations subject to
paragraph (c) of this section. The rule of this paragraph (d)(2) shall
not apply to transfers of foreign currency.
(3) Limitation of gain required to be recognized. If section
367(a)(1) applies to a transfer of property described in this paragraph,
then the gain required to be recognized shall be limited to --
(i) The gain realized upon the transfer of property described in this
paragraph (d), minus
(ii) Any loss realized as part of the same transaction upon the
transfer of property described in this paragraph (d).
This limitation applies in lieu of the rule in 1.367(a)-1T(b)(1).
No loss shall be recognized with respect to property described in this
paragraph (d).
(e) Intangible property. Regardless of use in an active trade or
business, a transfer of intangible property pursuant to section 332
shall be subject to section 367(a)(1), unless it constitutes foreign
goodwill or going concern value, as defined in 1.367(a)-1T(d)(5)(iii).
For rules concerning transfers of intangible property pursuant to
section 351 or 361, see section 367(d) and 1.367(d)-1T.
(f) Leased tangible property. Regardless of use in an active trade
or business, section 367(a)(1) shall apply to a transfer of tangible
property with respect to which the transferor is a lessor at the time of
the transfer, unless --
(1) With respect to property that will not be leased by the
transferee to third persons, the transferee was the lessee of the
property at the time of the transfer; or
(2) With respect to property that will be leased by the transferee to
third persons, the transferee satisfies the conditions set forth in
1.367(a)-4T(c) (1) or (2).
(T.D. 8087, 51 FR 17949, May 16, 1986)
26 CFR 1.367(a)-6T Transfer of foreign branch with previously deducted
losses (temporary).
(a) In general. This section provides special rules relating to the
transfer of the assets of a foreign branch with previously deducted
losses. Paragraph (b) of this section provides generally that such
losses must be recaptured by the recognition of the gain realized on the
transfer. Paragraph (c) of this section sets forth rules concerning the
character of, and limitations on, the gain required to be recognized.
Paragraph (d) of this section defines the term ''previously deducted
losses.'' Paragraph (e) of this section describes certain reductions
that are made to the previously deducted losses before they are taken
into income under this section. Finally, paragraph (g) of this section
defines the term ''foreign branch.''
(b) Recognition of gain required -- (1) In general. If a U.S.
person transfers any assets of a foreign branch to a foreign corporation
in an exchange described in section 367(a)(1), then the transferor shall
recognize gain equal to --
(i) The sum of the previously deducted branch ordinary losses as
defined and reduced in paragraphs (d) and (e) of this section; and
(ii) The sum of the previously deducted branch capital losses as
defined and reduced in paragraphs (d) and (e) of this section.
(2) No active conduct exception. The rules of this paragraph (b)
shall apply regardless of whether the assets of the foreign branch are
transferred for use in the active conduct of a trade or business outside
the United States.
(c) Special rules concerning gain recognized -- (1) Character and
source of gain. The gain described in paragraph (b)(1)(i) of this
section shall be treated as ordinary income of the transferor, and the
gain described in paragraph (b)(1)(ii) of this section shall be treated
as long-term capital gain of the transferor. Gain that is recognized
pursuant to the rules of this section shall be treated as income from
sources outside the United States. Such recognized gain shall be
treated as foreign oil and gas extraction income (as defined in section
907) in the same proportion that previously deducted foreign oil and gas
extraction losses bore to the total amount of previously deducted
losses.
(2) Gain limitation. For a rule limiting the amount of gain required
to be recognized under section 367(a) upon any transfer of property to a
foreign corporation, including the transfer of assets of a foreign
branch with previously deducted losses, see 1.367(a)-1T(b)(3).
(3) Foreign goodwill and going concern value. For purposes of this
section, the assets of a foreign branch shall include foreign goodwill
and going concern value related to the business of the foreign branch,
as defined in 1.367(a)-1T(d)(5)(iii). Thus, gain realized upon the
transfer of the foreign goodwill or going concern value of a foreign
branch to a foreign corporation will be taken into account in computing
the limitation on loss recapture under paragraph (c)(2) of this section.
(4) Transfers of certain intangible property. Gain realized on the
transfer of intangible property (computed with reference to the fair
market value of the intangible property as of the date of the transfer)
that is an asset of a foreign branch shall be taken into account in
computing the limitation on loss recapture under paragraph (c)(2) of
this section. For rules relating to the crediting of gain recognized
under this section against income deemed to arise by operation of
section 367(d), see 1.367(d)-1T(g)(3).
(d) Previously deducted losses -- (1) In general. This paragraph (d)
provides rules for determining, for purposes of paragraph (b)(1) of this
section, the previously deducted losses of a foreign branch any of whose
assets are transferred to a foreign corporation in an exchange described
in section 367(a)(1). Initially, the two previously deducted losses of
a foreign branch for a taxable year are the total ordinary loss
(''previously deducted branch ordinary loss'') and the total capital
loss (''previously deducted branch capital loss'') that were realized by
the foreign branch in that taxable year (a ''branch loss year'') prior
to the transfer and that were or will be reflected on a U.S. income tax
return of the transferor. The previously deducted branch ordinary loss
for each branch loss year is reduced by expired net ordinary losses
under paragraph (d)(2) of this section, while the previously deducted
capital loss for each loss year is reduced by expired net capital losses
under paragraph (d)(3) of this section. For each branch loss year, the
remaining previously deducted branch ordinary loss and the remaining
previously deducted branch capital loss are then reduced, proceeding
from the first branch loss year to the last branch loss year, to reflect
expired foreign tax credits under paragraph (d)(4) of this section. The
reductions are made in the order of the taxable years in which the
foreign tax credits arose. Finally, similar reductions are made to
reflect expired investment credits under paragraph (d)(5) of this
section.
(2) Reduction by expired net ordinary loss -- (i) In general. The
previously deducted branch ordinary loss for each branch loss year shall
be reduced under this paragraph (d)(2) by the amount of any expired net
ordinary loss with respect to that branch loss year. Expired net
ordinary losses arising in years other than the branch loss year shall
reduce the previously deducted branch ordinary loss for the branch loss
year only to the extent that the previously deducted branch ordinary
loss exceeds the net operating loss, if any, incurred by the transferor
in the branch loss year. The previously deducted branch ordinary losses
shall be reduced proceeding from the first branch loss year to the last
branch loss year. For each branch loss year, expired net operating
losses shall be applied to reduce the previously deducted branch
ordinary loss for that year in the order in which the expired net
ordinary losses arose.
(ii) Existence of expired net ordinary loss. An expired net ordinary
loss exists with respect to a branch loss year to the extent that --
(A) The transferor incurred a net operating loss (within the meaning
of section 172(c));
(B) That net operating loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 172(b)(1);
(C) That net operating loss has neither given rise to a net operating
loss deduction (within the meaning of section 172(a)) for any taxable
year prior to the year of the transfer, nor given rise to a reduction of
any previously deducted branch ordinary loss (pursuant to paragraph
(d)(2) of this section) of any foreign branch of the transferor upon a
previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a net operating
loss deduction with respect to that net operating loss has expired.
(3) Reduction by expired net capital loss -- (i) In general. The
previously deducted branch capital loss for each branch loss year shall
be reduced under this paragraph (d)(3) by the amount of any expired net
capital loss with respect to that branch loss year. Expired net capital
losses arising in years other than the branch loss year shall reduce the
previously deducted branch capital loss for the branch loss year only to
the extent that the previously deducted branch capital loss exceeds the
net capital loss, if any, incurred by the transferor in the branch loss
year. The previously deducted branch capital losses shall be reduced
proceeding from the first branch loss year to the last branch loss year.
For each branch loss year, expired net capital losses shall be applied
to reduce the previously deducted branch capital loss for that year in
the order in which the expired net capital losses arose.
(ii) Existence of expired net capital loss. An expired net capital
loss exists with respect to a branch loss year to the extent that --
(A) The transferor incurred a net capital loss (within the meaning of
section 1222(10));
(B) That net capital loss arose in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 1212;
(C) That net capital loss has neither been allowed for any taxable
year prior to the year of the transfer, nor given rise to a reduction of
any previously deducted branch capital loss (pursuant to paragraph
(c)(3) of this section) of any foreign branch of the transferor upon any
previous transfer to a foreign corporation; and
(D) The period during which the transferor may claim a capital loss
deduction with respect to that net capital loss has expired.
(4) Reduction for expired foreign tax credit -- (i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year remaining after the
reductions described in paragraph (d) (2) and (3) of this section shall
be further reduced under this paragraph (d)(4) proportionately by the
amount of any expired foreign tax credit loss equivalent with respect to
that branch loss year. The previously deducted branch losses shall be
reduced proceeding from the first branch loss year to the last branch
loss year. For each branch loss year, expired foreign tax credit loss
equivalents shall be applied to reduce the previously deducted branch
loss for that year in the order in which the expired foreign tax credits
arose.
(ii) Existence of foreign tax credit loss equivalent. A foreign tax
credit loss equivalent exists with respect to a branch loss year if --
(A) The transferor paid, accrued, or is deemed under section 902 or
960 to have paid creditable foreign taxes in a taxable year;
(B) The creditable foreign taxes were paid, accrued, or deemed paid
in the branch loss year or were available for carryover or carryback to
the branch loss year under section 904(c);
(C) No foreign tax credit with respect to the foreign taxes paid,
accrued, or deemed paid has been taken because of the operation of
section 904(a) or similar limitations provided by the Code or an
applicable treaty, and such taxes have not given rise to a reduction
(pursuant to this paragraph (d)(5)) of any previously deducted branch
loss of the foreign branch for a prior taxable year or of any previously
deducted branch losses of any foreign branch of the transferor upon a
prior transfer to a foreign corporation; and
(D) The period during which the transferor may claim a foreign tax
credit for the foreign taxes paid, accrued, or deemed paid has expired.
(iii) Amount of foreign tax credit loss equivalent. The amount of
the foreign tax credit loss equivalent for the branch loss year with
respect to the creditable foreign taxes described in paragraph
(d)(4)(ii) of this section is the amount of those creditable foreign
taxes divided by the highest rate of tax to which the transferor was
subject in the loss year.
(5) Reduction for expired investment credits -- (i) In general. The
previously deducted branch ordinary loss and the previously deducted
branch capital loss for each branch loss year shall be further reduced
under this paragraph (d)(5) proportionately by the amount of any expired
investment credit loss equivalent with respect to that branch year. The
previously deducted branch losses shall be reduced proceeding from the
first branch loss year to the last branch loss year. For each branch
loss year, expired investment credit loss equivalents shall be applied
to reduce the previously deducted branch loss for that year in the order
in which the expired investment credits were earned.
(ii) Existence of investment credit loss equivalent. An investment
credit loss equivalent exists with respect to a branch loss year if --
(A) The transferor earned an investment credit (within the meaning of
section 46(a)) in a taxable year;
(B) The investment credit was earned in the branch loss year or was
available for carryover or carryback to the branch loss year under
section 39;
(C) The investment credit earned by the transferor in the credit year
has been denied by section 38(a) or by similar provisions of the Code
and has not given rise to a reduction (pursuant to this paragraph
(d)(5)) of any previously deducted branch loss of the foreign branch for
a preceding taxable year or of the previously deducted losses of any
foreign branch of the transferor upon any previous transfer to a foreign
corporation; and
(D) The period during which the transferor may claim the investment
credit has expired.
(iii) Amount of investment tax credit loss equivalent. The amount of
the investment credit loss equivalent for the branch loss year with
respect to the investment credit described in paragraph (d)(5)(ii) of
this section is 85 percent of the amount of that investment credit
divided by the highest rate of tax to which the transferor was subject
in the loss year.
(e) Amounts that reduce previously deducted losses subject to
recapture -- (1) In general. This paragraph (e) describes five amounts
that reduce the sum of the previously deducted branch ordinary losses
and the sum of the previously deducted branch capital losses before they
are taken into income under paragraph (b) of this section. Amounts
representing ordinary income shall be applied to reduce first the sum of
the previously deducted branch ordinary losses to the extent thereof,
and then the sum of the previously deducted branch capital losses to the
extent thereof. Similarly, amounts representing capital gains shall be
applied to reduce first the sum of the previously deducted branch
capital losses and then the sum of the previously deducted branch
ordinary losses.
(2) Taxable income. The previously deducted losses shall be reduced
by any taxable income of the foreign branch recognized through the close
of the taxable year of the transfer, whether before or after any taxable
year in which losses were incurred.
(3) Amounts currently recaptured under section 904(f)(3). The
previously deducted losses shall be reduced by the amount recognized
under section 904(f)(3) on account of the transfer.
(4) Gain recognized under section 367(a). The previously deducted
branch losses shall be reduced by any gain recognized pursuant to
section 367(a)(1) (other than by reason of the provisions of this
section) upon the transfer of the assets of the foreign branch to the
foreign corporation.
(5) Amounts previously recaptured under section 904(f)(3) -- (i) In
general. The previously deducted branch losses shall be reduced by the
portion of any amount recognized under section 904(f)(3) upon a previous
transfer of property that was attributable to the losses of the foreign
branch, provided that the amount did not reduce any gain otherwise
required to be recognized under section 367(a)(3)(C) and this section
(or Revenue Ruling 78-201, 1978-1 C.B. 91).
(ii) Portion attributable to the losses of the foreign branch -- (A)
Branch property. The full amount recognized under section 904(f)(3)
upon a previous transfer of property of the branch shall be treated as
attributable to the losses of the foreign branch.
(B) Non-branch property. The portion of the amount previously
recognized under section 904(f)(3) upon a transfer of non-branch
property that was attributable to the losses of the foreign branch shall
be the sum, over the taxable years in which the transferor sustained an
overall foreign loss some portion of which was recaptured on the
disposition, of the recaptured portions of those overall foreign losses
after multiplication by the following fraction:
For purposes of this fraction, the term ''losses of the foreign
branch for the year'' means the losses of the foreign branch that were
taken into account under section 904(f)(2) in determining the amount of
the transferor's overall foreign loss for the year, and the term ''all
foreign losses for the year'' means all of the losses of the transferor
that were taken into account under section 904(f)(2).
(6) Amounts previously recognized under the rules of this section.
The previously deducted losses shall be reduced by the amounts
previously recognized under the rules of this section upon a previous
transfer of assets of the foreign branch.
(f) Example. The rules of paragraphs (b) through (e) of this section
are illustrated by the following example.
Example. (i) Facts. X, a U.S. corporation, is a calendar year
taxpayer. On January 1, 1981, X established a branch in foreign country
A to manufacture and sell X's products in country A. On July 1, 1986, X
organized corporation Y, a country A subsidiary, and transferred to Y
all of the assets of its country A branch, including goodwill and going
concern value. During the period from January 1, 1981, through July 1,
1986, X's country A branch earned income and incurred losses in the
following amounts:
At the time of the transfer of X's country A branch assets to Y,
those assets had a fair market value of $2,500 and an adjusted basis of
$1,000. For each of the assets, fair market value exceeded adjusted
basis. X had no net capital loss or unused investment credit during any
taxable year relevant to the transfer. In 1984, X incurred a net
operating loss of $400, $200 of which was carried back to prior years.
An additional $50 of the 1984 net operating loss was carried over to
1985. The remaining $150 of the 1984 net operating loss was not used in
any year prior to the transfer. In 1979, X paid creditable foreign
taxes of $330 that could not be claimed as a credit in that year or any
earlier year because of section 904. Of those foreign taxes, $100 were
carried over and claimed as a credit in 1983, but the remaining $230
were not used in any year prior to the transfer. X was not required to
recognize any gain under section 904(f)(3) on account of the 1986
transfer or any prior transfer. X was not required to recognize gain
upon the transfer under section 367(a) (other than by reason of the
provisions of this section).
(ii) Previously deducted losses. The previously deducted losses of
X's country A branch are $575 of ordinary losses and $25 of capital
losses, computed as follows: Initially, the branch has previously
deducted ordinary losses of $1,000 ($200+$300+$400+$100), and previously
deducted capital losses of $100. (See paragraph (d)(1) of this
section.)
(iii) Expired losses and credits. Under the facts of this example,
there are no reductions for expired net ordinary losses or expired net
capital losses under paragraph (d) (2) or (3) of this section. However,
the previously deducted losses are reduced proceeding from the first
branch loss year to the last branch loss year to reflect the expired
foreign tax credit from 1979. The amount of the foreign tax credit loss
equivalent with respect to 1981 is $500 ($230/.46). It reduces the
previously deducted losses for 1981 proportionately. Thus, the
previously deducted ordinary loss for 1981 is reduced from $200 to $0.
(See paragraph (d)(4) of this section.) The amount of the foreign tax
credit loss equivalent with respect to 1982 is $300 ($500^$200, i.e.,
$138/.46). (See paragraph (d)(4)(ii)(C) of this section.) It reduces the
previously deducted losses for 1982 proportionately. Thus, the
previously deducted ordinary loss for 1982 is reduced from $300 to $75,
and the previously deducted capital loss for 1982 is reduced from $100
to $25.
(iv) Further reductions. The previously deducted ordinary losses of
$575 and the previously deducted capital losses of $25 are reduced by
the taxable income earned by the branch prior to the date of the
transfer ($250). (See paragraph (e)(2) of this section.) Since that
income was ordinary income, it is applied first to reduce the previously
deducted ordinary losses of $575 to $325. (See paragraph (e)(1) of this
section.)
(v) Recapture. Since the gain realized by X upon its transfer of the
branch assets to Y exceeds the sum of the previously deducted branch
losses as defined and reduced above $325+$25), the limitation in
paragraph (c)(2) of this section does not apply. Thus, X is required to
recognize $325 of ordinary income and $25 of long-term capital gain upon
the transfer. (See paragraph (b) and (c)(1) of this section.)
(g) Definition of foreign branch -- (1) In general. For purposes of
this section, the term ''foreign branch'' means an integral business
operation carried on by a U.S. person outside the United States.
Whether the activities of a U.S. person outside the United States
constitute a foreign branch operation must be determined under all the
facts and circumstances. Evidence of the existence of a foreign branch
includes, but is not limited to, the existence of a separate set of
books and records, and the existence of an office or other fixed place
of business used by employees or officers of the U.S. person in carrying
out business activities outside the United States. Activities outside
the United States shall be deemed to constitute a foreign branch for
purposes of this section if the activities constitute a permanent
establishment under the terms of a treaty between the United States and
the country in which the activities are carried out. Any U.S. person
may be treated as having a foreign branch for purposes of this section,
whether that person is a corporation, partnership, trust, estate, or
individual.
(2) More than one branch. If a U.S. person carries on more than one
branch operation outside the United States, then the rules of this
section must be separately applied with respect to each foreign branch
that is transferred to a foreign corporation. Thus, the previously
deducted losses of one branch may not be offset, for purposes of
determining the gain required to be recognized under the rules of this
section, by the income of another branch that is also transferred to a
foreign corporation. Similarly, the losses of one branch shall not be
recaptured upon a transfer of the assets of a separate branch. Whether
the foreign activities of a U.S. person are carried out through more
than one branch must be determined under all of the facts and
circumstances. In general, a separate branch exists if a particular
group of activities is sufficiently integrated to constitute a single
business that could be operated as an independent enterprise. For
purposes of determining the combination of activities that constitute a
branch operation as defined in this paragraph (g), the nominal
relationship among those activities shall not be controlling. Factors
suggesting that nominally separate business operations constitute a
single foreign branch include a substantial identity of products,
customers, operational facilities, operational processes, accounting and
record-keeping functions, management, employees, distribution channels,
or sales and purchasing forces. For examples of the application of the
principles of this paragraph (g)(2), see Revenue Ruling 81-82, 1981-1
C.B. 127.
(3) Consolidated group. For purposes of this section, the activities
of each of two domestic corporations outside the United States will be
considered to constitute a single foreign branch if --
(i) The two corporations are members of the same consolidated group
of corporations; and
(ii) The activities of the two corporations in the aggregate would
constitute a single foreign branch if conducted by a single corporation.
Notwithstanding the preceding rule of this paragraph (g)(3), gains of
a foreign branch of a domestic corporation arising in a year in which
that corporation did not file a consolidated return with a second
domestic corporation shall not be applied to reduce the previously
deducted losses of a foreign branch of the second corporation (but may
be applied to reduce such losses of the foreign branch of the first
corporation) upon the transfer of the two branches to a foreign
corporation, even though the two domestic corporations file a
consolidated return for the year in which the transfer occurs and the
two branches are considered at that time to constitute a single foreign
branch. For an example of the application of the principles of this
paragraph (g)(3), see Revenue Ruling 81-89, 1981-1 C.B. 129.
(4) Property not transferred. A U.S. transferor's failure to
transfer any property of a foreign branch shall be irrelevant to the
determination of the previously deducted losses of the branch subject to
recapture under the rules of this section. Thus, if the activities with
respect to untransferred property constituted a part of the branch
operation under the rules of this paragraph (g), then the losses
generated by those activities shall be subject to recapture,
notwithstanding the failure to transfer the property. For an example of
the application of the principles of this paragraph (g)(4), see Revenue
Ruling 80-247, 1980-2 C.B. 127, relating to property abandoned by the
U.S. transferor.
(h) Anti-abuse rule. If --
(1) A U.S. person transfers property of a foreign branch to a
domestic corporation for a principal purpose of avoiding the effect of
this section; and
(2) The domestic corporation thereafter transfers the property of the
foreign branch to a foreign corporation,
Then, solely for purposes of this section, that U.S. person shall be
treated as having transferred the property of the branch directly to the
foreign corporation. A U.S. person shall be presumed to have
transferred property of a foreign branch for a principal purpose of
avoiding the effect of this section if the property is transferred to
the domestic corporation less than two years prior to the domestic
corporation's transfer of the property to a foreign corporation. This
presumption may be rebutted by clear evidence that the subsequent
transfer of the property was not contemplated at the time of the initial
transfer to the domestic corporation and that avoidance of the effect of
this section was not a principal purpose for the transaction. A
transfer may have more than one principal purpose.
(i) Basis adjustments. Basis adjustments reflecting gain recognized
pursuant to this section shall be made as described in
1.367(a)-1T(b)(4)(ii).
(T.D. 8087, 51 FR 17950, May 16, 1986)
26 CFR 1.367(a)-7T Temporary regulations providing a transitional rule
for certain transfers of intangibles.
(a) General rule. If, after June 6, 1984, and before January 1,
1985, a United States person transfers any intangible property to a
foreign corporation, then, except as provided to the contrary in this
section, the transfer shall be treated for purposes of section 367(a) of
the Code as pursuant to a plan having as one of its principal purposes
the avoidance of Federal income tax. For purposes of this section, the
term intangible property means any --
(1) Patent, invention, formula, process, design, pattern or know-how;
(2) Copyright, literary, musical, or artistic composition;
(3) Trademark, trade name, or brand name;
(4) Franchise, license, or contract;
(5) Method, program, system, procedure, campaign, survey, study,
forecast, estimate, customer list, or technical data; or
(6) Any similar item which property has substantial value independent
of the services of any individual.
(b) Period covered. The rules of this section apply to transfers of
intangible property made after June 6, 1984, and before January 1, 1985.
However, these rules will not apply to any transfer or exchange of
property described in a request for ruling filed under section 367(a)
before March 1, 1984 or with respect to which a ruling was obtained
before June 6, 1984. In the case of a transfer described in a request
for ruling filed before March 1, 1984, the guidelines of Revenue
Procedure 68-23 (68-1 CB 821) will be applicable (even if the transfer
is made after December 31, 1984).
(c) Waiver -- (1) Waiver granted. Application of the general rule of
paragraph (a) of this section will be waived for any of the following
transfers of intangible property:
(i) A transfer of intangible property for which the transferor agrees
to apply to the transfer the rules applicable to post-December 31, 1984
transfers under section 367(d) as amended by section 131(b) of the Tax
Reform Act of 1984.
(ii) A transfer for which the transferor --
(A) Purchased the intangible property from an unrelated third party,
(B) Has not deducted or claimed as credits against tax any research
and development or other similar expenses incurred in developing the
property, and
(C) Would have received for the transfer a favorable ruling under the
guidelines of Revenue Procedure 68-23 (68-1 CB 821) as applicable prior
to the Tax Reform Act of 1984;
(iii) A transfer in fact required by a foreign government as a
necessary condition of doing business in the foreign country or
compelled by a genuine threat of immediate expropriation by a foreign
government; or
(iv) A transfer of good will, going concern value or similar
intangible property developed by a foreign branch.
(2) Waiver not granted. Application of the general rule of paragraph
(a) of this section will not, except as provided in paragraph (c)(1)(i)
of this section, be waived for any of the following transfers:
(i) A transfer of intangible property that is not fully developed;
(ii) A transfer of intangible property that is not essential to the
active conduct of a trade or business of the transferee; or
(iii) A transfer that would not have received a favorable ruling
under the guidelines of Revenue Procedure 68-23. (See section 3.02(1)
(a)(iv) and (b)(i) through (iv) of that revenue procedure.)
For purposes of paragraph (c)(2)(i), intangible property will be
treated as fully developed if it has been used in a trade or business or
if no further significant research and development expenses are required
or expected to be incurred prior to such use. For purposes of paragraph
(c) of this section, intangible property is not essential to the active
conduct of a trade or business unless the products or services to which
the intangible relates may not be sold in a foreign country without
access by ownership, license, or otherwise to the intangible property,
or unless such access to the intangible property is necessary to
realization of a level of earnings reasonable for that trade or business
from sales of such products or services in that country.
(3) Facts and circumstances. In the case of a transfer not described
in paragraph (c)(1) or (c)(2), a waiver may be granted subject to a
facts and circumstances determination of whether the transfer would be
pursuant to a plan having as one of its principal purposes the avoidance
of Federal income tax. Waiver with respect to a transfer not described
in paragraph (c)(1) will be granted only upon a determination that the
transfer made before January 1, 1985, was not made for the purpose of
avoiding the application of section 367(d). Favorable facts and
circumstances to be considered in this regard in determining if a waiver
of the general rule of paragraph (a) of this section will be given
include (but are not limited to):
(i) The existence of a binding commitment (either with an unrelated
party or with a foreign government or governmental agency) made before
June 6, 1984, to transfer the intangible property;
(ii) The existence of a documented plan prior to March 1, 1984, to
transfer the properties before January 1, 1985; and
(iii) Anticipated use of the intangible by the transferee immediately
or soon after the transfer.
For purposes of paragraph (c)(3) (i) and (ii) of this section, the
earlier the commitment or plan was made, the greater is the probability
that a waiver will be given. In general, demonstration of the facts
described in paragraph (c)(3)(iii) will not be sufficient for a waiver
in the absence of other facts indicating that a waiver should be
granted. Waiver will be granted under this paragraph (c)(3) only if the
intangible property is fully developed, if the intangible property is
essential to the active conduct of a trade or business of the
transferee, and if a favorable ruling would have been issued under the
guidelines of Revenue Procedure 68-23.
(4) Effect of Waiver. If the general rule of paragraph (a) of this
section is waived, then a favorable ruling for the transfer of the
intangible will be granted pursuant to Revenue Procedure 68-23.
(Sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26
U.S.C. 7805) and sec. 131(g) of the Tax Reform Act of 1984 (98 Stat.
494))
(T.D. 7974, 49 FR 34465, Aug. 31, 1984. Redesignated by T.D. 8087, 51
FR 17938, May 16, 1986)
26 CFR 1.367(b)-2 Definitions.
(a) through (c) (Reserved).
(d) Section 1248 amount. In the case of an exchange of stock in a
first-tier foreign corporation described in 7.367 (b)-7 (c)(1)(i) of
this chapter or a distribution by a foreign corporation described in
7.367 (b)-10 (i) of this chapter in which an inclusion in gross income
determined by reference to the ''section 1248 amount'' is required by
those provisions, the term ''section 1248 amount'' means the net
positive earnings and profits which would have been attributable under
section 1248 and the regulations under that section to the stock of the
foreign corporation exchanged if the stock has been sold in a
transaction to which section 1248(a) applied. For all other purposes of
this section, in the case of an exchange of stock in a first-tier
foreign corporation to which section 367(b) applies, the term ''section
1248 amount'' means the earnings and profits or deficit in earnings and
profits which would have been attributable under section 1248 and the
regulations under that section to the stock of the foreign corporation
exchanged if the stock had been sold in a transaction to which section
1248(a) applied.
(e) (Reserved)
(f) All earnings and profits amounts. For purposes of asset
repatriations covered by 7.367 (b)-5 (b), 7.367 (b)-6 (c), 7.367 (b)-7
(c)(2) and 7.367 (b)-10 (j) of this chapter, the term ''all earnings and
profits amount'' means the net positive earnings and profits, if any,
for all taxable years which are attributable to the stock of the foreign
corporation exchanged under the principles of section 1246 or 1248
(whichever is applicable) and the regulations under that section. For
all other purposes, the term ''all earnings and profits amount'' means
the earnings and profits or deficit in earnings and profits for all
taxable years which are attributable to the stock of the foreign
corporation exchanged under the principles of section 1246 or 1248
(whichever is applicable) and the regulations under that section. The
determination shall be made by applying section 1246 or 1248 as modified
by 7.367 (b)-2 through 7.367 (b)-12 of this chapter as if there were
no distinction in those sections between earnings and profits
accumulated before or after December 31, 1962.
(T.D. 8397, 57 FR 6555, Feb. 26, 1992)
26 CFR 1.367(b)-7 Exchange of stock described in section 354.
(a) (Reserved).
(b) (Reserved).
(c) Receipt of other stock -- (1) General Rule. (i) (Reserved).
(ii) If an exchanging foreign corporation receives stock of a
domestic corporation, or stock of a foreign corporation which is not a
controlled foreign corporation, or stock of a controlled foreign
corporation as to which any United States shareholder of the exchanging
foreign corporation is not a United States shareholder, then there shall
be added to the earnings and profits or deficit of the exchanging
foreign corporation the section 1248 (c)(2) amount and the additional
earnings and profits amount of the exchanging foreign corporation,
computed as if all stock of the corporation whose stock is exchanged is
owned by a United States shareholder. The amount added shall not be
considered a dividend. Paragraph (c)(1)(iii) of this section, and not
this paragraph (c)(1)(ii), applies if the stock received --
(A) Is of a domestic corporation which is a member of an affiliated
group (as defined in section 1504(a), without application of section
1504(b)(3)) that also includes the exchanging foreign corporation as a
member; and
(B) Is not received in an exchange pursuant to which the foreign
corporation whose stock is exchanged transfers its assets to a domestic
corporation.
(iii) For exchanges beginning after March 3, 1989, if the stock
received is described in the last sentence of paragraph (c)(1)(ii) of
this section, then the foreign corporation whose stock is exchanged will
be considered to be a foreign corporation for purposes of section 354 or
356. This paragraph (c)(1)(iii) may be illustrated by the following
examples:
Example 1. A U.S. parent corporation (USP) owns all of the stock of
a foreign corporation (CFC1), which in turn owns all of the stock of a
second foreign corporation (CFC2), which in turn owns all of the stock
of a third foreign corporation (CFC3). USP also owns all of the stock
of a U.S. subsidiary (Subsidiary). CFC2 and CFC3 have accumulated
earnings and profits or accumulated deficits in earnings and profits.
Subsidiary acquires all of the stock of CFC2 from CFC1 in exchange for
stock of Subsidiary in a reorganization described in section
368(a)(1)(B). CFC1 will not recognize gain on the exchange. Moreover,
CFC2's and CFC3's accumulated earnings and profits or accumulated
deficits in earnings and profits will remain in CFC2 and CFC3,
respectively, and will not be added to the earnings and profits or
deficits in earnings and profits of CFC1.
Example 2. USP owns all of the stock of CFC1, which in turn owns all
of the stock of CFC2. USP also owns all of the stock of a U.S.
subsidiary (Subsidiary), which in turn owns all of the stock of CFC3.
CFC3 acquires the assets of CFC2 in exchange for voting stock of
Subsidiary in a reorganization described in section 368(a)(1)(C).
Pursuant to the reorganization, CFC2 distributes the stock of Subsidiary
to CFC1. CFC1 will not recognize gain on the exchange. In addition,
CFC2's accumulated earnings and profits or accumulated deficits in
earnings and profits will be added to CFC3's earnings and profits under
section 381(c)(2), subject to the limitations contained in section 381
and in the regulations under that section.
(2) (Reserved)
(T.D. 8397, 57 FR 6555, Feb. 26, 1992)
26 CFR 1.367(b)-8 Transfer of assets by a foreign corporation in an
exchange described in section 351.
(a) (Reserved).
(b) (Reserved).
(c) Transfer of stock in a controlled foreign corporation. (1)
(Reserved).
(2) If the transferor corporation transfers stock in a foreign
corporation of which there is a United States shareholder immediately
before the exchange, and the transferor receives stock of a domestic
corporation, of a foreign corporation which is not a controlled foreign
corporation, or of a controlled foreign corporation as to which any
United States shareholder of the transferor is not a United States
shareholder, paragraph (c)(1)(ii) of 1.367(b)-7 shall apply. This
paragraph (c)(2) may be illustrated by the following examples:
Example 1. A U.S. parent corporation (USP) owns all of the stock of
a foreign corporation (CFC1), which in turn owns all of the stock of a
second foreign corporation (CFC2). CFC1 and CFC2 have accumulated
earnings and profits or accumulated deficits in earnings and profits.
CFC1 transfers its CFC2 stock to a newly organized foreign corporation
(Newco) that is not a controlled foreign corporation, in an exchange
described in section 351(a). CFC1 receives 20 percent of the Newco
stock in exchange for its CFC2 stock. Persons unrelated to USP and CFC1
receive the remaining 80 percent of the Newco stock. Pursuant to the
first sentence of 1.367(b)-7 (c)(1)(ii), CFC2's accumulated earnings
and profits or accumulated deficits in earnings and profits will be
added to CFC1's earnings and profits or deficits in earnings and
profits.
Example 2. USP owns all of the stock of CFC1, which in turn owns all
of the stock of CFC2. USP also owns all of the stock of a U.S.
subsidiary (Subsidiary). Subsidiary has both voting and nonvoting stock
outstanding. In a transaction occurring after March 3, 1989, CFC1
transfers its CFC2 stock to Subsidiary in an exchange described in
section 351(a). CFC1 receives 80 percent of each class of Subsidiary's
stock in exchange for its CFC2 stock. Pursuant to the last sentence of
1.367(b)-7 (c)(1)(ii), CFC2's accumulated earnings and profits or
accumulated deficits in earnings and profits will remain in CFC2, and
will not be added to the earnings and profits or deficits in earnings
and profits of CFC1.
(T.D. 8397, 57 FR 6555, Feb. 26, 1992)
26 CFR 1.367(b)-9 Attribution of earnings and profits on an exchange
described in section 351, 354, or 356.
(a) (Reserved)
(b) General Rule. (1) through (3) (Reserved).
(4) For exchanges beginning on or after March 3, 1989, paragraph (b)
(2) and (3) of 7.367(b)-9 of this chapter will not apply if a U.S.
shareholder described in 7.367(b)-7 (b) or 7.367 (b)-8 (c) (1) of this
chapter owns (applying the attribution rules of section 958) more than
50 percent of either the total voting power or the total value of the
stock of both the corporation whose stock is received in the exchange
and the corporation whose stock is exchanged. If this paragraph (b) (4)
applies, the rules of section 381 (a) and the regulations under that
section will determine the extent to which the corporation whose stock
is received in the exchange (or other acquiring corporation) will
succeed to the earnings and profits or a deficit in earnings and profits
of the corporation whose stock is exchanged and of lower-tier
corporations. This paragraph (b) (4) may be illustrated by the
following examples:
Example 1. A U.S. parent owns all of the stock of CFC1 and CFC2.
CFC1 has accumulated earnings and profits or an accumulated deficit in
earnings and profits. CFC2 acquires all of the stock of CFC1 from the
U.S. parent in a reorganization described in section 368 (a) (1) (B).
CFC2 will not succeed to the earnings and profits or the accumulated
deficit in earnings and profits of CFC1.
Example 2. A U.S. parent owns all of the stock of CFC1, which in
turn owns all of the stock of CFC2. The U.S. parent also owns all of
the stock of CFC3. CFC2 has accumulated earnings and profits or an
accumulated deficit in earnings and profits. CFC3 acquires all of the
assets of CFC1, including the stock of CFC2, in a reorganization
described in section 368(a)(1)(D). CFC3 will not succeed to the
earnings and profits or the accumulated deficit in earnings and profits
of CFC2.
(T.D. 8397, 57 FR 6556, Feb. 26, 1992)
26 CFR 1.367(d)-1T Transfers of intangible property to foreign
corporations (temporary).
(a) Purpose and scope. This section provides rules under section
367(d) concerning transfers of intangible property by U.S. persons to
foreign corporations pursuant to section 351 or 361. Paragraph (b) of
this section specifies the transfers that are subject to section 367(d)
and the rules of this section, while paragraph (c) provides rules
concerning the consequences of such a transfer. In general, the U.S.
transferor will be treated as receiving annual payments contingent on
productivity or use of the transferred property, over the useful life of
the property (regardless of whether such payments are in fact made by
the transferee). Paragraphs (d), (e), and (f) of this section provide
rules for cases in which there is a later direct or indirect disposition
of the intangible property transferred. In general, deemed annual
license payments will continue if a transfer is made to a related
person, while gain must be recognized immediately if the transfer is to
an unrelated person. Paragraph (g) of this section provides several
special rules, including a rule allowing appropriate adjustments where
deemed payments under section 367(d) are not in fact received by the
U.S. transferor of the intangible property, and a rule providing for a
limited election to treat certain transfers of intangible property as
sales at fair market value (in lieu of applying the general useful
life-contingent payment rule). In addition, paragraph (g) of this
section provides rules coordinating the application of section 367(d)
with other relevant Code sections. Paragraph (h) of this section
defines the term ''related person'' for purposes of this section.
Finally, paragraph (i) of this section provides the effective date of
this section. For rules concerning transfers of intangible property
pursuant to section 332, see 1.367(a)-5T(e).
(b) Intangible property subject to section 367(d). Section 367(d)
and the rules of this section shall apply to the transfer of any
intangible property, as defined in 1.367(a)-1T(d)(5)(i). However,
section 367(d) and the rules of this section shall not apply to the
transfer of foreign goodwill or going concern value, as defined in
1.367(a)-1T(d)(5)(iii), or to the transfer of intangible property
described in 1.367(a)-5T(b)(2). However, the transfer of those items to
a foreign corporation is subject to the rules set forth in 1.367(a)-6T,
and the transfer of intangible property described in 1.367(a)-5T(b)(2)
is subject to the rules set forth in 1.367(a)-5T. For a special rule
relating to the transfer of operating intangibles, as defined in
1.367(a)-1T(d)(5)(ii), see paragraph (g)(3) of this section. Transfers
of intangible property to foreign corporations pursuant to section 351
or 361 are subject to the rules of this section regardless of whether
the property is to be used in the United States, in connection with
goods to be sold or consumed in the United States, or in connection with
a trade or business outside the United States.
(c) Deemed payments upon transfer of intangible property to foreign
corporation -- (1) In general. If a U.S. person transfers intangible
property that is subject to section 367(d) and the rules of this section
to a foreign corporation in an exchange described in section 351 or 361,
then such person shall be treated as having transferred that property in
exchange for annual payments contingent on the productivity or use of
the property. Such person shall, over the useful life of the property,
annually include in gross income an amount that represents an
appropriate arms-length charge for the use of the property. The
appropriate charge shall be determined in accordance with the provisions
of section 482 and regulations thereunder. See 1.482-2(d). The amount
of the deemed payment thus calculated shall be reduced by any royalty or
other periodic payment made or accrued by the transferee to an unrelated
person during that taxable year for the right to use the intangible
property. Amounts so included in the transferor's income shall be
treated as ordinary income from sources within the United States. For
purposes of computing estimated tax payments, deemed payments under this
paragraph (c) shall be treated as received by the transferor on the last
day of its taxable year.
(2) Required adjustments. The following adjustments shall be made
with respect to a U.S. person's recognition of a deemed payment for the
use of intangible property under this paragraph (c):
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
such deemed payment; and
(ii) For purposes of Subpart F of Part III of Subchapter N of the
Code, the transferee foreign corporation may treat such deemed payment
as an expense (whether or not that amount is actually paid), properly
allocated and apportioned to gross income subject to Subpart F, in
accordance with the provisions of 1.954-1(c) and 1.861-8.
No other special adjustments to earning the profits, basis, or gross
income shall be permitted by reason of the recognition of a deemed
payment under this paragraph (c). However, see paragraph (g)(1) of this
section for rules permitting the establishment of an account receivable
with respect to deemed payments not actually received by the U.S.
person.
(3) Useful life. For purposes of this section, the useful life of
intangible property is the entire period during which the property has
value. However, in no event shall the useful life of an item of
intangible property be considered to exceed twenty years. If intangible
property derives its value from secrecy or from protections afforded by
law, the useful life of such property shall terminate when the property
is no longer secret or no longer legally protected.
(4) Blocked income. No deemed payment included in a taxpayer's
income under paragraph (c)(1) of this section shall be treated as
deferrable income for purposes of applying rules relating to blocked
foreign income. See Revenue Ruling 74-351, 1974-2 C.B. 144.
(d) Subsequent transfer of stock of transferee foreign corporation to
unrelated person -- (1) Treatment as sale of intangible property. If a
U.S. person transfers intangible property that is subject to section
367(d) and the rules of this section to a foreign corporation in an
exchange described in section 351 or 361, and within the useful life of
the intangible property that U.S. transferor subsequently disposes of
the stock of the transferee foreign corporation to a person that is not
a related person (within the meaning of paragraph (h) of this section),
then the U.S. transferor shall be treated as having simultaneously sold
the intangible property to the person acquiring the stock of the
transferee foreign corporation. The U.S. transferor shall be required
to recognize gain (but not loss) from sources within the United States
in an amount equal to the difference between the fair market value of
the transferred intangible property on the date of the subsequent
disposition and the U.S. transferor's former adjusted basis in that
property (determined as of the original transfer). If the U.S.
transferor's disposition of the stock of the transferee foreign
corporation is subject to U.S. tax other than by reason of this
paragraph (d), then the amount of gain otherwise required to be
recognized with respect to the stock of the transferee foreign
corporation shall be reduced by the amount of gain recognized with
respect to the intangible property pursuant to this paragraph (d).
(2) Required adjustments. If a U.S. person disposes of the stock of
a transferee foreign corporation, and under paragraph (d)(1) of this
section is treated as having simultaneously sold intangible property,
then, for purposes of computing basis and earnings and profits, the
person acquiring the stock of the transferee foreign corporation shall
be deemed to have purchased that property at fair market value and to
have immediately thereafter contributed it to the transferee foreign
corporation in a transaction not covered by section 367(d). Therefore,
for purposes of Chapter 1 of the Code --
(i) The transferee foreign corporation's basis in the intangible
property will be equal to its fair market value (as calculated for
purposes of determining the gain required to be recognized by the U.S.
transferor);
(ii) The acquiring person's basis in the stock of the transferee
foreign corporation shall be determined as if no portion of the
consideration given by the acquiring person for the stock is
attributable to the intangible property; and
(iii) The earnings and profits of the transferee foreign corporation
will not be affected by the transfer of its stock or the deemed transfer
to it of the intangible property.
(e) Subsequent transfer of stock of transferee foreign corporation to
related person -- (1) Transfer to related U.S. person treated as
disposition of intangible property. If a U.S. person transfers
intangible property that is subject to section 367(d) and the rules of
this section to a foreign corporation in an exchange described in
section 351 or 361 and, within the useful life of the transferred
intangible property, that U.S. transferor subsequently transfers the
stock of the transferee foreign corporation to U.S. persons that are
related to the transferor within the meaning of paragraph (h) of this
section, then the following rules shall apply:
(i) Each such related U.S. person shall be treated as having received
(with the stock of the transferee foreign corporation) a right to
receive a proportionate share of the contingent annual payments that
would otherwise be deemed to be received by the U.S. transferor under
paragraph (c) of this section.
(ii) Each such related U.S. person shall, over the useful life of the
property, annually include in gross income a proportionate share of the
amount that would have been included in the income of the U.S.
transferor pursuant to paragraph (c) of this section. Such amounts
shall be treated as ordinary income from sources within the United
States.
(iii) The amount of income required to be recognized by the U.S.
transferor pursuant to the rule of paragraph (d)(1) of this section
shall be reduced to the amount determined in accordance with the
following formula:
(d)(1) amount (100%^(e) percentage)
For purposes of the above formula, the ''(d)(1) amount'' is the
income that would otherwise be required to be recognized by the
transferor corporation pursuant to paragraph (d)(1) of this section, and
the ''(e) percentage'' is the percentage of the transferor corporation's
total deemed rights to receive contingent annual payments under
paragraph (c) of this section that is deemed to be transferred to
related U.S. persons under the rules of this paragraph (e).
(iv) The rules of paragraphs (d) and (e) of this section shall be
reapplied in the case of any later transfer of the stock of the
transferee foreign corporation by a related U.S. person that received
such stock in a transfer that was subject to the rules of this paragraph
(e). For purposes of reapplying the rules of paragraphs (d) and (e),
each such related U.S. person shall be treated as a U.S. transferor of
intangible property to the transferee foreign corporation (to the extent
of the interest attributed to such person pursuant to subdivision (i) of
this paragraph (e)(1)).
(2) Required adjustments. If a U.S. person transfers stock of a
transferee foreign corporation to a U.S. related person in a transaction
that is subject to the rules of paragraph (e)(1) of this section, the
following adjustments shall be made:
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
any payment deemed to be received by a related U.S. person under
paragraph (e)(1)(ii) of this section;
(ii) For purposes of Subpart F of Part III of subchapter N of the
Code, the transferee foreign corporation may allocate and apportion such
deemed payments (whether or not such payments are actually made to gross
income subject to Subpart F to the extent appropriate under the
provisions of 1.954-1(c) and 1.861-8;
(iii) For purposes of reapplying the rules of paragraph (d) and (e)
of this section, if the related U.S. person is deemed to have received a
right to contingent annual payments for the use of intangible property,
then the U.S. related person shall be deemed to have held a
proportionate share of the property with a basis equal to a
proportionate share of the U.S. transferor's adjusted basis plus the
gain, if any, recognized by the U.S. transferor on the earlier transfer
of the stock to the U.S. related person, and then to have transferred
that proportionate share of the property to the foreign corporation in a
transfer subject to section 367(d); and
(iv) If the U.S. transferor is itself required to recognize gain upon
the transfer by reason of the operation of paragraphs (d)(1) and
(e)(1)(iii) of this section (because stock of the transferee foreign
corporation is also transferred to unrelated persons), then those
unrelated persons shall be deemed to have purchased a proportionate
share of the transferred intangible property at fair market value and
immediately contributed that property to the transferee foreign
corporation, consistent with the general rule of paragraph (d)(2) of
this section concerning transfers of stock to unrelated persons.
Therefore, for purposes of Chapter 1 of the Code --
(A) Each unrelated person's basis in the stock of the transferee
foreign corporation shall be increased to the extent of the gain
recognized by the U.S. transferor upon the deemed purchase of intangible
property by that person; and
(B) The transferee foreign corporation will receive an increase in
its basis in the transferred intangible property equal to the fair
market value of that portion of the intangible property deemed to be
contributed to the transferee foreign corporation by unrelated persons
(as calculated for purposes of determining the gain required to be
recognized by the U.S. transferor).
(3) Transfer to related foreign person not treated as disposition of
intangible property. If a U.S. person transfers intangible property
that is subject to section 367(d) and the rules of this section to a
foreign corporation in an exchange described in section 351 or 361, and
within the useful life of the transferred intangible property, that U.S.
transferor subsequently transfers any of the stock of the transferee
foreign corporation to one or more foreign persons that are related to
the transferor within the meaning of paragraph (h) of this section, then
the U.S. transferor shall continue to include in its income the deemed
payments described in paragraph (c) of this section in the same manner
as if the subsequent transfer of stock had not occurred. The rule of
this paragraph (e)(3) shall not apply with respect to the subsequent
transfer by the U.S. person of any of the remaining stock to any related
U.S. person or unrelated person.
(4) Proportionate share. For purposes of this paragraph (e), any
''proportionate share'' shall be determined by reference to the fair
market value (at the time of the original transfer) of the stock of the
transferee foreign corporation that was transferred by the U.S.
transferor and the fair market value of all of the stock of the
transferee foreign corporation originally received by the U.S.
transferor.
(f) Subsequent disposition of transferred intangible property by
transferee foreign corporation -- (1) In general. If a U.S. person
transfers intangible property that is subject to section 367(d) and the
rules of this section to a foreign corporation in an exchange described
in section 351 or 361, and within the useful life of the intangible
property that transferee foreign corporation subsequently disposes of
the intangible property to an unrelated person, then --
(i) The U.S. transferor of the intangible property (or any person
treated as such pursuant to paragraph (e)(1) of this section) shall be
required to recognize gain from U.S. sources (but not loss) in an amount
equal to the difference between the fair market value of the transferred
intangible property on the date of the subsequent disposition and the
U.S. transferor's former adjusted basis in that property (determined as
of the orginial transfer); and
(ii) The U.S. transferor shall be required to recognize a deemed
payment under paragraph (c) of this section for that part of its taxable
year that the intangible property was held by the transferee foreign
corporation and thereafter shall not be required to recognize any
further deemed payments under paragraph (c) or (e)(1) of this section
with respect to the transferred intangible property disposed of by the
transferee foreign corporation.
(2) Required adjustments. If a U.S. transferor is required to
recognize gain under paragraph (f)(1) of this section, then --
(i) For purposes of chapter 1 of the Code, the earnings and profits
of the transferee foreign corporation shall be reduced by the amount of
gain required to be recognized; and
(ii) The U.S. transferor's recognition of gain will permit the
establishment of an account receivable from the transferee foreign
corporation, in accordance with paragraph (g)(1) of this section.
(3) Subsequent transfer of intangible property to related person.
The requirement that a U.S. person recognize gain under paragraph (c) or
(e) of this section shall not be affected by the transferee foreign
corporation's subsequent disposition of the transferred intangible
property to a related person. For purposes of any required adjustments,
and of any accounts receivable created under paragraph (g)(1) of this
section, the related person that receives the intangible property shall
be treated as the transferee foreign corporation.
(g) Special rules -- (1) Establishment of accounts receivable -- (i)
In general. If a U.S. person is required to recognize income under the
provisions of paragraph (c), (e), or (f) of this section, and the amount
deemed to be received is not actually paid by the transferee foreign
corporation, then the U.S. person may establish an account receivable
from the transferee foreign corporation equal to the amount deemed paid
that was not actually paid. A separate account receivable must be
established for each taxable year in which payments deemed to be
received are not actually made. Payments received from the transferee
foreign corporation must be designated as payments upon a particular
account and must be deducted from that account. Accounts receivable
under this paragraph (g)(1) may be established and paid without further
U.S. income tax consequences to the U.S. transferor or the transferee
foreign corporation. No interest shall be paid or accrued on an account
receivable created under this paragraph (g)(1), nor shall any bad debt
deduction be allowed under section 166 with respect to any failure to
receive payment on an account.
(ii) Unpaid receivable treated as contribution to capital. If any
portion of an account receivable established under this paragraph (g)(1)
remains unpaid as of the last day of the third taxable year following
the taxable year to which the account relates, then --
(A) Such portion shall be deemed to have been paid on that date; and
(B) The U.S. person shall be deemed to have contributed an equivalent
amount to the capital of the foreign corporation, and the U.S. person's
basis in the stock of the foreign corporation shall, therefore, be
increased by that amount.
(2) Election to treat transfer as sale. A U.S. person that transfers
intangible property to a foreign corporation in a transaction subject to
section 367(d) may elect to recognize income in accordance with the
rules of this paragraph (g)(2), if --
(i) The intangible property transferred constitutes an operating
intangible, as defined in 1.367(a)-1T(d)(5)(ii); or
(ii) The transfer of the intangible property is either legally
required by the government of the country in which the transferee
corporation is organized as a condition of doing business in that
country, or compelled by a genuine threat of immediate expropriation by
the foreign government; or
(iii)(A) The U.S. person transferred the intangible property to the
foreign corporation within three months of the organization of that
corporation and as part of the original plan of capitalization of that
corporation;
(B) Immediately after the transfer, the U.S. person owns at least 40
percent but not more than 60 percent of the total voting power and total
value of the stock of the transferee foreign corporation;
(C) Immediately after the transfer, at least 40 percent of the total
voting power and total value of the stock of the transferee foreign
corporation is owned by foreign persons unrelated to the U.S. person;
(D) Intangible property constitutes at least 50 percent of the fair
market value of the property transferred to the foreign corporation by
the U.S. transferor; and
(E) The transferred intangible property will be used in the active
conduct of a trade or business outside of the United States within the
meaning of 1.367(a)-2T and will not be used in connection with the
manufacture or sale of products in or for use or consumption in the
United States.
A person that makes the election under this paragraph (g)(2) shall
not be subject to the provisions of paragraphs (c) through (f) of this
section. Such person shall instead recognize in the year of the
transfer ordinary income from sources within the United States in an
amount equal to the difference between the fair market value of the
intangible property transferred and its adjusted basis. A U.S. person
shall make an election under this paragraph (g)(2) by notifying the
Internal Revenue Service of the election in accordance with the
requirements of section 6038B and regulations thereunder, and
subsequently including the appropriate amounts in gross income in a
timely filed tax return for the year of the transfer.
(3) Intangible property transferred from branch with previously
deducted losses. If income is required to be recognized under section
904(f)(3) and the regulations thereunder or under 1.367(a)-6T upon the
transfer of intangible property of a foreign branch that had previously
deducted losses, then the income recognized under those sections with
respect to that property shall be credited against amounts that would
otherwise be required to be recognized with respect to that same
property under paragraphs (c) through (f) of this section in either the
current or future taxable years. The amount recognized under section
904(f)(3) or 1.367(a)-6T with respect to the transferred intangible
property shall be determined in accordance with the following formula:
For purposes of the above formula, the ''loss recapture income'' is
the total amount required to be recognized by the U.S. transferor
pursuant to section 904(f)(3) or 1.367(a)-6T. The ''gain from
intangibles'' is the total amount of gain realized by the U.S.
transferor pursuant to section 904(f)(3) and 1.367(a)-6T upon the
transfer of items of intangible property that are subject to section
367(d). (''Gain from intangibles'' does not include gain realized upon
the transfer of property described in 1.367(a)-5T(b)(2), foreign
goodwill or going concern value, or intangible property with respect to
which the taxpayer has made the election provided for in
1.367(d)-1T(g)(2).) The ''gain from all branch assets'' is the total
amount of gain realized by the transferor upon the transfer of items of
property of the branch in which gain is realized. The fraction shall
not exceed 1.
(4) Coordination with section 482 -- (i) In general. Section 367(d)
and the rules of this section shall not apply in the case of an actual
sale or license of intangible property by a U.S. person to a foreign
corporation. If an adjustment under section 482 is required with
respect to an actual sale or license of intangible property, then
section 367(d) and the rules of this section shall not apply with
respect to the required adjustment. If a U.S. person transfers
intangible property to a related foreign corporation without
consideration, or in exchange for stock or securities of the transferee
in a transaction described in sections 351 or 361, no sale or license
subject to adjustment under section 482 will be deemed to have occurred.
Instead, the U.S. person shall be treated as having made a transfer of
the intangible property that is subject to section 367(d).
(ii) Sham licenses and sales. For purposes of paragraph (g)(4)(i) of
this section, a purported sale or license of intangible property may be
disregarded, and treated as a transfer subject to section 367(d) and the
rules of this section, if --
(A) The purported sale or license is made to a foreign corporation in
which the transferor holds (or is acquiring) an interest; and
(B) The terms of the purported sale or license differ so greatly from
the economic substance of the transaction or the terms that would obtain
between unrelated persons that the purported sale or license is a sham.
The terms of a purported sale or license, for purposes of applying
the rule of this paragraph (g)(4)(ii), shall be determined by reference
not only to the nominal terms of the agreement but also to the actual
practice of the parties under that agreement. A sale or license of
intangible property shall not be disregarded under this paragraph
(g)(4)(ii) solely because other property of an integrated business is
simultaneously transferred to the foreign corporation by the U.S.
transferor in a transaction described in section 367(a)(1) or any
statutory or regulatory exception to section 367(a)(1).
(5) Determination of fair market value. For purposes of determining
the gain required to be recognized immediately under paragraph (d), (f),
or (g)(2) of this section, the fair market value of transferred property
shall be the single payment arm's-length price that would be paid for
the property by an unrelated purchaser determined in accordance with the
principles of section 482 and regulations thereunder. The allocation of
a portion of the purchase price to intangible property agreed to by the
parties to the transaction shall not necessarily be controlling for this
purpose.
(6) Anti-abuse rule. If a U.S. person --
(i) Transfers intangible property to a domestic corporation with a
principal purpose of avoiding the effect of section 367(d) and the rules
of this section; and
(ii) Thereafter transfers the stock of that domestic corporation to a
related foreign corporation,
then solely for purposes of section 367(d) that U.S. person shall be
treated as having transferred the intangible property directly to the
foreign corporation. A U.S. person shall be presumed to have
transferred intangible property for a principal purpose of avoiding the
effect of section 367(d) if the property is transferred to the domestic
corporation less than two years prior to the transfer of the stock of
that domestic corporation to a foreign corporation. The presumption
created by the previous sentence may be rebutted by clear evidence that
the subsequent transfer of the stock of the domestic transferee
corporation was not contemplated at the time the intangible property was
transferred to that corporation and that avoidance of section 367(d) and
the rules of this section was not a principal purpose of the
transaction. A transfer may have more than one principal purpose.
(h) Related person. For purposes of this section, persons are
considered to be related if --
(1) They are partners or partnerships described in section 707(b)(1)
of the Code; or
(2) They are related within the meaning of section 267 (b), (c), and
(f) of the Code, except that --
(i) ''10 percent or more'' shall be substituted for ''more than 50
percent'' each place it appears; and
(ii) Section 1563 shall apply (for purposes of section 267(d)),
without regard to section 1563(b)(2).
(i) Effective date. Except as specifically provided to the contrary
elsewhere in this section, this section applies to transfers occurring
after December 31, 1984.
(T.D. 8087, 51 FR 17953, May 16, 1986)
26 CFR 1.367(e)-0T Treatment of distributions or liquidations under
section 367(e); table of contents (temporary).
This section lists captioned paragraphs contained in 1.367(e)-1T
through 1.367(e)-2T, temporary regulations under section 367(e) of the
Internal Revenue Code.
(a) Purpose and scope.
(b) Recognition of gain required.
(1) General rule.
(2) Nonapplication of section 367 principles that provide for
exceptions to gain recognition.
(c) Nonrecognition of gain.
(1) Distribution of certain U.S. real property holding corporation
stock.
(2) Distribution of certain domestic stock.
(i) Conditions for nonrecognition.
(ii) Required statement.
(iii) Effect of submitting statement.
(iv) Priority of FIRPTA nonrecognition.
(3) Distribution of stock by a publicly traded corporation.
(i) Conditions for nonrecognition.
(ii) Relation to other nonrecognition provisions.
(d) Other consequences.
(1) Distributee basis in stock.
(2) Dividend treatment under section 1248.
(3) Exchange under section 897(e)(1).
(4) Distribution of stock of a passive foreign investment company.
(e) Examples.
(f) Effective date.
(a) Purpose and scope.
(1) In general.
(2) Nonapplicability of section 367(a).
(b) Distribution by a domestic corporation.
(1) Recognition of gain required.
(i) General rule.
(ii) Recognition of losses.
(iii) Distribution of partnership interest.
(A) In general.
(B) Basis adjustments.
(C) Limited partnership interest.
(2) Recognition of gain or loss not required.
(i) Distribution of property used in a United States trade or
business.
(A) Conditions for nonrecognition.
(B) Required statement.
(C) Effect of submitting statement.
(ii) Distribution of U.S. real property interests.
(iii) Transitional rule for certain treaty provisions.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Dividend treatment under section 1248.
(iii) Exchange under section 897(e)(1).
(iv) Distribution of stock of a passive foreign investment company.
(v) Carryover of tax attributes.
(4) Examples.
(c) Distribution by a foreign corporation.
(1) Recognition of gain generally not required.
(2) Recognition of gain required.
(i) Property used in a United States trade or business.
(A) In general.
(B) Required statement.
(C) Effect of submitting or failing to submit a statement.
(ii) Property formerly used in a United States trade or business.
(3) Other consequences.
(i) Distributee basis in property.
(ii) Distribution under section 367(b).
(iii) Distribution or exchange of U.S. real property interests.
(iv) Distribution of stock of a passive foreign investment company.
(v) Carryover of tax attributes.
(4) Examples.
(d) Effective date.
(T.D. 8280, 55 FR 1409, Jan. 16, 1990)
26 CFR 1.367(e)-1T Distributions described in section 367(e)(1)
(temporary).
(a) Purpose and scope. This section provides rules concerning the
recognition of gain by a domestic corporation (the ''distributing
corporation'') on a distribution of stock or securities in a domestic or
foreign corporation (the ''controlled corporation'') under section 355
to a person who is not a United States person. Paragraph (b) of this
section states as a general rule that gain recognition is required on
the distribution. Paragraph (c) of this section provides exceptions to
the gain recognition rule of paragraph (b). Paragraph (d) of this
section refers to other consequences of distributions described in this
section. Paragraph (e) of this section provides examples of the rules
of paragraphs (b), (c), and (d). Finally, paragraph (f) specifies the
effective date for the rules of this section. The rules of this section
are issued pursuant to the authority conferred by section 367(e)(1).
(b) Recognition of gain required -- (1) General rule. If a domestic
corporation makes a distribution of stock or securities of a domestic or
foreign corporation to a person who is not a United States person as
defined in 1.367(a)-1T(d)(1) (the ''foreign distributee'') in a
distribution that qualifies under section 355(a), then, except as
provided in paragraph (c) of this section, the distributing corporation
shall recognize gain (but not loss) on the distribution under section
367(e)(1). The gain recognized by the distributing domestic corporation
shall be equal to the excess of the fair market value of the stock or
securities distributed to the foreign distributee (as of the time of the
distribution) over such corporation's adjusted basis in the stock or
securities distributed to the foreign distributee. For purposes of the
preceding sentence, the distributing domestic corporation's adjusted
basis in each unit of each class of stock or securities distributed to a
foreign distributee shall be equal to the corporation's total adjusted
basis in all of the units of the respective class of stock or securities
held immediately before the distribution, divided by the total number of
units of such class of stock or securities held immediately before the
distribution. If the distribution otherwise qualifies under section
355, each distributee of the distributing domestic corporation shall be
considered to have received the distributed stock in such a distribution
even though the distributing corporation recognizes gain on the
distribution. Thus, the distributee does not receive a dividend upon
the receipt of the stock of the controlled corporation.
(2) Nonapplication of section 367 principles that provide for
exceptions to gain recognition. The rule of paragraph (b)(1) of this
section requires recognition of gain notwithstanding the application of
any principles contained in section 367 or the regulations thereunder
that provide for exceptions to gain recognition. The only exceptions to
the rule of paragraph (b)(1) of this section are contained in paragraph
(c) of this section.
(c) Nonrecognition of gain -- (1) Distribution of certain U.S. real
property holding corporation stock. Gain shall not be recognized under
paragraph (b)(1) of this section by a domestic corporation making a
distribution of stock or securities of a domestic controlled corporation
to a foreign distributee in a distribution that qualifies under section
355(a) if, immediately after the distribution, both the distributing and
the controlled corporations are U.S. real property holding corporations
(as defined in section 897(c)(2)). For the treatment of the
distribution under section 897, see section 897(e) and 1.897-6T(a) (1)
and (4).
(2) Distribution of certain domestic stock -- (i) Conditions for
nonrecognition. Gain shall not be recognized under paragraph (b)(1) of
this section by a domestic corporation making a distribution of stock or
securities of a domestic controlled corporation to a foreign distributee
in a distribution that qualifies under section 355(a) if each of the
following conditions is satisfied:
(A) Five or fewer persons, each of whom is either an individual or a
corporation (or an entity treated as a corporation for U.S. tax
purposes), directly own 100 percent of the outstanding stock (exclusive
of directors' qualifying shares) of the distributing corporation
immediately before the distribution.
(B) Immediately before the distribution, at least ninety percent (by
value) of the aggregate outstanding stock of the distributing
corporation has a holding period of at least two years in the hands of
the persons described in paragraph (c)(2)(i)(A). Such holding period
shall be determined under section 1223, except that for this purpose
section 1223(2) shall only apply if such person acquired such stock in a
transaction described in section 381.
(C) If the subject foreign distributee is a foreign corporation, the
stock of the distributing corporation held by such foreign distributee
immediately before the distribution has a fair market value that is less
than 50 percent of the total fair market value of all of the outstanding
stock of such foreign distributee immediately before the distribution.
For purposes of the preceding sentence, the fair market value of the
stock of the foreign distributee shall be determined without regard to
any cash, cash items (such as bank deposits or receivables), or
marketable securities held by the foreign distributee.
(D) Immediately before the distribution, all of the stock of the
distributing corporation owned by the subject foreign distributee has a
holding period of at least two years. Such holding period shall be
determined under section 1223, except that for this purpose section
1223(2) shall only apply if such person acquired such stock in a
transaction described in section 381.
(E) After the distribution, the subject foreign distributee is and
continues to be a resident of (if such foreign distributee is an
individual), or is incorporated in and continues to be incorporated in
(if such foreign distributee is a corporation), a foreign country that
maintains an income tax treaty with the United States that contains an
information exchange provision.
(F) Immediately after the distribution, the stock of the distributing
corporation has a fair market value that is at least equal to the fair
market value of the distributed stock (or if stock and securities are
distributed, the fair market value of the distributed stock and
securities) of the controlled corporation immediately before the
distribution.
(G) The separate corporate existence of the distributing corporation
(or its domestic successor in a reorganization described in section
368(a)(1)(F)) is maintained for a period of five full taxable years
(excluding short taxable years) beginning with the taxable year
following the year of the distribution. A domestic successor shall be
treated as the distributing corporation for purposes of this paragraph
(c)(2) and shall, therefore, succeed to all of the responsibilities of
the distributing corporation thereunder.
(H) No later than the last day of each of the five full taxable years
of the distributing corporation (excluding short taxable years) after
the taxable year of the distribution, the subject foreign distributee
provides to the distributing corporation the certificate described in
paragraph (c)(2)(ii)(F).
(I) The distributing and controlled corporations attach the statement
described in paragraph (c)(2)(ii) of this section to their U.S. income
tax returns for the taxable year that includes the distribution.
(ii) Required statement. The statement required by paragraph
(c)(2)(i)(I) of this section shall be prepared by or on behalf of the
distributing corporation and signed under penalties of perjury by an
authorized officer of each of the distributing corporation and the
controlled corporation, and by each foreign shareholder of the
distributing corporation that receives a distribution with respect to
which nonrecognition is claimed under paragraph (c)(2). The statement
shall set forth the following items:
(A) A declaration that the distribution is one to which the
provisions and rules of section 1.367(e)-1T(c)(2) apply.
(B) A description of each shareholder of the distributing corporation
(without regard to whether such shareholder is a United States person)
including such shareholder's name, address, taxpayer identification
number (if any), and residence and citizenship (in the case of an
individual) or place of incorporation (in the case of a corporation).
Such description must identify the shareholders that are foreign
distributees of controlled corporation stock with respect to which there
is a claim of nonrecognition under paragraph (c)(2).
(C) A description of the stock in the distributing corporation
directly owned immediately before the distribution by each shareholder
described in paragraph (c)(2)(ii)(B), including the number or amount of
shares, the type of stock, the percentage (by value) that such stock
represented of the total stock of the distributing corporation
outstanding immediately before the distribution, the date on which such
stock was directly acquired by such shareholder, and such shareholder's
holding period in respect of such stock (determined according to the
provisions of paragraph (c)(2)(i)(B)).
(D) A description of the stock of the distributing and controlled
corporations directly owned immediately after the distribution by each
shareholder described in paragraph (c)(2)(ii)(B), including the number
or amount of shares, the type of stock, and the percentage (by value)
that such stock represents of the total stock of the distributing or
controlled corporation immediately after the distribution. In the case
of the distribution to a foreign distributee of controlled corporation
stock with respect to which there is a claim of nonrecognition under
paragraph (c)(2), the description must also include the fair market
value of such stock at the time of its distribution, a summary of the
method (including appraisals, if any) used for determining such value,
and the distributing corporation's adjusted basis in such stock
immediately prior to the distribution (computed according to the
provisions of paragraph (b)(1) of this section).
(E) A declaration of the total fair market value of the stock of the
distributing corporation immediately after the distribution, the total
fair market value of the distributed stock (or, if stock and securities
are distributed, the fair market value of the distributed stock and
securities) of the controlled corporation immediately before the
distribution, and a summary of the method (including appraisals, if any)
used for determining such values.
(F) A declaration by the distributing corporation and each foreign
distributee of controlled corporation stock with respect to which
nonrecognition is claimed under paragraph (c)(2) that, no later than the
last day of each of the five full taxable years of the distributing
corporation after the taxable year of the distribution, such distributee
will certify to the distributing corporation, in writing and under
penalties of perjury, that as of the certification date:
(1) Such shareholder directly owns all of the stock of the
distributing and controlled corporations directly owned by such person
immediately after the distribution and all of the stock of the
distributing and controlled corporations acquired from either of the
corporations since the distribution, and
(2) Such shareholder has directly owned all of such stock without
interruption since the date of the distribution or acquisition.
(G) A declaration by the distributing corporation that it shall
attach the annual certifications described in the preceding subdivision
(F) to its U.S. income tax return for each year during the prescribed
five full taxable year period.
(H) A declaration that the distributing corporation agrees to extend
the statute of limitations on assessments and collections (under section
6501) with respect to the distribution of the stock and securities of
the controlled corporation until 3 years after the filing of its return
for the fifth full taxable year following the taxable year that includes
the distribution.
(iii) Effect of submitting statement. By claiming nonrecognition
under this paragraph (c)(2), the distributing corporation agrees to be
subject to the rules of this paragraph (c)(2)(iii).
(A) If:
(1) A foreign distributee with respect to whose stock there is a
claim of nonrecognition under paragraph (c)(2) does not provide to the
distributing corporation an annual certificate described in paragraph
(c)(2)(ii)(F), or
(2) The distributing corporation knows or has reason to know that
such foreign distributee has ceased to own directly (other than by
reason of an individual foreign distributee's death) all of the stock or
securities in the distributing and controlled corporations described in
the certificate prior to the end of the fifth full taxable year of the
distributing corporation following the distribution, then the
distributing corporation shall file an amended U.S. income tax return
for the year of the distribution and recognize all of the gain realized
on the distribution of stock and securities to such foreign distributee.
Such amended return shall be filed no later than 60 days after the
failure to file a certificate, or 60 days after the distributing
corporation knows or has reason to know that the requisite direct
ownership has ceased.
(B) If the separate corporate existence of the distributing
corporation is not maintained as provided in paragraph (c)(2)(i)(G),
then the distributing corporation shall file an amended U.S. income tax
return for the year of the distribution and shall recognize the gain
realized on the distribution of all of the controlled corporation stock
or securities with respect to which there was a claim of nonrecognition
under paragraph (c)(2) and with respect to which an amended return has
not previously been filed under paragraph (c)(2)(iii)(A). Such amended
return shall be filed no later than 60 days after adoption of a
resolution or agreement providing for the liquidation or other
termination or dissolution of the distributing corporation.
(C) If additional tax is required to be paid by the distributing
corporation for the year of the distribution, then interest must be paid
by the distributing corporation on that amount at the rates determined
under section 6621 with respect to the period between the date that was
prescribed for filing the distributing corporation's original U.S.
income tax return for the year of the distribution and the date on which
the additional tax for that period is paid.
(iv) Priority of FIRTPA nonrecognition. If the distribution of the
stock and securities of the controlled corporation also qualifies for
nonrecognition under paragraph (c)(1), then the distributing corporation
shall be entitled to nonrecognition under paragraph (c)(1) and not under
this paragraph (c)(2).
(3) Distribution of stock by a publicly traded corporation -- (i)
Conditions for nonrecognition. Gain shall not be recognized under
paragraph (b)(1) of this section by a domestic corporation making a
distribution of stock or securities of a domestic controlled corporation
to a foreign distributee in a distribution that qualifies under section
355(a) if each of the following conditions is satisfied:
(A) Classes of stock of the distributing corporation that are
regularly traded on an established securities market, as defined in
1.897-1(m) (1) and (3), located in the United States represent at least
80 percent of the total value of all classes of outstanding stock of the
distributing corporation. Stock is considered to be regularly traded if
it is regularly quoted by brokers or dealers making a market in such
interests. A broker or dealer is considered to make a market only if
the broker or dealer holds himself out to buy or sell interests in the
stock at the quoted price.
(B) Stock of the domestic controlled corporation with a value of more
than 80 percent of the outstanding stock of such corporation is
distributed with respect to one or more of the classes of the
outstanding stock of the distributing corporation that are regularly
traded on an established securities market.
(C) The distributing corporation does not know or have reason to know
that the subject foreign distributee owns, directly or indirectly, more
than five percent (by value) of the shares in the class of the
distributing corporation stock with respect to which the stock of the
domestic controlled corporation is distributed. For example, a
corporation that has received a notice pursuant to the rules or
regulations of the Securities and Exchange Commission that a foreign
shareholder owns six percent of the class of its stock, with respect to
which there is a distribution, knows that such foreign distributee owns
more than five percent of such class of stock.
(ii) Relation to other nonrecognition provisions. If the
distribution of the stock and securities of the controlled corporation
also qualifies for nonrecognition under paragraph (c)(1), then the
distributing corporation shall be entitled to nonrecognition under
paragraph (c)(1) and not under paragraph (c)(3).
(d) Other consequences -- (1) Distributee basis in stock. Except
where 1.897-6T(a)(4) causes gain recognition by the distributee, the
basis of the distributed domestic or foreign corporation stock in the
hands of the distributee who is not a United States person shall be the
basis of the distributed stock determined under section 358 without any
increase for any gain recognized by the domestic corporation on the
distribution.
(2) Dividend treatment under section 1248. With respect to the
treatment as a dividend of a portion of the gain recognized by the
domestic corporation on the distribution of the stock of certain foreign
corporations, see section 1248(a) and the regulations thereunder.
(3) Exchange under section 897(e)(1). With respect to the treatment
under section 897(e)(1) of a foreign distributee on the receipt of stock
or securities in a domestic or foreign corporation where the foreign
distributee's interest in the distributing domestic corporation is a
United States real property interest, see section 897(e)(1) and
1.897-6T(a) (1) and (4).
(4) Distribution of stock of a passive foreign investment company.
(Reserved)
(e) Examples. The rules of paragraphs (b), (c), and (d) of this
section may be illustrated by the following examples.
Example (1). (i) FC, a Country X corporation, owns all of the
outstanding stock of DC1, a domestic corporation, that owns all of the
outstanding stock of DC2, a domestic corporation. The fair market value
of the DC1 stock is 300x, and FC has a basis in the DC1 stock of 100x.
The fair market value of the DC2 stock is 180x, and DC1 has a basis in
the DC2 stock of 40x. Neither DC1 nor DC2 is a U.S. real property
holding corporation. Country X does not maintain an income tax treaty
with the United States.
(ii) ln a transaction qualifying as a distribution of stock of a
controlled corporation under section 355(a), DC1 distributes all of the
stock of DC2 to FC. After the distribution, the DC1 stock has a fair
market value of 120x.
(iii) Under paragraph (b)(1) of this section, DC1 recognizes gain of
140x, which is the difference between the fair market value (180x) and
the basis (40x) of the stock distributed. Under paragraph (d)(1) of
this section and section 358, FC takes a basis of 40x in the DC1 stock,
and a basis of 60x in the DC2 stock.
Example (2). (i) C, a citizen and resident of Country F, owns all of
the stock of DC, a U.S. real property holding corporation. The fair
market value of the DC stock is 500x, and C has a basis in the DC stock
of 100x.
(ii) In a transaction qualifying as a distribution of stock of a
controlled corporation under section 355(a), DC distributes to C all of
the stock of FC, a foreign corporation that is not a passive foreign
investment company. FC is not a U.S. real property holding corporation
and has not made an election under section 897(i) to be treated as a
domestic corporation for purposes of section 897. The FC stock has a
fair market value of 200x, and DC has a basis in the FC stock of 180x.
After the distribution, the DC stock has a fair market value of 300x.
(iii) Under paragraph (b) of this section, DC recognizes gain of 20x
which is the difference between the fair market value (200x) and the
basis (180x) of the stock distributed. In regard to the treatment of DC
under section 1248, see section 1248(a) and the regulations thereunder.
(iv) Under section 897(e) and 1.897-6T (a)(4), C is considered to
have exchanged DC stock with a fair market value of 200x and an adjusted
basis of 40x for FC stock with a fair market value of 200x. Because FC
is not a U.S. real property holding corporation, and its stock is not a
U.S. real property interest, C must recognize gain of 160x under section
897 (a) on the distribution. C takes a basis of 200x in the FC stock
because there is a recognition exchange under the rules of
1.897-6T(a)(4). C's basis in the DC stock is reduced to 60x pursuant to
section 358.
Example (3). (i) Assume the same facts as in Example (2), except
that (instead of FC stock) stock of DC2, a domestic corporation, is
distributed to C, and that DC and DC2 are U.S. real property holding
corporations immediately after the distribution.
(ii) Under paragraph (c)(1) of this section, DC does not recognize
gain on the distribution of the DC2 stock because DC and DC2 are U.S.
real property holding corporations immediately after the distribution.
(iii) Under section 897 (e) and 1.897-6T (a)(4), C is considered to
have exchanged DC stock with a fair market value of 200x and an adjusted
basis of 40x for DC2 stock with a fair market value of 200x. Because
DC2 is a U.S. real property holding corporation, and its stock is a U.S.
real property interest, C does not recognize any gain under section
897(e) on the distribution. C takes a basis of 40x in the DC2 stock,
and its basis in the DC stock is reduced to 60x pursuant to section 358.
Example (4). (i) C, a citizen and resident of Country F, has owned
all of the stock of DC1, a domestic corporation, for six years. The
fair market value of the DC1 stock is 800x, and C has a basis in the DC1
stock of 600x. Country F maintains an income tax treaty with the United
States that includes an information exchange provision.
(ii) In a transaction qualifying as a distribution of stock of a
controlled corporation under section 355(a), DC1 distributes to C all of
the stock of DC2, a domestic corporation. The DC2 stock has a fair
market value of 200x, and DC1 has a basis in the DC2 stock of 100x.
After the distribution, the DC1 stock has a fair market value of 600x.
C will continue to be a resident of Country F after the distribution.
The separate corporate existence of DC1 will be maintained for a period
of at least five full taxable years beginning with the taxable year
following the year of the distribution, with C as the sole shareholder.
(iii) Under paragraph (c)(2) of this section, DC1 does not recognize
gain on the distribution of the DC2 stock if DC1, DC2, and C comply with
all of the provisions of paragraph (c)(2) of this section. C takes a
basis of 150x in the DC2 stock, and C's basis in the DC1 stock is
reduced to 450x pursuant to section 358.
Example (5). (i) All of the outstanding common stock of DC, a
domestic corporation, is regularly traded on an established securities
market located in the United States. No other stock of DC is
outstanding. None of the foreign shareholders of DC, directly or
indirectly, owns more than five percent of the common stock of DC.
(ii) In a transaction qualifying as a distribution of stock of a
controlled corporation under section 355(a), DC distributees all of the
stock of DS, a domestic corporation, to the common shareholders of DC.
The stock of DS has appreciated in the hands of DC.
(iii) Under paragraph (c)(3) of this section, DC does not recognize
gain on the distribution of the DS stock to any foreign distributee
because the requirements of that paragraph have been met. The basis of
the shareholders in the DC and DS stock is determined pursuant to
section 358.
(f) Effective date. This section shall be effective for
distributions occurring after February 15, 1990.
(T.D. 8280, 55 FR 1409, Jan. 16, 1990)
26 CFR 1.367(e)-2T Distributions described in section 367(e)(2)
(temporary).
(a) Purpose and scope -- (1) In general. This section provides rules
concerning the recognition of gain by a corporation on its distribution
to a foreign corporation of property in a complete liquidation to which
section 332 applies. Paragraph (b)(1) of this section states as a
general rule that gain recognition is required when a domestic
corporation makes a distribution of property in complete liquidation
under section 332 to a foreign corporation that meets the stock
ownership requirements of section 332(b) with respect to stock in the
domestic corporation. Paragraph (b)(2) of this section provides the
only exceptions to the gain recognition rule of paragraph (b)(1).
Paragraph (b)(3) of this section refers to other consequences of
distributions described in paragraphs (b) (1) and (2). Paragraph (c)(1)
of this section states as a general rule that gain recognition is not
required when a foreign corporation makes a distribution of property in
complete liquidation under section 332 to another foreign corporation
that meets the stock ownership requirements of section 332(b) with
respect to stock in the distributing foreign corporation. Paragraph
(c)(2) of this section provides exceptions to the nonrecognition rule of
paragraph (c)(1). Paragraph (c)(3) of this section refers to other
consequences of distributions described in paragraphs (c) (1) and (2).
Examples of the rules of this section are provided in paragraphs (b)(4)
and (c)(4) of this section. Finally, paragraph (d) specifies the
effective date for the rules of this section. The rules of this section
are issued pursuant to the authority conferred by section 367 (e)(2).
(2) Nonapplicability of section 367(a). Section 367(a) shall not
apply to a complete liquidation described in section 332 by a domestic
corporation into a foreign corporation that meets the stock ownership
requirements of section 332(b) and that is subject to section 367(e)(2)
or is described in paragraph (b)(2)(iii) of this section.
(b) Distribution by a domestic corporation -- (1) Recognition of gain
required -- (i) General rule. If a domestic corporation makes a
distribution of property in a complete liquidation under section 332 to
a foreign corporation that meets the stock ownership requirements of
section 332(b) with respect to stock in the domestic corporation, then,
except as provided in paragraph (b)(2) of this section, section 337 (a)
and (b)(1) shall not apply and the distributing domestic corporation
shall recognize gain on the distribution of the item of property under
section 367(e)(2). The gain recognized by the domestic corporation
shall be equal to the excess of the fair market value of each such item
of property distributed over its adjusted basis. Except as provided in
paragraphs (b)(2)(iii) and (d) of this section, the recognition of gain
required under this paragraph is not prohibited by any treaty to which
the United States is a party.
(ii) Recognition of losses. If paragraph (b)(1)(i) of this section
would apply to a distribution of an item of property but for the fact
that the distributing domestic corporation realizes a loss on the
distribution of such item of property, then the distributing domestic
corporation shall recognize the loss realized on such distribution.
However, such loss shall be recognized only to the extent that (A) the
total amount of capital losses recognized on such distributions does not
exceed the total amount of capital gains recognized by the distributing
domestic corporation pursuant to paragraph (b)(1)(i), and (B) the total
amount of ordinary losses recognized on such distributions does not
exceed the total amount of ordinary income recognized by the
distributing domestic corporation pursuant to paragraph (b)(1)(i).
Notwithstanding any other provision of this paragraph, losses shall be
recognized under this section only on property that the distributing
domestic corporation did not acquire within the five year period ending
on the date of the liquidation through a capital contribution, a
liquidation under section 332, or an exchange under section 351(a) or
361(a). If, pursuant to the rules of this paragraph (b)(1)(ii), only a
portion of the capital loss or ordinary loss on the property distributed
is recognized because the aggregate capital loss exceeds the aggregate
capital gain or the aggregate ordinary loss exceeds the aggregate
ordinary gain of the distributing corporation, then the capital loss
(and the ordinary loss) recognized shall be treated as being recognized
on a pro rata basis with respect to each such capital or ordinary
property distributed.
(iii) Distribution of partnership interest -- (A) In general. If a
domestic corporation distributes an interest as a partner in a
partnership (whether foreign or domestic) in a distribution described in
paragraph (b)(1)(i) of this section, then for purposes of applying this
section the domestic corporation shall be treated as having distributed
a proportionate share of the property of the partnership. Accordingly,
the applicability of the nonrecognition rules of paragraph (b)(1) (i)
and (ii) and of any exception to recognition provided in this section
shall be determined with reference to the property of the partnership
rather than to the partnership interest itself. Where the property of
the partnership includes an interest in a lower-tier partnership the
applicability of any exception with respect to the interest in the
lower-tier partnership shall be determined with reference to the
property of the lower-tier partnership. In the case of multiple tiers
of partnerships, the applicability of an exception shall be determined
with reference to the property of the lowest-tier partnership in the
partnership chain. A domestic corporation's proportionate share of
partnership property shall be determined under the rules and principles
of sections 701 through 761 and the regulations thereunder.
(B) Basis adjustments. The foreign corporation's basis in the
distributed partnership interest shall be equal to the distributing
domestic corporation's basis in such partnership interest immediately
prior to the distribution, increased by the amount of gain and reduced
by the amount of loss recognized by the domestic corporation on the
distribution of the partnership interest. Solely for purposes of
sections 743 and 754, the foreign corporation shall be treated as having
purchased the partnership interest for an amount equal to the foreign
corporation's adjusted basis therein.
(C) Limited partnership interest. The distribution by a domestic
corporation of a limited partnership interest that is regularly traded
on an established securities market shall not be subject to the rules of
this paragraph (b)(1)(iii). Instead, the distribution of such an
interest shall be treated in the same manner as a distribution of stock.
For purposes of this section, a limited partnership interest is an
interest as a limited partner in a partnership that is organized under
the laws of any state of the United States or the District of Columbia.
Whether such an interest is regularly traded on an established
securities market shall be determined under the provisions of
1.367(a)-1T(c)(3)(ii)(D).
(2) Recognition of gain or loss not required -- (i) Distribution of
property used in a United States trade or business -- (A) Conditions for
nonrecognition. The domestic corporation shall not recognize gain or
loss under paragraph (b)(1) of this section on its distribution of
property (including inventory) used by the domestic corporation in the
conduct of a trade or business within the United States if --
(1) The distributee foreign corporation is not a controlled foreign
corporation, as defined in section 957(a) or section 953(c) (including a
corporation that would be treated as a controlled foreign corporation
under section 953(c) but for the provisions of section 953(c)(3)), at
the time of the distribution of property;
(2) The distributee foreign corporation, for the ten-year period
beginning on the date of the distribution of such property, uses the
property in the conduct of a trade or business in the United States (or,
in the case of inventory, continues to hold the property for sale to
customers until disposed of); and
(3) The domestic and foreign corporations attach the statement
described in paragraph (b)(2)(i)(B) to their U.S. income tax returns for
the year of the distribution (or to an amended return filed no later
than July 16, 1990).
This nonrecognition rule does not apply to the distribution of
intangibles described in section 936(h)(3)(B). Property is considered
used by a foreign corporation in the conduct of a trade or business in
the United States only if any income from the use of the property and
any income or gain from the sale or exchange of the property would be
subject to taxation under section 882(a) as effectively connected
income. For purposes of this paragraph (b)(2)(i)(A), stock held by a
dealer as inventory or for sale in the ordinary course of its trade or
business shall be treated as inventory and not as stock in the hands of
both the domestic corporation and the distributee foreign corporation.
lf a distributing domestic corporation that would otherwise qualify for
nonrecognition on the distribution of such property under this paragraph
(b)(2)(i) fails to file the statement properly or files a statement that
does not comply with the requirements of paragraph (b)(2)(i)(B) of this
section, the Commissioner may, nevertheless, in his discretion treat the
distributing domestic corporation as if it had, in fact, met all the
requirements of paragraph (b)(2)(i)(B) if such treatment is necessary to
prevent the taxpayer from otherwise deriving a tax benefit by such
failure.
(B) Required statement. The statement required by paragraph
(b)(2)(i)(A) shall be prepared by the distributing domestic corporation
and signed under penalties of perjury by an authorized officer of each
of the distributing domestic and distributee foreign corporations. The
statement shall set forth the following items:
(1) A declaration that the distribution to the foreign corporation is
one to which the rules of 1.367(e)-2T(b)(2)(i) apply.
(2) A description of all of the property distributed by the domestic
corporation (whether or not the property qualifies for nonrecognition).
Such description shall identify the property that continues to be used
by the distributee foreign corporation in the conduct of a trade or
business within the United States, including the location, adjusted
basis, estimated fair market value, a summary of the method (including
appraisals if any) used for determining such value, and the date of
distribution of such items of property.
(3) An identification of the distributee foreign corporation,
including its name and address, taxpayer identification number (if any),
residence and place of incorporation.
(4) With respect to property entitled to nonrecognition pursuant to
paragraph (b)(2)(i), a declaration by the distributee foreign
corporation that it irrevocably waives any right under any treaty
(whether or not currently in force at the time of the liquidation) to
sell or exchange any item of such property without U.S. income taxation
or at a reduced rate of taxation, or to derive income from the use of
any item of such property without U.S. income taxation or at a reduced
rate of taxation.
(5) An agreement by the distributing domestic corporation and the
distributee foreign corporation to extend the statute of limitations on
assessments and collections (under section 6501) with respect to the
distribution of each item of property until three years after the date
on which all such items of property have ceased to be used in a trade or
business within the United States pursuant to paragraph (b)(2)(i)(C)(1),
but in no event shall the extension be for a period longer than 13 years
from the filing of the original U.S. income tax return for the taxable
year of the last distribution of any such item of property. If,
however, the distributing domestic corporation files an amended return
pursuant to the provisions of paragraph (b)(2)(i)(C), other than an
amended return filed for the substitution of property exchanged under
section 1031 or converted under section 1033, the agreement to extend
the statute of limitations on assessments and collections as to the
property with respect to which gain is included on the amended return
will not extend beyond three years (except as otherwise provided by
section 6501) after the filing of the amended tax return.
(C) Effect of submitting statement. By the distributing domestic
corporation's claiming nonrecognition under this paragraph (b)(2)(i),
the distributing domestic corporation and the distributee foreign
corporation agree to be subject to the rules of this paragraph
(b)(2)(i)(C).
(1) If, within the ten year period from the date of distribution, any
item of property entitled to nonrecognition under paragraph (b)(2)(i)(A)
ceases to be used by the distributee foreign corporation in the conduct
of a trade or business in the United States for any reason (including
but not limited to the sale or exchange of such property or the removal
of the property from conduct of the trade or business), then, except as
provided in paragraph (b)(2)(i)(C)(3), the distributee foreign
corporation shall cause to be filed on behalf of the domestic
corporation an amended U.S. income tax return for the year of the
distribution of such item of property, in which return the domestic
corporation recognizes the gain (but not loss) realized but not
recognized upon the initial distribution of such item of property. On
the amended return filed pursuant to paragraph (b)(2)(i)(C)(1), the
distributing domestic corporation may use any losses (or credits)
existing in the year of the distribution, that were otherwise available
in that year and not used in another year, to offset the gain (or tax
thereon) required to be recognized under such paragraph.
(2) The amended return required by paragraph (b)(2)(i)(C)(1) shall be
filed no later than the due date (including extensions) for the return
of the distributee foreign corporation for the taxable year in which the
property ceases to be used by the distributee foreign corporation in the
conduct of a trade or business in the United States.
(3) If property ceases to be used by the distributee foreign
corporation in the conduct of a trade or business in the United States
by reason of a disposition of such property, and either (i) a loss is
recognized in whole on such disposition, or (ii) a gain is recognized in
whole and the distributee foreign corporation reports the full amount of
such gain on its timely filed U.S. tax return for the year of the
disposition, then the distributing domestic corporation shall not be
required to recognize any gain in respect of the distribution of such
property on an amended return for the year of the distribution. If a
gain is recognized in whole on the disposition of the property and the
distributee foreign corporation does not report the full amount of such
gain on a timely filed U.S. tax return for the year of the disposition,
then the distributing domestic corporation shall be required to
recognize and include in income on an amended return for the year of the
distribution the full amount of gain realized by such domestic
corporation on the distribution of such property. If the domestic
corporation is required to recognize gain in the year of the
distribution, the foreign corporation shall, nonetheless, be required to
recognize any gain realized on the disposition of the property according
to generally applicable principles, but the basis of the property in the
hands of the foreign corporation shall be adjusted to reflect the
recognition of gain by the domestic corporation. Thus, if the property
ceases to be used in the active conduct of a trade or business in the
United States in a transaction in which gain is recognized, and the
distributee foreign corporation includes in income the full amount of
such gain on a timely filed return for the taxable year in which gain is
recognized, then no amended return shall be required to be filed in
respect of such property by the distributing domestic corporation.
(4) For purposes of this paragraph (b)(2)(i)(C), property shall not
be considered as no longer used in the conduct of a trade or business in
the United States if exchanged for, or involuntarily converted into,
similar property used in the conduct of a trade or business in the
United States, to the extent such exchange or conversion qualifies for
nonrecognition under section 1031 or 1033, or distributed to another
foreign corporation in a liquidation distribution under section 337(a)
qualifying for nonrecognition under paragraph (c)(2)(i) of this section.
Further, a cessation of use of property in the conduct of a trade or
business in the United States shall not include the abandonment or
disposal of essentially worthless or obsolete property. If the
distributee foreign corporation exchanges the property under section
1031 for, or converts the property under section 1033 into similar
property used in the conduct of a trade or business in the United
States, then the domestic corporation and the distributee foreign
corporation must file amended returns for the year of the distribution
of such property from the domestic corporation to the distributee
foreign corporation, in order to substitute on the statement that was
required by paragraph (b)(2)(i)(B) the property received in place of the
property exchanged or converted. If the distributee foreign corporation
distributes the property in a liquidation distribution under section
337(a) qualifying for nonrecognition under paragraph (c)(2)(i), then the
rules of such paragraph shall apply to the distribution.
(5) If additional tax is required to be paid by the distributing
corporation for the year of a liquidating distribution, then interest
must be paid on that amount at the rates determined under section 6621
with respect to the period between the date that was prescribed for
filing the distributing domestic corporation's U.S. income tax return
for the year of the distribution and the date on which the additional
tax for that year is paid.
(6) The distributee foreign corporation, as successor in interest and
liability to the distributing domestic corporation, shall be jointly and
severally liable for any tax owed by the distributing domestic
corporation as a result of the application of paragraph (b)(2)(i), and
shall succeed to the distributing domestic corporation's agreement to
extend the statute of limitations and collections under section 6561.
(7) The distributee foreign corporation shall attach a statement to
its U.S. income tax return for each year after the liquidation of the
distributing domestic corporation. The statement shall identify the
distributed property that ceased to be used by the distributee foreign
corporation in the conduct of a trade or business within the United
States during that year (without regard to whether the distributing
domestic corporation was required to file an amended return as a result
of such disposition pursuant to paragraph (b)(2)(i)(C)(3) of this
section). The requirement to attach such statement to the return shall
not apply to any taxable year of the distributee foreign corporation
after the final taxable year in which any distributed property is used
by such corporation in the conduct of a trade or business within the
United States, and in no event shall the requirement apply to a taxable
year later than 13 years from the filing of the original U.S. income tax
return for the taxable year of the distribution.
(ii) Distribution of U.S. real property interests. The domestic
corporation shall not recognize gain under paragraph (b)(1) of this
section on the distribution of a U.S. real property interest (other than
stock in a former U.S. real property holding corporation which is
treated as a U.S. real property interest for five years under
1.897-5T(c)(1)) in a complete liquidation under section 332(a) to the
distributee foreign corporation that meets the stock ownership
requirements of section 332(b) with respect to stock in the distributing
domestic corporation. See 1.897-5T(b)(3)(iv)(A). If property
distributed by the domestic corporation is a U.S. real property interest
that qualifies for nonrecognition under this paragraph (b)(2)(ii) in
addition to nonrecognition provided by paragraph (b)(2)(i) of this
section, then the distributing domestic corporation shall secure
nonrecognition pursuant to this paragraph (b)(2)(ii) and not pursuant to
the provisions of paragraph (b)(2)(i).
(iii) Transitional rule for certain treaty provisions. A
distributing domestic corporation shall not recognize gain or loss under
paragraph (b)(1) of this section on the distribution of property in a
complete liquidation under section 332(a) to a foreign corporation that
meets the stock ownership requirements of section 332(b) with respect to
stock in the domestic corporation if --
(A) Such property was distributed by the domestic corporation and
received by the foreign corporation after July 31, 1986, and before
September 29, 1987 in a distribution that would have been subject to
section 367(e)(2) (as enacted by the Tax Reform Act of 1986) but for the
provisions of Notice 87-5, 1987-1 C.B. 416, and
(B) The foreign corporation is a resident of a foreign country which
had an income tax treaty with the United States in force at the time of
the distribution which contained a provision barring discrimination
based on capital ownership and the corporation is not denied the benefit
of nondiscrimination under that treaty.
See Notice 87-66, 1987-2 C.B. 376.
(3) Other consequences -- (i) Distributee basis in property. The
basis of property distributed pursuant to paragraph (b) of this section
in the hands of the distributee foreign corporation shall be the basis
of such property in the hands of the distributing domestic corporation,
increased by the amount of gain (if any), or reduced by the amount of
loss (if any), recognized by the domestic corporation on the
distribution of each of the respective properties pursuant to paragraph
(b)(1) of this section.
(ii) Dividend treatment under section 1248. With respect to the
treatment as a dividend of a portion of the gain recognized by the
domestic corporation on the distribution of the stock of certain
domestic and foreign corporations, see section 1248 (a) and (e) and the
regulations thereunder. With respect to the treatment as a dividend of
a portion of the gain realized but not otherwise recognized under
paragraph (b)(1) of this section by the domestic corporation on the
distribution of the stock of a foreign corporation (including a foreign
corporation, the stock of which is a U.S. real property interest,
because such corporation has in effect a valid election under section
897(i)), see section 1248(f) and the regulations thereunder.
(iii) Exchange under section 897(e)(1). With respect to the
treatment under section 897(e)(1) of a distributee foreign corporation
whose interest in the distributing domestic corporation is a U.S. real
property interest, see 1.897-5T(b)(3)(iv)(A).
(iv) Distribution of stock of a passive foreign investment company.
(Reserved)
(v) Carryover of tax attributes. In regard to the carryover of
certain tax attributes from the domestic corporation to the distributee
foreign corporation, see section 381 and the regulations thereunder.
(4) Examples. The rules of this paragraph (b) may be illustrated by
the following examples.
Example (1). (i) FC, a Country X corporation, owns all of the
outstanding stock of DC, a domestic corporation. All of the property of
DC has appreciated in value and is used in the conduct of a trade or
business in Country X. None of the DC property is used in connection
with the conduct of a trade or business within the United States. In a
liquidation under section 332, DC distributes all of its property to FC.
(ii) Under paragraph (b)(1) of this section, DC recognizes gain on
the distribution of its property to FC. FC takes a basis in each
property equal to DC's basis in the property increased by the amount of
any gain recognized by DC on the distribution of the property.
Example (2). (i) FC, a Country X corporation that is not a
controlled foreign corporation, owns all of the outstanding stock of DC,
a domestic corporation. DC owns Parcel P (a U.S. real property
interest), equipment used in the conduct of a trade or business in the
United States, and all of the stock in DC1, a domestic corporation, and
FS, a foreign corporation that is not a passive foreign investment
company. All of the property has appreciated in value since acquired by
DC. DC, DC1, and FS have never been U.S. real property holding
corporations.
(ii) DC distributes all of its property to FC in complete liquidation
under section 332 on March 1, 1988. Beginning immediately after the
distribution of the equipment, FC uses the equipment in the conduct of a
trade or business in the U.S.
(iii) Under paragraph (b)(2)(ii) of this section, DC does not
recognize gain on the distribution of Parcel P. If DC and FC comply
with the requirements of paragraph (b)(2)(i) of this section, DC will
not recognize gain on the distribution of the equipment, because FC uses
the equipment in the conduct of a U.S. trade or business immediately
after the distribution. DC must recognize gain pursuant to paragraph
(b)(1) of this section on the distribution of the stock of DC1 and FS
because there is no exception from gain recognition for the liquidating
distribution of stock that is not held by the distributing corporation
for sale to customers in the ordinary course or as inventory unless the
corporation the stock of which is being distributed is a U.S. real
property holding corporation. In regard to the treatment of DC under
section 1248, see, however, section 1248 (a) and (e) and the regulations
thereunder.
(iv) FC takes DC's basis under paragraph (b)(3)(i) of this section in
Parcel P and the equipment because no gain is recognized by DC on the
distribution of that property. Under paragraph (b)(3)(i) of this
section, FC takes DC's basis in the stock of DC1 and FS, increased by
the amount of the gain recognized by DC on the respective stocks.
(c) Distribution by a foreign corporation -- (1) Recognition of gain
generally not required. If a foreign corporation makes a distribution
of property in complete liquidation under section 332 to another foreign
corporation that meets the stock ownership requirements of section
332(b) with respect to stock in the distributing foreign corporation,
then, except as provided in paragraph (c)(2) of this section, section
337 (a) and (b)(1) shall apply and the distributing foreign corporation
shall not recognize gain (or loss) on the distribution under section
367(e)(2). If a distributing foreign corporation distributes an
interest as a partner in a partnership (whether foreign or domestic),
then such corporation shall be treated as having distributed a
proportionate share of the property of the partnership in accordance
with the principles of paragraph (b)(1)(iii) of this section.
(2) Recognition of gain required -- (i) Property used in a United
States trade or business -- (A) In general. A foreign corporation
(including a corporation that has made an effective election under
section 897(i)) that makes a distribution of property in complete
liquidation under section 332 to another foreign corporation that meets
the stock ownership requirements of section 332(b) with respect to the
stock in the distributing foreign corporation shall recognize gain on
the distribution of any property (other than U.S. real property
interests) used by the distributing foreign corporation at the time of
the liquidation in the conduct of a trade or business within the United
States unless the distributee foreign corporation for a ten-year period
continues to use such property in the conduct of a trade or business
within the United States, and the distributing and distributee foreign
corporations attach the statement described in paragraph (c)(2)(i)(B) to
their U.S. income tax returns for their taxable years that include the
distribution. However, this paragraph (c)(2)(i)(A) shall not apply if
all of the following conditions exist.
(1) At the time of the distribution, the distributing and the
distributee foreign corporations are controlled foreign corporations as
defined in section 957 (a) or (b) or section 953(c) (including a
corporation that would be treated as a controlled foreign corporation
under section 953(c) but for the provisions of section 953(c)(3));
(2) The distributee foreign corporation uses such property in the
conduct of a trade or business within the United States immediately
after the distribution;
(3) There was no prior liquidation subject to section 367(e)(2) of a
corporation into the distributing corporation (or a predecessor
corporation) under paragraph (b)(2)(i) or this paragraph (c)(2)(i)
(other than a controlled foreign corporation into another controlled
foreign corporation); and
(4) The distributee foreign corporation is not entitled to benefits
under a comprehensive income tax treaty, but if the distributing foreign
corporation (or predecessor corporation) was entitled to benefits under
a comprehensive income tax treaty, then the distributee foreign
corporation may (but need not) be entitled to benefits under a
comprehensive income tax treaty.
(B) Required statement. The statement required by paragraph
(c)(2)(i)(A) shall be prepared by or on behalf of the distributing
foreign corporation and signed under penalties of perjury by an
authorized officer of each of the distributing and distributee foreign
corporations, and shall be identical to the statement described in
paragraph (b)(2)(i)(B), except that '' 1.367(e)-2T(c)(2)(i)'' shall be
substituted for references to '' 1.367(e)-2T(b)(2)(i)'' and the term
''distributing foreign corporation'' shall be substituted for either the
term ''domestic corporation'' or the term ''distributing domestic
corporation'' each time it appears. References in the rules of
paragraph (b)(2)(i)(B) to various rules in paragraph (b) shall be
applied as if such references were to this paragraph (c). However, the
distributee foreign corporation shall not be required to waive its
income tax treaty benefits as required by 1.367(e)-2T(b)(2)(i)(B)(4)
unless the distributing foreign corporation was required to waive its
treaty benefits under paragraph (b)(2)(i)(B)(4) of this section in
connection with the distribution of such property in a prior liquidation
distribution subject to the provisions of this section; the distributee
foreign corporation is entitled to benefits under a treaty to which the
distributing foreign corporation was not entitled; or the distributee
foreign corporation is incorporated in a country different from the
country in which the distributing foreign corporation is incorporated.
(C) Effect of submitting or failing to submit a statement. By the
distributing foreign corporation's claiming nonrecognition under this
paragraph (c)(2)(i), the distributing foreign corporation and the
distributee foreign corporation agree to be subject to the rules of this
paragraph (c)(2)(i) and the rules of paragraph (b)(2)(i)(C). In
applying the rules of paragraph (b)(2)(i)(C), the term ''distributing
foreign corporation'' shall be substituted for either the term
''domestic corporation'' or the term ''distributing domestic
corporation'' each time it appears. References in the rules of
paragraph (b)(2)(i)(C) to various rules in paragraph (b) shall be
applied as if such references were to this paragraph (c). However, if a
distributing foreign corporation that would otherwise qualify for
nonrecognition on the distribution of such property under this paragraph
(c)(2)(i) fails to file the statement properly or files a statement that
does not comply with the requirements of this paragraph, the
Commissioner may, nevertheless, in his discretion treat the distributing
foreign corporation as if it had, in fact, met all the requirements of
this paragraph if such treatment is necessary to prevent the taxpayer
from otherwise deriving a tax benefit by such failure.
(ii) Property formerly used in a United States trade or business. A
foreign corporation making a distribution of property in complete
liquidation under section 332 to another foreign corporation that meets
the stock ownership requirements of section 332(b) with respect to stock
in the distributing foreign corporation shall recognize gain (but not
loss) on the distribution of any property (other than U.S. real
property interests) that ceased, in a taxable year beginning after
December 31, 1986, and within ten years prior to the date of
liquidation, to be used in connection with the conduct of a trade or
business within the United States. Section 864(c)(7) shall govern the
treatment of any gain recognized on the distribution of assets described
in this paragraph as income effectively connected with the conduct of a
trade or business within the United States.
(3) Other consequences -- (i) Distributee basis in property. The
basis of distributed property in the hands of the distributee foreign
corporation shall be the basis of the distributed property in the hands
of the distributing foreign corporation, increased by the amount of gain
(if any) recognized by the distributing foreign corporation on the
distribution of the property. However, the basis of the distributed
property in the hands of the distributee foreign corporation shall not
exceed the fair market value of such property where the distributing
foreign corporation recognizes gain on the distribution under this
section and the distributee foreign corporation recognizes gain under
section 897(e) or the regulations thereunder. See
1.897-5T(b)(3)(iv)(B).
(ii) Distribution under section 367(b). With respect to the
treatment of certain distributee foreign corporations under section
367(b), see 7.367(b)-5(c).
(iii) Distribution or exchange of U.S. real property interests. With
respect to the treatment under section 897(d) of a distributing foreign
corporation on the distribution of a U.S. real property interest, see
1.897-5T(c)(2) (i) and (ii). With respect to the treatment under
section 897(e) of the distributee foreign corporation where the
distributing foreign corporation has made an election under section
897(i) and the stock of such corporation is treated as a U.S. real
property interest, see 1.897-5T(b)(3)(iv)(B).
(iv) Distribution of stock of a passive foreign investment company.
(Reserved)
(v) Carryover of tax attributes. In regard to the carryover of
certain tax attributes from the distributing foreign corporation to the
distributee foreign corporation, see section 381 and the regulations
thereunder.
(4) Examples. The rules of this paragraph (c) may be illustrated by
the following examples.
Example (1). (i) FX1, a Country Y corporation, owns all of the
outstanding stock of FX2, a Country Y corporation that is not a passive
foreign investment company. FX2 owns Parcel P (a U.S. real property
interest), Asset 1 that formerly was used by FX2 in its U.S. trade or
business, and Asset 2 currently used by FX2 in its U.S. trade or
business. Asset 1 ceased to be used in a U.S. trade or business on
September 30, 1987. All of the property has appreciated in value since
acquired by FX2.
(ii) In a liquidation under section 332, FX2 distributes all of its
property to FX1 on December 31, 1989. FX1 uses Asset 2 in the conduct
of a trade or business in the United States immediately after the
distribution.
(iii) Under paragraphs (c) (1) and (2) of this section, FX2 does not
recognize gain under section 367(e)(2) on the distribution of Parcel P.
Any gain realized on Parcel P may be subject to taxation under section
897 (d) if certain procedural requirements contained in
1.897-5T(d)(1)(iii) are not followed. FX2 must recognize gain on the
distribution of Asset 1 under paragraph (c)(2)(ii) of this section.
Section 864 (c)(7) shall govern the treatment of the gain recognized by
FX2 on Asset 1 as income effectively connected with a trade or business
in the United States. Because FX2 used and FX1 uses Asset 2 in the
conduct of a trade or business in the United States, FX2 will not
recognize gain under paragraph (c)(2)(i) of this section on the
distribution of Asset 2 if FX1 and FX2 comply with the requirements of
that paragraph.
(iv) Under paragraph (c)(3)(i) of this section, FX1 takes FX2's basis
in Parcel P and Asset 2 if there is compliance with the requirements.
Under paragraph (c)(3)(i) of this section, FX1 takes FX2's basis in
Asset l increased by the gain recognized.
Example (2). (i) FY1, a Country F corporation, owns all of the
outstanding stock of FY2, a Country F corporation that is not a passive
foreign investment company. FY2 owns Parcel P (a U.S. real property
interest held for investment) and machinery used in its U.S. trade or
business. FY2 has made an effective election under section 897(i), and
the FY2 stock is treated as a U.S. real property interest.
(ii) In a liquidation under section 332, FY2 distributes all of its
property to FY1. FY1 will use the machinery in the conduct of a trade
or business in the United States immediately after the distribution.
(iii) Under paragraphs (c) (1) and (2) of this section, FY2 does not
recognize gain under section 367(e)(2) on the distribution of Parcel P.
Any gain realized on Parcel P may be subject to taxation under section
897(d) if certain procedural requirements contained in
l.897-5T(d)(1)(iii) are not followed. Because FY2 used and FY1
continues to use the machinery in the conduct of a trade or business in
the United States, FY2 does not recognize gain on the distribution of
the machinery under paragraph (c)(2)(i) of this section if FY1 and FY2
comply with the requirements of that paragraph.
(iv) Under paragraph (c)(3)(i) of this section, FY1 takes FY2's basis
in Parcel P. Under paragraph (c)(3)(i) of this section, FY1 takes FY2's
basis in the machinery. See 1.897-5T(b)(3)(iv)(B) for the treatment of
FY1 under section 897 (e).
(d) Effective date. This section shall be effective for
distributions after July 31, 1986, pursuant to section 337(a) as in
effect after the effective dates of the amendments of section 631 of the
Tax Reform Act of 1986, except that it shall not apply in the case of
any corporation completely liquidated before June 10, 1987, into a
corporation organized in a country which then had an income tax treaty
with the United States. See section 1006(e)(13) of the Technical and
Miscellaneous Revenue Act of 1988 (102 Stat. 3342, Public Law 100-647).
(T.D. 8280, 55 FR 1412, Jan. 16, 1990)
26 CFR 1.367(e)-2T special rule; definitions
26 CFR 1.368-1 Purpose and scope of exception of reorganization
exchanges.
(a) Reorganizations. As used in the regulations under parts I, II,
and III (section 301 and following), subchapter C, chapter 1 of the
Code, the terms reorganization and party to a reorganization mean only a
reorganization or a party to a reorganization as defined in subsections
(a) and (b) of section 368. With respect to insolvency reorganizations,
see part IV, subchapter C, chapter 1 of the Code.
(b) Purpose. Under the general rule, upon the exchange of property,
gain or loss must be accounted for if the new property differs in a
material particular, either in kind or in extent, from the old property.
The purpose of the reorganization provisions of the Code is to except
from the general rule certain specifically described exchanges incident
to such readjustments of corporate structures made in one of the
particular ways specified in the Code, as are required by business
exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms. Requisite to a
reorganization under the Code are a continuity of the business
enterprise under the modified corporate form, and (except as provided in
section 368(a)(1)(D)) a continuity of interest therein on the part of
those persons who, directly or indirectly, were the owners of the
enterprise prior to the reorganization. The continuity of business
enterprise requirement is described in paragraph (d) of this section.
The Code recognizes as a reorganization the amalgamation (occurring in a
specified way) of two corporate enterprises under a single corporate
structure if there exists among the holders of the stock and securities
of either of the old corporations the requisite continuity of interest
in the new corporation, but there is not a reorganization if the holders
of the stock and securities of the old corporation are merely the
holders of short-term notes in the new corporation. In order to exclude
transactions not intended to be included, the specifications of the
reorganization provisions of the law are precise. Both the terms of the
specifications and their underlying assumptions and purposes must be
satisfied in order to entitle the taxpayer to the benefit of the
exception from the general rule. Accordingly, under the Code, a
short-term purchase money note is not a security of a party to a
reorganization, an ordinary dividend is to be treated as an ordinary
dividend, and a sale is nevertheless to be treated as a sale even though
the mechanics of a reorganization have been set up.
(c) Scope. The nonrecognition of gain or loss is prescribed for two
specifically described types of exchanges, viz: The exchange that is
provided for in section 354(a)(1) in which stock or securities in a
corporation, a party to a reorganization, are, in pursuance of a plan of
reorganization, exchanged for the stock or securities in a corporation,
a party to the same reorganization; and the exchange that is provided
for in section 361(a) in which a corporation, a party to a
reorganization, exchanges property, in pursuance of a plan of
reorganization, for stock or securities in another corporation, a party
to the same reorganization. Section 368(a)(1) limits the definition of
the term ''reorganization'' to six kinds of transactions and excludes
all others. From its context, the term ''a party to a reorganization''
can only mean a party to a transaction specifically defined as a
reorganization by section 368(a). Certain rules respecting boot
received in either of the two types of exchanges provided for in section
354(a)(1) and section 361(a) are prescribed in sections 356, 357, and
361(b). A special rule respecting a transfer of property with a
liability in excess of its basis is prescribed in section 357(c). Under
section 367 a limitation is placed on all these provisions by providing
that except under specified conditions foreign corporations shall not be
deemed within their scope. The provisions of the Code referred to in
this paragraph are inapplicable unless there is a plan of
reorganization. A plan of reorganization must contemplate the bona fide
execution of one of the transactions specifically described as a
reorganization in section 368(a) and for the bona fide consummation of
each of the requisite acts under which nonrecognition of gain is
claimed. Such transaction and such acts must be an ordinary and
necessary incident of the conduct of the enterprise and must provide for
a continuation of the enterprise. A scheme, which involves an abrupt
departure from normal reorganization procedure in connection with a
transaction on which the imposition of tax is imminent, such as a mere
device that puts on the form of a corporate reorganization as a disguise
for concealing its real character, and the object and accomplishment of
which is the consummation of a preconceived plan having no business or
corporate purpose, is not a plan of reorganization.
(d) Continuity of business enterprise -- (1) Effective date. (i)
This paragraph (d) applies to acquisitions occurring after January 30,
1981.
(ii) For an asset acquisition, the date of acquisition is the date of
transfer. To determine the date of transfer, see 1.381 (b)-1 (b).
(iii) For a stock acquisition, the date of acquisition is the date on
which the exchange of stock occurs. If all stock is not exchanged on
the same date, the date of exchange is the date the exchange of all
stock under the plan of reorganization is complete.
(2) General rule. Continuity of business enterprise requires that
the acquiring corporation (P) either (i) continue the acquired
corporation's (T's) historic business or (ii) use a significant portion
of T's historic business assets in a business. The application of this
general rule to certain transactions, such as mergers of holding
companies, will depend on all facts and circumstances. The policy
underlying this general rule, which is to ensure that reorganizations
are limited to readjustments of continuing interests in property under
modified corporate form, provides the guidance necessary to make these
facts and circumstances determinations.
(3) Business continuity. (i) The continuity of business enterprise
requirement is satisfied if P continues T's historic business. The fact
P is in the same line of business as T tends to establish the requisite
continuity, but is not alone sufficient.
(ii) If T has more than one line of business, continuity of business
enterprise requires only that P continue a significant line of business.
(iii) In general, a corporation's historic business is the business
it has conducted most recently. However, a corporation's historic
business is not one the corporation enters into as part of a plan of
reorganization.
(iv) All facts and circumstances are considered in determining the
time when the plan comes into existence and in determining whether a
line of business is ''significant''.
(4) Asset continuity. (i) The continuity of business enterprise
requirement is satisfied if P uses a significant portion of T's historic
business assets in a business.
(ii) A corporation's historic business assets are the assets used in
its historic business. Business assets may include stock and securities
and intangible operating assets such as good will, patents, and
trademarks, whether or not they have a tax basis.
(iii) In general, the determination of the portion of a corporation's
assets considered ''significant'' is based on the relative importance of
the assets to operation of the business. However, all other facts and
circumstances, such as the net fair market value of those assets, will
be considered.
(5) Examples. The following examples illustrate this paragraph (d).
Example (1). T conducts three lines of business: manufacture of
synthetic resins, manufacture of chemicals for the textile industry, and
distribution of chemicals. The three lines of business are
approximately equal in value. On July 1, 1981, T sells the synthetic
resin and chemicals distribution businesses to a third party for cash
and marketable securities. On December 31, 1981, T transfers all of its
assets to P solely for P voting stock. P continues the chemical
manufacturing business without interruption. The continuity of business
enterprise requirement is met. Continuity of business enterprise
requires only that P continue one of T's three significant lines of
business.
Example (2). P manufactures computers and T manufactures components
for computers. T sells all of its output to P. On January 1, 1981, P
decides to buy imported components only. On March 1, 1981, T merges
into P. P continues buying imported components but retains T's
equipment as a backup source of supply. The use of the equipment as a
backup source of supply constitutes use of a significant portion of T's
historic business assets, thus establishing continuity of business
enterprise. P is not required to continue T's business.
Example (3). T is a manufacturer of boys' and men's trousers. On
January 1, 1978, as part of a plan of reorganization, T sold all of its
assets to a third party for cash and purchased a highly diversified
portfolio of stocks and bonds. As part of the plan T operates an
investment business until July 1, 1981. On that date, the plan of
reorganization culminates in a transfer by T of all its assets to P, a
regulated investment company, solely in exchange for P voting stock.
The continuity of business enterprise requirement is not met. T's
investment activity is not its historic business, and the stocks and
bonds are not T's historic business assets.
Example (4). T manufactures children's toys and P distributes steel
and allied products. On January 1, 1981, T sells all of its assets to a
third party for $100,000 cash and $900,000 in notes. On March 1, 1981,
T merges into P. Continuity of business enterprise is lacking. The use
of the sales proceeds in P's business is not sufficient.
Example (5). T manufactures farm machinery and P operates a lumber
mill. T merges into P. P disposes of T's assets immediately after the
merger as part of the plan of reorganization. P does not continue T's
farm machinery manufacturing business. Continuity of business
enterprise is lacking.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7745, 45
FR 86437, Dec. 31, 1980)
26 CFR 1.368-2 Definition of terms.
(a) The application of the term ''reorganization'' is to be strictly
limited to the specific transactions set forth in section 368(a). The
term does not embrace the mere purchase by one corporation of the
properties of another corporation, for it imports a continuity of
interest on the part of the transferor or its shareholders in the
properties transferred. If the properties are transferred for cash and
deferred payment obligations of the transferee evidenced by short-term
notes, the transaction is a sale and not an exchange in which gain or
loss is not recognized.
(b)(1) In order to qualify as a reorganization under section
368(a)(1)(A) the transaction must be a merger or consolidation effected
pursuant to the corporation laws of the United States or a State or
territory, or the District of Columbia.
(2) In order for the transaction to qualify under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(D), one
corporation (the acquiring corporation) must acquire substantially all
of the properties of another corporation (the acquired corporation)
partly or entirely in exchange for stock of a corporation which is in
control of the acquiring corporation (the controlling corporation),
provided that (i) the transaction would have qualified under section
368(a)(1)(A) if the merger had been into the controlling corporation,
and (ii) no stock of the acquiring corporation is used in the
transaction. The foregoing test of whether the transaction would have
qualified under section 368(a)(1)(A) if the merger had been into the
controlling corporation means that the general requirements of a
reorganization under section 368(a)(1)(A) (such as a business purpose,
continuity of business enterprise, and continuity of interest) must be
met in addition to the special requirements of section 368(a)(2)(D).
Under this test, it is not relevant whether the merger into the
controlling corporation could have been effected pursuant to State or
Federal corporation law. The term ''substantially all'' has the same
meaning as it has in section 368(a)(1)(C). Although no stock of the
acquiring corporation can be used in the transaction, there is no
prohibition (other than the continuity of interest requirement) against
using other property, such as cash or securities, of either the
acquiring corporation or the parent or both. In addition, the
controlling corporation may assume liabilities of the acquired
corporation without disqualifying the transaction under section
368(a)(2(D), and for purposes of section 357(a) the controlling
corporation is considered a party to the exchange. For example, if the
controlling corporation agrees to substitute its stock for stock of the
acquired corporation under an outstanding employee stock option
agreement, this assumption of liability will not prevent the transaction
from qualifying as a reorganization under section 368(a)(2)(D) and the
assumption of liability is not treated as money or other property for
purposes of section 361(b). Section 368(a)(2)(D) applies whether or not
the controlling corporation (or the acquiring corporation) is formed
immediately before the merger, in anticipation of the merger, or after
preliminary steps have been taken to merge directly into the controlling
corporation. Section 368(a)(2) (D) applies only to statutory mergers
occurring after October 22, 1968.
(3) For regulations under section 368(a)(2)(E), see paragraph (j) of
this section.
(c) In order to qualify as a ''reorganization'' under section
368(a)(1)(B), the acquisition by the acquiring corporation of stock of
another corporation must be in exchange solely for all or a part of the
voting stock of the acquiring corporation (or, in the case of
transactions occurring after December 31, 1963, solely for all or a part
of the voting stock of a corporation which is in control of the
acquiring corporation), and the acquiring corporation must be in control
of the other corporation immediately after the transaction. If, for
example, Corporation X in one transaction exchanges nonvoting preferred
stock or bonds in addition to all or a part of its voting stock in the
acquisition of stock of Corporation Y, the transaction is not a
reorganization under section 368(a)(1)(B). Nor is a transaction a
reorganization described in section 368(a)(1)(B) if stock is acquired in
exchange for voting stock both of the acquiring corporation and of a
corporation which is in control of the acquiring corporation. The
acquisition of stock of another corporation by the acquiring corporation
solely for its voting stock (or solely for voting stock of a corporation
which is in control of the acquiring corporation) is permitted tax-free
even though the acquiring corporation already owns some of the stock of
the other corporation. Such an acquisition is permitted tax-free in a
single transaction or in a series of transactions taking place over a
relatively short period of time such as 12 months. For example,
Corporation A purchased 30 percent of the common stock of Corporation W
(the only class of stock outstanding) for cash in 1939. On March 1,
1955, Corporation A offers to exchange its own voting stock for all the
stock of Corporation W tendered within 6 months from the date of the
offer. Within the 6-months' period Corporation A acquires an additional
60 percent of stock of Corporation W solely for its own voting stock, so
that it owns 90 percent of the stock of Corporation W. No gain or loss
is recognized with respect to the exchanges of stock of Corporation A
for stock of Corporation W. For this purpose, it is immaterial whether
such exchanges occurred before Corporation A acquired control (80
percent) of Corporation W or after such control was acquired. If
Corporation A had acquired 80 percent of the stock of Corporation W for
cash in 1939, it could likewise acquire some or all of the remainder of
such stock solely in exchange for its own voting stock without
recognition of gain or loss.
(d) In order to qualify as a reorganization under section
368(a)(1)(C), the transaction must be one described in subparagraph (1)
or (2) of this paragraph:
(1) One corporation must acquire substantially all the properties of
another corporation solely in exchange for all or a part of its own
voting stock, or solely in exchange for all or a part of the voting
stock of a corporation which is in control of the acquiring corporation.
For example, Corporation P owns all the stock of Corporation A. All
the properties of Corporation W are transferred to Corporation A either
solely in exchange for voting stock of Corporation P or solely in
exchange for less than 80 percent of the voting stock of Corporation A.
Either of such transactions constitutes a reorganization under section
368(a)(1)(C). However, if the properties of Corporation W are acquired
in exchange for voting stock of both Corporation P and Corporation A,
the transaction will not constitute a reorganization under section
368(a)(1)(C). In determining whether the exchange meets the requirement
of ''solely for voting stock'', the assumption by the acquiring
corporation of liabilities of the transferor corporation, or the fact
that property acquired from the transferor corporation is subject to a
liability, shall be disregarded. Though such an assumption does not
prevent an exchange from being solely for voting stock for the purposes
of the definition of a reorganization contained in section 368(a)(1)(C),
it may in some cases, however, so alter the character of the transaction
as to place the transaction outside the purposes and assumptions of the
reorganization provisions. Section 368(a)(1)(C) does not prevent
consideration of the effect of an assumption of liabilities on the
general character of the transaction but merely provides that the
requirement that the exchange be solely for voting stock is satisfied if
the only additional consideration is an assumption of liabilities.
(2) One corporation:
(i) Must acquire substantially all of the properties of another
corporation in such manner that the acquisition would qualify under (1)
above, but for the fact that the acquiring corporation exchanges money,
or other property in addition to such voting stock, and
(ii) Must acquire solely for voting stock (either of the acquiring
corporation or of a corporation which is in control of the acquiring
corporation) properties of the other corporation having a fair market
value which is at least 80 percent of the fair market value of all the
properties of the other corporation.
(3) For the purposes of subparagraph (2)(ii) only, a liability
assumed or to which the properties are subject is considered money paid
for the properties. For example, Corporation A has properties with a
fair market value of $100,000 and liabilities of $10,000. In exchange
for these properties, Corporation Y transfers its own voting stock,
assumes the $10,000 liabilities, and pays $8,000 in cash. The
transaction is a reorganization even though a part of the properties of
Corporation A is acquired for cash. On the other hand, if the
properties of Corporation A worth $100,000, were subject to $50,000 in
liabilities, an acquisition of all the properties, subject to the
liabilities, for any consideration other than solely voting stock would
not qualify as a reorganization under this section since the liabilities
alone are in excess of 20 percent of the fair market value of the
properties. If the transaction would qualify under either subparagraph
(1) or (2) of this paragraph and also under section 368(a)(1)(D), such
transaction shall not be treated as a reorganization under section 368
(a)(1)(C).
(e) A ''recapitalization'', and therefore a reorganization, takes
place if, for example:
(1) A corporation with $200,000 par value of bonds outstanding,
instead of paying them off in cash, discharges them by issuing preferred
shares to the bondholders;
(2) There is surrendered to a corporation for cancellation 25 percent
of its preferred stock in exchange for no par value common stock;
(3) A corporation issues preferred stock, previously authorized but
unissued, for outstanding common stock;
(4) An exchange is made of a corporation's outstanding preferred
stock, having certain priorities with reference to the amount and time
of payment of dividends and the distribution of the corporate assets
upon liquidation, for a new issue of such corporation's common stock
having no such rights;
(5) An exchange is made of an amount of a corporation's outstanding
preferred stock with dividends in arrears for other stock of the
corporation. However, if pursuant to such an exchange there is an
increase in the proportionate interest of the preferred shareholders in
the assets or earnings and profits of the corporation, then under
1.305-7(c)(2), an amount equal to the lesser of (i) the amount by which
the fair market value or liquidation preference, whichever is greater,
of the stock received in the exchange (determined immediately following
the recapitalization) exceeds the issue price of the preferred stock
surrendered, or (ii) the amount of the dividends in arrears, shall be
treated under section 305(c) as a deemed distribution to which sections
305(b)(4) and 301 apply.
(f) The term a party to a reorganization includes a corporation
resulting from a reorganization, and both corporations, in a transaction
qualifying as a reorganization where one corporation acquires stock or
properties of another corporation. A corporation remains a party to the
reorganization although it transfers all or part of the assets acquired
to a controlled subsidiary. A corporation controlling an acquiring
corporation is a party to the reorganization when the stock of such
controlling corporation is used in the acquisition of properties. Both
corporations are parties to the reorganization if, under statutory
authority, Corporation A is merged into Corporation B. All three of the
corporations are parties to the reorganization if, pursuant to statutory
authority, Corporation C and Corporation D are consolidated into
Corporation E. Both corporations are parties to the reorganization if
Corporation F transfers substantially all its assets to Corporation G in
exchange for all or a part of the voting stock of Corporation G. All
three corporations are parties to the reorganization if Corporation H
transfers substantially all its assets to Corporation K in exchange for
all or a part of the voting stock of Corporation L, which is in control
of Corporation K. Both corporations are parties to the reorganization
if Corporation M transfers all or part of its assets to Corporation N in
exchange for all or a part of the stock and securities of Corporation N,
but only if (1) immediately after such transfer, Corporation M, or one
or more of its shareholders (including persons who were shareholders
immediately before such transfer), or any combination thereof, is in
control of Corporation N, and (2) in pursuance of the plan, the stock
and securities of Corporation N are transferred or distributed by
Corporation M in a transaction in which gain or loss is not recognized
under section 354 or 355, or is recognized only to the extent provided
in section 356. Both Corporation O and Corporation P, but not
Corporation S, are parties to the reorganization if Corporation O
acquires stock of Corporation P from Corporation S in exchange solely
for a part of the voting stock of Corporation O, if (1) the stock of
Corporation P does not constitute substantially all of the assets of
Corporation S, (2) Corporation S is not in control of Corporation O
immediately after the acquisition, and (3) Corporation O is in control
of Corporation P immediately after the acquisition.
(g) The term ''plan of reorganization'' has reference to a
consummated transaction specifically defined as a reorganization under
section 368(a). The term is not to be construed as broadening the
definition of ''reorganization'' as set forth in section 368(a), but is
to be taken as limiting the nonrecognition of gain or loss to such
exchanges or distributions as are directly a part of the transaction
specifically described as a reorganization in section 368(a). Moreover,
the transaction, or series of transactions, embraced in a plan of
reorganization must not only come within the specific language of
section 368(a), but the readjustments involved in the exchanges or
distributions effected in the consummation thereof must be undertaken
for reasons germane to the continuance of the business of a corporation
a party to the reorganization. Section 368(a) contemplates genuine
corporate reorganizations which are designed to effect a readjustment of
continuing interests under modified corporate forms.
(h) As used in section 368, as well as in other provisions of the
Internal Revenue Code, if the context so requires, the conjunction
''or'' denotes both the conjunctive and the disjunctive, and the
singular includes the plural. For example, the provisions of the
statute are complied with if ''stock and securities'' are received in
exchange as well as if ''stock or securities'' are received.
(i) (Reserved)
(j)(1) This paragraph (j) prescribes rules relating to the
application of section 368 (a) (2) (E). Section 368(a)(2)(E) applies to
statutory mergers occurring after December 31, 1970.
(2) Section 368(a)(2)(E) does not apply to a consolidation.
(3) A transaction otherwise qualifying under section 368(a)(1)(A) is
not disqualified by reason of the fact that stock of a corporation (the
controlling corporation) which before the merger was in control of the
merged corporation is used in the transaction, if the conditions of
section 368(a)(2)(E) are satisfied. Those conditions are as follows:
(i) In the transaction, shareholders of the surviving corporation
must surrender stock in exchange for voting stock of the controlling
corporation. Further, the stock so surrendered must constitute control
of the surviving corporation. Control is defined in section 368(c).
The amount of stock constituting control is measured immediately before
the transaction. For purposes of this subdivision (i), stock in the
surviving corporation which is surrendered in the transaction (by any
shareholder except the controlling corporation) in exchange for
consideration furnished by the surviving corporation (and not by the
controlling corporation of the merged corporation) is considered not to
be outstanding immediately before the transaction. For effect on
''substantially all'' test of consideration furnished by the surviving
corporation, see paragraph (j)(3)(iii) of this section.
(ii) Except as provided in paragraph (j)(4) of this section, the
controlling corporation must control the surviving corporation
immedately after the transaction.
(iii) After the transaction, except as provided in paragraph (j)(4)
of this section, the surviving corporation must hold substantially all
of its own properties and substantially all of the properties of the
merged corporation (other than stock of the controlling corporation
distributed in the transaction). The term ''substantially all'' has the
same meaning as in section 368(a)(1)(C). The ''substantially all'' test
applies separately to the merged corporation and to the surviving
corporation. In applying the ''substantially all'' test to the
surviving corporation, consideration furnished in the transaction by the
surviving corporation in exchange for its stock is property of the
surviving corporation which it does not hold after the transaction. In
applying the ''substantially all'' test to the merged corporation,
assets transferred from the controlling corporation to the merged
corporation in pursuance of the plan of reorganization are not taken
into account. Thus, for example, money transferred from the controlling
corporation to the merged corporation to be used for the following
purposes is not taken into account for purposes of the ''substantially
all'' test:
(A) To pay additional consideration to shareholders of the surviving
corporation;
(B) To pay dissenting shareholders of the surviving corporation;
(C) To pay creditors of the surviving corporation;
(D) To pay reorganization expenses; or
(E) To enable the merged corporation to satisfy state minimum
capitalization requirements (where the money is returned to the
controlling corporation as part of the transaction).
(4) A transaction qualifying under section 368(a)(1)(A) by reason of
the application of section 368(a)(2)(E) is not disqualified merely
because part or all of the stock of the surviving corporation is
transferred to a corporation controlled by the controlling corporation,
or because part or all of the assets of the surviving corporation or the
merged corporation are transferred to a corporation controlled by the
surviving corporation. See section 368(a)(2)(C).
(5) The controlling corporation may assume liabilities of the
surviving corporation without disqualifying the transaction under
section 368(a)(2)(E). An assumption of liabilities of the surviving
corporation by the controlling corporation is a contribution to capital
by the controlling corporation to the surviving corporation. If, in
pursuance of the plan of reorganization, securities of the surviving
corporation are exchanged for securities of the controlling corporation,
or for other securities of the surviving corporation, see sections 354
and 356.
(6) In applying section 368(a)(2)(E), it makes no difference if the
merged corporation is an existing corporation, or is formed immediately
before the merger, in anticipation of the merger, or after preliminary
steps have been taken to otherwise acquire control of the surviving
corporation.
(7) The following examples illustrate the application of this
paragraph (j). In each of the examples, Corporation P owns all of the
stock of Corporation S and, except as otherwise stated, Corporation T
has outstanding 1,000 shares of common stock and no shares of any other
class. In each of the examples, it is also assumed that the transaction
qualifies under section 368(a)(1)(A) if the conditions of section
368(a)(2)(E) are satisfied.
Example (1). P owns no T stock. On January 1, 1981, S merges into
T. In the merger, T's shareholders surrender 950 shares of common stock
in exchange for P voting stock. The holders of the other 50 shares (who
dissent from the merger) are paid in cash with funds supplied by P.
After the transaction, T holds all of its own assets and all of S's
assets. Based on these facts, the transaction qualifies under section
368(a)(1)(A) by reason of the application of section 368(a)(2)(E). In
the transaction, former shareholders of T surrender, in exchange for P
voting stock, an amount of T stock (950/1,000 shares or 95 percent)
which constitutes control of T.
Example (2). The facts are the same as in example (1) except that
holders of 100 shares in corporation T, who dissented from the merger,
are paid in cash with funds supplied by T (and not by P or S) and in the
merger, T's remaining shareholders surrender 720 shares of common stock
in exchange for P voting stock and 180 shares of common stock for cash
supplied by P. The requirements of section 368(a)(2)(E)(ii) are
satisfied since, in the transaction, former shareholders of T surrender,
in exchange for P voting stock, an amount of T stock (720/900 shares or
80 percent) which constitutes control of T. The T stock surrendered in
exchange for consideration furnished by T is not considered outstanding
for purposes of determining whether the amount of T stock surrendered by
T shareholders for P stock constitutes control of T.
Example (3). T has outstanding 1,000 shares of common stock, 100
shares of nonvoting preferred stock, and no shares of any other class.
On January 1, 1981, S merges into T. Prior to the merger, as part of
the transaction, T distributes its own cash in redemption of the 100
shares of preferred stock. In the transaction, T's remaining
shareholders surrender their 1,000 shares of common stock in exchange
for P voting stock. The requirements of section 368(a)(2)(E)(ii) are
satisfied since, in the transaction, former shareholders of T surrender,
in exchange for P voting stock, an amount of T stock (1,000/1,000 shares
or 100 percent) which constitutes control of T. The preferred stock
surrendered in exchange for consideration furnished by T is not
considered outstanding for purposes of determining whether the amount of
T stock surrendered by T shareholders for P stock constitutes control of
T. However, the consideration furnished by T for its stock is property
of T which T does not hold after the transaction for purposes of the
substantially all test in paragraph (j)(3)(iii) of this section.
Example (4). On January 1, 1971, P purchased 201 shares of T's
stock. On January 1, 1981, S merges into T. In the merger, T's
shareholders (other than P) surrender 799 shares of T stock in exchange
for P voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (799/1,000 shares being
less than 80 percent). Therefore, the transaction does not qualify
under section 368(a)(1)(A). However, if S is a transitory corporation,
formed solely for purposes of effectuating the transaction, the
transaction may qualify as a reorganization described in section
368(a)(1)(B) provided all of the applicable requirements are satisfied.
Example (5). On January 1, 1971, P purchased 200 shares of T's
stock. On January 1, 1981, S merges into T. Prior to the merger, as
part of the transaction, T distributes its own cash in redemption of 1
share of T stock from a T shareholder other than P. In the merger, T's
remaining shareholders (other than P) surrender 799 shares of T stock in
exchange for P voting stock. Based on these facts, in the transaction,
former shareholders of T do not surrender, in exchange for P voting
stock, an amount of T stock which constitutes control of T (799/999
shares being less than 80 percent). Therefore, the transaction does not
qualify under section 368(a)(1)(A). However, if S is a transitory
corporation, formed for purposes of effectuating the transaction, the
transaction may qualify as a reorganization described in section
368(a)(1)(B) provided all of the applicable requirements are satisfied.
Example (6). The stock of S has a value of $25,000. The stock of T
has a value of $75,000. On January 1, 1984, S merges into T. In the
merger, T's shareholders surrender all of their T stock in exchange for
P voting stock. After the transaction, T holds all of its own assets
and all of S's assets. Based on these facts, the transaction qualifies
under section 368(a)(1)(A) by reason of the application of section
368(a)(2)(E). In the transaction, former shareholders of T surrender,
in exchange for P voting stock, an amount of T stock (1,000/1,000 shares
or 100 percent) which constitutes control of T. The stock of T received
by P in exchange for P's prior interest in S is not taken into account
for purposes of section 368(a)(2)(E)(ii) since the amount of T stock
constituting control of T is measured before the transaction.
Example (7). The stock of T has a value of $75,000. On January 1,
1984, S merges into T. In the merger, T's shareholders surrender all of
their T stock in exchange for P voting stock. As part of the
transaction, P contributes $25,000 to T in exchange for new shares of T
stock. None of the cash received by T is distributed or otherwise paid
out to former T shareholders. After the transaction, T holds all of its
own assets and all of S's assets. Based on these facts, the transaction
qualifies under section 368(a)(1)(A) by reason of the application of
section 368(a)(2)(E). In the transaction, former shareholders of T
surrender, in exchange for P voting stock, an amount of T stock
(1,000/1,000 shares or 100 percent) which constitutes control of T. The
T stock received by P in exchange for its contribution to T is not taken
into account for purposes of section 368(a)(2)(E)(ii) since the amount
of T stock constituting control of T is measured before the transaction.
Example (8). The facts are the same as in example (7) except that,
as part of the transaction, corporation R, instead of P, contributes
$25,000 to T in exchange for T stock. Based on these facts, the
transaction does not qualify under section 368(a)(1)(A) by reason of
section 368(a)(2)(E) since P does not control T immediately after the
transaction.
Example (9). T stock has a value of $75,000. P owns 500 shares (
1/2) of that stock with a value of $37,500. The stock of S has a value
of $125,000. On January 1, 1984, S merges into T. In the merger, T's
shareholders (other than P) surrender their T stock in exchange for P
voting stock. Based on these facts, in the transaction, former
shareholders of T do not surrender, in exchange for P voting stock, an
amount of T stock which constitutes control of T (500/1,000 shares being
less than 80 percent). Therefore, the transaction does not qualify
under section 368(a)(1)(A). The stock of T received by P in exchange
for P's prior interest in S does not contribute to satisfaction of the
requirement of section 368(a)(2)(E)(ii).
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7281, 38
FR 18540, July 12, 1973; T.D. 7422, 41 FR 26570, June 28, 1976; T.D.
8059, 50 FR 42689, Oct. 22, 1985; 51 FR 6400, Feb. 24, 1986)
26 CFR 1.368-3 Records to be kept and information to be filed with
returns.
(a) The plan of reorganization must be adopted by each of the
corporations parties thereto; and the adoption must be shown by the
acts of its duly constituted responsible officers, and appear upon the
official records of the corporation. Each corporation, a party to a
reorganization, shall file as a part of its return for its taxable year
within which the reorganization occurred a complete statement of all
facts pertinent to the nonrecognition of gain or loss in connection with
the reorganization, including:
(1) A copy of the plan of reorganization, together with a statement,
executed under the penalties of perjury, showing in full the purposes
thereof and in detail all transactions incident to, or pursuant to, the
plan.
(2) A complete statement of the cost or other basis of all property,
including all stock or securities, transferred incident to the plan.
(3) A statement of the amount of stock or securities and other
property or money received from the exchange, including a statement of
all distributions or other disposition made thereof. The amount of each
kind of stock or securities and other property received shall be stated
on the basis of the fair market value thereof at the date of the
exchange.
(4) A statement of the amount and nature of any liabilities assumed
upon the exchange, and the amount and nature of any liabilities to which
any of the property acquired in the exchange is subject.
(b) Every taxpayer, other than a corporation a party to the
reorganization, who receives stock or securities and other property or
money upon a tax-free exchange in connection with a corporate
reorganization shall incorporate in his income tax return for the
taxable year in which the exchange takes place a complete statement of
all facts pertinent to the nonrecognition of gain or loss upon such
exchange including:
(1) A statement of the cost or other basis of the stock or securities
transferred in the exchange, and
(2) A statement in full of the amount of stock or securities and
other property or money received from the exchange, including any
liabilities assumed upon the exchange, and any liabilities to which
property received is subject. The amount of each kind of stock or
securities and other property (other than liabilities assumed upon the
exchange) received shall be set forth upon the basis of the fair market
value thereof at the date of the exchange.
(c) Permanent records in substantial form shall be kept by every
taxpayer who participates in a tax-free exchange in connection with a
corporate reorganization showing the cost or other basis of the
transferred property and the amount of stock or securities and other
property or money received (including any liabilities assumed on the
exchange, or any liabilities to which any of the properties received
were subject), in order to facilitate the determination of gain or loss
from a subsequent disposition of such stock or securities and other
property received from the exchange.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 6622, 27
FR 11918, Dec. 4, 1962)
26 CFR 1.368-3 Insolvency Reorganizations
26 CFR 1.371-1 Exchanges by corporations.
(a) Exchange solely for stock or securities. (1) Section 371(a)(1)
provides for the nonrecognition of gain or loss by a corporation upon
certain exchanges made in connection with the reorganization of an
insolvent corporation. The section does not apply to a railroad
corporation as defined in section 77(m) of the Bankruptcy Act (11 U.S.C.
205(m)). In order to qualify as a section 371(a) reorganization, the
transaction must satisfy the express statutory requirements as well as
the underlying assumptions and purposes for which the exchange is
excepted from the general rule requiring the recognition of gain or loss
upon the exchange of property.
(2) Section 371(a)(1) applies only with respect to a reorganization
effected in one of two specified types of court proceedings: (i)
Receivership, foreclosure, or similar proceedings, or (ii) corporate
reorganization proceedings under Chapter X of the Bankruptcy Act (11
U.S.C. 10). The specific statutory requirements are the transfer of
property of a corporation, in pursuance of an order of the court having
jurisdiction of the corporation in such proceeding, to another
corporation organized or made use of to effectuate a plan of
reorganization approved by the court in such proceeding, in exchange
solely for stock or securities in such other corporation. If the
consideration for the transfer consists of other property or money as
well as stock and securities, see section 371(a)(2) and (c). As to the
assumption of liabilities in an exchange described in section 371(a),
see section 371(d).
(3) The application of section 371(a)(1) is to be strictly limited to
a transaction of the character set forth in such section. Hence, the
section is inapplicable unless there is a bona fide plan of
reorganization approved by the court having jurisdiction of the
proceeding and the transfer of the property of the insolvent corporation
is made pursuant to such plan. It is unnecessary that the transfer be a
direct transfer from the insolvent corporation; it is sufficient if the
transfer is an integral step in the consummation of the reorganization
plan approved by the court. By its terms, the section has no
application to a reorganization consummated by adjustment of the capital
or debt structure of the insolvent corporation without the transfer of
its assets to another corporation.
(4) As used in section 371(a)(1), the term ''reorganization'' is not
controlled by the definition of ''reorganization'' contained in section
368. However, certain basic requirements, implicit in the statute,
which are essential to a reorganization under section 368, are likewise
essential to qualify a transaction as a reorganization under section
371(a)(1). Among these requirements are a continuity of the business
enterprise under the modified corporate form and a continuity of
interest therein on the part of those persons who were the owners of the
enterprise prior to the reorganization. Thus, the nonrecognition
accorded by section 371(a)(1) applies only to a genuine reorganization
as distinguished from a liquidation and sale of property to either new
or old interests supplying new capital and discharging the obligations
of the old corporation. For the purpose of determining whether the
requisite continuity of interest exists, the interest of creditors who
have, by appropriate legal steps, obtained effective command of the
property of an insolvent corporation is considered as the equivalent of
a proprietary interest. But the mere possibility of a proprietary
interest is not its equivalent. In general, any transaction will be
subject to nonrecognition of gain or loss as prescribed by section
371(a)(1) where the property is transferred to a corporation and the
stock and securities of such corporation are transferred to persons who
were shareholders or creditors of the transferor corporation as if such
stock or securities had been transferred to such persons as shareholders
pursuant to the nonrecognition provisions of part III, subchapter C,
chapter 1 of the Code. The determinative and controlling factors are
the corporation's insolvency and the effective command by the creditors
over its property. The term ''insolvent'' as used herein refers to
insolvency at any time during the course of the proceeding referred to
in section 371(a)(1), either in the sense of excess of liabilities over
assets or in the sense of inability to meet obligations as they mature.
(5) A short-term purchase money note is not a security within the
meaning of this section, and the transfer of the properties of the
insolvent corporation for cash and deferred payment obligations of the
transferee evidenced by short-term notes is a sale and not an exchange.
(b) Exchange for stock or securities and other property or money. If
an exchange would be within the provisions of section 371(a)(1) if it
were not for the fact that the consideration for the transfer of the
property of the insolvent corporation consists not only of stock or
securities but also of other property or money, then, as provided in
section 371(a)(2), if the other property or money received by the
corporation is distributed by it pursuant to the plan of reorganization,
no gain to the corporation will be recognized. Property is distributed
within the meaning of this section if it is paid over or distributed to
shareholders or creditors who have by appropriate legal steps obtained
effective command of the property of the corporation. If the other
property or money received by the corporation is not distributed by it
pursuant to the plan of reorganization, the gain, if any, to the
corporation from the exchange will be recognized in an amount not in
excess of the sum of money and the fair market value of the other
property so received which is not distributed. In either case no loss
from the exchange will be recognized (see section 371(c)).
(c) Records to be kept and information to be filed. (1) Each
corporation a party to a section 371(a) reorganization shall furnish a
complete statement of all facts pertinent to the nonrecognition of gain
or loss in connection with the exchange, including:
(i) A certified copy of the plan of reorganization approved by the
court in the proceeding, together with a statement showing in full the
purposes thereof and in detail all transactions incident, or pursuant,
to the plan;
(ii) A complete statement of the cost or other basis of all property,
including all stock or securities, transferred incident to the plan;
(iii) A statement of the amount of stock or securities and other
property or money received in the exchange, including a statement of all
distributions or other disposition made thereof. The amount of each
kind of stock or securities or other property shall be stated on the
basis of the fair market value thereof at the date of the exchange;
(iv) A statement of the amount and nature of any liabilities assumed
upon the exchange.
The information required by this section shall be filed as a part of
the corporation's return for its taxable year within which the
reorganization occurred.
(2) Permanent records in substantial form must be kept by every
taxpayer who participates in a tax-free exchange in connection with a
corporate reorganization showing the cost or other basis of the
transferred property and the amount of stock or securities and other
property or money received (including any liabilities assumed upon the
exchange), in order to facilitate the determination of gain or loss from
a subsequent disposition of such stock or securities and other property
received from th securities and other property or money received
(including any liabilities assumed upon the exchange), in order to
facilitate the determination of gain or loss from a subsequent
disposition of such stock or securities and other property received from
the exchange.
26 CFR 1.371-2 Exchanges by security holders.
(a) In general. (1) Section 371(b) prescribes the rules relative to
the recognition of gain or loss upon certain exchanges made by the
holders of stock or securities of an insolvent corporation in connection
with a reorganization described in section 371(a). Under section
371(b)(1), no gain or loss shall be recognized if, pursuant to the plan
of reorganization, stock or securities in the insolvent corporation are
exchanged solely for stock or securities in the corporation organized or
made use of to effectuate such plan. If, in addition to such stock or
securities, other property or money is received upon such exchange, gain
is recognized to the extent of such other property or money (section
371(b)(2)), but no loss is recognized (section 371(c)). As to the basis
of the stock or securities or other property acquired upon an exchange
under section 371(b), see section 358.
(2) By thus characterizing as an exchange, and regarding as a single
taxable event, the event or series of events resulting in the
relinquishment or extinguishment of the stock or securities in the old
corporation and the acquisition in consideration thereof, in whole or in
part, of stock or securities in the new corporation, the Code secures
uniformity of treatment for the participating security holders,
regardless of the particular steps or the procedural devices by which
such exchange is effected. Thus, the transaction which qualified as a
reorganization under section 371(a) may take one of several forms. In a
typical creditors' reorganization there may be a transfer of the
property of the old corporation to its bondholders, or the bondholders'
committee, upon surrender of the bonds, followed by the transfer of such
property to the new corporation in consideration of stock in the latter;
or there may be a transfer of the bonds to the new corporation in
exchange for its stocks or securities, followed by the transfer of the
property of the old corporation in consideration of the surrender of its
bonds. In either event, section 371(b) treats the result to the
participating security holders as an exchange of the securities of the
old corporation for securities of the new corporation. In order,
however, to qualify as an exchange under section 371(b) the various
events resulting in the relinquishment or extinguishment of the old
securities and the acquisition of the new securities must be embraced
within the plan of reorganization and must be undertaken for reasons
germane to the plan. If the event, or series of events, qualifies as an
exchange under section 371(b), no antecedent event necessarily a
component of the relinquishment or extinguishment of the securities of
the old corporation in consideration of the acquisition of the
securities of the new corporation shall be considered a transaction or
event having consequences for income tax purposes.
(b) Exchange solely for stock or securities. Section 371(b)(1)
provides that no gain or loss shall be recognized upon an exchange
consisting of the relinquishment or extinguishment of stock or
securities in an insolvent corporation described in section 371(a), in
consideration of the acquisition solely of stock or securities in a
corporation organized or made use of to effectuate the plan of
reorganization. As used in this section, the term security does not
include a short-term note.
(c) Exchanges for stock or securities and other property or money.
If an exchange would be within section 371(b)(1) if it were not for the
fact that the property received in the exchange consists not only of
stock or securities in the corporation organized or made use of to
effectuate the plan of reorganization, but also of other property or
money, then
(1) As provided in section 371(b)(2), the gain, if any, to the
taxpayer will be recognized in an amount not in excess of the sum of
money and the fair market value of the other property. The gain so
recognized shall be treated as capital gain.
(2) The loss, if any, to the taxpayer from such an exchange is not to
be recognized to any extent (see section 371(c)).
(d) Records to be kept and information to be filed. (1) Every
taxpayer who receives stock or securities and other property or money
upon an exchange described in section 371(b) in connection with a
corporate reorganization, must furnish a complete statement of all facts
pertinent to the recognition or nonrecognition of gain or loss upon such
exchange, including --
(i) A statement of the cost or other basis of the stock or securities
transferred in the exchange, and
(ii) A statement in full of the amount of stock or securities and
other property or money received from the exchange, including any
liability assumed upon the exchange. The amount of each kind of stock
or securities and other property (other than liabilities assumed upon
the exchange) received shall be set forth upon the basis of the fair
market value thereof at the date of the exchange. The statement shall
be incorporated in the taxpayer's income tax return for the taxable year
in which the exchange occurs.
(2) Permanent records in substantial form shall be kept by every
taxpayer who participates in an exchange described in section 371(b),
showing the cost or other basis of the transferred property and the
amount of stock or securities and other property or money received
(including any liabilities assumed upon the exchange), in order to
facilitate the determination of gain or loss from a subsequent
disposition of such stock or securities and other property received from
the exchange.
26 CFR 1.372-1 Corporations.
(a) If, as the result of a transaction described in section 371, so
much of section 371(c) as relates to section 371(a), or the
corresponding provisions of prior law, the property of an insolvent
corporation is transferred, in pursuance of a plan of reorganization, to
a corporation organized or made use of to effectuate such plan, the
basis of such property in the hands of the acquiring corporation is the
same as it would be in the hands of the insolvent corporation, increased
in the amount of gain recognized upon such transfer under the law
applicable to the year in which the transfer was made. In any such
case, the adjustments to basis provided by section 270 of the Bankruptcy
Act (11 U.S.C. 670), or section 1017 of the Code, shall not be made in
respect of any indebtedness cancelled pursuant to the plan of
reorganization under which the transfer was made. If the transaction
falls within the provisions of section 372(a), the basis of the property
involved shall be determined pursuant to such provisions,
notwithstanding that the transaction might otherwise fall within another
basis provision.
(b) The provisions of section 372(a) are applicable in the
determination of basis for all taxable years beginning after December
31, 1933, except that the basis so determined shall not be given effect
in the determination of the tax liability for any taxable year beginning
prior to January 1, 1943. With the exception indicated, the basis so
prescribed is applicable from the date of acquisition of such property.
For example, the provisions of section 1016 relating to adjusted basis
shall be applied as if section 372(a) were a part of the Internal
Revenue Code of 1939 and prior internal revenue laws applicable to all
taxable years beginning after December 31, 1933. Hence, in determining
the amount of the adjustments for depreciation, depletion, etc., under
the provisions of section 1016(a)(2), the ''amount allowable'' is the
amount computed with reference to the basis provided in section 372(a).
(c) The effect of the application of section 372(a) may be
illustrated by the following examples:
Example (1). On January 1, 1935, the Y Corporation, a taxpayer
making its returns on the calendar year basis, acquired depreciable
property from the X Corporation as the result of a transaction described
in section 372(a). On January 1, 1935, the property had, in the hands
of the X Corporation, a basis of $200,000, an adjusted basis of
$150,000, a fair market value as of January 1, 1935 of $80,000, and an
estimated remaining life of 20 years. The 1935 transaction was treated
as a taxable exchange and, accordingly, the Y Corporation claimed and
was allowed depreciation in the amount of $4,000 for each of the eight
taxable years 1935 through 1942, inclusive. For each of the twelve
taxable years 1943 through 1954, inclusive, the Y Corporation claimed
and was allowed depreciation in the amount of $7,500. On December 31,
1954, the property was sold for $10,000 cash. The amount of the gain
realized upon the sale is computed as follows:
For the taxable year 1943 and succeeding taxable years, the Y
Corporation is entitled to deductions for depreciation in respect of
such property in the amounts of $7,500 in the determination of its tax
liabilities for such years. But no change in the tax liability is
authorized for preceding taxable years by reason of the difference
between the $7,500 depreciation allowable and the $4,000 deduction
previously allowed.
Example (2). Assume the same facts as in example (1), except that
the property acquired by the Y Corporation had a fair market value as of
January 1, 1935, of $180,000, instead of $80,000, and the Y Corporation
claimed and was allowed depreciation in the amount of $9,000 for each of
the eight taxable years 1935 to 1942, inclusive, and in the amount of
$6,500 for the taxable years 1943 to 1954, inclusive. In such case, the
amount of the gain realized upon the sale of the property would be
computed as follows:
No change in the tax liability is authorized for taxable years
preceding 1943 by reason of the difference between the $7,500
depreciation allowable and the $9,000 deduction previously allowed.
26 CFR 1.374-1 Exchanges by insolvent railroad corporations.
(a) Exchange solely for stock or securities. (1) Section 374(a)(1)
provides for the nonrecognition of gain or loss by an insolvent railroad
corporation upon certain exchanges made in connection with the
reorganization of the corporation. In order to qualify as a section
374(a) reorganization, the transaction must satisfy the express
statutory requirements as well as the underlying assumptions and
purposes for which the exchange is excepted from the general rule
requiring the recognition of gain or loss upon the exchange of property.
(2) Section 374(a)(1) applies only with respect to a reorganization
effected in one of two specified types of court proceedings: (i)
Receivership proceedings, or (ii) proceedings under section 77 of the
Bankruptcy Act (11 U.S.C. 205). The specific statutory requirements are
the transfer after July 31, 1955, of property of a railroad corporation,
as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205(m)), in
pursuance of an order of the court having jurisdiction of the
corporation in such proceeding, to another railroad corporation, as
defined in section 77(m) of the Bankruptcy Act, organized or made use of
to effectuate a plan of reorganization approved by the court in such
proceeding, in exchange solely for stock or securities in such other
railroad corporation. If the consideration for the transfer consists of
other property or money as well as stock and securities, see section
374(a)(2) and (3) and paragraph (b) of this section. As to the
assumption of liabilities in an exchange described in section 374(a),
see section 357 and paragraph (a)(1) and (2) of 1.357-1 and paragraph
(a) of 1.357-2.
(3) The application of section 374(a)(1) is to be strictly limited to
a transaction of the character set forth in such section. Hence, the
section is inapplicable unless there is a bona fide plan of
reorganization approved by the court having jurisdiction of the
proceeding and the transfer of the property of the insolvent railroad
corporation is made pursuant to such plan. It is unnecessary that the
transfer be a direct transfer from the insolvent railroad corporation;
it is sufficient if the transfer is an integral step in the consummation
of the reorganization plan approved by the court. By its terms, the
section has no application to a reorganization consummated by adjustment
of the capital or debt structure of the insolvent railroad corporation
without the transfer of its assets to another railroad corporation.
(4) As used in section 374(a)(1), the term ''reorganization'' is not
controlled by the definition of ''reorganization'' contained in section
368. However, certain basic requirements, implicit in the statute,
which are essential to a reorganization under section 368, are likewise
essential to qualify a transaction as a reorganization under section
374(a)(1). Among these requirements are a continuity of the business
enterprise under the modified corporate form and a continuity of
interest therein on the part of those persons who were the owners of the
enterprise prior to the reorganization. Thus, the nonrecognition
accorded by section 374(a)(1) applies only to a genuine reorganization
as distinguished from a liquidation and sale of property to either new
or old interests supplying new capital and discharging the obligations
of the old railroad corporation. For the purpose of determining whether
the requisite continuity of interest exists, the interest of creditors
who have, by appropriate legal steps, obtained effective command of the
property of an insolvent railroad corporation is considered as the
equivalent of a proprietary interest. But the mere possibility of a
proprietary interest is not its equivalent. In general, any transaction
will be subject to nonrecognition of gain or loss as prescribed by
section 374(a)(1) where the property is transferred to a railroad
corporation and the stock and securities of such corporation are
transferred to persons who were shareholders or creditors of the
transferor railroad corporation as if such stock or securities had been
transferred to such persons as shareholders pursuant to the
nonrecognition provisions of part III, subchapter C, chapter 1 of the
Code. The determinative and controlling factors are the railroad
corporation's insolvency and the effective command by the creditors over
its property. The term ''insolvent'' as used in this section refers to
insolvency at any time during the course of the proceeding referred to
in section 374(a) (1), either in the sense of excess of liabilities over
assets or in the sense of inability to meet obligations as they mature.
(5) A short-term purchase money note is not a security within the
meaning of this section, and the transfer of the properties of the
insolvent railroad corporation for cash and deferred payment obligations
of the transferee evidenced by short-term notes is a sale and not an
exchange.
(b) Exchange for stock or securities and other property or money. If
an exchange would be within the provisions of section 374(a)(1) if it
were not for the fact that the consideration for the transfer of the
property of the insolvent railroad corporation consists not only of
stock or securities but also of other property or money, then, as
provided in section 374(a)(2), if the other property or money received
by the railroad corporation is distributed by it pursuant to the plan of
reorganization, no gain to the railroad corporation will be recognized.
Property is distributed within the meaning of this section if it is paid
over or distributed to shareholders or creditors who have by appropriate
legal steps obtained effective command of the property of the railroad
corporation. If the other property or money received by the railroad
corporation is not distributed by it pursuant to the plan of
reorganization, the gain, if any, to the railroad corporation from the
exchange will be recognized in an amount not in excess of the sum of
money and the fair market value of the other property so received which
is not distributed. In either case no loss from the exchange will be
recognized (see section 374(a)(3)). See section 354(c) relative to
exchanges by stock or security holders.
(T.D. 6528, 26 FR 400, Jan. 19, 1961)
26 CFR 1.374-2 Basis of property acquired after December 31, 1938, by
railroad corporation in a receivership or railroad reorganization
proceeding.
Section 374(b)(1) provides that if property of a railroad
corporation, as defined in section 77(m) of the Bankruptcy Act (11
U.S.C. 205(m)), was acquired after July 31, 1955, in pursuance of an
order of the court having jurisdiction of such corporation in either a
receivership proceeding or a proceeding under section 77 of the
Bankruptcy Act, and the acquiring corporation is also a railroad
corporation as defined in section 77(m) of such Act, organized or
availed of to effectuate a plan of reorganization approved by the court
in such proceeding, the basis shall be the same as it would be in the
hands of the transferor railroad corporation, increased in the amount of
gain recognized to the transferor under section 374(a)(2) and paragraph
(b) of 1.374-1. For purposes of section 374(b)(1), it is unnecessary
that the acquisition in question be a direct transfer from the
corporation undergoing reorganization or that such reorganization
constitute a reorganization within the meaning of section 368(a) since
that section does not apply to part IV, subchapter C, chapter 1 of the
Code. It is sufficient if the acquisition is in pursuance of an order
of the court and is an integral step in the consummation of a
reorganization plan approved by the court having jurisdiction of the
proceeding. If the transaction falls within the provisions of section
374(b)(1), the basis of the property involved shall be determined
pursuant to such provisions, notwithstanding that the transaction might
also fall within another basis provision.
(T.D. 6528, 26 FR 401, Jan. 19, 1961, as amended by T.D. 7616, 44 FR
26870, May 8, 1979)
26 CFR 1.374-3 Records to be kept and information to be filed.
(a) Return information. Each railroad corporation a party to a
section 374(a) reorganization shall furnish a complete statement of all
facts pertinent to the recognition or nonrecognition of gain or loss in
connection with the exchange, including:
(1) A certified copy of the plan of reorganization approved by the
court in the proceeding, together with a statement showing in full the
purposes thereof and in detail all transactions incident, or pursuant,
to the plan;
(2) A complete statement of the cost or other basis of all property,
including all stock or securities, transferred incident to the plan;
(3) A statement of the amount of stock or securities and other
property or money received in the exchange, including a statement of all
distributions or other disposition made thereof. The amount of each
kind of stock or securities or other property shall be stated on the
basis of the fair market value thereof at the date of the exchange;
(4) A statement of the amount and nature of any liabilities assumed
upon the exchange.
The information required by this paragraph shall be filed as a part
of each railroad corporation's return for its taxable year within which
the reorganization occurred.
(b) Permanent records. Permanent records in substantial form must be
kept by every railroad corporation which participates in a tax-free
exchange in connection with a section 374(a) reorganization showing the
cost or other basis of the transferred property and the amount of stock
or securities and other property or money received (including any
liabilities assumed upon the exchange), in order to facilitate the
determination of gain or loss from a subsequent disposition of such
stock or securities and other property received from the exchange.
(T.D. 6528, 26 FR 401, Jan. 19, 1961)
26 CFR 1.374-4 Property acquired by electric railway corporation in
corporate reorganizing proceeding.
Subject to the limitations and conditions set forth in section
374(b)(2), if the reorganization under section 77 of the Bankruptcy Act
(11 U.S.C. 501 and following) of an electric railway corporation results
in the acquisition of the property of such corporation by another
corporation, the basis of such property in the hands of the acquiring
corporation is the same as it would be in the hands of the old
corporation. It is requisite to the application of the section that
both corporations be street, suburban, or interurban electric railway
corporations engaged in the transportation of persons or property in
interstate commerce, and that the acquisition is in pursuance of an
order of the court and is an integral step in the consummation of a
reorgnizing plan approved by the court having jurisidiction of the
proceeding. If section 374(b)(2) applies, section 270 of the Bankruptcy
Act (11 U.S.C. 670), relating to the adjustment of basis by reason of
the cancellation or reduction of indebtedness in a corporate
reorganization proceeding, is inapplicable. Moreover, if the
transaction is within the provisons of section 374(b)(2) and may also be
considered to be within any other basis provision, then the provisions
of section 374(b)(2) only shall apply.
(T.D. 7616, 44 FR 26870, May 8, 1979)
26 CFR 1.374-4 Carryovers
26 CFR 1.381(a)-1 General rule relating to carryovers in certain
corporate acquisitions.
(a) Allowance of carryovers. Section 381 provides that a corporation
which acquires the assets of another corporation in certain liquidations
and reorganizations shall succeed to, and take into account, as of the
close of the date of distribution or transfer, the items described in
section 381(c) of the distributor or transferor corporation. These
items shall be taken into account by the acquiring corporation subject
to the conditions and limitations specified in sections 381, 382(b), and
383 and the regulations thereunder.
(b) Determination of transactions and items to which section 381
applies -- (1) Qualified transactions. Except to the extent provided in
section 381(c)(20), relating to the carryover of unused pension trust
deductions in certain liquidations, the items described in section
381(c) are required by section 381 to be carried over to the acquiring
corporation (as defined in subparagraph (2) of this paragraph) only in
the following liquidations and reorganizations:
(i) The complete liquidation of a subsidiary corporation upon which
no gain or loss is recognized in accordance with the provisions of
section 332, but only if the basis of the assets distributed to the
acquiring corporation is not required by section 334(b)(2) to be the
adjusted basis of the stock with respect to which the distribution is
made;
(ii) A statutory merger or consolidation qualifying under section
368(a)(1)(A) to which section 361 applies;
(iii) A reorganization qualifying under section 368(a)(1)(C);
(iv) A reorganization qualifying under section 368(a)(1)(D) if the
requirements of section 354(b)(1)(A) and (B) are satisfied; and
(v) A mere change in identity, form, or place of organization
qualifying under section 368(a)(1)(F).
(2) Acquiring corporation defined. (i) Only a single corporation may
be an acquiring corporation for purposes of section 381 and the
regulations thereunder. The corporation which acquires the assets of
its subsidiary corporation in a complete liquidation to which section
381(a)(1) applies is the acquiring corporation for purposes of section
381. Generally, in a transaction to which section 381(a)(2) applies,
the acquiring corporation is that corporation which, pursuant to the
plan of reorganization, ultimately acquires, directly or indirectly, all
of the assets transferred by the transferor corporation. If, in a
transaction qualifying under section 381(a)(2), no one corporation
ultimately acquires all of the assets transferred by the transferor
corporation, that corporation which directly acquires the assets so
transferred shall be the acquiring corporation for purposes of section
381 and the regulations thereunder, even though such corporation
ultimately retains none of the assets so transferred. Whether a
corporation has acquired all of the assets transferred by the transferor
corporation is a question of fact to be determined on the basis of all
the facts and circumstances.
(ii) The application of this subparagraph may be illustrated by the
following examples:
Example (1). Y Corporation, a wholly-owned subsidiary of X
Corporation, directly acquired all the assets of Z Corporation solely in
exchange for voting stock of X Corporation in a transaction qualifying
under section 368(a)(1)(C). Y Corporation is the acquiring corporation
for purposes of section 381.
Example (2). X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred all the assets so acquired
to Y Corporation, its wholly-owned subsidiary (see section
368(a)(2)(C)). Y Corporation is the acquiring corporation for purposes
of section 381.
Example (3). X Corporation acquired all the assets of Z Corporation
solely in exchange for the voting stock of X Corporation in a
transaction qualifying under section 368(a)(1)(C). Thereafter, pursuant
to the plan of reorganization X Corporation transferred one-half of the
assets so acquired to Y Corporation, its wholly-owned subsidiary, and
retained the other half of such assets. X Corporation is the acquiring
corporation for purposes of section 381.
Example (4). X Corporation acquired all the assets of Z Corporation
solely in exchange for voting stock of X Corporation in a transaction
qualifying under section 368(a)(1)(C). Thereafter, pursuant to the plan
of reorganization X Corporation transferred one-half of the assets so
acquired to Y Corporation, its wholly-owned subsidiary, and the other
half of such assets to M Corporation, another wholly-owned subsidiary of
X Corporation. X Corporation is the acquiring corporation for purposes
of section 381.
(3) Transactions and items not covered by section 381. (i) Section
381 does not apply to partial liquidations, divisive reorganizations, or
other transactions not described in subparagraph (1) of this paragraph.
Moreover, section 381 does not apply to the carryover of an item or tax
attribute not specified in subsection (c) thereof. In a case where
section 381 does not apply to a transaction, item, or tax attribute by
reason of either of the preceding sentences, no inference is to be drawn
from the provisions of section 381 as to whether any item or tax
attribute shall be taken into account by the successor corporation.
(ii) If, pursuant to the provisions of subparagraph (2) of this
paragraph, a corporation is considered to be the acquiring corporation
even though a part of the acquired assets is transferred to one or more
corporations controlled by the acquiring corporation, or all the
acquired assets are transferred to two or more corporations controlled
by the acquiring corporation, then the carryover of any item described
in section 381(c) to such controlled corporation or corporations shall
be determined without regard to section 381. Thus, for example, if a
parent corporation is the acquiring corporation for purposes of section
381 notwithstanding the fact that, pursuant to the plan of
reorganization, it transferred to its wholly-owned subsidiary property
acquired from the transferor corporation which the transferor
corporation had elected to inventory under the last-in first-out method,
then the question whether the subsidiary corporation shall continue to
use the same method of inventorying with respect to that property shall
be determined without regard to section 381.
(c) Foreign corporations. A foreign corporation may be a
distributor, transferor, or acquiring corporation for purposes of
section 381. Thus, for example, the net operating loss carryovers of a
foreign corporation, determined under the provisions of section 172 and
subchapter N (section 861 and following), chapter 1 of the Code, may be
carried over to a domestic acquiring corporation if the domestic
corporation acquires the assets of the foreign corporation in a
liquidation or reorganization described in section 381(a) and the
requirements of 1.367-1, if applicable, have been complied with.
(d) Internal Revenue Code of 1939. Any reference in the regulations
under section 381 to any provision of the Internal Revenue Code of 1954
shall, where appropriate, be deemed also to refer to the corresponding
provision of the Internal Revenue Code of 1939.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7343, 40
FR 1698, Jan. 9, 1975)
26 CFR 1.381(b)-1 Operating rules applicable to carryovers in certain
corporate acquisitions.
(a) Closing of taxable year -- (1) In general. Except in the case of
certain reorganizations qualifying under section 368(a)(1)(F), the
taxable year of the distributor or transferor corporation shall end with
the close of the date of distribution or transfer. With regard to the
closing of the taxable year of the transferor corporation in certain
reorganizations under section 368(a)(1)(F) involving a foreign
corporation after December 31, 1986, see 1.367(a)-1T(e) and
7.367(b)-(e).
(2) Reorganizations under section 368(a)(1)(F). In the case of a
reorganization qualifying under section 368(a)(1)(F) (whether or not
such reorganization also qualifies under any other provision of section
368(a)(1)), the acquiring corporation shall be treated (for purposes of
section 381) just as the transferor corporation would have been treated
if there had been no reorganization. Thus, the taxable year of the
transferor corporation shall not end on the date of transfer merely
because of the transfer; a net operating loss of the acquiring
corporation for any taxable year ending after the date of transfer shall
be carried back in accordance with section 172(b) in computing the
taxable income of the transferor corporation for a taxable year ending
before the date of transfer; and the tax attributes of the transferor
corporation enumerated in section 381(c) shall be taken into account by
the acquiring corporation as if there had been no reorganization.
(b) Date of distribution or transfer. (1) The date of distribution
or transfer shall be that day on which are distributed or transferred
all those properties of the distributor or transferor corporation which
are to be distributed or transferred pursuant to a liquidation or
reorganization described in paragraph (b)(1) of 1.381(a)-1. If the
distribution or transfer of all such properties is not made on one day,
then, except as provided in subparagraph (2) of this paragraph, the date
of distribution or transfer shall be that day on which the distribution
or transfer of all such properties is completed.
(2) If the distributor or transferor and acquiring corporations file
the statements described in subparagraph (3) of this paragraph, the date
of distribution or transfer shall be that day as of which (i)
substantially all of the properties to be distributed or transferred
have been distributed or transferred, and (ii) the distributor or
transferor corporation has ceased all operations (other than liquidating
activities). Such day also shall be the date of distribution or
transfer if the completion of the distribution or transfer is
unreasonably postponed beyond the date as of which substantially all the
properties to be distributed or transferred have been distributed or
transferred and the distributor or transferor corporation has ceased all
operations other than liquidating activities. A corporation shall be
considered to have distributed or transferred substantially all of its
properties to be distributed or transferred even though it retains money
or other property in a reasonable amount to pay outstanding debts or
preserve the corporation's legal existence. A corporation shall be
considered to have ceased all operations, other than liquidating
activities, when it ceases to be a going concern and its activities are
merely for the purpose of winding up its affairs, paying its debts, and
distributing any remaining balance of its money or other properties to
its shareholders.
(3) The statements referred to in subparagraph (2) of this paragraph
shall specify the day considered to be the date of distribution or
transfer and shall specify, as of such date (i) the nature and amount of
the total assets which were distributed or transferred and the dates so
distributed or transferred, (ii) the nature and amount of the assets not
distributed or transferred and the purpose for which they were retained,
and (iii) the date on which the distributor or transferor corporation
ceased all operations other than liquidating activities. Such
statements shall be attached to the timely filed income tax return of
the distributor or transferor corporation for its taxable year ending
with such date of distribution or transfer and to the timely filed
income tax return of the acquiring corporation for its first taxable
year ending after such date, except that, with respect to any income tax
return filed before October 11, 1960, any such statement shall be filed
before October 11, 1960, with the district director with whom such
return is filed.
(4) If --
(i) The last day of the acquiring corporation's taxable year is a
Saturday, Sunday, or legal holiday, and
(ii) The day specified in subparagraph (1) or (2) of this paragraph
as the date of distribution or transfer is the last business day before
such Saturday, Sunday, or holiday,
then the last day of the acquiring corporation's taxable year shall
be the date of distribution or transfer for purposes of section 381(b)
and this section. For purposes of this subparagraph, the term
''business day'' means a day which is not a Saturday, Sunday, or legal
holiday, and also means a Saturday, Sunday, or legal holiday if the date
of distribution or transfer determined under subparagraph (1) or (2) of
this paragraph is such Saturday, Sunday, or holiday.
(c) Return of distributor or transferor corporation. The distributor
or transferor corporation shall file an income tax return for the
taxable year ending with the date of distribution or transfer described
in paragraph (b) of this section. If the distributor or transferor
corporation remains in existence after such date of distribution or
transfer, it shall file an income tax return for the taxable year
beginning on the day following the date of distribution or transfer and
ending with the date on which the distributor or transferor
corporation's taxable year would have ended if there had been no
distribution or transfer.
(d) Carryback of net operating losses. For provisions relating to
the carryback of net operating losses of the acquiring corporation, see
paragraph (b) of 1.381(c)(1)-1.
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended at T.D. 8280, 55
FR 1417, Jan. 16, 1990)
26 CFR 1.381(c)(1)-1 Net operating loss carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(1) requires the
acquiring corporation to succeed to, and take into account, the net
operating loss carryovers of the distributor or transferor corporation.
To determine the amount of these carryovers as of the close of the date
of distribution or transfer, and to integrate them with any carryovers
and carrybacks of the acquiring corporation for purposes of determining
the taxable income of the acquiring corporation for taxable years ending
after the date of distribution or transfer, it is necessary to apply the
provisions of section 172 in accordance with the conditions and
limitations of section 381(c)(1) and this section. See also section
382(b) and the regulations thereunder.
(2) The net operating loss carryovers and carrybacks of the acquiring
corporation determined as of the close of the date of distribution or
transfer shall be computed without reference to any net operating loss
of a distributor or transferor corporation. The net operating loss
carryovers of a distributor or transferor corporation as of the close of
the date of distribution or transfer shall be determined without
reference to any net operating loss of the acquiring corporation.
(3) For purposes of the tax imposed under section 56, the acquiring
corporation succeeding to and taking into account any net operating loss
carryovers of the distributor or transferor corporation shall also
succeed to and take into account along with such net operating loss
carryforward any deferred tax liability under section 56(b) and the
regulations thereunder attributable to such net operating loss
carryover.
(b) Carryback of net operating losses. A net operating loss of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer shall not be carried back in computing the
taxable income of a distributor or transferor corporation. However, a
net operating loss of the acquiring corporation for any such taxable
year shall be carried back in accordance with section 172(b) in
computing the taxable income of the acquiring corporation for a taxable
year ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, a net operating loss sustained by it
for any taxable year beginning after such date shall be carried back in
accordance with section 172(b) in computing the taxable income of such
corporation for a taxable year ending on or before that date, but may
not be carried back or over in computing the taxable income of the
acquiring corporation. This paragraph may be illustrated by the
following examples:
Example (1). On December 31, 1954, X Corporation merged into Y
Corporation in a statutory merger to which section 361 applies, and the
charter of Y Corporation continued after the merger. Y Corporation
sustained a net operating loss for the calendar year 1955. Y
Corporation's net operating loss for 1955 may not be carried back in
computing the taxable income of X Corporation but shall be carried back
in computing the taxable income of Y Corporation.
Example (2). On December 31, 1954, X Corporation and Y Corporation
transferred all their assets to Z Corporation in a statutory
consolidation to which section 361 applies. Z Corporation sustained a
net operating loss for the calendar year 1955. Z Corporation's net
operating loss for 1955 may not be carried back in computing the taxable
income of X Corporation or Y Corporation.
Example (3). On December 31, 1954, X Corporation ceased all
operations (other than liquidating activities) and transferred
substantially all its properties to Y Corporation in a reorganization
qualifying under section 368(a)(1)(C). Such properties comprised all of
X Corporation's properties which were to be transferred pursuant to the
reorganization. In the process of liquidating its assets and winding up
its affairs, X Corporation sustained a net operating loss for its
taxable year beginning on January 1, 1955. This net operating loss of X
Corporation shall be carried back in computing the taxable income of
that corporation but may not be carried back or over in computing the
taxable income of Y Corporation.
(c) First taxable year to which carryovers apply. (1) The net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer
shall first be carried to the first taxable year of the acquiring
corporation ending after that date. This rule applies irrespective of
whether the date of distribution or transfer is on the last day, or any
other day, of the acquiring corporation's taxable year. Thus, such net
operating loss carryovers shall first be used by the acquiring
corporation with respect to the computation of its net operating loss
deduction under section 172(a), and its taxable income determined under
the provisions of section 172(b)(2), for such first taxable year.
However, see paragraph (f) of this section.
(2) The net operating loss carryovers available to the distributor or
transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation. Thus, if a parent corporation owning 80 percent of all
classes of stock of its subsidiary corporation were to acquire its share
of the assets of the subsidiary corporation upon a complete liquidation
described in paragraph (b)(1)(i) of 1.381(a)-1, then, subject to the
conditions and limitations of this section, 100 percent of the net
operating loss carryovers available to the subsidiary corporation as of
the close of the date of distribution would be carried over to the
parent corporation.
(d) Limitation on net operating loss deduction for first taxable year
ending after date of distribution or transfer. (1) That part of the
acquiring corporation's net operating loss deduction, determined in
accordance with sections 172(a) and 381(c)(1), for its first taxable
year ending after the date of distribution or transfer which is
attributable to the net operating loss carryovers of the distributor or
transferor corporation, is limited by section 381(c)(1)(B) and this
paragraph to an amount equal to the acquiring corporation's
postacquisition part year taxable income. Such postacquisition part
year taxable income is the amount which bears the same ratio to the
acquiring corporation's taxable income for the first taxable year ending
after the date of distribution or transfer (determined under section 63
without regard to any net operating loss deduction but taking into
account other items to which the acquiring corporation succeeds under
section 381) as the number of days in such first taxable year which
follow the date of distribution or transfer bears to the total number of
days in such taxable year. Thus, if the date of distribution or
transfer is the last day of the acquiring corporation's taxable year,
the net operating loss carryovers of the distributor or transferor are
allowed in full in computing under section 172(a) the net operating loss
deduction of the acquiring corporation for its first taxable year ending
after that date. In such instance, the number of days in the first
taxable year which follow the date of distribution or transfer is the
total number of days in such taxable year.
(2) The limitation provided by section 381(c)(1)(B) applies solely
for the purpose of computing the net operating loss deduction of the
acquiring corporation under section 172(a) for the acquiring
corporation's first taxable year ending after the date of distribution
or transfer. The limitation does not apply for purposes of determining
the portion of any net operating loss (whether of the distributor,
transferor, or acquiring corporation) which may be carried to any
taxable year of the acquiring corporation following its first taxable
year ending after the date of distribution or transfer since such
determination is made pursuant to section 172(b) and section
381(c)(1)(C). See paragraphs (e) and (f) of this section.
(3) The limitation provided by section 381(c)(1)(B) shall be applied
to the aggregate of the allowable net operating loss carryovers of the
distributor or transferor corporation without reference to the taxable
years in which the net operating losses were sustained by such
corporation. If the acquiring corporation has acquired the assets of
two or more distributor or transferor corporations on the same date of
distribution or transfer, then the limitation provided by section
381(c)(1)(B) shall be applied to the aggregate of the net operating loss
carryovers from all of such distributor or transferor corporations.
(4) If the acquiring corporation succeeds to the net operating loss
carryovers of two or more distributor or transferor corporations on two
or more different dates of distribution or transfer within one taxable
year of the acquiring corporation, the limitation to be applied under
section 381(c)(1)(B) to the aggregate of such carryovers shall be
governed by the rules prescribed in paragraph (b) of 1.381(c)(1)-2.
(5) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example (1). (i) X Corporation and Y Corporation were organized on
January 1, 1956, and make their returns on the calendar year basis. On
December 16, 1957, X Corporation transferred all its assets to Y
Corporation in a statutory merger to which section 361 applies. The net
operating losses and taxable income (computed without the net operating
loss deduction) of the two corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year ending December 31, 1957, is $65,000; but pursuant to
section 381(c)(1)(B), only $1,500 of such aggregate amount ($36,500
15/365 ) may be used in computing the net operating loss deduction of Y
Corporation for such taxable year under section 172(a). This limitation
applies even though Y Corporation's own net operating loss carryover to
such year is only $5,000, with the result that Y Corporation has taxable
income under section 63 of $30,000 for its taxable year ending December
31, 1957, that is, $36,500 less the sum of $5,000 and $1,500.
(iii) For rules determining the portion of any given loss of X
Corporation or Y Corporation which may be carried to a taxable year of Y
Corporation following its taxable year ending December 31, 1957, see
sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of this section.
Example (2). (i) X Corporation was organized on January 1, 1954, and
Y Corporation was organized on January 1, 1956. Each corporation makes
its return on the basis of the calendar year. On December 31, 1956, X
Corporation transferred all its assets to Y Corporation in a statutory
merger to which section 361 applies. The net operating losses and the
taxable income (computed without any net operating loss deduction) of
the two corporations are as follows, the assumption being made that none
of the modifications specified in section 172(b)(2)(A) apply to any
taxable year:
(ii) The aggregate of the net operating loss carryovers of X
Corporation carried under section 381(c)(1)(A) to Y Corporation's
taxable year 1957 is $30,000, and the full amount of such carryovers is
allowed in such taxable year to Y Corporation as a deduction under
section 172(a), since such amount does not exceed the limitation
($40,000 365/365 ) for such taxable year under section 381(c)(1)(B).
Example (3). (i) X Corporation, Y Corporation, and Z Corporation
were organized on January 1, 1954, and each corporation makes its return
on the basis of the calendar year. On September 30, 1956, X Corporation
and Y Corporation transferred all their assets to Z Corporation in a
statutory merger to which section 361 applies. The net operating losses
and the taxable income (computed without any net operating loss
deduction) of the three corporations are as follows, the assumption
being made that none of the modifications specified in section
172(b)(2)(A) apply to any taxable year:
(ii) The aggregate of the net operating loss carryovers of X
Corporation and Y Corporation carried under section 381(c)(1)(A) to Z
Corporation's taxable year 1956 is $24,000; but, pursuant to section
381(c)(1)(B), only $18,400 of such aggregate amount ($73,200 92/366 )
may be used in computing the net operating loss deduction of Z
Corporation for such taxable year under section 172(a). For this
purpose, Z Corporation may not use the total of the aggregate carryovers
($10,000) from X Corporation plus the aggregate carryovers ($14,000)
from Y Corporation, even though each such aggregate of carryovers is
separately less than the limitation ($18,400) applicable under section
381(c)(1)(B) and this section.
(iii) For rules determining the portion of any given loss of X
Corporation, Y Corporation, or Z Corporation which may be carried to a
taxable year of Z Corporation following its taxable year ending December
31, 1956, see sections 172(b)(2) and 381(c)(1)(C) and paragraph (f) of
this section.
(e) Computation of carryovers and carrybacks; general rule -- (1)
Sequence for applying losses and computation of taxable income. The
portion of any net operating loss which is carried back or carried over
to any taxable year is the excess, if any, of the amount of the loss
over the sum of the taxable income for each of the prior taxable years
to which the loss may be carried under sections 172(b)(1) and 381. In
determining the taxable income for each such prior taxable year for this
purpose, the various net operating loss carryovers and carrybacks to
such prior taxable year are considered to be applied in reduction of the
taxable income in the order of the taxable years in which the net
operating losses are sustained, beginning with the loss for the earliest
taxable year. The application of this rule to the taxable income of the
acquiring corporation for any taxable year ending after the date of
distribution or transfer involves the use of carryovers of the
distributor or transfer corporation, and of carryovers and carrybacks of
the acquiring corporation. In such instance, the sequence for the use
of loss years remains the same, and the requirement is to begin with the
net operating loss of the earliest taxable year, whether or not it is a
loss of the distributor, transferor, or acquiring corporation. The
taxable income of the acquiring corporation for any taxable year ending
after the date of distribution or transfer shall be determined in the
manner prescribed by section 172(b)(2), except that, if the date of
distribution or transfer is on a day other than the last day of a
taxable year of the acquiring corporation, the taxable income of such
corporation for the taxable year which includes such date shall be
computed in the special manner prescribed by section 381(c)(1)(C) and
paragraph (f) of this section.
(2) Loss year of transferor or distributor considered prior taxable
year. Section 381(c)(1)(C) provides that, for the purpose of
determining the net operating loss carryovers under section 172(b)(2), a
net operating loss for a loss year of a distributor or transferor
corporation which ends on or before the last day of a loss year of the
acquiring corporation shall be considered to be a net operating loss for
a year prior to such loss year of the acquiring corporation. In a case
where the acquiring corporation has acquired the assets of two or more
distributor or transferor corporations on the same date of distribution
or transfer, the loss years of the distributor or transferor
corporations shall be taken into account in the order in which such loss
years terminate; if any one of the loss years of a distributor or
transferor corporation ends on the same day as the loss year of another
distributor or transferor corporation, either loss year may be taken
into account before the other.
(3) Years to which losses may be carried. The taxable years to which
a net operating loss shall be carried back or carried over are
prescribed by section 172(b)(1). Since the taxable year of the
distributor or transferor corporation ends with the close of the date of
distribution or transfer, such taxable year and the first taxable year
of the acquiring corporation which ends after that date shall be
considered two separate taxable years to which a net operating loss of
the distributor or transferor corporation for any taxable year ending
before that date may be carried over. This rule applies even though the
taxable year of the distributor or transferor corporation which ends on
the date of distribution or transfer is a period of less than twelve
months. However, for the purpose of determining under section 172(b)(1)
the taxable years to which a net operating loss of the acquiring
corporation is carried over or carried back, the first taxable year of
the acquiring corporation which ends after the date of distribution or
transfer shall be treated as only one taxable year even though such
taxable year is considered under section 381(c)(1)(C) and paragraph
(f)(2) of this section as two taxable years. The application of this
subparagraph may be illustrated by the following example:
Example. X Corporation was organized on January 1, 1954, and
thereafter it sustained net operating losses in its calendar years 1954,
1955, and 1956. On June 30, 1957, X Corporation transferred all its
assets to Y Corporation, which was organized on January 1, 1955, in a
statutory merger to which section 361 applies. In its taxable year
ending June 30, 1957, X Corporation sustained a net operating loss. Y
Corporation sustained net operating losses in its calendar years 1955,
1956, and 1958, but had taxable income for the year 1957. The years to
which these losses of X Corporation and Y Corporation shall be carried,
and the sequence in which carried, are as follows:
(4) Computation of carryovers in a case where the date of
distribution or transfer occurs on last day of acquiring corporation's
taxable year. The computation of the net operating loss carryovers from
the distributor or transferor corporation and from the acquiring
corporation in a case where the date of distribution or transfer occurs
on the last day of a taxable year of the acquiring corporation may be
illustrated by the following example:
Example. X Corporation and Y Corporation were organized on January 1,
1955, and each corporation makes its return on the basis of the calendar
year. On December 31, 1956, X Corporation transferred all its assets to
Y Corporation in a statutory merger to which section 361 applies. The
net operating losses and the taxable income (computed without any net
operating loss deduction) of the two corporations are as follows, the
assumption being made that none of the modifications specified in
section 172(b)(2)(A) apply to any taxable year:
The sequence in which the losses of X Corporation and Y Corporation
are applied, and the computation of the carryovers to Y Corporation's
calendar year 1958, may be illustrated as follows:
(i) X Corporation's 1955 loss. The carryover to 1958 is $2,000,
computed as follows:
(ii) Y Corporation's 1955 loss. The carryover to 1958 is $1,000,
computed as follows:
(iii) X Corporation's 1956 loss. The carryover to 1958 is $3,000,
computed as follows:
(iv) Y Corporation's 1957 loss. The carryover to 1958 is $15,000,
computed as follows:
(v) Summary of carryovers to 1958. The aggregate of the net
operating loss carryovers to 1958 is $21,000, computed as follows:
(f) Computation of carryovers and carrybacks when date of
distribution or transfer is not on last day of acquiring corporation's
taxable year -- (1) General rule. Pursuant to the provisions of section
381(c)(1)(C), the taxable income of the acquiring corporation for its
taxable year which is a prior taxable year for purposes of section
172(b)(2) and paragraph (e) of this section shall be determined in the
manner prescribed in this paragraph, if the date of distribution or
transfer occurs within, but not on the last day of, such taxable year.
(2) Taxable year considered as two taxable years. Such taxable year
of the acquiring corporation shall be considered as though it were two
taxable years, but only for the limited purpose of applying section
172(b)(2). The first of such two taxable years shall be referred to in
this section as the preacquisition part year; the second, as the
postacquisition part year. For purposes of section 172(b)(2), a net
operating loss of the acquiring corporation shall be carried to the
preacquisition part year and then to the postacquisition part year,
whereas a net operating loss of a distributor or transferor corporation
shall be carried to the postacquisition part year and then to the
acquiring corporation's subsequent taxable years. In determining under
section 172(b)(2) and this paragraph the portion of any net operating
loss of a distributor or transferor corporation which is carried to any
taxable year of the acquiring corporation ending after the
postacquisition part year, the taxable income (as determined under this
paragraph) of the postacquisition part year shall be taken into account
but the taxable income of the preacquisition part year (as so
determined) shall not be taken into account. Though considered as two
separate taxable years for purposes of section 172(b)(2), the
preacquisition part year and the postacquisition part year are treated
as one taxable year in determining the years to which a net operating
loss is carried under section 172(b)(1). See paragraph (e)(3) of this
section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
(5) Division of taxable income. The taxable income for such taxable
year (computed with the modifications specified in section 172(b)(2)(A)
but without any net operating loss deduction) of the acquiring
corporation shall be divided between the preacquisition part year and
the postacquisition part year in proportion to the number of days in
each. Thus, if in a statutory merger to which section 361 applies Y
Corporation acquires the assets of X Corporation on June 30, 1960, and Y
Corporation has taxable income (computed in the manner so prescribed) of
$36,600 for its calendar year 1960, then the preacquisition part year
taxable income would be $18,200 ($36,600 182/366 ) and the
postacquisition part year taxable income would be $18,400 ($36,600
184/366 ).
(6) Net operating loss deduction. After obtaining the taxable income
of the preacquisition part year and of the postacquisition part year in
the manner described in subparagraph (5) of this paragraph, it is
necessary to compute the net operating loss deduction for each such part
year. This deduction shall be determined in the manner prescribed by
section 172(b)(2)(B) but subject to the provisions of this subparagraph.
The net operating loss deduction for the preacquisition part year
shall, for purposes of section 172(b)(2) only, be determined in the same
manner as that prescribed by section 172(b)(2)(B) but shall be computed
without taking into account any net operating loss of the distributor or
transferor corporation. Therefore, only net operating loss carryovers
and carrybacks of the acquiring corporation to the preacquisition part
year shall be taken into account in computing the net operating loss
deduction for such part year. The net operating loss deduction for the
post- acquisition part year shall, for purposes of section 172(b)(2)
only, be determined in the same manner as that prescribed by section
172(b)(2)(B) and shall be computed by taking into account all the net
operating loss carryovers available to the distributor or transferor
corporation as of the close of the date of distribution or transfer, as
well as the net operating loss carryovers and carrybacks of the
acquiring corporation to the postacquisition part year. The sequence in
which the net operating losses of the two corporations shall be applied
for purposes of this subparagraph shall be determined in the manner
prescribed in paragraph (e) of this section.
(7) Limitation on taxable income. In no case shall the taxable
income of the preacquisition part year or the postacquisition part year,
as computed under this paragraph, be considered to be less than zero.
(8) Cross reference. If the acquiring corporation succeeds to the
net operating loss carryovers of two or more distributors or transferor
corporations on two or more dates of distribution or transfer during the
same taxable year of the acquiring corporation, the determination of the
taxable income of the acquiring corporation for such year pursuant to
section 381(c)(1)(C) shall be governed by the rules prescribed in
paragraph (c) of 1.381(c)(1)-2.
(9) Illustration. The application of this paragraph may be
illustrated by the following example:
Example -- (i) Facts. X Corporation was organized on January 1,
1955, and Y Corporation was organized on January 1, 1954. Each
corporation makes its return on the basis of the calendar year. On June
30, 1956, X Corporation transferred all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net operating losses
and the taxable income (computed without any net operating loss
deduction) of the two corporations are as follows, the assumption being
made that none of the modifications specified in section 172(b)(2)(A)
apply to any taxable year:
(ii) Y Corporation's 1954 loss. The carryover to 1957 is $0,
computed as follows:
(iii) X Corporation's 1955 loss. The carryover to 1957 is $45,600,
computed as follows:
(iv) Y Corporation's 1955 loss. The carryover to 1957 is $6,800,
computed as follows:
(v) Summary of carryovers to 1957. The aggregate of the net
operating loss carryovers to 1957 is $52,400, determined as follows:
(g) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
subject to the conditions and limitations of sections 172 and 381, the
net operating loss carryovers available to the first acquiring
corporation under sections 172 and 381.
(h) Illustration. The application of this section may be further
illustrated by the following example:
Example -- (1) Facts. X Corporation was organized on January 1,
1954, and Y Corporation was organized on January 1, 1955. Each
corporation makes its return on the basis of the calendar year. On
August 31, 1957, X Corporation transferred all its assets to Y
Corporation in a statutory merger to which section 361 applies. The net
operating losses and the taxable income of the two corporations for the
taxable years involved are set forth in the tabulation below. The
taxable income so shown is computed without the modifications required
by section 172(b)(2)(A) and without the benefit of any net operating
loss deduction. In its calendar year 1957, Y Corporation had a
deduction of $365 which is disallowed by section 172(b)(2)(A).
(2) Computation of carryovers and carrybacks. The sequence in which
the losses of X Corporation and Y Corporation are applied and the
computation of the carryovers to Y Corporation's calendar year 1959 may
be illustrated as follows:
(i) X Corporation's 1954 loss. The carryover to 1958, which is the
last year to which this loss may be carried, is $0, computed as follows:
(ii) X Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
(iii) Y Corporation's 1955 loss. The carryover to 1959 is $0,
computed as follows:
(iv) X Corporation's 1956 loss. The carryover to 1959 is $22,578,
computed as follows:
(v) Y Corporation's 1956 loss. The carryover to 1959 is $0, computed
as follows:
(vi) Y Corporation's 1958 loss. The carryover to 1959 is $0,
computed as follows:
(vii) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $22,578, computed as follows:
(3) Net operating loss deduction for 1957. (i) The net operating
loss deduction available to Y Corporation under section 172(a) for the
calendar year 1957, determined in accordance with paragraph (d) of this
section, is $48,300, computed as follows:
(ii) The taxable income under section 63 for 1957 is $6,450, computed
as follows:
(4) Net operating loss deduction for 1959. The taxable income under
section 63 for 1959 is $27,422, computed as follows:
(5) Years to which losses may be carried. The taxable years to which
the losses of X Corporation and Y Corporation may be carried, and the
sequence in which carried, are as follows:
(T.D. 6500, 25 FR 11607, Nov. 26, 1960, as amended by T.D. 7564, 43
FR 40493, Sept. 12, 1978)
26 CFR 1.381(c)(1)-2 Net operating loss carry- overs; two or more
dates of distribution or transfer in the taxable year.
(a) In general. If the acquiring corporation succeeds to the net
operating loss carryovers of two or more distributor or transferor
corporations on two or more dates of distribution or transfer within one
taxable year of the acquiring corporation, the limitation to be applied
under section 381(c)(1)(B) to the aggregate of the net operating loss
carryovers to that taxable year from all of the distributor or
transferor corporations shall be determined by applying the rules
prescribed in paragraph (b) of this section, and the taxable income of
the acquiring corporation for that taxable year under sections
381(c)(1)(C) and 172(b)(2) shall be determined by applying the rules
prescribed in paragraph (c) of this section. For purposes of this
section, the term ''postacquisition income'' means postacquisition part
year taxable income determined under paragraph (d)(1) of 1.381(c)(1)-1
by treating the first date of distribution or transfer as though it were
the only date of distribution or transfer during the taxable year of the
acquiring corporation.
(b) Determination of limitation under section 381(c)(1)(B) -- (1) In
general. If the acquiring corporation succeeds to the net operating
loss carryovers of two or more distributor or transferor corporations on
two or more dates of distribution or transfer during the same taxable
year of the acquiring corporation, and if the amount of the net
operating loss carryovers acquired on the first date of distribution or
transfer equals or exceeds the postacquisition income, then the
limitation under section 381(c)(1)(B) shall be an amount equal to such
postacquisition income. If the amount of the net operating loss
carryovers acquired on the first date of distribution or transfer is
less than such postacquisition income, then the limitation under section
381(c)(1)(B) shall be determined as provided in subparagraphs (2)
through (5) of this paragraph.
(2) Allocation of postacquisition income among partial
postacquisition years. That part of the taxable year of the acquiring
corporation beginning on the day following the first date of
distribution or transfer and ending with the close of the taxable year
of the acquiring corporation shall be divided into the same number of
partial postacquisition years as the number of dates of distribution or
transfer on which the acquiring corporation succeeds to net operating
loss carryovers during its taxable year. The first partial
postacquisition year shall begin with the day following the first date
of distribution or transfer and shall end with the close of the second
date of distribution or transfer. The second and succeeding partial
postacquisition years shall begin with the day following the close of
the preceding such partial year and shall end with the close of the
succeeding date of distribution or transfer, or, if there is no such
succeeding date, then with the close of the taxable year of the
acquiring corporation. The postacquisition income of the acquiring
corporation shall be allocated among the partial postacquisition years
in proportion to the number of days in each such partial year.
(3) Two dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of two
distributor or transferor corporations on two dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first partial postacquisition
year, the limitation provided by section 381(c)(1)(B) shall be the
amount of the postacquisition income. If the income for the first
partial postacquisition year exceeds the net operating loss carryovers
acquired on the first date of distribution or transfer, the limitation
provided by section 381(c)(1)(B) shall be the amount of the
postacquisition income reduced by the amount of such excess. The
application of this subparagraph may be illustrated by the following
example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of Y and Z Corporations
in statutory mergers to each of which section 361 applies, the dates of
transfer being January 1 and December 1, respectively. The net
operating loss carryovers of each transferor corporation and the income
for each partial postacquisition year are:
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by $32,400, the excess of the
income for the first partial year ($33,400) over the net operating loss
carryovers acquired on the first date of transfer ($1,000).
Accordingly, the limitation is $4,000 ($36,400 minus $32,400).
Therefore, although X Corporation acquired carryovers aggregating
$51,000 during 1955, it can utilize only $4,000 of such carryovers in
computing its net operating loss deduction for 1955.
(4) Three dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of three
distributor or transferor corporations on three dates of distribution or
transfer during the same taxable year of the acquiring corporation, and
if the amount of the net operating loss carryovers acquired on the first
date equals or exceeds the income for the first and second partial
postacquisition years, the limitation provided by section 381(c)(1)(B)
shall be the amount of the postacquisition income. If the amount of the
carryovers acquired on the first date equals or exceeds the income for
the first partial postacquisition year but does not equal or exceed the
income for the first and second partial postacquisition years, the
limitation shall be the amount of the postacquisition income reduced by
the excess of the income for the first and second partial
postacquisition years over the amount of carryovers acquired on the
first and second dates of distribution or transfer. If the income for
the first partial postacquisition year exceeds the carryovers acquired
on the first date, the limitation shall be the postacquisition income
reduced by the sum of the amount of such excess plus the amount, if any,
by which the income for the second partial postacquisition year exceeds
the carryovers acquired on the second date. This subparagraph may be
illustrated by the following examples:
Example (1). (i) X Corporation has taxable income (computed without
any net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquires the assets of M, N, and Z
Corporations in statutory mergers to each of which section 361 applies,
the dates of transfer being January 1, January 31, and December 1,
respectively. The net operating loss carryovers of each transferor
corporation and the income for each partial postacquisition year are:
(ii) Since the carryovers of $4,000 acquired on the first date of
transfer exceed the income for the first partial year ($3,000), the
limitation provided by section 381(c)(1)(B) is the amount of the
postacquisition income ($36,400) reduced by the excess of the income for
the first and second partial years ($33,400) over the carryovers
acquired on the first and second dates of transfer ($10,000).
Therefore, the limitation is $13,000 ($36,400 less $23,400).
Example (2). (i) Assume the same facts as in example (1) except that
the amount of the net operating loss carryovers acquired from M
Corporation is $1,000. The net operating loss carryovers of each
transferor corporation and the income for each partial postacquisition
year are:
(ii) Since the income for the first partial year ($3,000) exceeds the
$1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by such excess and also reduced by the excess
of the income for the second partial year ($30,400) over the carryovers
acquired on the second date of transfer ($6,000). Therefore, the
limitation is $10,000 ($36,400 less the sum of $2,000 and $24,400).
Example (3). (i) Assume the same facts as in example (2) except that
the carryovers acquired from N Corporation are $75,000. The net
operating loss carryovers of each transferor corporation and the income
for each partial postacquisition year are:
(ii) Since the income for the first partial year ($3,000) exceeds the
$1,000 of carryovers acquired on the first date by $2,000, the
limitation provided by section 381(c)(1)(B) is the postacquisition
income of $36,400 reduced by $2,000, or $34,400. No further reduction
is made since the income for the second partial year ($30,400) does not
exceed the carryovers of $75,000 acquired on the second date of
transfer.
(5) Four or more dates of distribution or transfer. If the acquiring
corporation succeeds to the net operating loss carryovers of four or
more distributor or transferor corporations on four or more dates of
distribution or transfer during the same taxable year of the acquiring
corporation, the limitation provided by section 381(c)(1)(B) shall be
determined consistently with the methods prescribed in subparagraphs (3)
and (4) of this paragraph. The application of this subparagraph may be
illustrated by the following example:
Example. (i) X Corporation has taxable income (computed without any
net operating loss deduction) of $36,500 for its calendar year 1955.
During 1955, X Corporation acquired the assets of M, N, O, Y, and Z
Corporations in statutory mergers to each of which section 361 applied,
the dates of transfer being, respectively, January 1, January 31, March
3, April 2, and December 1. The net operating loss carryovers of each
transferor corporation and the income for each partial postacquisition
year are:
(ii) The limitation provided by section 381(c)(1)(B) equals the
postacquisition income of $36,400 reduced by the sum of (a) the $2,000
excess of the income for the first partial year ($3,000) over the
carryovers acquired from M Corporation ($1,000), (b) the $1,100 excess
of the income for the second and third partial years ($6,100) over the
carryovers acquired from N and O Corporations ($5,000), and (c) the
$14,300 excess of the income for the fourth partial year ($24,300) over
the carryovers acquired from Y Corporation ($10,000). Accordingly, the
limitation is $19,000 ($36,400 minus $17,400). Therefore, although X
Corporation acquired carryovers aggregating $36,000 during 1955, it can
utilize only $19,000 of such carryovers in computing its net operating
loss deduction for 1955.
(c) Determination of taxable income of acquiring corporation under
section 381(c)(1)(C) -- (1) In general. If the acquiring corporation
succeeds to the net operating loss carryovers of two or more distributor
or transferor corporations on two or more dates of distribution or
transfer within one taxable year of the acquiring corporation, then
pursuant to section 381(c)(1)(C) the taxable income of the acquiring
corporation for its taxable year which is a prior taxable year for
purposes of section 172(b)(2) and paragraph (e) of 1.381(c)(1)-1 shall
be determined as provided in this paragraph.
(2) Division of taxable income. The taxable income of the acquiring
corporation (computed with the modifications specified in section
172(b)(2)(A) but without any net operating loss deduction) shall be
allocated proportionately on a daily basis among a preacquisition part
year (determined under paragraph (f)(3) of 1.381(c)(1)-1 by treating
the first date of distribution or transfer as though it were the only
date of distribution or transfer during the taxable year of the
acquiring corporation) and two or more partial postacquisition years
(determined as provided in paragraph (b)(2) of this section). The
preacquisition part year and each partial postacquisition year shall be
considered a separate taxable year, but only for the limited purpose of
applying sections 172(b)(2) and 381(c)(1)(C).
(3) Net operating loss deduction. The net operating loss deduction
of the preacquisition part year and the partial postacquisition years
shall be determined consistently with the manner described in paragraph
(f)(6) of 1.381(c)(1)-1 but by taking into account, in the case of any
partial postacquisition year, only the net operating loss carryovers and
carrybacks of the acquiring corporation and those net operating loss
carryovers from a distributor or transferor corporation which become
available to the acquiring corporation as of the close of those dates of
distribution or transfer which occur before the beginning of that
specific partial postacquisition year. The sequence in which the net
operating losses of the distributor or transferor and acquiring
corporations shall be applied for this purpose shall be determined in
the manner described in paragraph (e) of 1.381(c)(1)-1. Subject to the
preceding sentence, the net operating loss carryovers to any specific
partial postacquisition year, whether from a distributor, transferor, or
acquiring corporation, shall be taken into account in the order of the
taxable years in which the net operating losses arose, beginning with
the loss for the earliest taxable year.
(4) Illustration. The application of this paragraph may be
illustrated by the following example:
Example -- (i) Facts. X Corporation, which was organized on January
1, 1957, sustained a net operating loss of $20,000 for its calendar year
1957 and had taxable income (computed without any net operating loss
deduction) of $36,500 for its calendar year 1958. During 1958, X
Corporation acquired the assets of Y and Z Corporations in statutory
mergers to each of which section 361 applied, the dates of transfer
being June 30 and September 30, respectively. None of the modifications
specified in section 172(b)(2)(A) apply to any of the corporations for
any taxable year. The taxable income (computed without any net
operating loss deduction) and net operating losses of Y and Z
Corporations (which were organized on January 1, 1957, and January 1,
1954, respectively) are set forth below:
The sequence in which the losses of the acquiring corporation and the
transferor corporations are applied and the computation of the
carryovers to X Corporation's calendar year 1959 are illustrated in the
following subdivisions of this example.
(ii) Computation of taxable income. X Corporation's taxable income,
determined in the manner described in subparagraph (2) of this
paragraph, for the preacquisition part year and for the partial
postacquisition years is as follows:
(iii) Z Corporation's 1954 loss. The carryover to 1959 is $0,
computed as follows:
The balance of $16,800 is not carried over to 1959 since X
Corporation's taxable year 1958 is the last of the five years to which
Z's 1954 loss may be carried under section 172(b)(1).
(iv) Y Corporation's 1957 loss. The carryover to 1959 is $14,800,
computed as follows:
(v) X Corporation's 1957 loss. The carryover to 1959 is $1,900,
computed as follows:
(vi) Summary of carryovers to 1959. The aggregate of the net
operating loss carryovers to 1959 is $16,700, computed as follows:
26 CFR 1.381(c)(2)-1 Earnings and profits.
(a) In general. (1) Section 381(c)(2) requires the acquiring
corporation in a transaction to which section 381(a) applies to succeed
to, and take into account, the earnings and profits, or deficit in
earnings and profits, of the distributor or transferor corporation as of
the close of the date of distribution or transfer. In determining the
amount of such earnings and profits, or deficit, to be carried over, and
the manner in which they are to be used by the acquiring corporation
after such date, the provisions of section 381(c)(2) and this section
shall apply. For purposes of section 381(c)(2) and this section, if the
distributor or transferor corporation accumulates earnings and profits,
or incurs a deficit in earnings and profits, after the date of
distribution or transfer and before the completion of the reorganization
or liquidation, such earnings and profits, or deficit, shall be deemed
to have been accumulated or incurred as of the close of the date of
distribution or transfer.
(2) If the distributor or transferor corporation has accumulated
earnings and profits as of the close of the date of distribution or
transfer, such earnings and profits shall (except as hereinafter
provided in this section) be deemed to be received by, and to become a
part of the accumulated earnings and profits of, the acquiring
corporation as of such time. Similarly, if the distributor or
transferor corporation has a deficit in accumulated earnings and profits
as of the close of the date of distribution or transfer, such deficit
shall (except as hereinafter provided in this section) be deemed to be
incurred by the acquiring corporation as of such time. In no event,
however, shall the accumulated earnings and profits, or deficit, of the
distribution or transferor corporation be taken into account in
determining earnings and profits of the acquiring corporation for the
taxable year during which occurs the date of distribution or transfer.
(3) Any part of the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of the distributor or transferor
corporation which consists of earnings and profits, or deficits,
accumulated before March 1, 1913, shall be deemed to become earnings and
profits, or deficits, of the acquiring corporation accumulated before
March 1, 1913, and any part of the accumulated earnings and profits of
the distributor or transferor corporation which consists of increase in
value of property accrued before March 1, 1913, shall be deemed to
become earnings and profits of the acquiring corporation consisting of
increase in value of property accrued before March 1, 1913.
(4) If the acquiring corporation and each distributor or transferor
corporation has accumulated earnings and profits as of the close of the
date of distribution or transfer, or if each of such corporations has a
deficit in accumulated earnings and profits as of such time, then the
accumulated earnings and profits (or deficit) of each such corporation
shall be consolidated as of the close of the date of distribution or
transfer in the accumulated earnings and profits account of the
acquiring corporation. See subparagraph (6) of this paragraph for
determination of the accumulated earnings and profits (or deficit) of
the acquiring corporation as of the close of the date of distribution or
transfer.
(5) If (i) one or more corporations a party to a distribution or
transfer has accumulated earnings and profits as of the close of the
date of distribution or transfer, and (ii) one or more of such
corporations has a deficit in accumulated earnings and profits as of
such time, the total of any such deficits shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer. In such instance, the
acquiring corporation will be considered as maintaining two separate
earnings and profits accounts after the date of distribution or
transfer. The first such account shall contain the total of the
accumulated earnings and profits as of the close of the date of
distribution or transfer of each corporation which has accumulated
earnings and profits as of such time, and the second such account shall
contain the total of the deficits in accumulated earnings and profits of
each corporation which has a deficit as of such time. The total deficit
in the second account may not be used to reduce the accumulated earnings
and profits in the first account (although such earnings and profits may
be offset by deficits incurred, or deemed to have been incurred, after
the date of distribution or transfer) but shall be used only to offset
earnings and profits accumulated, or deemed to have been accumulated
under subparagraph (6) of this paragraph, by the acquiring corporation
after the date of distribution or transfer.
(6) In any case in which it is necessary to compute the accumulated
earnings and profits, or the deficit in accumulated earnings and
profits, of the acquiring corporation as of the close of the date of
distribution or transfer and such date is a day other than the last day
of a taxable year of the acquiring corporation --
(i) If the acquiring corporation has earnings and profits for its
taxable year during which occurs the date of distribution or transfer,
such earnings and profits (a) shall be deemed to have accumulated as of
the close of such date in an amount which bears the same ratio to the
undistributed earnings and profits of such corporation for such year as
the number of days in the taxable year preceding the date following the
date of distribution or transfer bears to the total number of days in
the taxable year, and (b) shall be deemed to have accumulated after the
date of distribution or transfer in an amount which bears the same ratio
to the undistributed earnings and profits of such corporation for such
year as the number of days in the taxable year following such date bears
to the total number of days in such taxable year. For purposes of the
preceding sentence, the undistributed earnings and profits of the
acquiring corporation for such taxable year shall be the earnings and
profits for such taxable year reduced by any distributions made
therefrom during such taxable year.
(ii) If the acquiring corporation has an operating deficit for its
taxable year during which occurs the date of distribution or transfer,
then, unless the actual accumulated earnings and profits, or deficit, as
of such date can be shown, such operating deficit shall be deemed to
have accumulated in a manner similar to that described in subdivision
(i) of this subparagraph.
(7) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example (1). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
(ii) As of the close of June 30, 1959, N acquires from M accumulated
earnings and profits of $115,000. Since M and N each has accumulated
earnings and profits as of the close of the date of transfer, M's
accumulated earnings and profits are added to N's accumulated earnings
and profits as of such time. However, no part of M's accumulated
earnings and profits is taken into account in determining N's earnings
and profits for the calendar year 1959. Therefore, N's earnings and
profits for the calendar year 1959 are $36,500.
Example (2). (i) X and Y Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation transfers
all its assets to Y Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
(ii) As of the close of June 30, 1959, Y acquires from X a deficit in
accumulated earnings and profits in the amount of $60,000. This deficit
may be used only to reduce those earnings and profits of Y which are
accumulated, or deemed to have accumulated, after June 30, 1959.
Accordingly, as of December 31, 1959, the accumulated earnings and
profits of Y amount to $118,100; at such time Y also has a separate
deficit in accumulated earnings and profits in the amount of $41,600.
These amounts are determined as follows:
Example (3). Assume the same facts as in example (2), except that on
September 15, 1959, Y Corporation makes a cash distribution of $96,500.
The entire distribution is a dividend: $36,500 from earnings and
profits for the taxable year 1959 and $60,000 from earnings and profits
accumulated as of December 31, 1958. Accordingly, as of December 31,
1959, Y has accumulated earnings and profits of $40,000, and also has a
separate deficit in accumulated earnings and profits of $60,000. These
amounts are determined as follows:
Example (4). (i) M and N Corporations make their returns on the
basis of the calendar year. On June 30, 1959, M Corporation transfers
all its assets to N Corporation in a statutory merger to which section
361 applies. The books of the two corporations reveal the following
information:
(ii) Assuming that N has not shown its actual accumulated earnings
and profits, or deficit, as of the close of June 30, 1959, N has a
deficit in accumulated earnings and profits at such time which amounts
to $22,400, determined as follows:
As of the close of June 30, 1959, N acquires from M accumulated
earnings and profits in the amount of $110,000, no part of which may be
offset by N's own deficit of $22,400; however, such earnings and
profits may be offset by deficits incurred, or deemed incurred, by N
after June 30, 1959. Thus, as of December 31, 1959, N has the
above-mentioned deficit of $22,400; at such time N also has accumulated
earnings and profits in the amount of $36,400, determined as follows:
Example (5). Assume the same facts as in example (4), except that on
September 9, 1959, N Corporation makes a cash distribution of $100,000.
The amount of $82,000 is a dividend from accumulated earnings and
profits, computed as follows:
As of December 31, 1959, N Corporation has a deficit in accumulated
earnings and profits of $68,000, computed as follows:
Example (6). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1959, X Corporation and Y
Corporation transfer all their assets to Z Corporation in a statutory
merger to which section 361 applies. The books of the three
corporations reveal the following information:
(ii) As of the close of June 30, 1959, Z acquires from Y a deficit in
accumulated earnings and profits of $30,000. As of such time, Z's own
deficit in accumulated earnings and profits amounts to $1,900,
determined as follows:
The total deficit of $31,900 may be used only to offset earnings and
profits of Z accumulated, or deemed to have accumulated, after June 30,
1959; such deficit may not be used to reduce the accumulated earnings
and profits of $40,000 acquired from X as of the close of June 30, 1959.
Thus, as of December 31, 1959, the accumulated earnings and profits of
Z amount to $40,000; at such time Z Corporation also has a separate
deficit in accumulated earnings and profits in the amount of $13,500,
determined as follows:
Example (7). X and Y Corporations make their returns on the basis of
the calendar year. On December 31, 1954, X transfers all its assets to
Y in a statutory merger to which section 361 applies. The books of the
two corporations reveal the following information:
The balances in the accumulated earnings and profits account and the
separate deficit account of Y Corporation at the close of the taxable
year involved are as follows:
(b) Successive acquisitions. (1) If, as of the date of distribution
or transfer, either the acquiring corporation, or the distributor or
transferor corporation, or both, is considered under paragraph (a) of
this section to be maintaining separate earnings and profits accounts as
the result of a prior transaction or transactions to which section
381(a) applied, the accumulated earnings and profits, or deficit in
accumulated earnings and profits, of each such corporation shall be
combined with the appropriate earnings and profits account of the other
such corporation. For example, if, as of the date of transfer, the
acquiring corporation and the transferor corporation are each
maintaining separate accounts, one containing accumulated earnings and
profits and the other containing a deficit in accumulated earnings and
profits, the amounts in the two accumulated earnings and profits
accounts shall be combined into one account, and the amounts in the two
deficit accounts shall be combined into a second account, and the amount
in one combined account may not be used to offset the amount in the
other combined account.
(2) This paragraph may be illustrated by the following examples, in
which it is assumed that none of the accumulated earnings and profits,
or deficits, consist of earnings and profits or deficits accumulated, or
increase in value of property accrued, before March 1, 1913.
Example (1). (i) X, Y, and Z Corporations make their returns on the
basis of the calendar year. On June 30, 1958, X Corporation transfers
all its assets to Z Corporation in a statutory merger to which section
361 applies, and on August 31, 1958, Y Corporation transfers all its
assets to Z Corporation in another statutory merger to which section 361
applies. The books of the three corporations reveal the following
information:
(ii) As of the close of June 30, 1958, Z acquires from X a deficit in
accumulated earnings and profits in the amount of $45,000, which deficit
may be used only to reduce those earnings and profits of Z which are
accumulated, or deemed to have been accumulated, after June 30, 1958.
As of the close of August 31, 1958, Z acquires from Y earnings and
profits of $12,000, no portion of which may be reduced by the deficit
acquired by Z from X. Accordingly, as of December 31, 1958, Z has
accumulated earnings and profits of $90,100, and also has a separate
deficit in accumulated earnings and profits of $26,600. These amounts
are determined as follows:
Example (2). (i) Assume the same facts as in example (1), plus the
additional fact that on June 30, 1959, Z Corporation transfers all its
assets to M Corporation (which makes its return on the basis of the
calendar year) in a statutory merger to which section 361 applies, and
that as of such time M Corporation is considered to be maintaining
separate earnings and profits accounts as the result of a previous
transaction to which section 381(a) applied. The books of the two
corporations reveal the following information:
(ii) As of June 30, 1959, M acquires from Z accumulated earnings and
profits of $90,100, which amount is combined with M's own accumulated
earnings and profits of $50,000; M also acquires from Z a deficit in
accumulated earnings and profits of $21,600 ($26,600 minus $5,000),
which amount is combined with M's own deficit of $11,900. The total
deficit of $33,500 may be used only to reduce earnings and profits of M
which are accumulated, or deemed to have accumulated, after June 30,
1959. Accordingly, as of December 31, 1959, M has accumulated earnings
and profits of $140,100, and also has a separate deficit in accumulated
earnings and profits in the amount of $15,100. These amounts are
determined as follows:
(c) Distribution of earnings and profits pursuant to reorganization
or liquidation. (1) If, in a reorganization to which section 381(a)(2)
applies, the transferor corporation pursuant to the plan of
reorganization distributes to its stockholders property consisting not
only of property permitted by section 354 to be received without
recognition of gain, but also of other property or money, then the
accumulated earnings and profits of the transferor corporation as of the
close of the date of transfer shall be computed by taking into account
the amount of earnings and profits properly applicable to the
distribution, regardless of whether such distribution occurs before or
after the close of the date of transfer.
(2) If, in a distribution to which section 381(a)(1) (relating to
certain liquidations of subsidiaries) applies, the acquiring corporation
receives less than 100 percent of the assets distributed by the
distributor corporation, then the accumulated earnings and profits of
the distributor corporation as of the close of the date of distribution
shall be computed by taking into account the amount of earnings and
profits properly applicable to the distributions to minority
stockholders, regardless of whether such distributions occur before or
after the close of the date of distribution.
(d) Treatment of earnings and profits where assets are transferred to
a corporation controlled by the acquiring corporation. If, pursuant to
the provisions of paragraph (b)(2) of 1.381(a)-1, a corporation is
considered to be the acquiring corporation even though a part of the
acquired assets is transferred to one or more corporations controlled by
the acquiring corporation, or all the acquired assets are transferred to
two or more corporations controlled by the acquiring corporation, then
whether any portion of the earnings and profits received by the
acquiring corporation under section 381(c)(2) is allocable to such
controlled corporation or corporations shall be determined without
regard to section 381. See paragraph (a) of 1.312-11.
(T.D. 6586, 26 FR 12550, Dec. 28, 1961, as amended by T.D. 6692, 28
FR 12817, Dec. 3, 1963)
26 CFR 1.381(c)(3)-1 Capital loss carryovers.
(a) Carryover requirement. (1) Section 381(c)(3) requires the
acquiring corporation in a transaction to which section 381(a) applies
to succeed to, and take into account, the capital loss carryovers of the
distributor or transferor corporation. To determine the amount of these
carryovers as of the close of the date of distribution or transfer, and
to integrate them with the capital loss carryovers of the acquiring
corporation for purposes of determining the taxable income of the
acquiring corporation for taxable years ending after the date of
distribution or transfer, it is necessary to apply the provisions of
section 1212 in accordance with the conditions and limitations of
section 381(c)(3) and this section.
(2) The capital loss carryovers of the acquiring corporation as of
the close of the date of distribution or transfer shall be determined
without reference to any capital gains or capital losses of the
distributor or transferor corporation. The capital loss carryovers of a
distributor or transferor corporation as of the close of the date of
distribution or transfer shall be determined without reference to any
capital gains or capital losses of the acquiring corporation.
(3) This section contains rules applicable to capital loss carryovers
determined without reference to the amendment of section 1212(a) made by
section 7 of the Act of September 2, 1964 (Public Law 88-571, 78 Stat.
860) in respect of foreign expropriation capital losses. If the
distributor, transferor, or acquiring corporation sustains a net capital
loss in a taxable year ending after December 31, 1958, any portion of
which is attributable to a foreign expropriation capital loss, such
portion shall be carried over to each of the ten succeeding taxable
years consistently with the rules prescribed in this section and
paragraph (a)(2) of 1.1212-1.
(b) First taxable year to which carryovers apply. (1) The capital
loss carryovers available to the distributor or transferor corporation
as of the close of the date of distribution or transfer shall first be
carried to the first taxable year of the acquiring corporation ending
after that date. This rule applies irrespective of whether the date of
distribution or transfer is on the last day, or any other day, of the
acquiring corporation's taxable year.
(2) The capital loss carryovers available to the distributor or
transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(c) Limitation on capital loss carryovers for first taxable year
ending after date of distribution or transfer. (1) Any capital loss
carryover of a distributor or transferor corporation which is available
to the acquiring corporation as of the close of the date of distribution
or transfer shall be a short-term capital loss of the acquiring
corporation in each of the taxable years to which the net capital loss
giving rise to such carryover may be carried to the extent provided in
section 1212 and this section. However, in the first taxable year of
the acquiring corporation ending after the date of distribution or
transfer, the total capital loss carryovers of the distributor or
transferor corporation which may be treated in that year as short-term
capital losses of the acquiring corporation is limited by section
381(c)(3)(B) to an amount which bears the same ratio to the acquiring
corporation's capital gain net income (net capital gain for taxable
years beginning before January 1, 1977) for such first taxable year
(determined without regard to any capital loss carryovers) as the number
of days in such first taxable year which follow the date of distribution
or transfer bears to the total number of days in such taxable year.
Thus, if the date of distribution or transfer is the last day of the
acquiring corporation's taxable year, there is no limitation under
section 381(c)(3)(B) on the amount of such carryovers which may be
treated as short-term capital losses of the acquiring corporation for
its first taxable year ending after that date.
(2) The limitation provided by section 381(c)(3)(B) shall be applied
to the aggregate of the capital loss carryovers of the distributor or
transferor corporation without reference to the taxable years in which
the net capital losses giving rise to the carryovers were sustained. If
the acquiring corporation has acquired the assets of two or more
distributor or transferor corporations on the same date of distribution
or transfer, then the limitation provided by section 381(c)(3)(B) shall
be applied to the aggregate of the capital loss carryovers from all of
such distributor or transferor corporations.
(3) If the acquiring corporation succeeds to the capital loss
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the limitation to be applied under section
381(c)(3)(B) to the aggregate of such carryovers shall be determined
consistently with the rules prescribed in paragraph (b) of
1.381(c)(1)-2.
(4) The application of this paragraph may be illustrated by the
following example:
Example. (i) X and Y Corporations are organized on January 1, 1954,
and make their returns on the basis of the calendar year. On July 4,
1957, X Corporation transfers all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after Dec. 31, 1976), (computed without regard to any capital
loss carryovers) of the two corporations are as follows:
(ii) The capital loss carryovers of X Corporation which are available
to Y Corporation as of the close of July 4, 1957, amount to $48,000 in
the aggregate; but only $18,000 ($36,500 180/365 ) of such amount may
be treated as short-term capital losses of Y Corporation for 1957.
(d) Computation of carryovers; general rule -- (1) Sequence for
applying losses and determination of capital gain net income. Section
1212 provides that a net capital loss sustained in any taxable year
(hereinafter referred to as the ''loss year'') shall be carried over to
each of the five succeeding taxable years and treated in each of such
succeeding years as a short-term capital loss to the extent not allowed
as a deduction against any capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of any taxable years
intervening between the loss year and the taxable year to which such
loss is carried. For this purpose, the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of any
intervening taxable year is determined without regard to the net capital
loss for the loss year or for any taxable year thereafter, and the
various capital loss carryovers from taxable years preceding the loss
year to any such intervening taxable year are considered to be applied
in reduction of the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) for such year in the
order of the taxable years in which the losses were sustained, beginning
with the loss for the earliest preceding taxable year. The application
of these rules to the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of the acquiring
corporation for any taxable year ending after the date of distribution
or transfer involves the use of carryovers of the distributor or
transferor corporation and of the acquiring corporation. In determining
the order in which the capital loss carryovers of the distributor or
transferor and acquiring corporations from taxable years ending on or
before the date of distribution or transfer are considered to be applied
in reduction of the capital gain net income (net capital gain for
taxable years beginning before January 1, 1977) of the acquiring
corporation for any intervening taxable year ending after such date, the
following rules shall apply:
(i) Each taxable year of the distributor or transferor and acquiring
corporations which, with respect to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
constitutes a first preceding taxable year, shall be treated as if each
such year ended on the same day, whether or not such taxable years
actually end on the same day. In like manner, each taxable year of the
distributor or transferor and acquiring corporations which, with respect
to such first taxable year of the acquiring corporation ending after the
date of distribution or transfer, constitutes a second preceding taxable
year, shall be treated as if each such year ended on the same day
(whether or not such taxable years actually end on the same day), and a
similar rule shall be applied with respect to those taxable years of the
distributor or transferor and acquiring corporations which constitute
third, fourth, and fifth preceding taxable years;
(ii) If in the same preceding taxable year both the distributor or
transferor and acquiring corporations incurred a net capital loss which
is a carryover to an intervening taxable year of the acquiring
corporation ending after the date of distribution or transfer, then in
applying such losses in reduction of the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) for
such an intervening year, either such loss may be taken into account
before the other; and
(iii) The rules of subdivisions (i) and (ii) of this subparagraph
shall apply regardless of the number of distributor or transferor
corporations the assets of which are acquired by the acquiring
corporation on the same date of distribution or transfer.
(2) Cross reference. If the date of distribution or transfer is a
day other than the last day of a taxable year of the acquiring
corporation, then in determining the capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) of the
acquiring corporation for its first taxable year ending after the date
of distribution or transfer, section 1212 and this paragraph shall be
applied in the special manner set forth in paragraph (e) of this
section.
(3) Years to which losses may be carried. The taxable years to which
a net capital loss shall be carried are prescribed by section 1212.
Since the taxable year of a distributor or transferor corporation ends
with the close of the date of distribution or transfer, such taxable
year and the first taxable year of the acquiring corporation which ends
after that date are considered two separate taxable years to which a net
capital loss of the distributor or transferor corporation for any
taxable year ending before that date shall be carried. This rule
applies even though the taxable year of the distributor or transferor
corporation which ends on the date of distribution or transfer is a
period of less than twelve months. However, the distribution or
transfer has no effect in determining under section 1212 the taxable
years to which a net capital loss of the acquiring corporation is
carried. For this purpose, the first taxable year of the acquiring
corporation which ends after the date of distribution or transfer
constitutes only one taxable year even though such taxable year is
considered under paragraph (e) of this section as two taxable years for
certain purposes. The application of this subparagraph may be
illustrated by the following example:
Example. R and S Corporations are organized on January 1, 1954, and
both corporations make their returns on the basis of the calendar year.
R Corporation has net capital losses for its years 1954, 1955, and 1957,
and S Corporation has net capital losses for its years 1954 and 1956.
On June 30, 1958, R Corporation transfers all its assets to S
Corporation in a statutory merger to which section 361 applies. The
taxable years to which these losses of R and S Corporations may be
carried are as follows:
(4) Computation of carryovers in case where date of distribution or
transfer occurs on last day of acquiring corporation's taxable year.
The computation of the capital loss carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
Example. X and Y Corporations are organized on January 1, 1955, and
make their returns on the basis of the calendar year. On December 31,
1956, X Corporation transfers all its assets to Y Corporation in a
statutory merger to which section 361 applies. The net capital losses
and the net capital gains (capital gain net income for taxable years
beginning after December 31, 1976), (computed without regard to any
capital loss carryovers) of the two corporations are as follows:
The sequence in which the net capital losses of X and Y Corporations
are applied, and the computation of the capital loss carryovers to Y
Corporation's taxable year 1959, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the transferor corporation will be applied before the carryover from the
same preceding taxable year of the acquiring corporation):
(i) X Corporation's 1955 loss. The carryover to 1959 is $0, computed
as follows:
(ii)Y Corporation's 1955 loss. The carryover to 1959 is $0, computed
as follows:
(iii) X Corporation's 1956 loss. The carryover to 1959 is $0,
computed as follows:
(iv) Y Corporation's 1956 loss. The carryover to 1959 is $5,000,
computed as follows:
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year -- (1)
General rule. If, in determining under paragraph (d) of this section
the portion of a net capital loss for any taxable year which is carried
over to a succeeding taxable year, an intervening taxable year is a
taxable year of the acquiring corporation which includes, but does not
end on, the date of distribution or transfer, the capital gain net
income (net capital gain for taxable years beginning before January 1,
1977) of such intervening year shall be determined by applying section
1212 in the special manner provided by this paragraph.
(2) Taxable year considered as two taxable years. Such intervening
taxable year of the acquiring corporation shall be considered as though
it were two taxable years, but only for the limited purpose of computing
capital loss carryovers to subsequent taxable years. The first of such
two taxable years shall be referred to in this paragraph as the
preacquisition part year; the second, as the postacquisition part year.
Though considered as two separate taxable years for purposes of this
paragraph, the preacquisition part year and the postacquisition part
year are treated as one taxable year in determining the years to which a
net capital loss is carried under section 1212. See paragraph (d)(3) of
this section.
(3) Preacquisition part year. The preacquisition part year shall
begin with the beginning of such taxable year of the acquiring
corporation and shall end with the close of the date of distribution or
transfer.
(4) Postacquisition part year. The postacquisition part year shall
begin with the day following the date of distribution or transfer and
shall end with the close of such taxable year of the acquiring
corporation.
(5) Division of capital gain net income. The capital gain net income
(net capital gain for taxable years beginning before January 1, 1977)
for such intervening taxable year (computed without regard to any
capital loss carryovers) of the acquiring corporation shall be divided
between the preacquisition part year and the postacquisition part year
in proportion to the number of days in each. Thus, if in a statutory
merger to which section 361 applies Y Corporation acquires the assets of
X Corporation on June 30, 1956, and Y Corporation has net capital gain
(computed in the manner so prescribed) of $36,600 for its calendar year
1956, then the preacquisition part year capital gain net income (net
capital gain for taxable years beginning before January 1, 1977) would
be $18,200 ($36,600 182/366) and the postacquisition part year capital
gain net income (net capital gain for taxable years beginning before
January 1, 1977) would be $18,400 ($36,600 184/366).
(6) Application of capital loss carryovers. After obtaining the
capital gain net income (net capital gain for taxable years beginning
before January 1, 1977) of the preacquisition part year and
postacquisition part year in the manner described in subparagraph (5) of
this paragraph, it is necessary to determine the capital loss carryovers
which are taken into account with respect to each such part year. The
carryovers to be taken into account and the sequence in which such
carryovers are applied, shall be determined in accordance with paragraph
(d)(1) of this section but subject to the provisions of this
subparagraph. With respect to the preacquisition part year, no capital
loss carryovers of the distributor or transferor corporation shall be
taken into account; that is, only capital loss carryovers of the
acquiring corporation shall be taken into account. With respect to the
postacquisition part year, capital loss carryovers of both the
distributor or transferor corporation and the acquiring corporation
shall be taken into account.
(7) Cross reference. If an intervening taxable year is a taxable
year of the acquiring corporation during which the acquiring corporation
succeeds to the capital loss carryovers of two or more distributor or
transferor corporations on two or more dates of distribution or
transfer, the capital gain net income (net capital gain for taxable
years beginning before January 1, 1977) of the acquiring corporation for
such intervening taxable year shall be determined consistently with the
rules prescribed in paragraph (c) of 1.381(c)(1)-2, except that the
sequence in which the capital loss carryovers of the distributor or
transferor and acquiring corporations shall be applied shall be
determined under paragraph (d)(1) of this section.
(8) Illustration. The application of this paragraph may be
illustrated as follows:
Example. X Corporation is organized on April 1, 1959, and makes its
return on the basis of the fiscal year ending March 31. Y Corporation
is organized on January 1, 1959, and makes its return on the basis of
the calendar year. On June 30, 1961, X Corporation transfers all its
assets to Y Corporation in a statutory merger to which section 361
applies. The net capital losses and the net capital gains (capital gain
net income for taxable years beginning after December 31, 1976)
(computed without regard to any capital loss carryovers) of the two
corporations are as follows:
The following table shows those taxable years of the transferor and
acquiring corporations which, with respect to Y Corporation's calendar
year 1961, are first, second, and third preceding taxable years:
The sequence in which the net capital losses of X and Y Corporations
are applied, and the computation of the capital loss carryovers to Y
Corporation's calendar year 1963, may be illustrated as follows. (For
purposes of this example, the carryover from a preceding taxable year of
the acquiring corporation will be applied before the carryover from the
same preceding taxable year of the transferor corporation):
(i) X Corporation's 3/31/60 loss. The carryover to 1963 is $0,
computed as follows:
(ii) Y Corporation's 1959 loss. The carryover to 1963 is $0,
computed as follows:
(iii) X Corporation's 3/31/61 loss. The carryover to 1963 is $0,
computed as follows:
(iv) Y Corporation's 1960 loss. The carryover to 1963 is $5,500,
computed as follows:
(f) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a distributor or transferor corporation which previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, shall succeed to and take into account, subject
to the conditions and limitations of sections 1212 and 381, the capital
loss carryovers available to the first acquiring corporation under
sections 1212 and 381.
(T.D. 6552, 26 FR 1985, Mar. 8, 1961, as amended by T.D. 6867, 30 FR
15094, Dec. 12, 1965; T.D. 7728, 45 FR 72650, Nov. 3, 1980)
26 CFR 1.381(c)(4)-1 Method of accounting.
(a) Carryover requirement -- (1) General rule. (i) Section 381(c)(4)
provides that, in a transaction to which section 381(a) applies, an
acquiring corporation shall use the same method of accounting used by
the distributor or transferor corporation on the date of distribution or
transfer unless different methods of accounting were used on that date
by several distributor or transferor corporations or by a distributor or
transferor corporation and the acquiring corporation. If different
methods of accounting were used, the acquiring corporation shall use the
method or combination of methods of accounting adopted pursuant to this
section.
(ii) The acquiring corporation shall take into its accounts the
dollar balances of those accounts of the distributor or transferor
corporation representing items of income or deduction which, because of
its method of accounting, were not required or permitted to be included
or deducted by the distributor or transferor corporation in computing
taxable income for taxable years ending on or before the date of
distribution or transfer. The acquiring corporation shall similarly
take into its accounts the dollar balances of those accounts of the
distributor or transferor corporation which represents reserves in
respect of which the distributor or transferor corporation has taken a
deduction for taxable years ending on or before the date of distribution
or transfer. The acquiring corporation shall also take into its
accounts the dollar balance of that account of the distributor or
transferor corporation which represents a suspense account established
by the distributor or transferor corporation under section 166(f)(4) in
taxable years ending on or before the date of distribution or transfer.
Items of income and deduction shall have the same character in the hands
of the acquiring corporation as they would have had in the hands of the
distributor or transferor corporation or corporations if no distribution
or transfer had occurred. This section shall have no application to
items of income or deduction, or dollar balances, to the extent they are
attributable to assets or liabilities not distributed or transferred,
and shall have no application to items the tax treatment of which is
specifically provided for in other paragraphs of section 381(c). In the
case of an obligation of the distributor or transferor corporation which
is assumed by the acquiring corporation and which gives rise to a
liability (within the meaning of paragraph (a)(4) of 1.381(c)(16)-1)
after the date of distribution or transfer, the deductibility of such an
item is determined under this section if it is not deductible under
section 381(c)(16) and the regulations thereunder. The amount of the
adjustments necessary to reflect a change in accounting method pursuant
to this section, the manner in which they are to be taken into account,
and the tax attributable thereto shall be determined and computed under
section 481 and the regulations thereunder, subject to the rules
provided in paragraphs (c) and (d) of this section. Where such change
is a change from the accrual to the installment method by a dealer in
personal property, section 453(c) and the regulations thereunder apply.
(2) Rules of application. For purposes of section 381(c)(4) and this
section, the term ''method of accounting'' shall have the same meaning
as that provided under section 446 and the regulations thereunder. This
section shall not be construed as preventing the exercise of any
election which may be made by the acquiring corporation without consent
of the Commissioner, or preventing the application of section 269 or
482, or the regulations thereunder. For provisions defining the date of
distribution or transfer, see paragraph (b) of 1.381(b)-1. See other
paragraphs of section 381(c) and the regulations thereunder for other
rules regarding the treatment of the carryover of certain items
specifically enumerated therein.
(b) Conditions for continuation of methods of accounting -- (1) No
differences in methods of accounting. If all the parties to a section
381(a) transaction used the same method of accounting on the date of
distribution or transfer, the acquiring corporation shall continue to
use such method of accounting, unless the acquiring corporation has
obtained the consent of the Commissioner in accordance with paragraph
(e) of 1.446-1 to use a different method of accounting. This
subparagraph may be illustrated by the following examples:
Example (1). X Corporation and Y Corporation use the accrual method
as their overall method of accounting. Both corporations have
established a reserve for bad debts under section 166(c). Pursuant to
elections made by each corporation, they are amortizing trademark and
trade name expenditures over a 60-month period under section 177,
expensing intangible drilling and development costs under section
263(c), and accruing real property taxes ratably under section 461(c).
It is assumed that there are no other items to which paragraph (a) of
this section might apply. Y Corporation acquires all of the assets of X
Corporation in a transaction to which section 381(a) applies. On and
after the date of distribution or transfer Y Corporation must continue,
without further election, to use the same overall method of accounting
and the same accounting treatment of the specified items, unless consent
of the Commissioner is obtained in accordance with paragraph (e) of
1.446-1 to change the methods of accounting. Thus, Y Corporation shall
carry over the balance in X Corporation's reserve for bad debts account,
shall continue to amortize and deduct over the remaining portion of the
60-month period the unamortized portion of the trademark and trade name
expenditures carried over from X Corporation, and shall continue the
same treatment of intangible drilling and development costs and of real
property taxes.
Example (2). M Corporation and N Corporation use the cash receipts
and disbursements method of accounting. N Corporation acquires all of
the assets and assumes all the obligations of M Corporation in a
transaction to which section 381(a) applies. M Corporation, immediately
prior to the transaction, is entitled to receive $10,000 for unbilled
services performed, and has billed but not received payment for services
performed in an amount of $20,000. It has received but not paid
invoices amounting to $18,000, and has received services in the amount
of $5,000 for which no invoices have been received. Since M Corporation
and N Corporation are both on the cash receipts and disbursements
method, N Corporation must continue to use that method, unless consent
of the Commissioner is obtained in accordance with paragraph (e) of
1.446-1 to change its method of accounting. Accordingly, N Corporation
must include in income when received the unrealized receivables of M
Corporation and may deduct the payment of those obligations of M
Corporation which would have been deductible by such corporation if paid
by it. Thus, N Corporation shall treat as ordinary income the receipt
by it of M Corporation's $30,000 of receivables, and may deduct upon
payment the amount of M Corporation's $23,000 of payables which would
have been deductible by it.
Example (3). S Corporation and T Corporation are both publishers and
use the accrual method as their overall method of accounting. Both
corporations have elected under section 455 to defer prepaid
subscription income to the taxable years during which the liability to
furnish the newspaper, magazine, or other periodical exists. T
Corporation, in a transaction to which section 381(a) applies, acquires
all the assets of S Corporation and assumes the liability of such
corporation to furnish or deliver the newspaper, magazine, or other
periodical. On and after the date of the transfer, T Corporation must
continue, without further election, to use the accrual method as its
over-all method of accounting and to defer prepaid subscription income
under section 455, unless consent of the Commissioner is obtained in
accordance with paragraph (e) of 1.446-1 to change the method of
accounting. T Corporation shall carry over the closing balance of S
Corporation's prepaid subscription income account. The principles in
this example would be equally applicable if both corporations had been
deferring prepaid subscription income under a method permitted by
subsection (e) of section 455.
(2) Separate businesses. If, after the date of distribution or
transfer, the trades or businesses of the parties to a transaction
described in section 381(a) are operated as separate and distinct trades
or businesses within the meaning of paragraph (d) of 1.446-1, then the
method of accounting employed by the parties to the transaction on the
date of distribution or transfer with respect to each trade or business
shall be used by the acquiring corporation, unless the acquiring
corporation has obtained the consent of the Commissioner in accordance
with paragraph (e) of 1.446-1 to use a different method of accounting,
or unless the Commissioner prescribes a different method of accounting
under paragraph (b)(1) of 1.446-1. However, if only a single method of
accounting may be employed by a taxpayer with respect to a particular
item regardless of the number of separate and distinct trades or
businesses operated by such taxpayer, but different methods were
employed by the several corporations on the date of distribution or
transfer with respect to such item, then the acquiring corporation shall
adopt the principal method of accounting determined under paragraph (c)
of this section (see subparagraph (2)(iv) thereof) for such item, or the
method of accounting determined in accordance with paragraph (d) of this
section, whichever is applicable. This subparagraph may be illustrated
by the following examples:
Example (1). M Corporation is engaged in a personal service business
and uses the cash receipts and disbursements method of accounting. N
Corporation is engaged in a retail furniture business and uses the
accrual method of accounting. N Corporation acquires the assets of M
Corporation in a transaction to which section 381(a) applies. In
accordance with paragraph (d) of 1.446-1, N Corporation operates as a
separate and distinct trade or business the personal service business
formerly operated by M Corporation. Unless consent of the Commissioner
is obtained in accordance with paragraph (e) of 1.446-1 to change the
method of accounting, N Corporation shall continue to use the cash
receipts and disbursements method of accounting with respect to the
personal service business formerly operated by M Corporation, and shall
use the accrual method of accounting with respect to the retail
furniture business.
Example (2). Assume the same facts as in example (1), except that M
Corporation has elected under section 171 to amortize bond premium with
respect to fully taxable bonds. N Corporation has not made the election
to amortize bond premium with respect to such bonds owned by it. N
Corporation may not continue separate accounting methods as to
amortizable bond premium but must consistently apply only a single
method of accounting with respect to such bond premium since the
election to amortize bond premium applies to all fully taxable bonds
held by the taxpayer. N Corporation shall use the principal method of
accounting determined under paragraph (c) of this section for such bond
premium, unless it is determined in accordance with paragraph (d) of
this section that a different method of accounting is to be used.
However, if such principal or different method of accounting is not to
amortize bond premium N Corporation is not precluded from making a new
election to the extent permitted by section 171.
(3) Integrated businesses. (i) If, after the date of distribution or
transfer, any of the trades or business of the parties to a transaction
in section 381(a) are not operated as separate and distinct trades or
businesses within the meaning of paragraph (d) of 1.446-1, then, to the
extent that the same methods of accounting were employed on the date of
distribution or transfer by the parties to the transaction with respect
to any trades or businesses which are integrated or are required to be
integrated in accordance with section 446(d) and the regulations
thereunder, the acquiring corporation shall continue to employ such
methods of accounting, unless the acquiring corporation has obtained the
consent of the Commissioner in accordance with paragraph (e) of 1.446-1
to use a different method of accounting, or unless the Commissioner
prescribes a different method of accounting under paragraph (b)(1) of
1.446-1.
(ii) If, after the date of distribution or transfer, any of the
trades or businesses of the parties to a transaction described in
section 381(a) are not operated as separate and distinct trades or
businesses within the meaning of paragraph (d) of 1.446-1, then, to the
extent that different methods of accounting were employed on the date of
distribution or transfer by the parties to the transaction with respect
to any trades or businesses which are integrated or required to be
integrated in accordance with section 446(d) and the regulations
thereunder, this paragraph shall not apply and the acquiring corporation
shall adopt the principal method of accounting determined under
paragraph (c) of this section or the method of accounting determined in
accordance with paragraph (d) of this section, whichever is applicable.
(iii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). M Corporation and N Corporation both use the accrual
method as an overall method of accounting. M Corporation has
established a reserve for bad debts while N Corporation uses the
specific charge-off method with respect to its bad debts. N Corporation
acquires all of the assets of M Corporation in a transaction to which
section 381(a) applies and integrates the business formerly operated by
M Corporation into the business operated by N Corporation before the
date of distribution or transfer. N Corporation shall continue to use
the accrual method as its overall method of accounting, unless consent
of the Commissioner is obtained in accordance with paragraph (e) of
1.446-1 to change its method of accounting. N Corporation shall use the
principal method of accounting determined under paragraph (c) of this
section with respect to bad debts, or the method of accounting
determined in accordance with paragraph (d) of this section, whichever
is applicable.
Example (2). X Corporation conducts two separate and distinct trades
or businesses, a personal service business with respect to which the
cash receipts and disbursements method of accounting is used and a
manufacturing business with respect to which the accrual method of
accounting is used. Y Corporation conducts a manufacturing business and
uses the accrual method of accounting. Y Corporation acquires all of
the assets of X Corporation in a transaction to which section 381(a)
applies. After the date of distribution or transfer, Y integrates the
manufacturing business formerly operated by X Corporation into the
manufacturing business operated by it and continues to operate as a
separate and distinct trade or business the personal service business
formerly operated by X Corporation. Unless consent of the Commissioner
is obtained in accordance with paragraph (e) of 1.446-1 to change the
method of accounting, Y Corporation shall continue to use the accrual
method of accounting with respect to the integrated manufacturing
business and shall continue to use the cash receipts and disbursements
method of accounting with respect to the personal service business.
(4) Rules of application. In any case where the method of accounting
employed on the date of distribution or transfer is continued, it will
be unnecessary for the acquiring corporation to renew any election
previously made by it or by any distributor or transferor corporation
with respect to such method of accounting. Also, the acquiring
corporation is bound by any election previously made by it or by any
distributor or transferor corporation with respect to such method of
accounting which is in effect on the date of distribution or transfer to
the same extent as though the distribution or transfer had not occurred.
If, on the date of distribution or transfer, any party to a section
381(a) transaction had no established method of accounting for any item,
or came into existence as a result of the transaction, such party shall
not be considered to be using a method of accounting for such item or
having an overall method of accounting different from that used by the
other parties to the transaction. Where under other sections of the
Internal Revenue Code or regulations thereunder a taxpayer is permitted
to elect a method of accounting on a project-by-project, job-by-job, or
other similar basis (such as the election to charge taxes and carrying
charges to capital account under 1.266-1), that method elected with
respect to each project or job shall be deemed to be an established
method of accounting only for the project or job for which it is
elected. Accordingly, unless two or more of the parties were working on
the same project or job and were using different methods of accounting
for such project or job before the date of distribution or transfer, the
method of accounting previously elected for each project or job must be
continued.
(c) Change of method of accounting without consent of Commissioner --
(1) General rule. If the acquiring corporation may not continue to use,
under the provisions of paragraph (b) of this section, the method of
accounting used by it or the distributor or transferor corporation or
corporations on the date of distribution or transfer, the acquiring
corporation shall use the principal method of accounting of such
corporation (as determined under subparagraph (2) of this paragraph),
provided that (i) such method of accounting clearly reflects the income
of the acquiring corporation, and (ii) the use of such method is not
inconsistent with the provisions of any closing agreement entered into
under section 7121 and the regulations thereunder. If the principal
method of accounting does not meet these requirements, or if there is no
principal method of accounting, see subdivision (i) of paragraph (d)(1)
of this section. If the acquiring corporation wishes to use a method of
accounting other than the principal method of accounting, see
subdivision (ii) of paragraph (d)(1) of this section. Whenever this
paragraph applies, the increase or decrease in tax resulting from the
change from the method of accounting previously used by any of the
corporations involved shall be taken into account by the acquiring
corporation. The adjustments necessary to reflect such change and such
increase or decrease in tax shall be determined and computed in the same
manner as if on the date of distribution or transfer each of the several
corporations whose method or methods of accounting are required to be
changed in accordance with this section had initiated a change in
accounting method. In addition, the acquiring corporation shall take
into account the portion of such adjustments which is attributable to
pre-1954 Code years to the extent not taken into account by any of the
other corporations in accordance with the rules provided in section
481(b)(4) and this paragraph. If the principal method of accounting is
adopted under this paragraph, it will be unnecessary for the acquiring
corporation to renew any election previously made by it or by any
distributor or transferor corporation with respect to such principal
method of accounting. Also, in such event, the acquiring corporation is
bound by any election previously made by it or by any distributor or
transferor corporation with respect to such principal method of
accounting which is in effect on the date of distribution or transfer to
the same extent as though the distribution or transfer had not occurred.
(2) Principal method of accounting. (i) The determination of the
principal method of accounting shall be made with respect to each
integrated trade or business operated by the acquiring corporation
immediately after the date of distribution or transfer, except with
respect to items for which only a single method of accounting may be
used by any one taxpayer. See subdivision (iv) of this subparagraph.
Such determination for an integrated trade or business shall be made by
reference to the methods of accounting used immediately preceding the
date of distribution or transfer by each of the component trades or
businesses which now constitute the integrated trade or business of the
acquiring corporation. The method of accounting for items other than
those for which special methods of accounting are provided under chapter
1 of the Code and the regulations thereunder (see 1.446-1(c)(1)(iii))
shall be governed by the principal overall method determined for such
trade or business under subdivision (ii) of this subparagraph. The
method of accounting for items for which special methods of accounting
are provided under chapter 1 of the Code and the regulations thereunder
shall be determined under subdivision (iii) of this subparagraph.
(ii) The principal overall method of accounting of an integrated
trade or business is determined by making a comparison of --
(a) The total of the adjusted bases of the assets (determined under
section 1011 and the regulations thereunder) immediately preceding the
date of distribution or transfer, and
(b) The gross receipts for a representative period (ordinarily the
most recent period of 12 consecutive calendar months ending on or prior
to the date of distribution or transfer)
of the component trades or businesses which are integrated or are
required to be integrated. If more than one component trade or business
used the same overall method, then such total assets and gross receipts
of each of the component trades or businesses shall be aggregated and
compared with the aggregate of such total assets and gross receipts of
other component trades or businesses which used a different overall
method. If this comparison shows that the one or more component trades
or businesses (using a common overall method of accounting) having the
greatest total of the adjusted bases of assets also has the greatest
amount of gross receipts, then the overall method of accounting of such
one or more component trades or businesses shall be the principal
overall method of accounting. If this comparison shows that the one or
more component trades or businesses (using a common overall method of
accounting) having the greatest total of the adjusted bases of assets
does not also have the greatest amount of gross receipts, then there is
no principal overall method of accounting, and the acquiring corporation
shall request the Commissioner to determine the appropriate overall
method of accounting for such integrated trade or business in accordance
with paragraph (d) of this section.
(iii) The principal method of accounting for an item for which a
special method or methods of accounting are provided under chapter 1 of
the Code and the regulations thereunder is determined by comparing the
amounts of such item and related accounts for the component trades or
businesses in accordance with the principles of subdivision (ii) of this
subparagraph. Thus, for example, in the case of bad debts, trades or
businesses which are components of the integrated trade or business and
which had been using the reserve method of accounting will be compared
with the other component trades or businesses which had been using the
specific charge-off method of accounting. In such a case, the following
factors would ordinarily be used in determining the principal method of
accounting for bad debts: (a) Sales on account for the most recent
period of 12 consecutive calendar months ending on or prior to the date
of distribution or transfer, (b) accounts receivable immediately before
the date of distribution or transfer, and (c) the amount of debts which
became worthless within the meaning of section 166(a) and the
regulations thereunder during the most recent period of 12 consecutive
calendar months ending on or prior to the date of distribution or
transfer. If this comparison shows that the one or more component
trades or businesses using the same method of accounting with respect to
bad debts have the greater amounts of such sales, accounts receivable,
and bad debts, then the method of accounting with respect to bad debts
for such one or more component trades or businesses shall be the
principal method of accounting. If such comparison shows that the one
or more component trades or businesses using the same method of
accounting with respect to bad debts do not have the greater amounts of
all of such items, then there is no principal method of accounting with
respect to bad debts, and the acquiring corporation shall request the
Commissioner to determine the appropriate method of accounting for bad
debts for such integrated trade or business in accordance with paragraph
(d) of this section.
(iv) If a single method of accounting must be employed by a taxpayer
with respect to a particular item regardless of the number of separate
and distinct trades or businesses operated by the taxpayer, the
principal method of accounting for such item shall be determined by
comparing the aggregate amount of the item and related accounts for all
the parties to the transaction using a common method, with the aggregate
amount of the item and related accounts for those parties to the
transaction which use a different common method. The method of
accounting of the party having the greatest aggregate amount of such
item and related accounts shall be the principal method of accounting
for such item.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). M Corporation, which commenced business in 1955, uses
the cash receipts and disbursements method of accounting, while N
Corporation uses the accrual method. On June 30, 1961, N Corporation
acquires all of the assets of M Corporation in a transaction to which
section 381(a) applies. N Corporation then integrates its own business
with that of M Corporation. Immediately prior to the transfer the total
of the adjusted bases of the assets of N Corporation was greater than
that of M Corporation, and for the 12-month period ending on June 30,
1961, the gross receipts of N Corporation were greater than that of M
Corporation. Under such circumstances, the accrual method of accounting
is the principal overall method of accounting and N Corporation shall
use such method for the integrated business, provided it clearly
reflects income, unless consent of the Commissioner is obtained in
accordance with paragraph (d) of this section to use a different method
of accounting. Except as to items for which N Corporation had no
established method of accounting and items for which a special method of
accounting is provided under chapter 1 of the Code and the regulations
thereunder, all adjustments necessary to place the accounts of M
Corporation on the accrual method shall be made in accordance with
section 481. Any increase or decrease in tax resulting from such
adjustments shall be taken into account by N Corporation. Such
adjustments and such increase or decrease in tax shall be determined and
computed in the same manner as if M Corporation had initiated a change
in method of accounting on June 30, 1961.
Example (2). Assume the same facts as in example (1) except that the
gross receipts of M Corporation were greater than those of N Corporation
for the 12-month period ending on June 30, 1961. N Corporation must,
under such circumstances, request the Commissioner to determine the
appropriate overall method of accounting, in accordance with the
provisions of paragraph (d) of this section. The necessary adjustments
to be made by the corporation whose method of accounting is changed
shall be made in accordance with section 481 to place the integrated
business on the method so adopted. Any increase or decrease in tax
resulting from such adjustments shall be taken into account by N
Corporation. Such adjustments and such increase or decrease in tax
shall be determined and computed in the same manner as if the
corporation whose method is changed had initiated a change in method of
accounting on June 30, 1961.
Example (3). Assume the same facts as in example (1). Assume
further that M Corporation's deduction for wages and salaries for the 12
calendar months ending on June 30, 1961, is larger than N Corporation's
deduction for wages and salaries for such period. Since wages and
salaries is not an item for which a special method of accounting is
provided under chapter 1 of the Code or the regulations thereunder, the
necessary adjustments shall be made in accordance with section 481 to
place the wages and salary account of M Corporation on the accrual
method of accounting, provided such accrual method clearly reflects
income, unless consent of the Commissioner is obtained in accordance
with paragraph (d) of this section to use a different method of
accounting. Any increase or decrease in tax resulting from such
adjustments shall be taken into account by N Corporation. Such
adjustments and such increase or decrease in tax shall be determined and
computed in the same manner as if M Corporation had initiated a change
in method of accounting on June 30, 1961.
Example (4). Assume the same facts as in example (1). Assume
further that M Corporation used the specific charge-off method with
respect to bad debts, and that N Corporation has established a reserve
for bad debts. M Corporation's sales on account and bad debts for the
12 calendar months ending June 30, 1961, were larger than those of N
Corporation. Also M Corporation's accounts receivable immediately prior
to June 30, 1961, were larger than those of N Corporation. Since the
method of accounting for bad debts is a special method of accounting
under section 166, M Corporation's method of accounting for bad debts is
the principal method of accounting for such item. Assuming such method
clearly reflects income, appropriate adjustments shall be made in
accordance with section 481 to the accounts of N Corporation to place N
Corporation on the specific charge-off method with respect to all of its
bad debts, as if N Corporation had initiated a change in method of
accounting on June 30, 1961, and N Corporation shall include the amount
of its reserve for bad debts in gross income, unless consent of the
Commissioner is obtained in accordance with paragraph (d) of this
section to use a different method of accounting.
Example (5). Assume the same facts as in example (1) except that M
Corporation commenced business in 1945. In addition assume that N
Corporation is a calendar-year taxpayer and that of the total amount of
the adjustments required by section 481 to place the accounts of M
Corporation on the accrual method $40,000 is attributable to pre-1954
Code years as described in section 481(b)(4) and the regulations
thereunder. Assume further that M Corporation does not elect, under
section 481(b)(6), to take the $40,000 portion of the adjustments into
account in the manner described in section 481(b)(1) or (2). In
computing the increase in tax of M Corporation attributable to the
$40,000 portion of the adjustment for the fiscal year ended June 30,
1961, only one-tenth, or $4,000, will be taken into account. The
resulting increase in tax shall be taken into account by N Corporation.
The remaining nine-tenths of the $40,000 portion of the adjustments, or
$36,000, shall be taken into account by N Corporation in the amount of
$4,000 in each of the calender years 1962 through 1970.
(d) Change of method of accounting with consent of Commissioner --
(1) General rule. (i) If the acquiring corporation may not continue to
use, under paragraph (b), the method of accounting used by it or the
distributor or transferor corporation or corporations on the date of
distribution or transfer, and may not under paragraph (c) use the
principal method of accounting, or, if there is no principal method of
accounting, then the Commissioner shall determine the appropriate method
or combination of methods of accounting to be used.
(ii) If an acquiring corporation wishes to use a method or
combination of methods of accounting other than the principal method of
accounting which is required to be used by paragraph (c) of this
section, it shall apply to the Commissioner for permission to use such
other method or combination of methods of accounting. Permission to use
such other method or combination of methods of accounting will not be
granted unless the acquiring corporation and the Commissioner agree to
the terms, conditions, and adjustments under which the change to such
method or combination of methods will be effected.
(iii) The increase or decrease in tax resulting from the change from
the method of accounting previously used by any of the corporations
involved shall be taken into account by the acquiring corporation. The
adjustments necessary to reflect such change and such increase or
decrease in tax shall be determined and computed in the same manner as
if, on the date of distribution or transfer, each of the several
corporations that were not using the method or combination of methods of
accounting adopted pursuant to subdivision (i) or (ii) of this
subparagraph had initiated a change in accounting method.
(2) Time and manner of making application. Applications under
subparagraph (1) of this paragraph for permission to use a method of
accounting or requests for determination of the method of accounting to
be used shall be filed with the Commissioner of Internal Revenue,
Attention: T:R, Washington, D.C., 20224, not later than 90 days after
the date of distribution or transfer, except that in cases where the
date of distribution or transfer occurs before August 5, 1964, such
applications or requests shall be filed not later than November 3, 1964.
The application shall be accompanied by a copy of the statement
described in paragraph (b)(3) of 1.381(b)-1, and by a statement
specifying the nature of the transaction which causes section 381 to
apply; the difference in accounting methods used by the corporations
concerned; the method or methods of accounting proposed to be used by
the acquiring corporation; and the various amounts, if any, of items of
income or deduction which will be duplicated or omitted in the
computation of taxable income under such proposed method or methods.
The Commissioner may also require such other information as may be
necessary in order to determine the appropriate method or combination of
methods of accounting to be used by the acquiring corporation.
(e) Special rules applicable to distributions or transfers before
August 5, 1964 -- (1) Statute of limitations bars assessment or refund.
If the date of distribution or transfer was before August 5, 1964, and
if the assessment of any deficiency or the refund or credit of any
overpayment for the taxable year of the acquiring corporation which
includes the date of distribution or transfer or any subsequent taxable
year is prevented by the operation of any law or rule of law, then this
section does not authorize the Commissioner or the acquiring corporation
to change any method or methods of accounting in any taxable year of the
acquiring corporation. However, the Commissioner or the acquiring
corporation may change such method or methods of accounting under the
provisions of section 446 and the regulations thereunder or, where
applicable, any section of the Internal Revenue Code (other than section
381(c)(4)), or the regulations thereunder, in accordance with which such
changes may be made without the consent of the Commissioner.
(2) Statute of limitations does not bar assessment and refund.
Except as provided in subparagraph (1) of this paragraph --
(i) If the date of distribution or transfer was before August 5,
1964, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, (a) adopted or continued
a method of accounting consistent with the rules of this section, (b)
been granted permission by the Commissioner in accordance with paragraph
(e) of 1.446-1 to use a method or combination of methods of accounting,
or (c) adopted a method of accounting that under other sections of the
Internal Revenue Code, or regulations thereunder, may be adopted without
the consent of the Commissioner, then the method or methods of
accounting adopted or continued in the manner described in (a), (b), and
(c) shall not be changed, by reason of the rules contained in this
section, by the Commissioner or the acquiring corporation for any
taxable year ending after the date of distribution or transfer.
However, the Commissioner or the acquiring corporation may change such
methods of accounting for any such taxable year under the provisions of,
and to the extent permitted by, section 446 and the regulations
thereunder or, where applicable, any section of the Internal Revenue
Code (other than section 381(c)(4)), or regulations thereunder, in
accordance with which such change may be made without the consent of the
Commissioner.
(ii) If the date of distribution or transfer was before August 5,
1964, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, adopted or continued a
method or methods of accounting other than in the manner described in
(a), (b), and (c) of subdivision (i) of this subparagraph, then the
acquiring corporation may --
(a) Continue to use the method or methods of accounting so adopted or
continued if such method or methods clearly reflect income and if proper
adjustments were made to reflect the adoption of such method or methods,
or
(b) Adopt the method or methods of accounting prescribed by this
section. Such method or methods of accounting shall be adopted by
filing an amended return (which includes the proper adjustments required
by this section) for the taxable year of the acquiring corporation which
includes the date of distribution or transfer, and by filing amended
returns for all subsequent taxable years of the acquiring corporation
for which returns have previously been filed. Such amended return or
returns shall be accompanied by a copy of the statement described in
paragraph (b)(3) of 1.381(b)-1, and by a statement specifying the
nature of the transaction which causes section 381 to apply; the
difference in accounting methods used by the corporations concerned;
the method or methods of accounting originally adopted by the acquiring
corporation; the method or methods of accounting adopted on the amended
return or returns; and the computation of the amount of the adjustments
and the resulting increase or decrease in tax.
(T.D. 6750, 29 FR 11263, Aug. 5, 1964, as amended by T.D. 8071, 51 FR
2481, Jan. 17, 1986)
26 CFR 1.381(c)(5)-1 Inventories.
(a) Carryover requirement -- (1) General rule. Section 381(c)(5)
provides that in a transaction to which section 381(a) applies and in
which inventories are received by the acquiring corporation (as defined
in 1.381(a)-1(b)(2)) such inventories shall be taken by the acquiring
corporation (in determining its income) on the same basis on which such
inventories were taken by the distributor or tranferor corporation on
the date of distribution or transfer unless different inventory methods
were used on that date by several distributor or transferor corporations
or by a distributor or transferor corporation and the acquiring
corporation. If different methods were used, the acquiring corporation
shall use the method or combination of methods of taking inventories
adopted pursuant to the provisions of this section.
(2) Rules of application. Reference in this section to a method or
methods of taking inventories are to be construed as referring to both
the method or methods of identifying the goods and the method or methods
of valuing the goods. The method or methods of taking inventories shall
be determined on the date of distribution or transfer, and any
corporation, a party to a section 381(a) transaction whose taxable year
does not end on such date shall be considered as using the method or
methods of taking inventories that it would have employed had its
taxable year ended on such date. The amount of the adjustments
necessary to reflect the change in method of taking inventories pursuant
to this section, the manner in which they are to be taken into account
by the acquiring corporation, and the tax attributable thereto shall be
determined and computed under section 481 and the regulations
thereunder, subject to the rules provided in paragraphs (c) and (d) of
this section. However, in the case of any party to a section 381(a)
transaction which changes its method of taking inventories to the
last-in, first-out method of identification, the adjustments required by
section 472(d) shall be applicable. See paragraph (e) of this section.
This section shall not be construed as preventing any party to a section
381(a) transaction from adopting an inventory method which, under the
provisions of section 471 or 472, and the regulations thereunder, may be
adopted without the consent of the Commissioner. For provisions
defining the date of distribution or transfer, see paragraph (b) of
1.381(b)-1.
(b) Conditions for continuation of methods of taking inventories --
(1) No difference in method of taking inventories. (i) If all the
parties to a section 381(a) transaction used the same method of taking
inventories on the date of distribution or transfer, the acquiring
corporation, whether or not immediately after the date of distribution
or transfer it operates separate or integrated trades or businesses,
shall continue to use such method of taking inventories, unless the
acquiring corporation has, in accordance with paragraph (e) of 1.446-1,
obtained the consent of the Commissioner to use a different method of
taking inventories. For purposes of this determination, a corporation
shall be deemed to be using the last-in, first-out method of taking
inventories with respect to a particular type of goods on the date of
the distribution or transfer, if such corporation elects, under the
provisions of section 472, to adopt the last-in, first-out method with
respect to such goods for its taxable year within which or with which
the date of distribution or transfer occurs.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. O and P corporations are manufacturing companies which
compute their entire inventories by the use of the last-in, first-out
method of identification and the cost basis of valuation. In applying
the last-in, first-out method both corporations use the dollar-value
method, use the double-extension method, pool under the natural business
unit method, and value annual inventory increases by reference to the
actual cost of goods most recently purchased. P corporation acquires
the assets of O corporation in a transaction to which section 381(a)
applies. Under the provisions of this subparagraph, on and after the
date of distribution or transfer P corporation must continue to use the
last-in, first-out method of identification, the cost basis of
valuation, and, in applying the last-in, first-out method, must continue
to use the dollar-value method, use the double-extension method, pool
under the natural business unit method, and value annual inventory
increases by reference to the actual cost of goods most recently
purchased, unless, in accordance with paragraph (e) of 1.446-1, consent
of the Commissioner is obtained to change the method of taking
inventories.
(2) Separate businesses. (i) If, immediately after the date of
distribution or transfer, any of the trades or businesses of the parties
to a section 381(a) transaction are operated as separate and distinct
trades or businesses within the meaning of paragraph (d) of 1.446-1,
then the method or methods of taking inventories employed by such
parties to the transaction on the date of distribution or transfer with
respect to such trades or businesses shall be used by the acquiring
corporation, unless the acquiring corporation has, in accordance with
paragraph (e) of 1.446-1, obtained the consent of the Commissioner to
use a different method of taking inventories. This subparagraph shall
not be construed as precluding the Commissioner under section 471 or
472, and the regulations thereunder, from requiring that the method of
taking inventories used in a particular trade or business be used in
another trade or business with respect to similar types of goods, if, in
the opinion of the Commissioner, the use of such method of taking
inventories is necessary for a clear reflection of income.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. R Corporation is engaged in the production of radios and
television sets and S Corporation is engaged in the production of
washers and driers. In computing their inventories both corporations
use the cost basis of valuation. R corporation uses the last-in,
first-out method of identification, whereas S corporation uses the
first-in, first-out method. T corporation acquires the assets of R
corporation and S corporation in a transaction to which section 381(a)
applies. T corporation operates as a separate and distinct trade or
business, within the meaning of paragraph (d) of 1.446-1, each of the
businesses formerly operated by R corporation and S corporation. Under
the provisions of this subparagraph, T corporation is required to
continue to use the method of taking inventories previously used by R
corporation and S corporation, respectively, with respect to each trade
or business, unless, in accordance with paragraph (e) of 1.446-1,
consent of the Commissioner is obtained to change the methods of taking
inventories, on and after the dates of transfer. However, the
Commissioner may require T corporation, in accordance with 1.472-2, to
use the last-in, first-out method with respect to that portion of the
goods in the trades or businesses formerly operated by S corporation and
T corporation which are similar to goods in the trade or business
formerly operated by R corporation, if, in his opinion, the use of the
last-in, first-out method with respect to such similar goods is
necessary for a clear reflection of income.
(3) Integrated businesses -- (i) Same inventory method. If,
immediately after the date of distribution or transfer, any of the
trades or businesses of the parties to a section 381(a) transaction are
not operated as separate and distinct trades or businesses within the
meaning of paragraph (d) of 1.446-1, then, to the extent that the same
methods of taking inventories for particular types of goods were
employed on the date of distribution or transfer by the parties to the
transaction with respect to any trades or businesses which are
integrated or are required to be integrated in accordance with paragraph
(d) of 1.446-1, the acquiring corporation shall continue to employ such
methods of taking inventories for such types of goods, unless, in
accordance with paragraph (e) of 1.446-1, the acquiring corporation has
obtained the consent of the Commissioner to use a different method of
taking inventories. This subdivision shall not be construed as
precluding the Commissioner under section 471 or 472, and the
regulations thereunder, from requiring that the method of taking
inventories used with respect to particular types of goods in a
particular trade or business operated by the acquiring corporation after
the date of distribution or transfer be used with respect to similar
types of goods in another trade or business operated by it after such
date if, in the opinion of the Commissioner, the use of such method of
taking inventories is necessary for a clear reflection of income.
(ii) Different inventory methods. If, immediately after the date of
distribution or transfer, any of the trades or businesses of the parties
to a section 381(a) transaction are not operated as separate and
distinct trades or businesses within the meaning of paragraph (d) of
1.446-1, then, to the extent that different methods of taking
inventories for particular types of goods were employed on the date of
distribution or transfer by the parties to the transaction with respect
to any trades or businesses which are integrated or required to be
integrated in accordance with paragraph (d) of 1.446-1, the acquiring
corporation shall not be permitted to continue to use such different
methods of taking inventories, and shall adopt the method of taking
inventories described in paragraph (c) of this section for such types of
goods unless, in accordance with paragraph (d) of this section, consent
of the Commissioner is obtained to use a different method of taking
inventories.
(iii) Examples. The provisions of this subparagraph may be
illustrated by the following examples:
Example (1). O and P corporations are manufacturing companies which
compute their entire inventories by the use of the last-in, first-out
method of identification and the cost basis of valuation. In applying
the last-in, first-out method both corporations use the dollar-value
method and the double-extension method. However, O corporation pools
under the natural business unit method while P corporation pools under
the multiple pool method. In addition, O corporation determines the
cost of its annual inventory increase by reference to the actual cost of
goods most recently purchased, whereas P corporation determines the cost
of such increase by reference to the actual cost of the goods purchased
during the taxable year in the order of acquisition. P corporation
acquires the assets of O corporation in a transaction to which section
381(a) applies and integrates the business formerly operated by O
corporation into the business which was operated by P corporation before
the date of distribution or transfer. Under the provisions of
subdivision (i) of this subparagraph (relating to the same inventory
methods in an integrated trade or business), P corporation shall
continue to use the last-in, first-out method of identification, the
cost basis of valuation, and in applying the last-in, first-out method,
shall continue to use the dollar-value method and the double-extension
method, unless, in accordance with paragraph (e) of 1.446-1, consent of
the Commissioner is obtained to change the method of taking inventories.
However, under the provisions of subdivision (ii) of this subparagraph
(relating to different inventory methods in an integrated trade or
business), P corporation shall use the method of taking inventories
described in paragraph (c) of this section with respect to the method of
pooling and the method of determining the cost of annual inventory
increases, unless, in accordance with paragraph (d) of this section,
consent of the Commissioner is obtained to use a different method of
taking inventories.
Example (2). Y and Z corporations are engaged in the manufacture of
cereal products. Y corporation uses the first-in, first-out method of
identification and the cost or market, whichever is lower, method of
valuing its inventories, including oats. Z corporation uses the
first-in, first-out method of identification and the cost or market,
whichever is lower, method of valuing its inventories, except oats which
are valued on the cost method. Y corporation acquires all of the assets
of Z corporation in a transaction to which section 381(a) applies and
integrates the business formerly operated by Z corporation into the
business which was operated by Y corporation before the date of
distribution or transfer. Under the provisions of subdivision (i) of
this subparagraph (relating to the same inventory methods in an
integrated trade or business), Y corporation must continue to use the
first-in, first-out method with respect to all of its inventories and
must continue to use the cost or market, whichever is lower, method of
valuing all inventories except oats, unless, in accordance with
paragraph (e) of 1.446-1, consent of the Commissioner is obtained to
change the method of taking inventories. In addition, under the
provisions of subdivision (ii) of this subparagraph (relating to
different inventory methods in an integrated trade or business), Y
corporation shall use the method described in paragraph (c) of this
section in valuing its inventory of oats, unless, in accordance with
paragraph (d) of this section, consent of the Commissioner is obtained
to use a different method of valuing its oats.
(4) Rules of application. (i) In any case where the method of taking
inventories employed on the date of distribution or transfer is
continued, it will be unnecessary for the acquiring corporation to renew
any election previously made by it or by any distributor or transferor
corporation with respect to such method of taking inventories, and the
acquiring corporation is bound by any such elections. If, on the date
of distribution or transfer, any party to a section 381(a) transaction
had no inventories of a particular type of goods, or such party came
into existence as a result of the transaction, such party shall not be
considered to be using a method of taking inventories for the particular
type of goods different from that used by the other parties to the
transaction. If, on the date of distribution or transfer, any one of
the parties to the transaction is using the cash receipts and
disbursements method of accounting and is not required to take
inventories, the determination as to whether such method of accounting
is to be continued by the acquiring corporation shall be made in
accordance with section 381(c)(4) and the regulations thereunder.
(ii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). M corporation is engaged in manufacturing and computes
its inventories under the first-in, first-out method of identification
and the cost or market, whichever is lower, method of valuation. N
corporation is also engaged in manufacturing and computes its
inventories under the first-in, first-out method of identification and
the cost method of valuation. M corporation acquires the assets of N
corporation in a transaction to which section 381(a) applies and M
corporation integrates the business formerly operated by N corporation
into the business which was operated by M corporation before the date of
distribution or transfer. On the date of distribution or transfer, N
corporation has inventories of sheet steel while M corporation has no
inventories of this particular type of goods. In all other respects the
inventories of the two corporations consist of similar types of goods.
Under the provisions of this subparagraph, M corporation must use the
first-in, first-out method of identification and the cost method of
valuation of inventories of sheet steel, unless, in accordance with
paragraph (e) of 1.446-1, consent of the Commissioner is obtained to
change the method of taking such inventories. For other goods in its
inventories M corporation must use the first-in, first-out method of
identification (as required by subparagraph (3)(i) of this paragraph),
and with respect to the method of valuation, must use the method of
taking inventories described in paragraph (c) of this section, unless,
in accordance with paragraph (d) of this section, consent of the
Commissioner is obtained to use a different method of taking
inventories.
Example (2). W corporation is engaged in the business of raising
cattle and uses the cash receipts and disbursements method of computing
taxable income. Inventories, therefore, are not required. X
corporation is also engaged in the business of raising cattle and uses
the accrual method of computing taxable income under which it has
elected to use the ''farm-price method'' of valuing inventories. The
assets of W corporation are acquired by X corporation in a transaction
to which section 381(a) applies and X corporation integrates the
business formerly operated by W corporation into the business which was
operated by X corporation before the date of distribution or transfer.
Under the provisions of this subparagraph, whether X corporation is
required to take inventories will depend upon which method of accounting
is used by X corporation after the date of distribution or transfer, in
accordance with the provisions of section 381(c)(4) and the regulations
thereunder. Therefore, if X corporation uses the cash receipts and
disbursements method, it will not be required to take inventories into
account in computing its taxable income. However, if X corporation uses
the accrual method, it must use the ''farm-price method'' of taking
inventories, unless, in accordance with paragraph (d) of this section,
consent of the Commissioner is obtained to use a different method of
taking inventories.
(c) Change of method of taking inventories without consent of
Commissioner -- (1) General rule. If, under the provisions of paragraph
(b) of this section, the acquiring corporation is not permitted to
continue to use the method of taking inventories used by it or by the
distributor or transferor corporation or corporations on the date of
distribution or transfer, the acquiring corporation shall use the
principal method of taking inventories for each particular type of goods
of such corporations, as determined under subparagraph (2) of this
paragraph: Provided, That:
(i) Such method clearly reflects the income of the acquiring
corporation after the distribution or transfer as provided by sections
446(a) and 471 and the regulations thereunder, and
(ii) The use of such method is not inconsistent with the provisions
of any closing agreement entered into under section 7121 and the
regulations thereunder.
If the principal method does not satisfy the requirements of
subdivisions (i) and (ii) of this subparagraph, or if the acquiring
corporation wishes to use a method other than the principal method, see
paragraph (d)(1) of this section. If the principal method of taking
inventories is adopted under this paragraph, it will not be necessary
for the acquiring corporation or corporations to renew any election
previously made by it or by the distributor or transferor corporation
with respect to such principal method of taking inventories, and the
acquiring corporation is bound by any such election.
(2) Principal method of taking inventories. The determination of the
principal method of taking inventories shall be made with respect to
each particular type of goods of each integrated trade or business
operated by the acquiring corporation immediately after the date of
distribution or transfer. Such determination for each integrated trade
or business shall be made by reference to the methods of taking
inventories previously used in the component trades or businesses for
such types of goods which constitute the subsequent integrated trade or
business of the acquiring corporation. For purposes of this
determination, a corporation shall be deemed to be using the last-in,
first-out method of taking inventories with respect to a particular type
of goods on the date of the distribution or transfer, if such
corporation elects, under the provisions of section 472, to adopt the
last-in, first-out method with respect to such goods for its taxable
year within which or with which the date of distribution or transfer
occurs. The fair market value of the particular types of goods of each
group of component trades or businesses with respect to which one method
of taking inventories common to all was employed shall be compared with
the fair market value of comparable types of goods of other groups of
component trades or businesses with respect to which another method of
taking inventories common to all was employed. For purposes of the
above comparison and to the extent that particular types of goods are
included in inventory by grouping or pooling, then such group or pool
shall be considered as a single unit. The total fair market value of
such group or pool shall be the basis for comparison in determining the
principal method of taking inventories. The method of taking
inventories of the group of component trades or businesses having the
largest fair market value of such inventories shall be the principal
method of taking inventories. For purposes of this subparagraph, the
fair market value of the inventories of a component trade or business
shall be determined immediately after the date of distribution or
transfer.
(3) Examples. The provisions of this paragraph may be illustrated by
the following examples:
Example (1). (i) X, Y, and Z corporations are all engaged in the
manufacture of sheet metal. In addition, Y and Z corporations are
engaged in the manufacture of paper containers. X and Y corporations
use the first-in, first-out method of identifying goods and the cost
method of valuing all inventories, while Z corporation uses the
first-in, first-out method of identifying goods and the cost or market,
whichever is lower, method of valuing all inventories. X, Y, and Z
corporations enter into a transaction to which section 381(a) applies,
and the acquiring corporation integrates the sheet metal businesses
formerly operated by X, Y, and Z corporations and also integrates the
paper container businesses formerly operated by Y and Z corporations.
Each corporation has the same types of goods in the inventories of its
sheet metal business and Y and Z corporations have the same types of
goods in the inventories of their paper container businesses.
Immediately after the date of distribution or transfer the fair market
values of the respective inventories are as follows:
(ii) Since X, Y, and Z corporations all used the first-in, first-out
method of identifying their inventories as of the date of distribution
or transfer, then, under the provisions of paragraph (b)(3)(i) of this
section, the acquiring corporation shall continue to use the first-in,
first-out method of identifying all goods unless, in accordance with
paragraph (e) of 1.446-1, consent of the Commissioner is obtained to
change the method of accounting.
(iii) Since the acquired corporations used different methods of
valuing inventories in their sheet metal business and their paper
container business, when the businesses were integrated the acquiring
corporation must, under the provisions of this paragraph, determine
which method of inventory valuation used by the acquired corporations on
the date of distribution or transfer is the principal method of
inventory valuation for each of such businesses.
(a) In determining which is the principal method of valuing
inventories for the sheet metal business pursuant to subparagraph (2) of
this paragraph, the total fair market value of the sheet metal
inventories of X and Y corporations, $17,000 (i.e., $10,000
+$7,000=$17,000), is compared with the fair market value of the sheet
metal inventory of Z corporation, $15,000. Since the total fair market
value of the sheet metal inventories of X and Y corporations ($17,000)
exceeds the fair market value of the sheet metal inventory of Z
corporation ($15,000), the cost method of valuation used by X and Y
corporations is the principal method of taking such inventories, and
must be used by the acquiring corporation in valuing such inventories,
if the conditions set forth in subparagraph (1) of this paragraph are
satisfied.
(b) In determining which is the principal method of valuing
inventories for the paper container business pursuant to subparagraph
(2) of this paragraph, the fair market value of the paper container
inventory of Y corporation ($6,000) is compared with the fair market
value of the paper container inventory of Z corporation ($7,000). Since
the fair market value of the paper container inventory of Z corporation
($7,000) exceeds the fair market value of the paper container inventory
of Y corporation ($6,000), the cost or market, whichever is lower,
method of valuation used by Z corporation is the principal method of
taking such inventories, and must be used by the acquiring corporation
in valuing such inventories, if the conditions set forth in subparagraph
(1) of this paragraph are satisfied.
Example (2). (i) X, Y, and Z corporations are all engaged in the
manufacture of electrical appliances. In addition, X and Z corporations
are engaged in the manufacture of plastic containers. X corporation
uses the first-in, first-out method of identifying goods and the cost
method of valuing all inventories. Y and Z corporations use the
last-in, first-out method of identifying goods and the cost method of
valuing all inventories. In applying the last-in, first-out method, Y
corporation uses the dollar value method, the double-extension method,
and pools under the natural business unit method, while Z corporation
uses the dollar value method, the double-extension method, and pools
under the multiple pooling method for all inventories. X, Y, and Z
corporations enter into a transaction to which section 381(a) applies,
and the acquiring corporation integrates the electric appliance
businesses formerly operated by X, Y, and Z corporations and also
integrates the plastic container businesses formerly operated by X and Z
corporations. Each corporation has the same types of goods in the
inventories of its electric appliance business and X and Z corporations
have the same types of goods in the inventories of their plastic
container businesses. Immediately after the date of distribution or
transfer, the fair market values of the respective inventories are as
follows:
(ii) Since X, Y, and Z corporations all used the cost method of
valuing their inventories as of the date of distribution or transfer,
then, under the provisions of paragraph (b)(3)(i) of this section, the
acquiring corporation shall continue to use the cost method of valuing
all goods unless, in accordance with paragraph (e) of 1.446-1, consent
of the Commissioner is obtained to change the method of accounting.
(iii) Since the acquired corporations used different methods of
identifying inventories in their electric appliance business and their
plastic container business, when the businesses were integrated the
acquiring corporation must, under the provisions of this paragraph,
determine which method of inventory identification used by the acquired
corporations on the date of distribution or transfer is the principal
method of inventory identification for each of such businesses.
(a)(1) In determining which is the principal method of identifying
inventories for the electric appliance business pursuant to subparagraph
(2) of this paragraph, the fair market value of the electric appliance
inventory of X corporation, $13,000, is compared with the total fair
market value of the electric appliance inventories of Y and Z
corporations, $15,000 (i.e., $10,000+$5,000 =$15,000). Since the total
fair market value of the electric appliance inventories of Y and Z
corporations ($15,000) exceeds the fair market value of the electric
appliance inventory of X corporation ($13,000), the last-in, first-out
method of identification is the principal method of taking the electric
appliance inventories and must be used by the acquiring corporation, if
the conditions set forth in subparagraph (1) of this paragraph are
satisfied.
(2) Since Y and Z corporations used different pooling methods, in
applying the last-in, first-out method, the acquiring corporation must,
under the provisions of this paragraph, determine which pooling method
as used by Y and Z corporations on the date of distribution or transfer
is the principal method. In making such determination pursuant to
subparagraph (2) of this paragraph, the fair market value of the
electric appliance inventory of Y corporation ($10,000) is compared with
the fair market value of the electric appliance inventory of Z
corporation ($5,000). Since the fair market value of the electric
appliance inventory of Y corporation ($10,000) exceeds the fair market
value of the electric appliance inventory of Z corporation ($5,000), the
natural business unit method is the principal method of pooling and must
be used by the acquiring corporation in applying the last-in, first-out
method with respect to the electric appliance business, if the
conditions set forth in subparagraph (1) of this paragraph are
satisfied.
In addition, under the provisions of paragraph (b)(3)(i) of this
section, the acquiring corporation must use the dollar value method and
the double-extension method for valuing goods in its electric appliance
inventory since Y and Z corporations both used such methods in valuing
their electric appliance inventories as of the date of distribution or
transfer, unless, in accordance with paragraph (e) of 1.446-1, consent
of the Commissioner is obtained to change the method of accounting.
(b) In determining which is the principal method of identifying
inventories for the plastic container business pursuant to subparagraph
(2) of this paragraph, the fair market value of the plastic container
inventory of X corporation ($7,000) is compared with the fair market
value of the plastic container inventory of Z corporation ($6,000).
Since the fair market value of the plastic container inventory of X
corporation. ($7,000) exceeds the fair market value of the plastic
container inventory of Z corporation ($6,000) the first-in, first-out
method of identification, as used by X corporation, is the principal
method of taking the plastic container inventories and must be used by
the acquiring corporation, if the conditions set forth in subparagraph
(1) of this paragraph are satisfied.
(d) Change of method of taking inventories with consent of the
Commissioner -- (1) General rule -- (i) Carryover and principal method
not permitted. If the acquiring corporation is not permitted, under
paragraph (b) of this section, to continue to use the method of taking
inventories used by it or the distributor or transferor corporation or
corporations on the date of distribution or transfer, and is not
permitted, under paragraph (c) of this section, to use the principal
method of taking inventories, then such acquiring corporation must
request the Commissioner to determine the appropriate method of taking
inventories.
(ii) Principal method required. If the acquiring corporation wishes
to use a method of taking inventories other than the principal method of
taking inventories which is required to be used under paragraph (c) of
this section, it shall apply to the Commissioner for permission to use
such other method of taking inventories. Permission to use such other
method of taking inventories will not be granted unless the acquiring
corporation and the Commissioner agree to the terms, conditions, and
adjustments under which the change to such method will be effected.
(2) Time and manner of making application. Request for a
determination of the method of taking inventories to be used under
subparagraph (1)(i) of this paragraph or applications for permission to
use a method of taking inventories under subparagraph (1)(ii) of this
paragraph shall be filed with the Commissioner of Internal Revenue,
Attention: T:I:C, Washington, DC 20224, not later than 90 days after
the date of distribution or transfer, except that in cases where the
date of distribution or transfer occurs before January 15, 1975, such
applications or requests shall be filed not later than 90 days after
such date. The application shall be accompanied by a copy of the
statement described in paragraph (b)(3) of 1.381(b)-1, and by a
statement specifying the nature of the transaction which causes section
381 to apply; the differences in methods of taking inventories used by
the corporations concerned; the method of taking inventories proposed
to be used by the acquiring corporations; and the amount of adjustments
necessary to prevent duplication or omission of items in the computation
of taxable income under such proposed method. The Commissioner may also
require such other information as may be necessary in order to determine
the proper method of taking inventories to be used by the acquiring
corporation.
(e) Treatment of layers of inventories by the acquiring corporation
and rules for making adjustments -- (1) In general. This paragraph
provides rules for treating layers of inventories by the acquiring
corporation and rules for making adjustments, once the acquiring
corporation's method of taking inventories for its taxable year
including the date of distribution or transfer has been determined in
accordance with the rules set forth in paragraphs (a) through (d) of
this section. Thus, for example, if the acquiring corporation uses the
last-in, first-out method of taking inventories for its taxable year
including the date of distribution or transfer, either because such
corporation elects the last-in, first-out method of taking inventories
under the provisions of section 472 for such year or because such method
is otherwise determined to be the principal method of taking inventories
under paragraph (c)(2) of this section, then such corporation shall
integrate its layers of inventories and make the necessary adjustments
in accordance with the rules under paragraph (e)(2) of this section.
(2) Acquiring corporation uses last-in, first-out method -- (i)
Dollar-value method -- (a) Distributor or transferor corporation using
last-in, first-out method. In any case where the acquiring corporation
is required or permitted to use the dollar value method of pricing
inventories on the last-in, first-out method for its taxable year
including the date of distribution or transfer, the inventories of each
distributor or transferor corporation which used the last-in, first-out
method for its taxable year in which the distribution or transfer
occurred shall be placed on the dollar value method pursuant to the
rules contained in paragraph (f) of 1.472-8, and then such inventories
shall be integrated with the inventories of the acquiring corporation.
If pools of each corporation are permitted or required to be combined,
they shall be combined in accordance with the principles set forth in
paragraph (g)(2) of 1.472-8. For purposes of combining pools, all
base-year inventories or layers of increment which occur in taxable
years including the same December 31 shall be combined. A base-year
inventory or layer of increment occurring in any short taxable year not
including a December 31 or in the final taxable year of a distributor or
transferor corporation shall be merged with and considered a layer of
increment of its immediately preceding taxable year.
(b) Distributor or transferor corporation not using last-in,
first-out method. In any case where the acquiring corporation is
required or permitted to use the last-in, first-out method of taking
inventories for its taxable year including the date of distribution or
transfer, the inventories of each distributor or transferor corporation
which did not use the last-in, first-out method for its taxable year in
which the distribution or transfer occurred shall be treated by the
acquiring corporation as having been acquired at their average unit cost
in a single transaction on the date of distribution or transfer. Thus,
where the acquiring corporation is required or permitted to use the
dollar value method of pricing inventories, if an item of inventory is
to be combined in an existing dollar value pool, such item shall be
treated as if it were purchased at its average unit cost on the date of
distribution or transfer with respect to such pool. On the other hand,
if such item is not to be combined in an existing pool and the taxpayer
otherwise uses LIFO with respect to such item, such item will be treated
as if it were purchased at its average unit cost on the date of
distribution or transfer with respect to a new pool (if any), with the
base-year being the year of distribution or transfer. Adjustments
resulting from a restoration to cost of any write-down to market value
of such inventories of a distributor or transferor corporation shall be
taken into account by such corporation in its final taxable year (where
such year is closed by reason of section 381(b)). See section 472(d).
(ii) Specific goods method -- (a) Distributor or transferor
corporation using last-in, first-out method. In any case where the
acquiring corporation is required or permitted to use the specific goods
method of pricing inventories on the last-in, first-out method for its
taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which used the
last-in, first-out method for its taxable year in which the distribution
or transfer occurred shall be treated by the acquiring corporation as
having the acquisition dates and costs of the distributor or transferor
corporation.
(b) Distributor or transferor not using last-in, first-out method.
See paragraph (e)(1)(i) (b) of this section.
(3) Acquiring corporation uses first-in, first-out method -- (i)
Distributor or transferor corporations not using first-in, first-out
method. In any case where the acquiring corporation is permitted or
required to use the first-in, first-out method of taking inventories for
its taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which did not
use the first-in, first-out method shall be treated by the acquiring
corporation as having the same acquisition dates and costs which such
inventory would have had if the distributor or transferor corporation
had been using the first-in, first-out method for its taxable year in
which the distribution or transfer occurred. However, if the acquiring
corporation values its inventories at cost or market, whichever is
lower, then the acquired inventories shall be treated as having been
acquired at cost or market, whichever is lower.
(ii) Distributor or transferor corporation using first-in, first-out
method. In any case where the acquiring corporation is required or
permitted to use the first-in, first-out method of taking inventories
for its taxable year including the date of distribution or transfer, the
inventories of each distributor or transferor corporation which used
such method for its taxable year in which the distribution or transfer
occurred shall be treated by the acquiring corporation as having the
same acquisition dates and costs as the distributor or transferor
corporations. However, where the acquiring corporation values its
inventories at cost or market, whichever is lower, then the acquiring
corporation shall treat the acquired inventories as having been acquired
at cost or market, whichever is lower.
(4) Adjustments. Except as provided in paragraph (e)(1) of this
section with respect to any adjustments under section 472(d), the
adjustments necessary to reflect the change from the method of taking
inventories previously used by any of the corporations involved
(including any adjustments required by section 481), shall be determined
and computed in the same manner as if on the date of distribution or
transfer, each of the several corporations that were not using the
method of taking inventories used by the acquiring corporation for its
taxable year including the date of distribution or transfer had
initiated a change in the method of taking inventories. However, such
adjustments (as an item of income or deduction, as the case may be)
shall be taken into account solely by the acquiring corporation in
computing its taxable income.
(f) Basis of inventories received. The basis of inventories received
by the acquiring corporation from a distributor or transferor
corporation shall be determined in accordance with section 334(b)(1) or
362(b), and the regulations thereunder. See also section 1013, and the
regulations thereunder.
(g) Additional rules applicable to distributions or transfers before
January 15, 1975 -- (1) Statute of limitations bars assessment or
refund. If the date of distribution or transfer was before January 15,
1975, and if the assessment of any deficiency or the refund or credit of
any overpayment for the taxable year of the acquiring corporation which
includes the date of distribution or transfer or any subsequent taxable
year is prevented by the operation of any law or rule of law, then this
section does not authorize the Commissioner or the acquiring corporation
to change any method or methods of computing inventories in any taxable
year of the acquiring corporation. However, the Commissioner or the
acquiring corporation may change such method or methods of computing
inventories under the provisions of section 446, 471, or 472 and the
regulations thereunder.
(2) Statute of limitations does not bar assessment and refund.
Except as provided in subparagraph (1) of this paragraph --
(i) If the date of distribution or transfer was before January 15,
1975, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer:
(a) Adopted or continued a method or methods of taking inventories
consistent with the rules of this section,
(b) Been granted permission by the Commissioner, in accordance with
section 446, 471, or 472 and the regulations thereunder, to use a method
or methods of taking inventories, or
(c) Adopted a method or methods of taking inventories that, under
section 446, 471, or 472 and the regulations thereunder may be adopted
without the consent of the Commissioner,
then the method or methods of taking inventories adopted or continued
in the manner described in (a), (b), or (c) of this subdivision, shall
not be changed, by reason of the rules contained in this section, by the
Commissioner or by the acquiring corporation for any taxable year ending
after the date of distribution or transfer. However, the Commissioner
or the acquiring corporation may change such method or methods of taking
inventories for any such taxable year under the provisions of, and to
the extent permitted by, section 446, 471, or 472 and the regulations
thereunder.
(ii) If the date of distribution or transfer was before January 15,
1975, and the acquiring corporation has, for the taxable year which
includes the date of distribution or transfer, adopted or continued a
method or methods of taking inventories other than in the manner
described in (a), (b), or (c) of subdivision (i) of this subparagraph,
then the acquiring corporation may --
(a) Continue to use the method or methods of taking inventories so
adopted or continued if such method or methods clearly reflect income
and if proper adjustments were made to reflect the adoption of such
method or methods, or
(b) Adopt the method or methods of taking inventories prescribed by
this section.
Such method or methods of taking inventories shall be adopted by
filing an amended return (which includes the proper adjustments required
by this section) for the taxable year of the acquiring corporation which
includes the date of distribution or transfer, and by filing amended
returns for all subsequent taxable years of the acquiring corporation
for which returns have previously been filed. Such amended return or
returns shall be accompanied by a copy of the statement described in
paragraph (b)(3) of 1.381(b)-1, and by a statement specifying the
nature of the transaction which causes section 381 to apply; the
difference in methods of taking inventories used by the corporation
concerned; the method or methods of taking inventories originally
adopted by the acquiring corporation; the method or methods of taking
inventories adopted on the amended return or returns; and the
computation of the amount of the adjustments and the resulting increase
or decrease in tax.
(h) Effective date. This section is applicable with respect to
taxable years beginning after January 15, 1975. However, if a taxpayer
wishes to rely on the rules stated in this section for taxable years
beginning before January 15, 1975 it may do so, subject to the
provisions of paragraph (g) of this section.
(Sec. 381(c)(5) and 7805 of the Internal Revenue Code of 1954 (68A
Stat. 917; 26 U.S.C. 381(c)(5) and 7805))
(T.D. 7344, 40 FR 2684, Jan. 15, 1975)
26 CFR 1.381(c)(6)-1 Depreciation method.
(a) Carryover requirement -- (1) Distributions in taxable years
ending before July 25, 1969. (i) Section 381(c)(6) provides that if, in
a transaction in a taxable year which ends before July 25, 1969, to
which section 381(a) applies, an acquiring corporation acquires
depreciable property from a distributor or transferor corporation which
computes its allowance for the depreciation of the property under
section 167(b) (2), (3), or (4), the acquiring corporation shall compute
its depreciation allowance by the same method used by the distributor or
transferor corporation with respect to such property. Thus, if the
distributor or transferor corporation used the sum of the years-digits
method under section 167(b)(3) with respect to an asset distributed or
transferred to an acquiring corporation, the acquiring corporation will
be required to use the sum of the years-digits method with respect to
such asset acquired. The computation of the depreciation allowance with
respect to the property acquired shall be made under the provisions of
section 167 and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph will apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or other
disposition of such property. For provisions defining the date of
distribution or transfer see 1.381(b)-1(b).
(2) Distributions in taxable years ending after July 24, 1969. (i)
Section 381(c)(6) provides that if, in a transaction in a taxable year
ending after July 24, 1969, to which section 381(a) applies, an
acquiring corporation acquires depreciable property from a distributor
or transferor corporation which computes its allowances for the
depreciation of the property under subsection (b), (j), or (k) of
section 167, the acquiring corporation shall compute its depreciation
allowance by the same method used by the distributor or transferor
corporation with respect to such property. Thus, if the distributor or
transferor corporation used the straight line method under section
167(b)(1) with respect to an asset distributed or transferred to an
acquiring corporation, the acquiring corporation will be required to use
the straight line method with respect to such asset. Similarly, if the
distributor or transferor corporation elected to compute depreciation
under section 167(k) with respect to property attributable to
rehabilitation expenditures, and such property is transferred to an
acquiring corporation, the acquiring corporation will be required to
compute depreciation under section 167(k) with respect to the property
acquired. The computation of the depreciation allowance with respect to
the property acquired shall be made under the provisions of section 167
and the regulations thereunder.
(ii) The rules provided in section 381(c)(6) and subdivision (i) of
this subparagraph shall apply only with respect to that part or all of
the basis of the property in the hands of the acquiring corporation
immediately after the date of distribution or transfer as does not
exceed the basis of the property in the hands of the distributor or
transferor corporation on the date of the distribution or transfer. For
this purpose, the basis of the property in the hands of the distributor
or transferor corporation shall be the adjusted basis provided in
section 1011 for the purpose of determining gain on the sale or other
disposition of such property. For provisions defining the date of
distribution or transfer see 1.38(b)-1(b).
(b) Portion in excess of distributor or transferor corporation's
basis -- (1) General rule. With respect to that part of the basis of
the depreciable property (other than certain section 1250 property
described in subparagraph (2) of this paragraph) which in the hands of
the acquiring corporation exceeds the adjusted basis to the distributor
or transferor corporation, the acquiring corporation may use any
reasonable method of computing depreciation, other than the methods
provided in section 167(b)(2), (3), or (4). See paragraph (b) of
1.167(b)-0 for methods which are acceptable under section 167(a) with
respect to such property. See also sections 334(b)(1) and 362(b) for
the determination of basis of property in the hands of the acquiring
corporation in connection with a transaction to which section 381(a)
applies.
(2) Section 1250 property. With respect to that part of the basis of
section 1250 property acquired after July 24, 1969, which in the hands
of the acquiring corporation exceeds the adjusted basis to the
distributor or transferor corporation, the acquiring corporation shall
be subject to the limitations contained in section 167(j)(4) (relating
to used section 1250 property) or 167(j)(5) (relating to used
residential rental property). Thus, for example, if section 1250
property which is not residential rental property is acquired in a
section 381(a) transaction after July 24, 1969, the straight line method
of depreciation (or other method allowable under section 167(j)(4)(B))
is the only acceptable method with respect to that portion of the basis
of the property which, in the hands of the acquiring corporation,
exceeds the adjusted basis to the transferor or distributor corporation.
(c) Records required. Records shall be maintained in sufficient
detail to identify any depreciable property to which this section
applies, and to establish the basis thereof.
(d) Agreement under section 167(d). To the extent not inconsistent
with paragraph (b) of this section, an acquiring corporation shall be
treated as the distributor or transferor corporation in the case of an
agreement between the distributor or transferor corporation and the
district director under section 167(d) and 1.167(d)-1 with respect to
property to which section 381(c)(6) and this section apply. Thus, in
the case where the basis of an asset in the hands of an acquiring
corporation exceeds the basis of such asset in the hands of the
distributor or the transferor corporation, such an agreement will not
have the effect of permitting the acquiring corporation to compute its
depreciation allowance with respect to such excess basis under the
methods provided in section 167(b) (2), (3), or (4). However, the
provisions of the agreement will continue to apply with respect to the
useful life of the asset.
(e) Change of method of depreciation. Although the acquiring
corporation is required to use the method of computing depreciation used
by the distributor or transferor with respect to depreciable property to
which this section applies, such acquiring corporation may use another
method with respect to such property if consent of the Commissioner is
obtained in accordance with paragraph (e) of 1.446-1. Further, subject
to the provisions of paragraph (b) of 1.167(e)-1 the acquiring
corporation may change from the declining balance method described in
section 167(b)(2) to the straight line method without consent of the
Commissioner.
(f) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, for example, if X
Corporation, a transferor corporation, used the sum of the years-digits
method under section 167(b)(3) with respect to an asset transferred to Y
Corporation, an acquiring corporation, in a transaction to which section
381(a) applies, and subsequently Y Corporation, using the same method,
transfers such asset to Z Corporation in a transaction to which section
381(a) also applies, then Z Corporation shall be required to use the sum
of the years-digits method with respect to such asset.
(g) Illustration. The application of this section may be illustrated
by the following example:
Example. M and N Corporations compute their taxable incomes on the
basis of the calendar year. On December 31, 1959, M Corporation
transfers all of its assets to N Corporation in a transaction to which
section 381(a) applies. Included among these assets is an item of
depreciable property which on that date has an adjusted basis (for
determining gain) of $800,000 after M Corporation takes into account for
1959 its allowance for depreciation under section 167(b)(2). The basis
attributable to the asset under section 362(b) is determined to be
$900,000 in the hands of N Corporation. Under the provisions of section
381(c)(6) and paragraph (a) of this section, N Corporation is required
to compute its allowance for the depreciation of the asset under section
167(b)(2) for 1960 and subsequent years but only in respect of $800,000
of its basis. N Corporation may use any reasonable method other than
the methods provided in section 167(b) (2), (3), or (4) in computing its
depreciation allowance of the remaining $100,000.
(T.D. 6559, 26 FR 2983, Apr. 7, 1961, as amended by T.D. 7166, 37 FR
5246, Mar. 11, 1972; 37 FR 6400, Mar. 29, 1972)
26 CFR 1.381(c)(8)-1 Installment method.
(a) Carryover requirement. (1) Section 381(c)(8) provides that if,
in a transaction to which section 381(a) applies, an acquiring
corporation acquires installment obligations, the income from which the
distributor or transferor corporation has elected under section 453 and
the regulations thereunder to report on the installment method, then the
acquiring corporation shall be treated as the distributor or transferor
corporation would have been treated under section 453 had it not
transferred the installment obligations. Thus, if the distributor or
transferor corporation had properly elected to return income from the
sale or other disposition of property giving rise to the obligations on
the installment method, then the acquiring corporation shall be required
to return the income from all such installment obligations in the same
manner and to the same extent as the distributor or transferor
corporation, unless consent of the Commissioner to use another method is
obtained in accordance with paragraph (e) of 1.446-1. Amounts received
by the acquiring corporation on or after the date of distribution or
transfer with respect to an installment sale made by the distributor or
transferor corporation will not be taken into account in applying the
limitation under section 453(b)(2) with respect to the amount of
payments received in the year of sale or other disposition.
(2) Section 381(c)(8) and this section have no application to sales
or other dispositions of property made by the acquiring corporation on
or after the date of distribution or transfer. For provisions defining
the date of distribution or transfer, see 1.381(b)-1(b). See section
381(c)(4) and the regulations thereunder for rules relating to the
proper method or combination of methods of accounting to be used by the
acquiring corporation.
(b) Basis of obligations. The basis in the hands of an acquiring
corporation of installment obligations described in section 381(c)(8)
and paragraph (a) of this section shall be the same as in the hands of
the distributor or transferor corporation.
(c) Repossession of property sold in prior years. If the acquiring
corporation repossesses property, previously sold by the distributor or
transferor corporation, by reason of default by the purchaser in payment
of the acquired installment obligations, then the acquiring corporation
shall be treated as though it were the vendor corporation for purposes
of determining, under section 453 and the regulations thereunder, the
gain, loss, income, or deduction with respect to the property
repossessed.
(T.D. 6559, 26 FR 2983, Apr. 7, 1961)
26 CFR 1.381(c)(9)-1 Amortization of bond discount or premium.
(a) Carryover requirement. If, in a transaction to which section
381(a) applies, the acquiring corporation assumes liability for the
payment of bonds of a distributor or transferor corporation which were
issued at a discount or premium, then under the provisions of section
381(c)(9) the acquiring corporation is to be treated as the distributor
or transferor corporation after the date of distribution or transfer for
purposes of determining the amount of amortization allowable, or
includible, with respect to such discount or premium in computing
taxable income. Thus, if subsequent to February 28, 1913, a distributor
or transferor corporation issues bonds at a premium and the liability
for them is assumed by the acquiring corporation in a transaction to
which section 381(a) applies, then the net amount of the premium is
income which should be prorated or amortized over the life of the bonds,
including the period during which the acquiring corporation is liable
upon the obligations assumed. On the other hand, if a distributor or
transferor corporation issues bonds at a discount and the liability for
them is assumed by the acquiring corporation in a transaction to which
section 381(a) applies, then the net amount of the discount is
deductible in computing taxable income but should be prorated or
amortized over the life of the bonds, including the period during which
the acquiring corporation is liable upon the obligations assumed.
(b) Expense incurred upon issuance of bonds. If, in a transaction to
which section 381(a) applies, the acquiring corporation assumes
liability for bonds of a distributor or transferor corporation which
were issued at a discount or premium, the acquiring corporation shall be
treated as the distributor or transferor corporation after the date of
distribution or transfer with respect to the expense incurred upon the
issuance of such bonds.
(c) Purchase of bonds. If, in a transaction to which section 381(a)
applies, the acquiring corporation assumes liability for bonds of a
distributor or transferor corporation which were issued at a discount or
premium and if the acquiring corporation subsequently purchases such
bonds, then the acquiring corporation shall be treated as the
distributor or transferor corporation for the purpose of determining the
amount of any income or deduction resulting from the purchase. See
paragraph (c) of 1.61-12. For rules relating to the exchange or
substitution of bonds issued by the acquiring corporation for bonds of a
distributor or transferor corporation, see paragraph (d) of this
section.
(d) Exchange of new for old bonds. Notwithstanding any other
provision of this section, if --
(1) In a transaction to which section 381(a) applies, bonds of the
acquiring corporation are exchanged or substituted for bonds of a
distributor or transferor corporation which were issued at a discount or
premium, or
(2) Bonds of the acquiring corporation are exchanged or substituted
for bonds of a distributor or transferor corporation which were issued
at a discount or premium and in respect of which the acquiring
corporation has assumed the liability in a transaction to which section
381(a) applies,
then, with respect to any unamortized discount, premium, or expense
of issuance attributable to such bonds of the distributor or transferor
corporation, the acquiring corporation shall be treated as the
distributor or transferor corporation.
(e) Bonds of a distributor or transferor corporation. For purposes
of applying section 381(c)(9), the term ''bonds of a distributor or
transferor corporation'' includes not only bonds issued by the
distributor or transferor corporation but also bonds for which the
distributor or transferor corporation has assumed liability. Thus, if
the distributor or transferor corporation has assumed liability for
bonds in a transaction in which any unamortized discount or premium
attributable to such bonds carried over to such corporation, then the
acquiring corporation assuming liability for the bonds shall be treated
as the distributor or transferor corporation after the date of
distribution or transfer for purposes of determining the amount of
amortization allowable, or includible, with respect to such discount or
premium. On the other hand, if the distributor or transferor
corporation has assumed liability for bonds in a transaction in which
any unamortized discount or premium attributable to such bonds did not
carry over to such corporation, then there can be no carryover to the
acquiring corporation under this section.
(T.D. 6532, 26 FR 405, Jan. 19, 1961)
26 CFR 1.381(c)(10)-1 Deferred exploration and development
expenditures.
(a) Carryover requirement. (1) If for any taxable year a distributor
or transferor corporation has elected under section 615 or section 616
(or corresponding provisions of prior law) to defer and deduct on a
ratable basis any exploration or development expenditures made in
connection with any ore, mineral, mine, or other natural deposit
transferred to the acquiring corporation in a transaction described in
section 381(a), then under the provisions of section 381(c)(10) the
acquiring corporation shall be entitled to deduct such expenditures on a
ratable basis in the same manner, and to the same extent, as they would
have been deductible by the distributor or transferor corporation in the
absence of the distribution or transfer. For this purpose, the
acquiring corporation shall be treated as though it were the distributor
or transferor corporation. The principles set forth in paragraph (e) of
1.615-3 and paragraph (f) of 1.616-2 are applicable in computing the
amount of the deduction allowable to the acquiring corporation in
respect of expenditures deferred by a distributor or transferor
corporation.
Example. X and Y Corporations are both organized on January 1, 1955,
and both corporations compute their taxable income on the basis of the
calendar year. During 1955, X Corporation purchases a mineral property
which it begins to develop in 1956. During 1956, X Corporation incurs
development expenditures of $500,000 in respect of such property which
it elects to defer under section 616(b). On December 31, 1956, Y
Corporation acquires all of the assets of X Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to X Corporation on the transfer. In 1957, Y Corporation sells 150,000
units of produced ore benefited by the development expenditures incurred
and deferred by X Corporation, and the number of units remaining as of
the end of 1957, plus the number of units sold during that year, is
estimated to be 1,000,000. In addition to its deduction for depletion,
Y Corporation is, in 1957, entitled to a deduction under sections 616(b)
and 381(c)(10) of $75,000 of the development expenditures previously
deferred by X Corporation, that is, $500,000 150,000/1,000,000.
(2) If a distributor or transferor corporation has elected under
section 615 or section 616 (or corresponding provisions of prior law) to
defer exploration or development expenditures in respect of a mine or
other natural deposit which it subsequently disposes of except for a
retained economic interest therein, such as the right to royalty income
or in-ore payments, and such retained economic interest is transferred
to the acquiring corporation in a transaction to which section 381(a)
applies, then the acquiring corporation shall be entitled to deduct such
deferred expenditures attributable to the economic interest retained on
a ratable basis to the same extent they would have been deductible by
the distributor or transferor corporation in the absence of the
distribution or transfer. See paragraph (c) of 1.615-3 and paragraph
(c) of 1.616-2.
(3) For purposes of this section, the terms ''exploration
expenditures'' and ''development expenditures'' shall have the same
meaning as that ascribed to them in the regulations under sections 615
and 616 of the Internal Revenue Code of 1954, or under sections 23(cc)
and 23(ff) of the Internal Revenue Code of 1939, whichever applies.
See, for example, paragraph (a) of 1.615-1 and paragraph (a) of
1.616-1.
(b) Effect and identification of election previously made. (1) The
election made by a distributor or transferor corporation under the
provisions of section 615 or section 616 (or corresponding provisions of
prior law) to defer exploration or development expenditures in respect
of any taxable year may not be revoked by the acquiring corporation for
any reason whatsoever.
(2) When filing its return for the first taxable year for which it
deducts exploration or development expenditures which were deferred
under section 615 or section 616 (or corresponding provisions of prior
law) by a distributor or transferor corporation, the acquiring
corporation shall attach thereto a statement properly identifying the
taxable year for which the election to defer was made by the distributor
or transferor corporation, the name of the corporation which made the
election, and the district director with whom the election was filed.
(3) It is unnecessary for an acquiring corporation to renew an
election to defer exploration or development expenditures which was made
by a distributor or transferor corporation.
(c) Successive transactions to which section 381(a) applies. If, by
virtue of section 381(c)(10), the acquiring corporation is entitled to
deduct exploration or development expenditures deferred by a distributor
or transferor corporation, then such acquiring corporation shall be
deemed to have made the election to defer such expenditures for purposes
of applying section 381(c)(10) to any subsequent transaction in which
such acquiring corporation is a distributor or transferor corporation.
(d) Carryover of limitation requirements. (1) If a distributor or
transferor corporation transfers any mineral property to the acquiring
corporation in a transaction described in section 381(a) and the
acquiring corporation pays or incurs exploration expenditures in a
taxable year ending after the date of the distribution or transfer, then
in applying the 4-year or $400,000 limitations described in section
615(c) and paragraphs (a) and (b) of 1.615-4, whichever is applicable,
the acquiring corporation shall be deemed to have been allowed any
deduction which, for any taxable year ending on or before the date of
distribution or transfer, was allowed to the distributor or transferor
corporation under section 615(a), or under section 23(ff)(1) of the
Internal Revenue Code of 1939, or to have made any election which, for
any such preceding year, was made by the distributor or transferor
corporation under section 615(b), or under section 23(ff)(2) of the
Internal Revenue Code of 1939. Thus, in such instance, the acquiring
corporation shall taken into account the years in which the distributor
or transferor corporation exercised the election to deduct or defer
exploration expenditures and any amounts so deducted or deferred. For
this purpose, it is immaterial whether the deduction has been allowed
to, or the election has been made by, the distributor or transferor
corporation with respect to the specific mineral property transferred by
that corporation to the acquiring corporation.
(2) Generally, for purposes of applying the 4-year limitation
described in paragraph (a) of 1.615-4, if there are two or more
distributor or transferor corporations that transfer any mineral
property to the acquiring corporation, each taxable year of any such
corporation ending on or before the date of distribution or transfer in
which exploration expenditures were deducted or deferred shall be
treated as a separate taxable year regardless of the fact that the
taxable years of two or more such corporations normally end on the same
date. However, if the date of distribution or transfer is the same with
respect to more than one distributor or transferor corporation, then the
taxable years of such corporations ending on the same date of
distribution or transfer shall be considered as one taxable year for
purposes of applying the 4-year limitation even though more than one
such corporation deducted or deferred exploration expenditures for such
taxable years.
(3) For purposes of applying the $400,000 limitation described in
paragraph (b) of 1.615-4, if there are two or more distributor or
transferor corporations that transfer any mineral property to the
acquiring corporation, any exploration expenditures which were deducted
or treated as deferred expenses by such corporations for taxable years
ending after December 31, 1950, shall be taken into account by the
acquiring corporation.
(4) If a distributor or transferor corporation that transfers any
mineral property to the acquiring corporation was required to take into
account any taxable years or amounts of its transferor, as provided by
paragraph (e) of 1.615-4, for purposes of either the 4-year limitation
described in paragraph (a) of 1.615-4 or the $400,000 limitation
described in paragraph (b) of 1.615-4, then the acquiring corporation
shall also take these taxable years and amounts into account in applying
the same limitations.
(5) The provisions of this paragraph may be illustrated by the
following examples:
Example (1). M and N Corporations were organized on January 1, 1956,
and each corporation computes its taxable income on the basis of the
calendar year. For each of its taxable years 1956 and 1957, M
Corporation expended $60,000 for exploration expenditures and exercised
the option to deduct such amounts under section 615(a). N Corporation
made no exploration expenditures during its taxable years 1956 and 1957.
On December 31, 1957, M Corporation transferred all of its assets to N
Corporation in a transaction to which section 381(a) applies, no gain
being recognized to the transferor corporation on the transfer. N
Corporation made exploration expenditures of $100,000, $120,000,
$110,000, and $100,000 for the years 1958, 1959, 1960, and 1961,
respectively, which expenditures it desired to deduct under section
615(a) to the extent allowable. On the basis of these facts, N
Corporation may deduct up to $100,000 for each of the years 1958 and
1959. No deduction or deferral is allowable for 1960 since the benefits
of section 615(c) were previously availed of for 4 taxable years.
However, N Corporation may deduct $80,000 for 1961 (the 4-year
limitation not applying to such year) but, if such deduction is made, N
Corporation will not be allowed any further deductions or deferrals
since the $400,000 limitation of paragraph (b) of 1.615-4 will have
been reached.
Example (2). R and S Corporations were organized on January 1, 1955,
and each corporation computes its income on the basis of the calendar
year. For the 1955 taxable year neither corporation made any
exploration expenditures under section 615(a). On June 30, 1956, R
Corporation transferred all its assets to S Corporation in a transaction
to which section 381(a) applies, no gain being recognized to the
transferor corporation on the transfer. During its short taxable year
ending June 30, 1956, R Corporation made exploration expenditures of
$60,000 which it elected to deduct under section 615. For its taxable
year ending December 31, 1956, S Corporation may deduct or defer
exploration expenditures up to $100,000 since this is a separate
election for purposes of utilizing section 615 and is not affected by
the $60,000 previously deducted by R Corporation. Assuming S
Corporation exercises an election under section 615 for its taxable year
ending December 31, 1956, S Corporation may elect to apply the benefits
of section 615 to exploration expenditures for two more taxable years.
However, for taxable years beginning after July 6, 1960 (the 4-year
limitation not applying), S Corporation is entitled under section 615 to
deduct or defer exploration expenditures made in such years to the
extent that the combined deductions and deferrals by R and S
Corporations in prior years did not exceed $400,000.
Example (3). O and P Corporations were organized on January 1, 1955,
and each corporation computes its taxable income on the basis of the
calendar year. For their taxable years 1955, 1956, and 1957, each
corporation deducted exploration expenditures made in such years under
section 615(a). On June 30, 1958, O Corporation transferred all its
assets to P Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporation on the
transfer. If, during its short taxable year ending June 30, 1958, O
Corporation made additional exploration expenditures, it may deduct or
defer such expenditures (up to $100,000) under section 615 since O
Corporation has utilized section 615 in only three previous taxable
years. For its taxable years ending after June 30, 1958, and beginning
before July 7, 1960, P Corporation may not deduct or defer exploration
expenditures under section 615, since the benefits of that section were
utilized by O and P Corporations for 4 taxable years. However, for
taxable years beginning after July 6, 1960 (the 4-year limitation not
applying), P is entitled under section 615 to deduct or defer
exploration expenditures made in such years to the extent that the
combined deductions and deferrals by O and P Corporations in prior years
do not exceed $400,000. See paragraph (b) of 1.615-4.
Example (4). X, Y, and Z Corporations were organized on January 1,
1955, and each corporation computes its taxable income on the basis of
the calendar year. For their taxable years ending December 31, 1955, X
and Y Corporations each deferred $100,000 for exploration expenditures
made in such taxable years under section 615(b). Z Corporation made no
exploration expenditures during its taxable year ending December 31,
1955. On March 31, 1956, X and Y Corporations transferred all their
assets to Z Corporation in a transaction to which section 381(a)
applies, no gain being recognized to the transferor corporations on the
transfer. X and Y Corporations each made exploration expenditures of
$75,000 during their short taxable years ending March 31, 1956, which
they deducted under section 615(a). For purposes of taxable years
beginning before July 7, 1960, Z Corporation must take into account the
taxable years in which X and Y Corporations deducted or deferred
exploration expenditures. In so doing, each taxable year in which
exploration expenditures were deducted or deferred must be taken into
account except that the taxable years of X and Y Corporations ending on
March 31, 1956, shall be considered as one taxable year. Therefore, Z
Corporation may deduct or defer exploration expenditures in accordance
with section 615 for any one taxable year ending after March 31, 1956,
and beginning before July 7, 1960. However, for taxable years beginning
after July 6, 1960 (the 4-year limitation not applying), Z Corporation
must take into account for purposes of the $400,000 limitation all of
the $350,000 of exploration expenditures deducted or deferred by X, Y,
and Z Corporations during taxable years ending after December 31, 1950.
Therefore, Z Corporation, assuming it has not deducted or deferred any
exploration expenditures, is entitled under section 615 to deduct or
defer in taxable years beginning after July 6, 1960, up to $50,000 for
exploration expenditures made in such years.
Example (5). For purposes of this example, assume that each taxpayer
computes taxable income on the basis of the calendar year. Taxpayer A,
an individual who has deducted exploration expenditures of $75,000 under
section 23(ff) of the Internal Revenue Code of 1939 for each of his
taxable years 1952 and 1953, transferred a mineral property to K
Corporation on January 1, 1954, in a transaction in which the basis of
the mineral property in the hands of K Corporation is determined under
section 362(a). For its taxable year 1954 and pursuant to section
615(a)., K Corporation deducted exploration expenditures of $100,000
which it made in such year. K Corporation had made no exploration
expenditures in any preceding taxable year. On December 31, 1954, K
Corporation transferred all its assets to L Corporation in a
reorganization to which section 381(a) applies, no gain being recognized
to the transferor corporation on the transfer. Assuming that L
Corporation has not deducted or deferred exploration expenditures in any
preceding taxable year, L Corporation may deduct or defer exploration
expenditures (up to $100,000) in accordance with section 615 for any one
taxable year ending after December 31, 1954, and beginning before July
7, 1960, in view of the 4-year limitation. However, if L Corporation
does not deduct or defer exploration expenditures in that period, then
for taxable years beginning after July 6, 1960 (the 4-year limitation
not applying), L Corporation is entitled to deduct or defer up to
$150,000 (but not to exceed $100,000 per year) for exploration
expenditures made in such years. See paragraph (b) of 1.615-4.
(T.D. 6552, 26 FR 1988, Mar. 8, 1961, as amended by T.D. 6685, 28 FR
11406, Oct. 24, 1963)
26 CFR 1.381(c)(11)-1 Contributions to pension plan, employees' annuity
plans, and stock bonus and profit-sharing plans.
(a) Carryover requirement. Section 381(c)(11) provides that, for
purposes of determining amounts deductible under section 404 for any
taxable year, the acquiring corporation shall be considered after the
date of distribution or transfer to be the distributor or transferor
corporation in respect of any pension, annuity, stock bonus, or
profit-sharing plan.
(b) Nature of carryover. (1) Primarily, section 381(c)(11) and this
section apply to the amount of any unused deductions or excess
contributions carryovers which, in the absence of the transaction
causing section 381 to apply, would have been available to the
distributor or transferor corporation under section 404. Thus, for
example, this section applies to unused deductions under a
profit-sharing or stock bonus trust which, in accordance with the second
sentence of section 404(a)(3)(A) and 1.404(a)-9, would have been
available in succeeding taxable years to the transferor corporation if
the transfer of assets to the acquiring corporation had not occurred.
(2) Section 381(c)(11) also permits or requires the acquiring
corporation to be treated as though it were the distributor or
transferor corporation for the purpose of satisfying any conditions
which would have been required of the distributor or transferor
corporation in the absence of the distribution or transfer, so that it
may be determined whether the distributor or transferor corporation, or
the acquiring corporation, is entitled to take a deduction under section
404 in respect of a trust or plan established by the distributor or
transferor corporation. Thus, for example, in a case when the taxable
year of the transferor corporation ends on the date of transfer pursuant
to section 381(b)(1), that corporation is entitled, pursuant to the
provisions of section 404(a)(6) and paragraph (c) of 1.404(a)-1, to a
deduction in such taxable year for a payment to a qualified trust of
that corporation made by the acquiring corporation after the close of
such taxable year but within the time specified in section 404(a)(6).
In further illustration, if the transferor corporation were to establish
a qualified plan, and if the plan were maintained as a qualified plan by
the acquiring corporation, then any contributions paid under the plan by
the acquiring corporation (other than those which are deductible by the
transferor corporation by reason of section 404(a)(6)) would be
deductible under section 404 by the acquiring corporation even though
the plan were exclusively for the benefit of former employees of the
transferor corporation. Also, for example, if the transferor
corporation were to adopt an annuity plan during its taxable year ending
on the date of transfer, the acquiring corporation would be entitled,
subject to the provisions of section 401(b) and 1.401-5, to amend the
plan so as to make it retroactively satisfy the requirements of section
401(a) (3), (4), (5), and (6) for the period beginning with the date on
which the plan was put into effect.
(c) Taxable year of deduction. The first taxable year of the
acquiring corporation in which any amount shall be allowed as a
deduction to that corporation by reason of section 381(c)(11) and this
section shall be its first taxable year ending after the date of
distribution or transfer.
(d) Requirements for deductions. (1) In order for any amount paid by
the acquiring corporation (other than amounts deductible under section
404(a)(5)) to be deductible by the acquiring corporation by reason of
this section in respect of a trust or nontrusteed annuity plan which is
established by a distributor or transferor corporation and maintained by
the acquiring corporation, the contributions must be paid (or deemed to
have been paid under section 404(a)(6)) by the acquiring corporation in
a taxable year of that corporation which ends with or within a year of
the trust for which it is exempt under section 501(a), or, in the case
of a nontrusteed annuity plan, for which it meets the requirements of
section 404(a)(2). See, however, section 404(a)(4) and 1.404(a)-11 for
rules relating to deductions for contributions to foreign-situs trusts.
The trust or plan which is established by the distributor or transferor
corporation and maintained by the acquiring corporation may separately
satisfy the requirements of section 401(a) or section 404(a)(2) or may,
together with other trusts or plans of the acquiring corporation,
constitute a single plan which qualifies under section 401(a) or meets
the requirements of section 404(a)(2).
(2) Excess contributions paid under a qualified trust or plan
established by the transferor or distributor corporation may be carried
over and, subject to the applicable limitations, deducted by the
acquiring corporation in a taxable year ending after the date of
distribution or transfer regardless of whether the trust is exempt, or
the plan meets the requirements of section 404(a)(2), during such
taxable year. There are, however, special rules for computing the
limitations on the amount of excess contributions which are deductible
in a taxable year ending after the trust or plan has terminated (see
1.404(a)-7, paragraph (e) of 1.404(a)-9, and paragraph (a) of
1.404(a)-13). For this purpose, the pension, annuity, stock bonus, or
profit-sharing plan of the distributor or transferor corporation under
which the excess contributions were made shall be considered continued
(and not terminated) by the acquiring corporation if, after the date of
distribution or transfer, the acquiring corporation continues the plan
as a separate and distinct plan of its own which continues to qualify
under section 401(a), or to meet the requirements of section 404(a)(2),
or consolidates or replaces that plan with a comparable plan. See
subparagraph (4) of this paragraph for rules relating to what
constitutes a ''comparable'' plan.
(3) In order for any amount paid by the acquiring corporation to be
deductible by the acquiring corporation as an unused deduction carried
over from a qualified profit-sharing or stock bonus trust established by
a distributor or transferor corporation, the acquiring corporation must
continue such trust established by the distributor or transferor
corporation as a separate and distinct trust of its own which continues
to qualify under section 401(a), or must consolidate or replace that
trust with a comparable trust. In addition, the amount paid by the
acquiring corporation will be deductible as an unused deduction carried
over from the transferor or distributor corporation only if it is paid
into the profit-sharing or stock bonus trust established by the
transferor or distributor corporation, or the comparable trust, in a
taxable year of the acquiring corporation which ends with or within a
year of such trust (or such comparable trust) for which it meets the
requirements of section 401(a) and is exempt under section 501(a). See
subparagraph (4) of this paragraph for rules relating to what
constitutes a ''comparable'' trust.
(4) For purposes of subparagraphs (2) and (3) of this paragraph, a
plan under which deductions are determined pursuant to paragraph (1) or
(2) of section 404(a) shall be considered comparable to another plan
under which deductions are determined pursuant to either of those
paragraphs, and a plan under which deductions are determined pursuant to
paragraph (3) of section 404(a) shall be considered comparable to
another plan under which deductions are determined pursuant to such
paragraph (3). Thus, a profit-sharing plan (which qualifies under
section 401(a)) established by the transferor or distributor corporation
shall, for purposes of subparagraphs (2) and (3) of this paragraph, be
considered terminated if, after the date of distribution or transfer,
the acquiring corporation transfers the funds accumulated under the
profit-sharing plan into a pension plan covering the same employees. In
such a case, excess contributions paid under the profit-sharing plan by
the distributor or transferor corporation may be carried over and
deducted by the acquiring corporation in a taxable year ending after the
date of distribution or transfer subject to the limitations in section
404(a)(3)(A) computed in accordance with the rules in paragraph (e)(2)
of 1.404(a)-9 for computing limitations when a profit-sharing plan has
terminated. On the other hand, unused deductions attributable to the
profit sharing plan may not be carried over and used by the acquiring
corporation as a basis for deducting amounts contributed by it to the
pension plan.
(e) Effect of consolidation or replacement of plan on prior
contributions. If a pension, annuity, stock bonus, or profit-sharing
plan which was established by a distributor or transferor corporation is
terminated after the date of distribution or transfer because of
consolidation or replacement with a comparable plan of the acquiring
corporation, then the contributions paid to or under its plan by the
distributor or transferor corporation on or before the date of
distribution or transfer shall not be disallowed under section 404
merely because of the termination of the plan which was established by
that corporation, provided that the termination does not cause the plan
to fail to qualify under section 401(a).
(f) Amounts deductible under section 404. Section 381(c)(11) and
this section apply only to amounts which are otherwise deductible under
section 404 and the regulations thereunder. See 1.404(a)-1 through
1.404(d)-1. Thus, to be deductible by reason of this section,
contributions paid by the acquiring corporation must be expenses which
otherwise satisfy the conditions of section 162 (relating to trade or
business expenses). No deduction shall be allowed by reason of section
381(c)(11) and this section for a contribution which is allowable under
section 162 but is not allowable under section 404. Thus, the acquiring
corporation shall not be allowed a deduction by reason of this section
in respect of a plan established by a distributor or transferor
corporation if the contribution would not otherwise be deductible under
section 404 by reason of section 404(c) and 1.404(c)-1. On the other
hand, any unused deductions or excess contributions of a distributor or
transferor corporation which are carried over from 1939 Code years shall
be deductible by the acquiring corporation if the requirements of this
section, section 404(d), and 1.404(d)-1 are satisfied.
(g) Cost of past service credits. In computing the cost of past
service credits under a plan with respect to employees of the
distributor or transferor corporation, the acquiring corporation may
include the cost of credits for periods during which the employees were
in the service of the distributor or transferor corporation.
(h) Separate carryovers required. The excess contributions which are
available to a distributor or transferor corporation under the
provisions of section 404(a)(1)(D) and section 404(a)(3)(A) at the close
of the date of distribution or transfer and are carried over to the
acquiring corporation under this section shall be kept separate and
distinct from each other and from any excess contributions which are
available to the distributor or transferor corporation at that time
under the provisions of section 404(a)(7) and are carried over to the
acquiring corporation under this section. If there are excess
contributions carried over to the acquiring corporation from more than
one transferor or distributor corporation, the excess contributions of
each transferor or distributor corporation shall be kept separate and
distinct from those of the other transferor or distributor corporations
and, with respect to each such transferor or distributor corporation,
shall be kept separate and distinct as provided in the preceding
sentence. See, however, paragraph (i) of this section for rules for
applying the provisions of section 404(a)(3)(A) when the acquiring
corporation maintains two or more profit-sharing or stock bonus trusts,
one or more of which was established by a distributor or transferor
corporation. The requirements in this paragraph shall apply with
respect to any excess contributions which are carried over to the
acquiring corporation from a distributor or transferor corporation under
the provisions of section 404(d) and this section.
(i) Limitations applicable to profit-sharing or stock bonus trusts.
When contributions are paid by the acquiring corporation after the date
of distribution or transfer to two or more profit-sharing or stock bonus
trusts, and one or more of such trusts was established by a distributor
or transferor corporation, such trusts shall be considered as a single
trust in applying the provisions of section 404(a)(3)(A) under this
section. Accordingly, in determining its secondary limitation, and its
excess contributions carryover, under section 404(a)(3)(A) and
1.404(a)-9 in any taxable year ending after the date of distribution or
transfer, the acquiring corporation shall take into accounts its primary
limitations, and the deductions allowed or allowable to it, for all
prior years under the limitations provided in those sections, and also
the primary limitations of, and deductions allowed or allowable to, the
distributor or transferor corporation or corporations for all prior
years under the limitations provided in those sections.
(j) Successive carryovers. The provisions of section 381(c)(11) and
this section shall apply to an acquiring corporation which, in a
distribution or transfer to which section 381(a) applies acquires the
assets of a distributor or transferor corporation which has previously
acquired the assets of another corporation in a transaction to which
section 381(a) applies, even though, in computing an unused deductions
or excess contributions carryover to the second acquiring corporation,
it is necessary to take into account contributions paid by, and
limitations applicable to, the first distributor or transferor
corporation.
(k) Information to be furnished by acquiring corporation. The
acquiring corporation shall furnish such information with respect to a
plan established by a distributor or transferor corporation as will,
consistently with the principles of section 404, establish that the
provisions of such section and this section apply. For purposes of this
section, the district director may require any other information that he
considers necessary to determine deductions allowable under section 404
and this section or qualification under section 401. Any unused
deductions or excess contributions carried over from a distributor or
transferor corporation pursuant to this section shall be properly
identified with the corporation which would have been permitted to use
those deductions or contributions in the absence of the transaction
causing section 381 to apply.
(l) Illustration. The application of this section may be illustrated
by the following example:
Example. In 1955, X Corporation, which makes its return on the basis
of the calendar year, paid $400,000 to completely fund past service
credits under a qualified pension plan and deducted 10 percent ($40,000)
of that cost in each of the taxable years 1955, 1956, and 1957. The
pension plan established by X Corporation had an anniversary date of
January 1. On December 31, 1957, on which date the undeducted part of
the cost amounted to $280,000, X Corporation transferred all its assets
to Y Corporation in a statutory merger to which section 361 applies. Y
Corporation, which also makes its return on the basis of the calendar
year, had a qualified pension plan and trust which also had an
anniversary date of January 1. Since Y Corporation had many more
employees than X Corporation on the date of transfer, it covered the
former employees of X Corporation under its own plan. Y Corporation is
entitled to deductions under section 404(a)(1)(D) and this section in
1958 and succeeding taxable years, in order of time, with respect to the
undeducted balance of $280,000, to the extent of the difference between
the amount paid and deductible by that corporation in each such taxable
year and the maximum amount deductible by that corporation for such
taxable year in accordance with the applicable limitations of section
404(a)(1). In computing the maximum amount deductible by Y Corporation
for 1958 and 1959 under section 404(a)(1)(C), that corporation may
include $40,000 for each year, the amount that X Corporation could have
included for each of those years in computing the maximum amount that
would have been deductible by X Corporation under section 404(a)(1)(C)
if the merger had not occurred. Thus, assuming that Y Corporation's
appropriate limitation so computed under section 404(a)(1)(C) is
$1,000,000 (including the $40,000 carried over from X Corporation under
this section) for each of those taxable years, and that Y Corporation
contributed $925,000 to its trust in 1958 and $975,000 in 1959, then Y
Corporation is entitled under section 404(a)(1)(D) and this section to
deduct in 1958 $75,000, and in 1959 $25,000, of the amount ($280,000)
carried over from X Corporation. The undeducted balance of such amount
($180,000) available to Y Corporation on December 31, 1959, would be
deductible by that corporation in succeeding taxable years in accordance
with section 404(a)(1)(D) and this section.
(T.D. 6556, 26 FR 2405, Mar. 22, 1961, as amended by T.D. 7168, 37 FR
5024, Mar. 9, 1972)
26 CFR 1.381(c)(12)-1 Recovery of bad debts, prior taxes, or
delinquency amounts.
(a) Carryover requirement. (1) If, as a result of a distribution or
transfer to which section 381(a) applies, the acquiring corporation is
entitled to the recovery of a bad debt, prior tax, or delinquency amount
on account of which a deduction or credit was allowed to a distributor
or transferor corporation for a prior taxable year, and such debt, tax,
or amount is recovered by the acquiring corporation after the date of
distribution or transfer, then under the provisions of section
381(c)(12) the acquiring corporation is required to include in its gross
income for the taxable year of recovery the same amount of income
attributable to the recovery as the distributor or transferor
corporation would have been required to include under section 111 and
the regulations thereunder had the distribution or transfer not
occurred.
(2) The rule prescribed by paragraph (a)(1) of this section and by
section 381(c)(12) with respect to bad debts, prior taxes, and
delinquency amounts applies equally with respect to the recovery by the
acquiring corporation of all other losses, expenditures, and accruals
made the basis of deductions from the gross income of a distributor or
transferor corporation for prior taxable years, including war losses
referred to in section 127 of the Internal Revenue Code of 1939, but not
including deductions with respect to depreciation, depletion,
amortization, or amortizable bond premiums. An item which is not a
''section 111 item'' for purposes of the regulations under section 111
is not subject to the provisions of section 381(c)(12). The provisions
of section 111(c) shall be applied with respect to a recovery by the
acquiring corporation in the same manner as they would have been applied
by the distributor or transferor corporation.
(b) Amount of recovery exclusion allowable for year of recovery. For
the year of any recovery by the acquiring corporation, the amount of the
recovery exclusion for the original taxable year shall be determined in
accordance with paragraph (b) of 1.111-1. For the purpose of this
paragraph and section 381(c)(12), the recovery exclusion for any year
with respect to section 111 items of the acquiring corporation shall be
kept separate from the recovery exclusion for any year with respect to
section 111 items of each distributor or transferor corporation. The
recovery by the acquiring corporation of any section 111 item of such
corporation after the date of the distribution or transfer shall be
considered separately from recoveries by the acquiring corporation of
any such item which was deducted or credited by a distributor or
transferor corporation. Any recovery by the acquiring corporation of a
section 111 item shall be excluded from the gross income of the
acquiring corporation to the extent of the recovery exclusion (1)
determined for the original year for which that item was deducted or
credited by the specific corporation which claimed the deduction or
credit and (2) reduced by the excludable recoveries (whether made by the
acquiring corporation, or by the distributor or transferor corporation)
in intervening years with respect to the recovery exclusion of such
corporation for such original year. There shall be taken into account
the effect of net operating loss carryovers and carrybacks or capital
loss carryovers.
(c) Illustration of carryover of recovery exclusion -- (1) Facts.
(i) The application of section 381(c)(12) may be illustrated by the
following example. M and N Corporations are both organized on January
1, 1957, and both corporations compute their taxable income on the basis
of the calendar year. On December 31, 1959, M Corporation transfers all
its assets to N Corporation in a reorganization to which section 381(a)
applies.
(ii) The section 111 items of the two corporations for the following
taxable years are as follows, identification of such items being made by
an appropriate letter:
(iii) The recovery exclusions in respect of such taxable years,
computed in accordance with 1.111-1(b)(2), are assumed to be as
follows:
(iv) The recoveries of the above-mentioned section 111 items by the
two corporations are as follows:
(2) M Corporation's 1958 recovery.
(3) M Corporation's 1959 recoveries.
(4) N Corporation's 1958 recovery.
(5) N Corporation's 1959 recoveries.
(6) N Corporation's 1960 recoveries.
(7) Summary of recoveries included in gross income of N Corporation
for 1960.
(T.D. 6559, 26 FR 2984, Apr. 7, 1961)
26 CFR 1.381(c)(13)-1 Involuntary conversions.
(a) Carryover requirement -- (1) General rule. Section 381(c)(13)
requires that after the date of distribution or transfer the acquiring
corporation, in a transaction to which section 381(a) applies, shall be
treated as the distributor or transferor corporation for purposes of
applying section 1033, relating to involuntary conversions. This rule
shall apply even though the property similar or related in service or
use to the property converted, or the stock of a corporation owning such
similar property, is purchased by the acquiring corporation after the
date of distribution or transfer and is not received from the
distributor or transferor corporation in the transaction to which
section 381(a) applies. Accordingly, if any factor essential to the
application of section 1033 occurs on or before the date of distribution
or transfer and any other such factor also occurs after that date, then,
in accordance with section 381(c)(13) and this section, the provisions
of section 1033 shall apply to the acquiring corporation in the same
manner that they would have applied to the distributor or transferor
corporation in the absence of the distribution or transfer. For
purposes of this section, the terms ''involuntary conversion'' and
''disposition of the converted property'' shall have the meaning
ascribed to them by the regulations under section 1033.
(2) Application to other transactions. The provisions of this
section shall apply to any transaction which, under provisions of the
Internal Revenue Code of 1954, is treated as though it were an
involuntary conversion within the meaning of section 1033. See, for
example, section 1071, relating to gain from a sale or exchange to
effectuate the policies of the Federal Communications Commission; and
sections 1332(b)(3) and 1333(3), relating to war loss recoveries.
(b) Conversion into similar property. Section 1033(a)(1) provides
that no gain shall be recognized if property is involuntarily converted
only into property which is similar or related in service or use to the
property so converted. If there is a disposition of property of a
distributor or transferor corporation and, subsequent to the date of
distribution or transfer, property similar or related in service or use
to the property disposed of is received by the acquiring corporation as
compensation for the property so disposed of, then no gain shall be
recognized to the acquiring corporation, provided that no gain would
have been recognized under section 1033(a)(1) if the similar property
had been received directly by the distributor or transferor corporation.
Example. Property of S Corporation with an adjusted basis of $100 is
condemned by the local government. Shortly after the property is so
condemned, S Corporation liquidates and distributes its assets to P
Corporation in a distribution to which section 381(a) applies.
Subsequent to the date of distribution, P Corporation receives from the
government (in settlement of the condemnation proceedings) property with
a market value of $500 which is similar or related in service or use to
the property so condemned. No gain is recognized to either corporation
upon P Corporation's receipt of the similar property, and the property
so received has a basis of $100 in the hands of P Corporation on the
date of its acquisition.
(c) Conversion into money or dissimilar property when disposition
occurs after December 31, 1950 -- (1) General rule. Section 1033(a)(3)
and 1.1033(a)-2 provide rules for involuntary conversions of property
into money or dissimilar property where the disposition of the converted
property occurs after December 31, 1950. In such a case, the gain on
the conversion, if any, shall be recognized, at the election of the
taxpayer, only to the extent that the amount realized on the conversion
exceeds the cost of other property purchased by the taxpayer which is
similar or related in service or use to the property so converted, or
exceeds the cost of stock purchased by the taxpayer in the acquisition
of control of a corporation owning such other property, provided (i) the
taxpayer purchases such other property or stock for the purpose of
replacing the property so converted and (ii) the purchase occurs during
the period of time specified in section 1033(a)(3)(B). The provisions
of this paragraph shall apply to involuntary conversions where the
disposition of the property occurs after December 31, 1950, and where
the election to have section 1033(a)(3) apply to the treatment of the
gain upon the conversion is contingent upon activities of both the
distributor or transferor corporation and the acquiring corporation.
For purposes of section 381(c)(13), the period of time specified in
section 1033(a)(3)(B) shall be determined by taking into account taxable
years of, and extensions of time granted to, both the distributor or
transferor corporation and the acquiring corporation.
(2) Replacement period. The period during which the purchase of
similar property or stock must be made in order to prevent the
recognition of gain on the involuntary conversion terminates 2 years
(or, in the case of a disposition occurring before Dec. 31, 1969, 1
year) after the close of the first taxable year in which any part of the
gain upon the conversion is realized, or at the close of such later date
as may be designated pursuant to an application of the taxpayer. See
paragraph (c)(3) of 1.1033(a)-2. Therefore, if, in a case to which this
subparagraph applies, the first taxable year in which gain is realized
is the taxable year of the distributor or transferor corporation ending
with the close of the date of distribution or transfer, the acquiring
corporation will have a maximum of only 2 years (or, in the case of a
disposition occurring before Dec. 31, 1969, 1 year) after that date in
which to purchase the similar property or stock, unless an extension of
time has been granted upon application by the distributor, transferor,
or acquiring corporation within the time prescribed. See paragraph (a)
of 1.381(b)-1 as to the termination of the taxable year of the
distributor or transferor corporation. See paragraph (c)(3) of
1.1033(a)-2 as to applications to extend the period within which to
replace the converted property. In addition to the information
otherwise required under paragraph (c)(3) of 1.1033(a)-2, the
application shall contain sufficient detail in connection with the
distribution or transfer to establish that section 381(c)(13) applies to
the involuntary conversion involved.
(3) Examples. The application of this paragraph may be illustrated
by the following examples:
Example (1). A and B Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970 property of A Corporation is
destroyed by fire, and in January 1971, A Corporation receives $15,000
from an insurance company as compensation for its loss of property. The
adjusted basis of the property on the date of destruction is $10,000;
as a consequence, A Corporation realizes a gain of $5,000 on the
involuntary conversion. On June 30, 1971, B Corporation acquires all of
the assets of A Corporation in a reorganization to which section 381(a)
applies. In accordance with paragraph (c)(2) of 1.1033(a)-2, A
Corporation reports in its return for the short taxable year ending June
30, 1971, all the details in connection with the involuntary conversion
but does not include the realized gain in gross income, thereby electing
to have the gain recognized only to the extent provided in section
1033(a)(3). On June 15, 1973, B Corporation purchases for $20,000
property which is similar or related in service or use to the property
previously destroyed. In its return for 1973, B Corporation reports all
of the details in connection with its replacement of the property, as
required by paragraph (c)(2) of 1.1033(a)-2. As a result of this
replacement by B Corporation, none of the gain realized by A Corporation
is recognized. The replacement property which is purchased by B
Corporation has a basis to that corporation of $15,000 on the date of
its purchase, that is, the cost of such property ($20,000) decreased by
the amount of gain not recognized to A Corporation on the involuntary
conversion ($5,000).
Example (2). Assume the same facts as in example (1), except that B
Corporation does not purchase similar property on or before June 30,
1973, and does not apply on or before that date (in accordance with
paragraph (c)(3) of 1.1033(a)-2) for an extension of time in which to
make a replacement. In such event, the gain realized by A Corporation
is recognized to that corporation for its taxable year ending June 30,
1971. A Corporation's tax liability for such taxable year must be
recomputed in accordance with paragraph (c)(2) of 1.1033(a)-2 in order
to reflect this additional income.
Example (3). Assume the same facts as in example (1), except that
the property of A Corporation is destroyed in 1968, A Corporation
receives the $15,000 from an insurance company in January 1969, B
Corporation acquires all of the assets of A Corporation on June 30,
1969, and A Corporation's return is filed for the short taxable year
ending June 30, 1969. B Corporation would have to purchase property
which is similar or related in service or use to the property previously
destroyed by June 30, 1970, in order to take advantage of the provisions
of section 1033.
Example (4). M and N Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970, property of M Corporation is
destroyed by fire. The adjusted basis of the property on the date of
destruction is $10,000. The property is insured against loss by fire,
but the insurance claim is not satisfied on or before June 30, 1971, the
date on which N Corporation acquires all of the assets (including the
insurance claim) of M Corporation in a reorganization to which section
381(a) applies. On September 1, 1972, N Corporation receives $15,000
from the insurance company as compensation for the fire loss suffered by
M Corporation. Upon receipt of the insurance proceeds, N Corporation
realizes a gain of $5,000 upon the involuntary conversion; however, in
its return for 1972, N Corporation elects under the provisions of
paragraph (c)(2) of 1.1033(a)-2 to have the gain recognized only to the
extent provided by section 1033(a)(3). On December 30, 1974, N
Corporation purchases for $20,000 property which is similar or related
in service or use to the property previously destroyed in the hands of M
Corporation. As a result of this replacement by N Corporation, none of
the gain realized by N Corporation in 1972 is recognized. The
replacement property which is purchased by N Corporation has a basis to
that corporation of $15,000 on the date of its purchase, that is, the
cost of such property ($20,000) decreased by the amount of gain not
recognized to N Corporation on the involuntary conversion ($5,000).
Example (5). R and S Corporations compute their taxable income on
the basis of the calendar year, and both corporations use the cash
method of accounting. During 1970 property of R Corporation is
destroyed by fire. The adjusted basis of the property on the date of
destruction is $10,000. In anticipation of taking the benefit of
section 1033(a)(3), R Corporation purchases for $20,000 on June 1, 1971,
property which is similar or related in service or use to the destroyed
property. In its return for 1971, R Corporation reports all of the
details in connection with the replacement of the property, as required
by paragraph (c)(2) of 1.1033(a)-2. The property destroyed in 1970 is
insured against loss by fire, but the insurance claim is not satisfied
on or before March 1, 1972, the date on which S Corporation acquires all
of the assets (including the insurance claim) of R Corporation in a
reorganization to which section 381(a) applies. On October 1, 1972, S
Corporation receives $12,000 from the insurance company as compensation
for the fire loss suffered by R Corporation. Upon receipt of the
insurance proceeds, S Corporation realizes a gain of $2,000 upon the
involuntary conversion; however, in its return for 1972, S Corporation
elects under the provisions of paragraph (c)(2) of 1.1033(a)-2 to have
the gain recognized only to the extent provided by section 1033(a)(3).
As a result of the replacement by R Corporation, none of the gain
realized by S Corporation in 1972 is recognized. Assuming there are no
adjustments for depreciation, the replacement property has a basis on
October 1, 1972, of $18,000, that is, the cost of such property
($20,000) decreased by the amount of gain not recognized to S
Corporation on the involuntary conversion ($2,000)
(d) Conversion into money when disposition occurs before January 1,
1951. Section 1033(a)(2) provides that, if property is disposed of in
an involuntary conversion before January 1, 1951, and money is received
as compensation for the conversion, no gain shall be recognized if such
money is forthwith expended in the acquisition of other property similar
or related in service or use to the property so converted, or in the
acquisition of control of a corporation owning such other property, or
in the establishment of a replacement fund. That section also provides
that, if any part of the money is not so expended, the gain, if any,
shall be recognized to the extent of the money which is not so expended.
For example, if, pursuant to section 381(c)(13) and section 1033(a)(2),
property of a distributor or transferor corporation is disposed of
before January 1, 1951, in an involuntary conversion, and the proceeds
from the conversion are received by the acquiring corporation so that
the gain on the conversion is realized by that corporation, the
acquiring corporation may avoid recognition of the gain if it complies
with the provisions of section 1033(a)(2) for nonrecognition of gain.
Thus, the acquiring corporation must forthwith expend the proceeds in
the acquisition of similar property or stock, or in the establishment of
a replacement fund, in order to avoid recognition of the gain, if the
disposition occurred before January 1, 1951. See the provisions of
1.1033(a)-3 and 1.1033(a)-4 relating to involuntary conversions and
replacement funds when disposition of the converted property occurred
before January 1, 1951.
(e) Successive acquiring corporations. An acquiring corporation
which, in a transaction to which section 381(a) applies, acquires the
assets of a corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall be
treated as such other corporation for purposes of applying sections
381(c)(13) and 1033 (relating to involuntary conversions). Thus, for
example, if any factor essential to the application of section 1033
occurs on or before the date of distribution or transfer in one
transaction to which section 381(a) applies, and any other such factor
occurs after the date of distribution or transfer in a subsequent
transaction to which section 381(a) applies, then the acquiring
corporation in such subsequent transaction shall be treated as the first
distributor or transferor corporation subject to the rules and
limitations of this section for purposes of sections 381(c)(13) and
1033.
(T.D. 6552, 26 FR 1989, Mar. 8, 1961, as amended by T.D. 7075, 35 FR
17995, Nov. 24, 1970)
26 CFR 1.381(c)(14)-1 Dividend carryover to personal holding company.
(a) Carryover requirement. Section 381(c)(14) provides that an
acquiring corporation shall succeed to and take into account the
dividend carryover (described in section 564) of a distributor or
transferor corporation in computing its dividends paid deduction under
section 561 for taxable years ending after the date of distribution or
transfer for which the acquiring corporation is a personal holding
company under section 542. To determine the amount of such dividend
carryover and to integrate it with the dividend carryover of the
acquiring corporation in computing the dividends paid deduction for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of section 564 and 1.564-1 in
accordance with this section.
(b) Manner of computing dividend carryover -- (1) Preceding taxable
years. If the acquiring corporation is a personal holding company under
section 542 for its first taxable year ending after the date of
distribution or transfer, the taxable year of the distributor or
transferor corporation ending with such date is a first preceding
taxable year for purposes of section 564, and the taxable year of the
distributor or transferor corporation immediately preceding such first
preceding year is a second preceding taxable year for purposes of
section 564. If the acquiring corporation is a personal holding company
for its second taxable year ending after the date of distribution or
transfer, the taxable year of the distributor or transferor corporation
ending with such date is a second preceding taxable year for purposes of
section 564.
(2) Determination of dividends paid deduction and taxable income.
The dividends paid deduction of any distributor or transferor
corporation (determined under section 561 but without regard to any
dividend carryover) and the taxable income of any such corporation
(adjusted as provided in section 545(b)) for any taxable year ending on
or before the date of distribution or transfer shall be determined
without reference to any dividends paid deduction, or taxable income, of
the acquiring corporation or any other distributor or transferor
corporation; in like manner, the dividends paid deduction and the
taxable income of the acquiring corporation for any such taxable year
shall be determined without reference to any dividends paid deduction,
or taxable income, of a distributor or transferor corporation.
(3) Computation of dividend carryover. (i) For the purpose of
determining the dividend carryover to the first taxable year of the
acquiring corporation ending after the date of distribution or transfer,
the amount of the dividend carryover from the distributor or transferor
corporation shall be determined under section 564 without reference to
the dividends paid deduction or taxable income of the acquiring
corporation or any other corporation. If two or more transactions to
which section 381(a) applies have the same date of distribution or
transfer, or if a particular taxable year of the acquiring corporation
is the first taxable year ending after the dates of distribution or
transfer of two or more such transactions occurring on different dates,
the amount of the dividend carryover from each distributor or transferor
corporation shall be determined separately as provided in the preceding
sentence. Except as provided in subdivision (iii) of this subparagraph,
the aggregate of the dividend carryovers from each distributor or
transferor corporation and the dividend carryover of the acquiring
corporation (computed without regard to this section) shall constitute
the dividend carryover under section 561(a)(3) of the acquiring
corporation for its first taxable year ending after the date (or dates)
of distribution or transfer.
(ii) For the purpose of determining the dividend carryover to the
second taxable year of the acquiring corporation ending after the date
(or dates) of distribution or transfer, the excess, if any, of the
dividends paid deduction (determined under section 561 without regard to
any dividend carryover) over the taxable income (adjusted as provided in
section 545(b)) for the taxable year of each distributor or transferor
corporation and the acquiring corporation referred to as a second
preceding taxable year shall be determined separately without reference
to the dividends paid deduction or taxable income of any other of such
corporations. The excesses thus determined shall be aggregated, and
such aggregate shall be --
(a) Increased by the excess of the dividends paid deduction
(determined without regard to any dividend carryover) over the taxable
income (adjusted as provided in section 545(b)), or
(b) Reduced by the excess of the taxable income (adjusted as provided
in section 545(b)) over the dividends paid deduction (determined without
regard to any dividend carryover),
for the first preceding taxable year of the acquiring corporation.
Except as provided in subdivision (iii) of this subparagraph, the amount
thus determined shall constitute the dividend carryover under section
561(a)(3) of the acquiring corporation for its second taxable year
ending after the date (or dates) of distribution or transfer.
(iii) If a particular taxable year of the acquiring corporation is
its first taxable year ending after the date (or dates) of distribution
or transfer of one or more transactions to which section 381(a) applies,
and if the same taxable year of the acquiring corporation is also its
second taxable year ending after the date (or dates) of distribution or
transfer of one or more other transactions to which section 381(a)
applies, then, for the purpose of determining the dividend carryover to
such taxable year of the acquiring corporation, the rules contained in
both subdivisions (i) and (ii) of this subparagraph shall be applied.
Insofar as such taxable year constitutes the first taxable year ending
after the date (or dates) of distribution or transfer of any
transaction, the amount of the dividend carryover from any distributor
or transferor corporation involved in such transaction shall be
determined separately as provided in subdivision (i) of this
subparagraph. Insofar as such taxable year constitutes the second
taxable year ending after the date (or dates) of distribution or
transfer of any transaction, the amount of the dividend carryover from
any distributor or transferor corporation involved in the transaction
and the acquiring corporation shall be determined as provided in
subdivision (ii) of this subparagraph. The aggregate of the dividend
carryovers thus determined shall constitute the dividend carryover under
section 561(a)(3) of the acquiring corporation for such taxable year.
See example (4) in paragraph (c) of this section.
(c) Illustrations. The rules set forth in paragraphs (a) and (b) of
this section may be illustrated by the following examples:
Example (1). (i) Facts. N Corporation acquired on June 30, 1960,
all the assets of M Corporation in a reorganization to which section
381(a) applies. Both corporations compute taxable income on the basis
of the calendar year. N Corporation is a personal holding company for
its taxable years ending December 31, 1960, and December 31, 1961.
(ii) Dividend carryover to N Corporation's taxable year ending
December 31, 1960. With respect to N Corporation's taxable year ending
December 31, 1960, the taxable years referred to as first preceding
taxable years and second preceding taxable years are --
(a) M Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
(b) N Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to N Corporation's taxable year ending
December 31, 1960, is $22,000 computed as follows, assuming the
dividends paid deduction before dividend carryovers, and the taxable
income after section 545(b) adjustments, to be as stated in the
computation:
The aggregate dividend carryover of $22,000 is the sum of $12,000
(the separate dividend carryover from M Corporation) and $10,000 (the
separate dividend carryover from N Corporation's own preceding taxable
years).
(iii) Dividend carryover to N Corporation's taxable year ending
December 31, 1961. With respect to N Corporation's taxable year ending
December 31, 1961, the first preceding taxable year is N Corporation's
taxable year ending December 31, 1960; and the taxable years referred
to as second preceding taxable years are M Corporation's taxable year
ending June 30, 1960, and N Corporation's taxable year ending December
31, 1959. The dividend carryover to N Corporation's taxable year ending
December 31, 1961, is $17,000 computed as follows, assuming the
dividends paid deduction before dividend carryovers, and the taxable
income after section 545(b) adjustments, to be as stated in the
computation:
The aggregate excess of dividends paid deduction over taxable income
for the second preceding taxable year is $12,000, the sum of $2,000
(separate excess from N Corporation) and $10,000 (separate excess from N
Corporation). Such aggregate excess is increased by the excess
dividends paid deduction, or is reduced by the excess of taxable income,
for the first preceding taxable year as follows:
Example (2). (i) Facts. X Corporation is organized on May 1, 1956,
and computes its taxable income on the basis of the fiscal year ending
April 30. Y Corporation and Z Corporation are both organized on January
1, 1955, and both compute their taxable income on the basis of the
calendar year. On July 31, 1957, X Corporation and Y Corporation
transfer all their assets to Z Corporation in a statutory merger to
which section 381(a) applies. For its taxable years ending December 31,
1957, and December 31, 1958, Z Corporation is a personal holding
company.
(ii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1957. With respect to Z Corporation's taxable year ending
December 31, 1957, the taxable years referred to as first preceding
taxable years and second preceding taxable years are --
(a) X Corporation's taxable years ending July 31, 1957, and April 30,
1957, respectively;
(b) Y Corporation's taxable years ending July 31, 1957, and December
31, 1956, respectively; and
(c) Z Corporation's taxable years ending December 31, 1956, and
December 31, 1955, respectively.
The dividend carryover to Z Corporation's taxable year ending
December 31, 1957, is $40,000 computed as follows, assuming the
dividends paid deduction before dividend carryovers, and the taxable
income after section 545(b) adjustments, to be as stated in the
computation:
(iii) Dividend carryover to Z Corporation's taxable year ending
December 31, 1958. With respect to Z Corporation's taxable year ending
December 31, 1958, the first preceding taxable year is Z Corporation's
taxable year ending December 31, 1957; and the taxable years referred
to as second preceding taxable years are X Corporation's taxable year
ending July 31, 1957, Y Corporation's taxable year ending July 31, 1957,
and Z Corporation's taxable year ending December 31, 1956. The dividend
carryover to Z Corporation's taxable year ending December 31, 1958, is
$1,000 computed as follows, assuming the dividends paid deduction before
dividend carryovers, and the taxable income after section 545(b)
adjustments, to be as stated in the computation:
The aggregate excess of dividends paid deduction over taxable income
for the second preceding taxable year is $7,000, the sum of $2,000
(separate excess from X Corporation) and $5,000 (separate excess from Z
Corporation). Such aggregate excess is increased by the excess
dividends paid deduction, or is reduced by the excess of taxable income,
for the first preceding taxable year as follows:
Example (3). Assume the facts stated in example (2), except that Y
Corporation transferred all its assets to Z Corporation on May 31, 1957.
Assume also that the facts for Y Corporation's taxable year ending May
31, 1957, are otherwise the same as those stated for its taxable year in
example (2) ending July 31, 1957. In such case, the dividend carryovers
to Z Corporation's taxable years ending on December 31, 1957, and
December 31, 1958, are the same as in example (2) notwithstanding the
fact that the transfers from X Corporation and Y Corporation occurred on
the different dates.
Example (4). (i) Facts. T Corporation acquired on June 30, 1960,
all the assets of U Corporation in a statutory merger to which section
381(a) applies, and in a like transaction acquired on June 30, 1961, all
the assets of V Corporation. Such corporations all compute taxable
income on the basis of the calendar year. T Corporation is a personal
holding company for its taxable years 1960 and 1961.
(ii) Dividend carryover to T Corporation's taxable year 1960. With
respect to T Corporation's taxable year ending December 31, 1960, the
taxable years referred to as first preceding taxable years and second
preceding taxable years are --
(a) U Corporation's taxable years ending June 30, 1960, and December
31, 1959, respectively; and
(b) T Corporation's taxable years ending December 31, 1959, and
December 31, 1958, respectively.
The dividend carryover to T Corporation's taxable year ending
December 31, 1960, is $7,000 computed as follows, assuming the dividends
paid deduction before dividend carryovers, and the taxable income after
section 545(b) adjustments, to be as stated in the computation:
The aggregate dividend carryover of $7,000 is the sum of $6,000 (the
separate dividend carryover from U Corporation) and $1,000 (the separate
dividend carryover from T Corporation's own first preceding taxable
year).
(iii) Dividend carryover to T Corporation's taxable year 1961.
Inasmuch as T Corporation's taxable year 1961 is the second taxable year
ending after the date of distribution or transfer from U Corporation,
paragraph (b)(3)(ii) of this section governs the determination of the
dividend carryover from taxable years of T Corporation and U
Corporation. On the other hand, inasmuch as T Corporation's taxable
year 1961 is the first taxable year ending after the date of
distribution or transfer from V Corporation, paragraph (b)(3)(i) governs
the determination of the dividend carryover from taxable years of V
Corporation.
(a) Application of paragraph (b)(3)(ii) of this section. With
respect to T Corporation's taxable year 1961, the first preceding
taxable year is T Corporation's taxable year ending December 31, 1960;
and the taxable years referred to as second preceding taxable year are T
Corporation's taxable year ending December 31, 1959, and U Corporation's
taxable year ending June 30, 1960. The dividend carryover from taxable
years of T Corporation and U Corporation is $1,500 computed as follows,
assuming the dividends paid deduction before dividend carryovers, and
the taxable income after section 545(b) adjustments, to be as stated in
the computation:
The aggregate excess of dividends paid deduction over taxable income
for the second preceding taxable year is $3,000, the sum of $2,000
(separate excess from U Corporation) and $1,000 (separate excess from T
Corporation). Such aggregate is increased by the excess dividends paid
deduction, or is reduced by the excess of taxable income, for the first
preceding taxable year as follows:
(b) Application of paragraph (b)(3)(i) of this section. With respect
to T Corporation's taxable year 1961, V Corporation's taxable year
ending June 30, 1961, is a first preceding taxable year, and its taxable
year ending December 31, 1960, is a second preceding taxable year. The
separate dividend carryover from V Corporation is $8,000 computed as
follows, assuming the dividends paid deduction before dividend
carryovers, and the taxable income after section 545(b) adjustments, to
be as stated in the computation:
(c) Dividend carryover. The dividend carryover to T Corporation's
taxable year 1961 is $9,500, the sum of $8,000 (the separate dividend
carryover from V Corporation) and $1,500 (the aggregate dividend
carryover from T Corporation and U Corporation).
(d) Successive carryovers. The provisions of this section shall
apply for the purpose of determining a dividend carryover to an
acquiring corporation which, in a distribution or transfer to which
section 381(a) applies, acquires the assets of a distributor or
transferor corporation which has previously acquired the assets of
another corporation in a transaction to which section 381(a) applies;
even though, in computing the dividend carryover to such second
acquiring corporation, it is necessary to take into account the
deduction for dividends paid, and the adjusted taxable income, of the
first distributor or transferor corporation.
(e) Acquiring corporation not receiving all the assets. The dividend
carryover acquired from a distributor or transferor corporation by an
acquiring corporation in a transaction to which section 381(a) applies
is not reduced by reason of the fact that the acquiring corporation does
not acquire 100 percent of the assets of the distributor or transferor
corporation.
(f) Dividends paid after the close of taxable year. A transaction to
which section 381(a) applies does not prevent the application of section
563(b) to a dividend paid by a distributor or transferor corporation
after the close of its taxable year ending with the date of distribution
or transfer but on or before the 15th day of the third month following
the close of such taxable year. However, dividends paid by the
acquiring corporation may not be taken into account under section 563(b)
for the purpose of determining the dividends paid deduction of the
distributor or transferor corporation for its taxable year ending with
the date of distribution or transfer.
(T.D. 6532, 26 FR 406, Jan. 19, 1961)
26 CFR 1.381(c)(15)-1 Indebtedness of certain personal holding
companies.
(a) Qualified indebtedness -- (1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness which was qualified indebtedness
(as defined in section 545(c) and 1.545-3) in the hands of the
distributor or transferor corporation immediately before the assumption
of such indebtedness, then, under section 381(c)(15), in computing its
undistributed personal holding company income for any taxable year
beginning after December 31, 1963, and ending after the date of
distribution or transfer, the acquiring corporation shall be considered
the distributor or transferor corporation for purposes of computing the
deduction under section 545(c) and 1.545-3. Such deduction shall be
allowed to the acquiring corporation in accordance with section 545(c)
and 1.545-3.
(2) Successive transactions to which section 381(a) applies. If in a
transaction to which section 381(a) applies, an acquiring corporation
assumes liability for qualified indebtedness, such acquiring corporation
shall be deemed to have incurred such qualified indebtedness for the
purpose of applying section 381(c)(15) to any subsequent transaction in
which such acquiring corporation is the distributor or transferor
corporation.
(b) Pre-1934 indebtedness -- (1) Carryover requirement. If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes liability for any indebtedness incurred, or assumed, before
January 1, 1934, by a distributor or transferor corporation, then under
section 381(c)(15) the acquiring corporation shall be allowed, in
computing its undistributed personal holding company income for any
taxable year ending after the date of distribution or transfer, a
deduction under section 545(b)(7) for amounts used or irrevocably set
aside to pay or to retire such indebtedness. Such deduction shall be
allowed to the acquiring corporation in accordance with section
545(b)(7) and paragraph (g) of 1.545-2 as though the indebtedness had
been incurred, or assumed, by the acquiring corporation before January
1, 1934.
(2) Successive transactions to which section 381(a) applies. If, in
a transaction to which section 381(a) applies, an acquiring corporation
assumes liability for indebtedness described in subparagraph (1) of this
paragraph, such acquiring corporation shall be deemed to have incurred
the indebtedness before January 1, 1934, for the purpose of applying
section 381(c)(15) to any subsequent transaction in which such acquiring
corporation is the distributor or transferor corporation.
(c) Special rule. For purposes of this section, if, in a transaction
otherwise described in this section, an acquiring corporation acquires
real estate -- (1) of which the distributor or transferor corporation is
the legal or equitable owner immediately before the acquisition, and (2)
which is subject to indebtedness that, with respect to the distributor
or transferor corporation, is indebtedness described in this section
immediately before the acquisition, then the acquiring corporation will
be treated as having assumed such indebtedness, provided it shows to the
satisfaction of the Commissioner that under all the facts and
circumstances it bears the burden of discharging such indebtedness.
(T.D. 6949, 33 FR 5524, Apr. 9, 1968; 33 FR 6091, Apr. 20, 1968)
26 CFR 1.381(c)(16)-1 Obligations of distributor or transferor
corporation.
(a) Deduction allowed to acquiring corporation. (1) If, in a
transaction to which section 381(a) applies, the acquiring corporation
assumes an obligation of a distributor or transferor corporation which
gives rise to a liability after the date of distribution or transfer and
if the distributor or transferor corporation would be entitled to deduct
such liability in computing taxable income were it paid or accrued after
that date by such corporation, then, under the provisions of section
381(c)(16) and this section, the acquiring corporation shall be entitled
to deduct such liability as if it were the distributor or transferor
corporation. However, in the case of a transaction to which section
381(a)(2) applies, section 381(c)(16) shall not apply to an obligation
which is reflected in the amount of consideration, that is, the stock,
securities, or other property, transferred by the acquiring corporation
to a transferor corporation or its shareholders in exchange for the
property of that transferor corporation. An obligation which is so
reflected in the amount of consideration will be treated as an item or
tax attribute not specified in section 381(c)(16). Such an obligation
is subject to section 381(c)(4). See subparagraph (2) of this
paragraph. Any deduction allowed under section 381(c)(16) to the
acquiring corporation shall be taken by that corporation in the taxable
year ending after the date of distribution or transfer in which the
liability is paid or accrued by that corporation, as the case may be.
(2) In order to determine whether, in the case of obligations of a
distributor or transferor corporation assumed by an acquiring
corporation, section 381(c)(16) and this section, or section 381(c)(4)
and the regulations thereunder, apply, the following rules shall govern:
(i) If the obligation gave rise to a liability before the date of
distribution or transfer, see section 381(c)(4) and the regulations
thereunder.
(ii) If the obligation gives rise to a liability after the date of
distribution or transfer, and the obligation was not reflected in the
amount of consideration transferred by the acquiring corporation to the
distributor or transferor corporation or its shareholders in exchange
for the property of the distributor or transferor corporation, then
section 381(c)(16) and this section shall apply.
(iii) In the case of a transaction to which section 381(a)(1)
applies, if the obligation gives rise to a liability after the date of a
distribution, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the
distributor corporation or its shareholders in exchange for the property
of the distributor corporation, then section 381(c)(16) and this section
shall apply.
(iv) In the case of a transaction to which section 381(a)(2) applies,
if the obligation gives rise to a liability after the date of a
transfer, and the obligation was reflected in the amount of
consideration transferred by the acquiring corporation to the transferor
corporation or its shareholders in exchange for the property of the
transferor corporation, then see section 381(c)(4) and the regulations
thereunder.
(3) The rules of this section apply to obligations assumed by
agreement of the parties as well as by operation of law.
(4) For purposes of this section, an obligation of a distributor or
transferor corporation gives rise to a liability when the liability
would be accruable by a taxpayer using the accrual method of accounting
notwithstanding the fact that the distributor or transferor corporation
is not using the accrual method of accounting. See paragraph (a)(2) of
1.461-1.
(5) In the case of a transaction to which section 381(a)(2) applies,
the determination as to whether or not an obligation was reflected in
the amount of consideration transferred by the acquiring corporation to
the transferor corporation or its shareholders in exchange for the
property of the transferor corporation shall be made on the basis of all
the facts of each particular transfer. Where, on the date of
distribution or transfer, the parties were aware of the existence of a
specific obligation and reduced the amount of consideration to be
transferred by the acquiring corporation by a specific amount because of
the existence of such obligation, then such obligation shall be
considered to have been reflected in the amount of consideration
transferred. In the absence of such facts, it shall be presumed that
the obligation was not reflected in the amount of consideration
transferred.
(b) Distribution or transfer occurring under the Internal Revenue
Code of 1939. Subject to the provisions of section 381(c)(16) and this
section, a corporation which would have been an acquiring corporation
(under the provisions of paragraph (b) of 1.381(a)-1) in a transaction
to which section 381(a) applies if the date of distribution or transfer
had occurred on or after the effective date of the provisions of
subchapter C, chapter 1 of the Internal Revenue Code of 1954, applicable
to a liquidation or reorganization, as the case may be, shall be
entitled to take a deduction for amounts paid or accrued in any taxable
year beginning after December 31, 1953, in respect of any obligation
which it has assumed from a corporation which would have been a
distributor or transferor corporation in such transaction. However,
this paragraph shall have no application to a situation described in
paragraph (a)(2)(iv) of this section.
(c) Examples. The application of the foregoing rules may be
illustrated by the following examples:
Example (1). X Corporation and Y Corporation compute their taxable
income on the basis of the calendar year, and both corporations use an
accrual method of accounting. On December 31, 1954, Y Corporation
acquires the assets of X Corporation in a transfer to which section
381(a)(2) applies. By reason of State law, Y Corporation assumes
responsibility for all of the obligations for which X Corporation is
then, or may become, liable. The parties have no knowledge of any
specific obligations of X Corporation which are not yet fixed and
ascertainable, but it is agreed to reduce the amount of consideration
that Y Corporation is to transfer in exchange for the assets of X
Corporation by $5,000 to reflect any unforeseen contingent liabilities
of X Corporation for which Y Corporation might subsequently become
liable. After the date of the transfer, a claim for damages on account
of the alleged negligence of an alleged agent of X Corporation is filed.
After commencement of legal action by the claimant and in order to
eliminate the possibility of injury to its business, Y Corporation
settles the claim in 1955 by paying the claimant the amount of $3,000.
Assuming that such sum would have been deductible under section 162 if
paid by X Corporation, Y Corporation is entitled to deduct such sum in
accordance with the provisions of section 381(c)(16) and this section in
computing its taxable income for 1955, since the claim gave rise to a
liability after the date of transfer, the parties were not aware of a
specific obligation, and the specific obligation was not reflected in
the consideration transferred by Y Corporation in exchange for the
assets of X Corporation.
Example (2). Assume the same facts as in example (1), except that
the claim for damages was filed prior to the transfer of X Corporation's
assets to Y Corporation, but the parties considered the chances for
recovery by the claimant so remote that no specific amount other than
the $5,000 reduction in consideration for all contingent liabilities as
a whole is reflected in the consideration transferred by Y Corporation
in exchange for the assets of X Corporation. Assuming that such sum
would have been deductible under section 162 if paid by X Corporation,
the $3,000 paid by Y Corporation in 1955 is deductible in accordance
with the provisions of section 381(c)(16) and this section in 1955.
Example (3). Assume the same facts as in example (1), except that
the parties consider the chances of recovery by the claimant of
sufficient probability that Y Corporation reduces the amount of
consideration it transfers in exchange for the assets of X Corporation
by $1,000 in addition to the $5,000 reduction for all other contingent
liabilities. The $3,000 paid by Y Corporation in 1955 is not deductible
under section 381(c)(16) and this section, since the specific obligation
was reflected in the consideration transferred by Y Corporation in
exchange for the assets of X Corporation. The deductibility of the
payment is accordingly governed by the provisions of section 381(c)(4)
and the regulations thereunder. Similarly, if in this case Y
Corporation had transferred $10,000 less in consideration for the assets
of X Corporation because of this particular claim, Y Corporation would
not be entitled to any deduction for the $3,000 paid in 1955 under
section 381(c)(16) and this section, and the deductibility of the
payment would be governed by the provisions of section 381(c)(4) and the
regulations thereunder. If the date of transfer of X Corporation's
assets had occurred prior to the effective date of subchapter C, chapter
1 of the Internal Revenue Code of 1954, applicable to a reorganization,
no deduction would be allowed to Y Corporation under that section.
(T.D. 6750, 29 FR 11267, Aug. 5, 1964)
26 CFR 1.381(c)(17)-1 Deficiency dividend of personal holding company.
(a) Carryover requirement. If a determination (as defined in section
547(c)) establishes that a distributor or transferor corporation in a
transaction to which section 381(a) applies is liable for personal
holding company tax imposed by section 541 (or by a corresponding
provision of prior income tax law) for any taxable year ending on or
before the date of distribution or transfer, then in computing such tax
the deduction described in section 547 shall be allowed pursuant to
section 381(c)(17) to such corporation for the amount of deficiency
dividends paid by the acquiring corporation with respect to the
distributor or transferor corporation. Except as otherwise provided in
this section, the provisions of section 547 and the regulations
thereunder apply with respect to a deficiency dividend deduction
allowable pursuant to section 381(c)(17).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation is a distribution that would
satisfy the definition of a deficiency dividend under section 547(d)(1)
if paid by the distributor or transferor corporation to its own
shareholders except that it shall be paid by the acquiring corporation
to its own shareholders and shall be paid after the date of distribution
or transfer and on, or within 90 days after, the date of the
determination but before the acquiring corporation files claim under
paragraph (c) of this section.
(c) Claim for deduction. A claim for a deduction under this section
shall be made by the acquiring corporation on Form 976, and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
paragraph (b)(2) of 1.547-2 in sufficient detail to properly identify
the facts with the distributor or transferor corporation and the
acquiring corporation. The statement required with respect to the
shareholders on the date of payment of the deficiency dividend shall
relate to the shareholders of the acquiring corporation, and the
required certified copy of the resolution authorizing the payment of the
dividend shall be that of the board of directors, or other authority, of
the acquiring corporation. Necessary changes may be made in Form 976 in
order to carry out the provisions of this paragraph. The claim shall be
filed with the district director for the internal revenue district in
which the return of the distributor or transferor corporation to which
such claim relates was filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation, which is allowable as a deduction to a
distributor or transferor corporation pursuant to section 381(c)(17),
shall not become a part of the dividends paid deduction of the acquiring
corporation under section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X Corporation
transfers its assets to Y Corporation in a transaction to which section
381(a) applies and if Y Corporation transfers its assets to Z
Corporation in a subsequent transaction to which section 381(a) applies,
then, subject to the provisions of this section, X Corporation may take
a deficiency dividend deduction for the amount of deficiency dividends
paid by Z Corporation with respect to X Corporation.
(f) Example. The provisions of this section may be illustrated by
the following example:
Example. M Corporation, a personal holding company, computes its
taxable income on the basis of the calendar year. On December 31, 1956,
N Corporation acquires the assets of M Corporation in a transaction to
which section 381(a) applies. On July 31, 1958, a determination (as
defined in section 547(c)) establishes that M Corporation is liable for
the taxable year 1955 for personal holding company tax in the amount of
$35,500 based on undistributed personal holding company income of
$42,000 for such taxable year. N Corporation complies with the
provisions of this section and on September 30, 1958, distributes
$42,000 to its shareholders as deficiency dividends with respect to M
Corporation's taxable year 1955. The distribution of $42,000 by N
Corporation is a taxable dividend under section 316(b)(2) regardless of
whether N Corporation is a personal holding company for the taxable year
1958 or whether it had any current or accumulated earnings and profits.
See example (3) in paragraph (e) of 1.316-1. Because N Corporation has
paid deficiency dividends of $42,000 in accordance with this section, M
Corporation is entitled to a deficiency dividend deduction of $42,000
for the taxable year 1955 and is thus relieved of its liability for
personal holding company tax of $35,500 for such taxable year. To
prevent a duplication of deductions, the amount distributed by N
Corporation in 1958 does not become a part of N Corporation's dividends
paid deduction under section 561 for any taxable year.
(T.D. 6532, 26 FR 409, Jan. 19, 1961, as amended by T.D. 7604, 44 FR
18661, Mar. 29, 1979; T.D. 7767, 45 FR 11264, Feb. 6, 1981)
26 CFR 1.381(c)(18)-1 Depletion on extraction of ores or minerals from
the waste or residue of prior mining.
(a) Carryover requirement. Section 381(c)(18) provides that the
acquiring corporation in a transaction described in section 381(a) shall
be considered as though it were the distributor or transferor
corporation after the date of distribution or transfer for the purpose
of determining the applicability of section 613(c)(3) (relating to
extraction of ores or minerals from the ground). Thus, an acquiring
corporation which has acquired the waste or residue of prior mining from
a distributor or transferor corporation in a transaction described in
section 381(a) shall be entitled, after the date of distribution or
transfer, to an allowance for depletion under section 611 in respect of
ores or minerals extracted from such waste or residue if the distributor
or transferor corporation would have been entitled to such an allowance
for depletion in the absence of the distribution or transfer. See
paragraph (f) of 1.613-4 to determine whether a distributor or
transferor corporation is entitled to an allowance for depletion with
respect to the waste or residue of prior mining.
(b) Application of section 614 to waste or residue of prior mining.
If, in a transaction described in section 381(a), the acquiring
corporation acquires waste or residue of prior mining from a distributor
or transferor corporation, then the acquiring corporation shall be
considered as though it were the distributor or transferor corporation
for the purpose of applying section 614 and the regulations thereunder
to the waste or residue so acquired. Thus, if the distributor or
transferor corporation was required under paragraph (c) of 1.614-1 to
treat the waste or residue as part of the mineral deposit from which it
was extracted and if the acquiring corporation acquires both the waste
or residue and the mineral deposit from which it was extracted in a
transaction described in section 381(a), then such waste or residue
shall be treated as a part of such mineral deposit in the hands of the
acquiring corporation. On the other hand, if the waste or residue was
required to be treated as a separate mineral deposit in the hands of the
distributor or transferor corporation, such waste or residue shall be
treated as a separate mineral deposit in the hands of the acquiring
corporation.
(T.D. 6552, 26 FR 1991, Mar. 8, 1961, as amended by T.D. 7170, 37 FR
5373, Mar. 15, 1972)
26 CFR 1.381(c)(19)-1 Charitable contribution carryovers in certain
acquisitions.
(a) Carryover requirement. Section 381(c)(19) provides that, in
computing taxable income for its taxable years which begin after the
date of distribution or transfer to which section 381(a) applies, the
acquiring corporation shall take into account any charitable
contributions made by a distributor or transferor corporation during the
taxable year ending on the date of distribution or transfer, and in
certain immediately preceding taxable years, which are in excess of the
maximum amount deductible for those taxable years under section
170(b)(2) in the following manner:
(1) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins before January 1,
1962, the acquiring corporation shall, in computing taxable income for
its first 2 taxable years which begin after the date of such
distribution or transfer, take into account the excess contributions
made by the distributor or transferor corporation in the taxable year
ending on the date of distribution or transfer and in the immediately
preceding taxable year;
(2) If the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer begins after December 31,
1961, the acquiring corporation shall, in computing taxable income for
certain taxable years which begin after the date of distribution or
transfer, take into account the excess contributions made by the
distributor or transferor corporation in the taxable year ending on such
date of distribution or transfer and in any of the four taxable years
immediately preceding such taxable year but excluding any taxable year
beginning before January 1, 1962 (see paragraph (c)(3) of this section).
Notwithstanding the preceding sentence, if the taxable year of the
distributor or transferor corporation ending on the date of distribution
or transfer begins after December 31, 1961, and before January 1, 1963,
the acquiring corporation shall, in computing taxable income for its
first taxable year which begins after the date of distribution or
transfer, also take into account the excess contributions made by the
distributor or transferor corporation in the taxable year immediately
preceding the taxable year of the distributor or transferor corporation
ending on the date of distribution or transfer (see paragraph (c)(2) of
this section).
To determine the amount of excess contributions made by a distributor
or transferor corporation and to integrate them with contributions made
by the acquiring corporation for the purpose of determining the
charitable contributions deductible by the acquiring corporation for its
taxable years beginning immediately after the date of distribution or
transfer, it is necessary to apply the provisions of section 170(b)(2)
and 1.170-3 (or, if applicable, section 170(b)(2) and (d)(2) and
1.170A-11) in accordance with the conditions and limitations of section
381(c)(19) and this section. For taxable years beginning before January
1, 1970, see section 170 for provisions of section 170(b)(2) as referred
to in this section. For taxable years beginning after December 31,
1969, see section 170A for provisions of section 170(b)(2) or (d)(2) as
referred to in this section. For special rules for applying section
170(d)(2) with respect to contributions paid, or treated as paid, in
taxable years beginning before January 1, 1970, see paragraph (d) of
1.170A-11.
(b) Manner of computing excess charitable contribution carryovers.
(1) The amount of any charitable contribution made by a distributor or
transferor corporation in any taxable year ending on or before the date
of distribution or transfer, or made by the acquiring corporation in any
taxable year before its taxable year beginning after the date of
distribution or transfer, in excess of the amount allowable as a
deduction to such corporation for such taxable year under section
170(b)(2) shall be determined by taking into account the taxable income
of, and the contributions made by, that corporation only.
(2) An acquiring corporation which, in a distribution or transfer to
which section 381(a) applies, acquires the assets of a distributor or
transferor corporation which previously acquired the assets of another
corporation in a transaction to which section 381(a) applies, shall
succeed to and take into account, subject to the conditions and
limitations of sections 170 and 381, the charitable contribution
carryovers available to the first acquiring corporation under sections
170 and 381, including those derived by such first acquiring corporation
from its distributor or transferor corporation.
(3) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and in certain immediately preceding taxable
years (see paragraph (c) of this section) which are not deductible by
the distributor or transferor corporation because of the 5-percent
limitation of section 170(b)(2) shall be available to the acquiring
corporation without diminution by reason of the fact that the acquiring
corporation does not acquire 100 percent of the assets of the
distributor or transferor corporation. Thus, if a parent corporation
owning 80 percent of all classes of stock of its subsidiary corporation
were to acquire its share of the assets of the subsidiary corporation
upon a complete liquidation described in paragraph (b)(1)(i) of
1.381(a)-1, then, subject to the conditions and limitations of this
section, 100 percent of the excess contributions made by the subsidiary
corporation would be available to the acquiring corporation.
(c) Taxable years to which carryovers apply and amount deductible --
(1) Taxable years beginning before January 1, 1962. If the taxable year
of the distributor or transferor corporation ending on the date of
distribution or transfer begins before January 1, 1962:
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first taxable year shall not be deducted
by that corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second taxable year beginning after that date. Any portion of such
excess which is not deductible under this section by the acquiring
corporation in such first and second taxable years shall not be deducted
by that corporation in any other taxable year.
(2) Taxable years beginning in 1962. If the taxable year of the
distributor or transferor corporation ending on the date of distribution
or transfer begins after December 31, 1961, and before January 1, 1963:
(i) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year immediately preceding that
ending on the date of distribution or transfer, to the extent not
deductible by it because of the limitations of section 170(b)(2) in its
taxable year ending on that date, shall be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) in its first
taxable year beginning after the date of distribution or transfer. Any
portion of such excess which is not deductible under this section by the
acquiring corporation in such first year shall not be deducted by that
corporation in any other taxable year.
(ii) The excess charitable contributions made by a distributor or
transferor corporation in its taxable year ending on the date of
distribution or transfer and beginning after December 31, 1961, and
before January 1, 1963, shall first be deductible by the acquiring
corporation to the extent prescribed by section 170(b)(2) and this
section in its first taxable year beginning after that date and then, to
the extent prescribed by section 170(b)(2) and this section, in its
second, third, fourth, and fifth taxable year, in order of time,
beginning after that date. Any portion of such excess which is not
deductible under this section by the acquiring corporation in such 5
taxable years shall not be deducted by that corporation in any other
taxable year.
(3) Taxable years beginning after December 31, 1962. (i) If the
taxable year of the distributor or transferor corporation ending on the
date of distribution or transfer begins after December 31, 1962, the
excess charitable contributions made by a distributor or transferor
corporation in its taxable year ending on the date of distribution or
transfer and in each of its four immediately preceding taxable years
(excluding any taxable year beginning before January 1, 1962), to the
extent not deductible by it because of the limitations of section
170(b)(2) in its taxable year ending on the date of distribution or
transfer or its prior taxable years, shall be deductible by the
acquiring corporation to the extent prescribed by section 170(b)(2) (or,
if applicable, section 170(d)(2)) and subdivision (ii) of this
subparagraph, in its taxable years which begin after the date of
distribution or transfer. However, any portion of the excess charitable
contributions made by a distributor or transferor corporation in a
particular taxable year, to which this subparagraph is applicable, which
is not deductible under this section within the 5 taxable years
immediately following the taxable year in which the contribution was
paid by the distributor or transferor corporation shall not be
deductible by the acquiring corporation in any other taxable year.
(ii) For purposes of determining the 5 taxable years in which the
excess contributions may be deducted, all taxable years of the
distributor or transferor corporation subsequent to the taxable year in
which the excess contribution was made, including the taxable year
ending on the date of distribution or transfer shall be treated as
taxable years of the acquiring corporation.
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation both compute taxable income
on the calendar year basis. X Corporation has excess charitable
contributions for 1962 and 1964. On December 31, 1966, X Corporation
distributes all its assets to Y Corporation in a complete liquidation to
which section 381(a) applies. The excess 1962 charitable contributions
of X Corporation (to the extent not deductible by X because of the
limitations of section 170(b)(2) in its taxable years 1963 through 1966)
may be deducted by Y Corporation only in 1967. Y Corporation's taxable
year 1967 is the fifth taxable year succeeding the taxable year 1962
(the year in which the excess contributions were made), and the portion
of such excess contributions which is not deductible in the 5 taxable
years immediately succeeding 1962 (1963 through 1967) is not deductible
by Y Corporation in any other taxable year. Any excess charitable
contributions for 1964 to which Y Corporation may be entitled must be
deducted by Y Corporation (if deductible at all) in 1967, 1968, and 1969
since such years are the third, fourth, and fifth taxable years
succeeding the taxable year 1964 (the year in which the excess
contributions were paid).
(4) General rules. No excess charitable contributions made by a
distributor or transferor corporation shall be deductible by the
acquiring corporation in its taxable year which includes the date of
distribution or transfer. In addition, an excess charitable
contribution made by a distributor or transferor corporation in a
taxable year prior to the taxable year of the transfer is only
deductible by the distributor or transferor corporation, subject to the
limitations of section 170(b)(2) (or, if applicable, section 170(d)(2)),
in its subsequent taxable years which begin on or before the date of
distribution or transfer, and by the acquiring corporation in its
taxable year or years beginning after the date of distribution or
transfer.
(d) Rules governing amounts deductible by acquiring corporations.
(1) In applying the provisions of section 170(b)(2) (or, if applicable,
section 170(d)(2)) for the purpose of determining the amount of excess
charitable contributions which are deductible by the acquiring
corporation in its taxable years beginning after the date of
distribution or transfer, all taxable years of the distributor or
tranferor and acquiring corporations which, with respect to a particular
taxable year beginning after the date of distribution or transfer,
constitute the same numbered preceding taxable year shall together be
considered as a 1 taxable year even though the taxable years involved
may not end on the same date. Thus, for example, all taxable years of
the distributor or transferor and acquiring corporations which, with
respect to the first taxable year of the acquiring corporation beginning
after the date of distribution or transfer, constitutes the second
preceding taxable year shall together be considered as 1 taxable year
even though the taxable years involved may not end on the same date.
Any excess charitable contributions carried over from preceding taxable
years which are considered as 1 taxable year shall be taken into account
by the acquiring corporation as one amount, without regard to the extent
to which the contributions were made by a distributor or transferor
corporation or the acquiring corporation.
(2) For purposes of this paragraph, each taxable year of the
distributor or transferor corporation beginning on or before the date of
distribution or transfer shall be treated as a preceding taxable year
with reference to the acquiring corporation's taxable years beginning
after such date. For example, the taxable year of a distributor or
transferor corporation which ends on the date of distribution or
transfer shall be considered a first preceding taxable year with
reference to the acquiring corporation's first taxable year beginning
after that date, a second preceding taxable year with reference to the
acquiring corporation's second taxable year beginning after that date,
and so forth with respect to succeeding taxable years of the acquiring
corporation. Also, for example, the taxable year of a distributor or
transferor corporation which immediately precedes its taxable year
ending on the date of distribution or transfer shall be considered a
second preceding taxable year with reference to the acquiring
corporation's first taxable year beginning after that date.
(e) Illustration. The application of this section may be illustrated
by the following example:
Example. (i) X Corporation is organized on April 1, 1956, and
computes its taxable income on the basis of the fiscal year ending March
31. Y Corporation is organized on July 1, 1955, and computes its
taxable income on the basis of the fiscal year ending June 30. Z
Corporation is organized on January 1, 1956, and computes its taxable
income on the basis of the calendar year. On June 30, 1957, X
Corporation distributes all its assets to Y Corporation in a complete
liquidation to which section 381(a) applies. On November 30, 1957, Y
Corporation transfers all its assets to Z Corporation in a statutory
merger to which section 381(a) applies.
(ii) The 5-percent limitation (computed in the manner prescribed by
section 170(b)(2)), the charitable contributions actually paid, and the
excess contributions with respect to each such corporation during the
taxable years involved are as follows:
(iii) X Corporation was in existence for two taxable years, in each
of which it made charitable contributions in excess of the maximum
amount deductible for those years under section 170(b)(2). The excess
contributions made in the year ending March 31, 1957, of $12,000, are
deductible by X Corporation in its short taxable year ending June 30,
1957, and then by Y Corporation in its short taxable year ending
November 30, 1957, in each instance in the manner and to the extent
prescribed by section 170(b)(2) and this section. The excess
contributions made by X Corporation in the year ending June 30, 1957, of
$6,000, are deductible by Y Corporation in its short taxable year ending
November 30, 1957, and then by Z Corporation in its taxable year 1958,
in each instance in the manner and to the extent prescribed by section
170(b)(2) and this section.
(iv) Y Corporation was in existence for three taxable years. In the
year ended June 30, 1956, its contributions in excess of the amount
deductible for that year under section 170(b)(2) amounted to $14,000.
Such excess is deductible by Y Corporation in its taxable year ending
June 30, 1957, and, together with X Corporation's excess contributions
of $18,000, in its short taxable year ending November 30, 1957, in each
instance in the manner and to the extent prescribed by section 170(b)(2)
and this section. Accordingly, since Y Corporation made no
contributions in its taxable year ending June 30, 1957, its deduction
for that year on account of excess contributions carried over is
$10,000, an amount equal to the 5-percent limitation of section
170(b)(2). The deduction is attributable to excess contributions made
by Y Corporation in the taxable year ended June 30, 1956; thus, the
excess of those contributions over $10,000, namely, $4,000, is
deductible by Y Corporation in its short taxable year ending November
30, 1957, in the manner and to the extent prescribed by section
170(b)(2) and this section. With respect to the short taxable year
ending November 30, 1957, the excess contributions of the second
preceding year are X Corporation's excess contributions of $12,000 made
in the year ending March 31, 1957, and Y Corporation's excess
contributions of $4,000 made in the year ending June 30, 1956, which
were not deductible by Y Corporation in the taxable year ending June 30,
1957, because of the 5-percent limitation prescribed by section
170(b)(2), an aggregate of $16,000. Inasmuch as Y Corporation's
limitation for the short taxable year ended November 30, 1957, exceeds
the contributions made in that year by $1,000, the excess contributions
of the second preceding taxable year are deductible in the taxable year
ending November 30, 1957, to the extent of $1,000 and the remainder
($15,000) is not deductible by any corporation in any taxable year. The
excess contributions of the first preceding taxable year, namely, X
Corporation's excess contributions made in the short taxable year ending
June 30, 1957, are deductible by Z Corporation in its taxable year 1958,
in the manner and to the extent prescribed in section 170(b)(2) and this
section.
(v) Z Corporation has been in existence for 3 taxable years. The
contributions made in 1956 in excess of the amount deductible for that
year under section 170(b)(2) amounted to $30,000. Such excess is
deductible by Z Corporation in its taxable year 1957 and, together with
X Corporation's excess contributions of $6,000 (derived through Y
Corporation) made in the taxable year ending June 30, 1957, in the
taxable year 1958, in each instance in the manner and to the extent
prescribed by section 170(b)(2) and this section. Thus, $2,000 of the
$30,000 excess contributions made in the year 1956 are deducted in 1957
and the remainder ($28,000), together with X Corporation's excess
contributions of $6,000 made in the short taxable year ending June 30,
1957, are deducted in 1958 since the aggregate of such amounts plus the
contributions actually made in that year does not exceed the 5-percent
limitation prescribed by section 170(b)(2).
(T.D. 6552, 26 FR 1992, Mar. 8, 1961, as amended by T.D. 6900, 31 FR
14642, Nov. 17, 1966; T.D. 7207, 37 FR 20795, Oct. 5, 1972)
26 CFR 1.381(c)(21)-1 Pre-1954 adjustments resulting from change in
method of accounting.
(a) Carryover requirement. Section 381(c)(21) provides that, in a
transaction to which section 381(a) applies, an acquiring corporation
shall take into account the net amount of any adjustments described in
section 481(b)(4) (relating to adjustments arising from changes in
accounting methods initiated by the taxpayer attributable to pre-1954
Code years) of the distributor or transferor corporation to the extent
that such net amount of such adjustments has not been taken into account
in any taxable year, including a short taxable year, by the distributor
or transferor corporation. The acquiring corporation shall take into
account in each taxable year beginning with the taxable year ending
after the date of distribution or transfer the net amount of such
adjustments in the same manner and at the same time as such net amount
would have been taken into account by the distributor or transferor
corporation. Thus, the amount of any such adjustment which the
acquiring corporation shall take into account in each taxable year shall
be the same amount that would have been taken into account in each
taxable year by the distributor or transferor corporation.
(b) This section may be illustrated by the following example:
Example. On January 1, 1960, X Corporation, a calendar year taxpayer,
voluntarily changed its method of accounting giving rise to a $50,000
adjustment under section 481(a), of which $20,000 is attributable to
pre-1954 Code years. Under section 481(b)(4) the $20,000 adjustment is
to be spread over 1960 and the following 9 years at the rate of $2,000
each year. On November 1, 1963, all the assets of X Corporation are
acquired by Y Corporation in a transaction to which section 381(a)
applies. Y Corporation reports its income on a fiscal year ending June
30. X and Y Corporations must take into account the $20,000 adjustment
at the rate of $2,000 in each taxable year in the following time and
manner:
(c) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if R Corporation,
which was taking into account adjustments described in section
481(b)(4), distributes or transfers its assets to S Corporation in a
transaction to which section 381(a) applies, and S Corporation was
required to take into account any remaining portion of such adjustments
under section 381(c)(21) and this section, and if subsequently S
Corporation distributes or transfers its assets to T Corporation in a
transaction to which section 381(a) applies, then T Corporation, under
section 381(c)(21) and this section, shall take into account any
remaining portion of such adjustments not previously taken into account
by R and S Corporations.
(d) Acquiring corporation not receiving all the assets. The
adjustments described in this section acquired from a distributor or
transferor corporation by an acquiring corporation in a transaction to
which section 381(a) applies is not reduced by reason of the fact that
the acquiring corporation does not acquire 100 percent of the assets of
the distributor or transferor corporation.
(T.D. 6553, 26 FR 2171, Mar. 15, 1961)
26 CFR 1.381(c)(22)-1 Successor life insurance company.
(a) Carryover requirement. If in a taxable year beginning after
December 31, 1957, a distributor or transferor corporation which is a
life insurance company (as defined in section 801(a)) is acquired by a
corporation which is a life insurance company (as defined in section
801(a)), in a transaction to which section 381(a) applies, section
381(c)(22) provides that the acquiring corporation shall take into
account the appropriate items which the distributor or transferor
corporation was required to take into account for purposes of part I,
subchapter L, chapter 1 of the Code. Furthermore, except as otherwise
provided by this section, the acquiring corporation shall take into
account the items described in paragraphs (2) through (21), other than
paragraphs (14), (15), and (17), of section 381(c) and the regulations
thereunder. For example, the acquiring corporation shall take into
account the reserves described in section 810(c) distributed or
transferred to it as of the close of the date of distribution or
transfer by the distributor or transferor corporation in accordance with
the provisions of section 381(c)(4) and the regulations thereunder. For
provisions defining the date of distribution or transfer, see paragraph
(b) of 1.381(b)-1.
(b) Items required to be taken into account by acquiring corporation.
If a transaction meets the requirements of paragraph (a) of this
section, the acquiring corporation shall, except as otherwise provided,
take into account as of the close of the date of distribution or
transfer the following items of the distributor or transferor
corporation:
(1) The operations loss carryovers (as determined under section 812),
subject to conditions and limitations consistent with the conditions and
limitations prescribed in section 381(c)(1) and the regulations
thereunder. For example, a loss from operations for a loss year of a
distributor or transferor corporation which ends on or before the last
day of a loss year of the acquiring corporation shall be considered to
be a loss from operations for a year prior to such loss year of the
acquiring corporation. All references in section 381(c)(1) and the
regulations thereunder to section 172 shall be construed as referring to
the appropriate corresponding provisions of section 812. Thus, a
reference to section 172(b) shall be construed as referring to section
812 (b) and (d). In determining the span of years for which a loss from
operations may be carried, the number of taxable years for which the
distributor or transferor corporation was authorized to do business as
an insurance company shall be taken into account. For purposes of this
determination, the taxable year of the distributor or transferor
corporation which ends on the date of distribution or transfer shall be
taken into account even though such taxable year is a period of less
than 12 months.
(2)(i) The investment yield and the beginning of the year asset
balance for the distributor or transferor corporation's taxable year
ending with the close of the date of distribution or transfer. Such
items shall be integrated with the investment yield and beginning of the
year asset balance of the acquiring corporation for its first taxable
year ending after such date of distribution or transfer for purposes of
determining the current earnings rate of the acquiring corporation for
such taxable year. Furthermore, for purposes of determining the average
earnings rate of the acquiring corporation, the investment yield and
mean of the assets of the distributor or transferor corporation for its
4 taxable years immediately preceding its taxable year which closes with
the date of distribution or transfer shall be integrated with the
investment yield and mean of the assets of the acquiring corporation for
such corresponding taxable years.
(ii) The provisions of this subparagraph may be illustrated by the
following examples:
Example (1). X qualified as a life insurance company in 1949. Y
qualified as a life insurance company in 1951. On June 30, 1961, at
which time both X and Y were life insurance companies (as defined in
section 801(a)), X transferred all its assets to Y in a statutory merger
to which section 361 applies. For its taxable year ending on June 30,
1961, X had investment yield of $15 and assets at the beginning of such
taxable year of $450. For purposes of determining its current earnings
rate for its taxable year ending on December 31, 1961, Y had investment
yield of $45 (including the $15 of investment yield of X), assets at the
beginning of such taxable year of $1,250 (including the $450 of X's
assets at the beginning of its taxable year 1961), and assets at the end
of such taxable year of $1,750 (after the application of section
806(a)). Under the provisions of subdivision (i) of this subparagraph,
the current earnings rate of Y for the taxable year 1961 would be 3
percent, determined by dividing the investment yield of Y, $45, by the
mean of the assets of Y, $1,500 ($1,250+$1,750 2). In order to
determine its average earnings rate and adjusted reserves rate for the
taxable year 1961, Y would make up the following schedule:
For the taxable year 1961, Y would have an average earnings rate of
3.2 percent, computed by taking into account the current earnings rates
for the taxable year 1961 and each of the 4 taxable years immediately
preceding such taxable year. The adjusted reserves rate for such
taxable year would be 3 percent since the current earnings rate of 3
percent for 1961 is lower than the average earnings rate of 3.2 percent.
Example (2). The facts are the same as in example (1), except that
the taxable year in issue is 1962, and the current earnings rate of Y
for such taxable year was 3.8 percent. For the taxable year 1962, Y
would have an average earnings rate of 3.3 percent, computed by taking
into account only the current earnings rates for the taxable year 1962
and each of the 4 taxable years immediately preceding such taxable year.
The adjusted reserves rate for such taxable year would be 3.3 percent
since the average earnings rate of 3.3 percent is lower than the 1962
current earnings rate of 3.8 percent.
(3) To the extent there are any amounts accrued for discounts in the
nature of interest which have not been included as interest paid under
section 805(e)(3), the acquiring corporation shall be treated as the
distributor or transferor corporation for purposes of including such
amounts as interest paid.
(4) Any adjustment required by section 806(b) with respect to an item
described in section 810(c) shall be made by the acquiring corporation
in its first taxable year which begins after the date of distribution or
transfer.
(5) The amount of the deduction provided by section 809(d)(6), as
limited by section 809(f), for all taxable years of the distributor or
transferor corporation which end on and before the date of distribution
or transfer (irrespective of whether or not the distributor or
transferor corporation claimed this deduction for such taxable years)
for the purpose of determining the limitation under section 809(d)(6).
(6)(i) To the extent there are any remaining net increases or net
decreases in reserves required to be taken into account by the
distributor or transferor corporation under section 810(d)(1), the
acquiring corporation shall be treated as the distributor or transferor
corporation as of its first taxable year which begins after the date of
distribution or transfer.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. Assume that the amount of an item described in section
810(c) of X, a life insurance company, at the beginning of the taxable
year 1959 is $100. Assume that at the end of the taxable year 1959, as
a result of a change in the basis used in computing such item during the
taxable year, the amount of the item (computed on the new basis) is $200
but computed on the old basis would have been $150. Since the amount of
the item at the end of the taxable year computed on the new basis, $200,
exceeds the amount of the item at the end of the taxable year computed
on the old basis, $150, by $50, section 810(d)(1) provides that
one-tenth of the amount of such excess, or $5, shall be taken into
account by X as a net increase referred to in section 809(d)(2) and
paragraph (a)(2) of 1.809-5 in determining gain or loss from operations
for each of the 10 taxable years immediately following the taxable year
1959. Assume further that on June 30, 1961, X transferred all its
assets to Y, a life insurance company, in a statutory merger to which
section 361 applies. Under the provisions of section 810(d)(1), X would
include $5 as a net increase under section 809(d)(2) and paragraph
(a)(2) of 1.809-5 in determining gain or loss from operations for its
taxable years 1960 and 1961. Thus, the remaining net increase to be
taken into account by X under section 810(d)(1) is $40 (eight-tenths of
$50). Accordingly, Y shall take into account $5 as a net increase
referred to in section 809(d)(2) and paragraph (a)(2) of 1.809-5 in
determining gain or loss from operations for each of its 8 taxable years
beginning in 1962 ($5 8=$40).
(7)(i) The dollar balances in the shareholders surplus account,
policyholders surplus account, and other accounts provided, however,
that the acquiring corporation is a stock life insurance company. The
dollar balance in the policyholders surplus account shall reflect the
amount (if any) treated as a subtraction from such account by reason of
the application of the limitation provided under section 815(d)(4)
immediately prior to the close of the date of distribution or transfer.
To the extent that any amount must be added to the shareholders surplus
account as a result of the application of the limitation provided under
section 815(d)(4), the acquiring corporation shall be treated as the
distributor or transferor corporation as of its first taxable year which
begins after the date of distribution or transfer.
(ii) If the acquiring corporation is a mutual life insurance company,
the dollar balances in the shareholders surplus account, policyholders
surplus account, and other accounts shall not be taken into account by
such acquiring corporation and the distributor or transferor corporation
shall be subject to the provisions of section 815(d)(2)(A) as of the
close of the date of distribution or transfer.
(8) To the extent that any amount must be added to the shareholders
surplus account as a result of an election made under section 815(d)(1)
by the distributor or transferor corporation, the acquiring corporation
shall be treated as the distributor or transferor corporation as of its
first taxable year which begins after the date of distribution or
transfer.
(9) The amount of the life insurance reserves at the end of 1958, but
only for the purpose of applying the limitation provided under section
815(d)(4)(B).
(10) To the extent there are amounts subject to the provisions of
section 817(d), the acquiring corporation shall be treated as the
distributor or transferor corporation.
(11) To the extent there are any installments of tax imposed by
section 818(e)(3)(A) remaining to be paid, the acquiring corporation
shall be treated as the distributor or transferor corporation for the
purpose of paying such installments.
(12) The capital loss carryovers, subject to conditions and
limitations consistent with the conditions and limitations prescribed in
section 381(c)(3) and the regulations thereunder, except that any net
capital loss of the distributor or transferor corporation for a taxable
year beginning before January 1, 1959, shall not be taken into account.
See section 817(c).
(T.D. 6625, 27 FR 12541, Dec. 19, 1962)
26 CFR 1.381(c)(23)-1 Investment credit carryovers in certain corporate
acquisitions.
(a) Carryover requirement. (1) Section 381(c)(23) requires the
acquiring corporation in a transaction to which section 381 applies to
succeed to and take into account under such regulations as may be
prescribed by the Secretary or his delegate, the investment credit
carryovers of the distributor or transferor corporation. To determine
the amount of these carryovers as of the close of the date of
distribution or transfer, and to integrate them with any carryovers and
carrybacks of the acquiring corporation for purposes of determining the
amount of credit allowed by section 38 to the acquiring corporation for
taxable years ending after the date of distribution or transfer, it is
necessary to apply the provisions of sections 46, 47, and 48 in
accordance with the conditions and limitations of this section.
(2) The investment credit carryovers and carrybacks of the acquiring
corporation determined as of the close of the date of distribution or
transfer shall be computed without reference to any unused credit of a
distributor or transferor corporation. The investment credit carryovers
of a distributor or transferor corporation as of the close of the date
of distribution or transfer shall be determined without reference to any
unused credit of the acquiring corporation.
(b) Carryback of unused credits. An unused credit of the acquiring
corporation for any taxable year ending after the date of distribution
or transfer shall not be carried back in computing the credit allowed by
section 38 to a distributor or transferor corporation. However, an
unused credit of the acquiring corporation for any such taxable year
shall be carried back in accordance with section 46(b)(1) in computing
the credit allowed to the acquiring corporation for a taxable year
ending on or before the date of distribution or transfer. If a
distributor or transferor corporation remains in existence after the
date of distribution or transfer, an unused credit sustained by it for
any taxable year beginning after such date shall be carried back in
accordance with section 46(b)(1) in computing the credit allowed by
section 38 to such corporation for a taxable year ending on or before
that date, but may not be carried back or over in computing the credit
allowed by section 38 to the acquiring corporation.
(c) Computation of carryovers and carrybacks. (1) Subject to the
modifications set forth in this paragraph, the provisions of 1.46-2
shall apply in computing carryovers and carrybacks of unused credits to
taxable years of the acquiring corporation.
(2)(i) The investment credit carryovers available to the distributor
or transferor corporation as of the close of the date of distribution or
transfer shall first be carried to the first taxable year of the
acquiring corporation ending after that date. This rule applies whether
the date of distribution or transfer is on the last day, or any other
day, of the acquiring corporation's taxable year.
(ii) The investment credit carryovers available to the distributor or
transferor corporation as of the close of the date of distribution or
transfer shall be carried to the acquiring corporation without
diminution by reason of the fact that the acquiring corporation does not
acquire 100 percent of the assets of the distributor or transferor
corporation.
(3) An unused credit of a distributor or transferor corporation for a
taxable year which ends on or before the last day of a taxable year of
the acquiring corporation shall be considered to be an unused credit for
a year prior to such taxable year of the acquiring corporation. If the
acquiring corporation has acquired the assets of two or more distributor
or transferor corporations on the same date of distribution or transfer,
the unused credit years of the distributor or transferor corporations
shall be taken into account in the order in which such years terminate.
If any one of the unused credit years of a distributor or transferor
corporation ends on the same day as the unused credit year of another
distributor or transferor corporation, either unused credit year may be
taken into account before the other.
(4) The extent to which an investment credit carryover of a
distributor or transferor corporation or of an acquiring corporation
from an unused credit year ending before January 1, 1971, may be taken
into account by the acquiring corporation for a taxable year beginning
after December 31, 1970, shall be determined without regard to the
credit earned by the acquiring corporation for such year. Thus, in such
a case, the amount of unused credit from such unused credit years which
may be taken into account in a taxable year of the acquiring corporation
beginning after December 31, 1970, shall be determined solely with
reference to the limitation based on amount of tax for such taxable year
(without reduction for the credit earned for such year).
(d) Computation of carryovers when date of distribution or transfer
occurs on last day of acquiring corporation's taxable year. The
computation of the investment credit carryovers from the distributor or
transferor corporation and from the acquiring corporation in a case
where the date of distribution or transfer occurs on the last day of a
taxable year of the acquiring corporation may be illustrated by the
following example:
Example. X Corporation and Y Corporation were organized on January 1,
1971, and each corporation files its return on the calendar year basis.
On December 31, 1972, X transfers all its assets to Y in a statutory
merger to which section 361 applies. X's credit earned and its
limitation based on amount of tax for its taxable years 1971 and 1972
are as follows:
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 through 1973 are as follows:
The sequence for the allowance of unused credits of X Corporation and
Y Corporation, and the computation of the carryovers to Y Corporation's
calendar year 1974, may be illustrated as follows:
(1) X Corporation's 1971 unused credit. -- The carryover to Y 1974 is
$0, computed as follows:
(2) Y Corporation's 1971 unused credit. -- The carryover to Y 1974 is
$0, computed as follows:
(3) X Corporation's 1972 unused credit. -- The carryover to Y 1974 is
$1,000, computed as follows:
(4) Y Corporation's 1972 unused credit. -- The carryover to Y 1974 is
$2,000, computed as follows:
(5) The aggregate of the investment credit carryovers to Y's year
1974 is $3,000, computed as follows:
(e) Computation of carryovers when date of distribution or transfer
is not on last day of acquiring corporation's taxable year. (1) If the
date of distribution or transfer occurs on any day other than the last
day of a taxable year of the acquiring corporation, the amount which may
be added to the amount allowable as a credit by section 38 for the first
taxable year of the acquiring corporation ending after the date of
distribution or transfer (hereinafter called the ''year of
acquisition'') shall be determined in the following manner. The year of
acquisition shall be considered as though it were 2 taxable years. The
first of such 2 taxable years shall be referred to in this paragraph as
the preacquisition part year and shall begin with the beginning of the
year of acquisition and end with the close of the date of distribution
or transfer. The second of such 2 taxable years shall be referred to in
this paragraph as the postacquisition part year and shall begin with the
day following the date of distribution or transfer and shall end with
the close of the year of acquisition.
(2) The excess limitation for the year of acquisition (i.e., the
excess of the limitation based on the amount of tax for such year over
the amount of credit earned for such year) shall be divided between the
preacquisition part year and the postacquisition part year in proportion
to the number of days in each. Thus, if in a statutory merger to which
section 361 applies Y Corporation, a calendar year taxpayer, acquires
the assets of X Corporation on June 30, 1975, and Y Corporation has an
excess limitation of $36,500 for its calendar year 1975, then the excess
limitation for the preacquisition part year would be $18,100 ($36,500
181/365) and the excess limitation for the postacquisition part year
would be $18,400 ($36,500 184/365).
(3) An unused credit of the acquiring corporation shall be carried to
and applied against the excess limitation for the preacquisition part
year and then carried to and applied against the excess limitation for
the postacquisition part year, whereas an unused credit of the
distributor or transferor corporation shall not be carried to the
preacquisition part year but shall only be carried to and applied
against the excess limitation for the postacquisition part year. For
special rule relating to carryovers from taxable years ending before
January 1, 1971, to taxable years beginning after December 31, 1970, see
subparagraph (6) of this paragraph.
(4) Though considered as two separate taxable years for purposes of
this paragraph, the preacquisition part year and the postacquisition
part year are treated as one taxable year in determining the years to
which an unused credit is carried under section 46(b)(1).
(5) The preceding subparagraphs may be illustrated by the following
example:
Example. X Corporation and Y Corporation were organized on January 1,
1971, and each corporation files its return on the calendar year basis.
On May 1, 1972, X transfers all its assets to Y in a statutory merger to
which section 361 applies. X's credit earned and its limitation based
on amount of tax for its taxable years 1971 and ending May 1, 1972, are
as follows:
Y's credit earned and its limitation based on amount of tax for its
taxable years 1971 and 1972 are as follows:
The sequence for the allowance of unused credits of X Corporation and
Y Corporation, and the computation of carryovers to Y Corporation's
calendar year 1973, may be illustrated as follows:
(i) X Corporation's 1971 unused credit. The carryover to Y 1973 is
$0, computed as follows:
(ii) Y Corporation's 1971 unused credit. The carryover to Y 1973 is
$1,000, computed as follows:
(iii) The aggregate of the investment credit carryovers to Y's year
1973 is $1,000, computed as follows:
(6) If the year of acquisition is a taxable year beginning after
December 31, 1970, and if there is an unused credit of the distributor
or transferor corporation or of the acquiring corporation arising in an
unused credit year ending before January 1, 1971, which may be carried
to such year of acquisition (see paragraph (c)(4) of this section), then
in applying subparagraphs (1), (2), and (3) of this paragraph, in lieu
of dividing the excess limitation for the year of acquisition between
the preacquisition and postacquisition part years, only the limitation
based on the amount of tax for such year (i.e., without reduction for
the credit earned) shall be divided between the preacquisition and
postacquisition part years. If there is also an unused credit arising
in an unused credit year ending after December 31, 1970, which may be
carried to the year of acquisition, then for the purpose of determining
the amount of such unused credit which may be taken into account for
such year of acquisition, the credit earned for the year of acquisition
shall first be applied against the limitation based on amount of tax for
the preacquisition part year (reduced by any investment credit
carryovers to such part year from unused credit years ending before
January 1, 1971) and the excess, if any, shall then be applied against
the limitation based on amount of tax for the postacquisition part year
(also reduced by any investment credit carryovers to such part year from
unused credit years ending before January 1, 1971).
(7) Subparagraph (6) of this paragraph may be illustrated by the
following example:
Example. X Corporation and Y Corporation were organized on January 1,
1970, and each corporation files its return on the calendar year basis.
On May 1, 1972, X transfers all its assets to Y in a statutory merger to
which section 361 applies. X's credit earned and its limitation based
on amount of tax for its taxable years 1970, 1971, and ending May 1,
1972, are as follows:
Y's credit earned and its limitation based on amount of tax for its
taxable years 1970 through 1972 are as follows:
The sequence for the allowance of unused credits of X Corporation and
Y Corporation, and the computation of carryovers to Y Corporation's
calendar year 1973, may be illustrated as follows:
(i) X Corporation's 1970 unused credit. -- The carryover to Y 1973 is
$0, computed as follows:
(ii) Y Corporation's 1970 unused credit. -- The carryover to Y 1973
is $0, computed as follows:
(iii) Y Corporation's credit earned for 1972. -- The carryover to Y
1973 is $0, computed as follows:
(iv) X Corporation's 1971 unused credit. -- The carryover to Y 1973
is $0, computed as follows:
(v) Y Corporation's 1971 unused credit. -- The carryover to Y 1973 is
$100, computed as follows:
(vi) X Corporation's 5-1-72 unused credit. -- The carryover to Y 1973
is $200, computed as follows:
(vii) The aggregate of the investment credit carryovers to Y 1973 is
$300, computed as follows:
(8) If the year of acquisition is a taxable year to which the
limitation provided in 1.46-2(b)(2) (relating to 20- percent limitation
on carryovers and carrybacks to certain taxable years) applies, then for
purposes of applying such limitation the preacquisition part year and
the postacquisition part year shall each be considered a fractional part
of a year, but, if the date of distribution or transfer is not on the
last day of a month, the entire month in which the date of distribution
or transfer occurs shall be considered as included in the preacquisition
part year and no portion thereof shall be considered as included in the
postacquisition part year.
(9) If the acquiring corporation succeeds to the investment credit
carryovers of two or more distributor or transferor corporations on two
or more dates of distribution or transfer during the same taxable year
of the acquiring corporation, the manner in which the unused credits of
the distributor or transferor corporations shall be applied shall be
determined consistently with the rules prescribed in paragraph (c) of
1.381(c)(1)-2.
(f) Successive acquiring corporations. An acquiring corporation
which, in a distribution or transfer to which section 381(a) applies,
acquires the assets of a distributor or transferor corporation which
previously acquired the assets of another corporation in a transaction
to which section 381(a) applies, shall succeed to and take into account,
subject to the conditions and limitations of 1.46-2 and this section,
the investment credit carryovers available to the first acquiring
corporation under 1.46-2 and this section.
(g) Recomputation of credit allowed by section 38 on certain property
of acquiring corporation. -- If section 38 property acquired by an
acquiring corporation in a transaction to which section 381(a) applies
is disposed of, or otherwise ceases to be section 38 property (or
becomes public utility property) with respect to the acquiring
corporation, before the close of the estimated useful life which was
taken into account in computing the distributor or transferor
corporation's qualified investment, see paragraph (e) of 1.47-3.
(h) Electing small business corporation. An unused credit of a
distributor or transferor corporation arising in an unused credit year
for which such corporation is not an electing small business corporation
(as defined in section 1371(b)) may not be carried over in a transaction
to which section 381 applies to a taxable year of the acquiring
corporation for which such corporation is an electing small business
corporation and may not be added to the amount allowable as a credit
under section 38 to the shareholders of the acquiring corporation for
such taxable year. However, in such a case, a taxable year for which
the acquiring corporation is an electing small business corporation
shall be counted as a taxable year for purposes of determining the
taxable years to which such unused credit may be carried.
(i) (Reserved)
(j) Carryover of operating capacity for qualified intercity bus. For
rules for determining an acquiring corporation's qualified investment
for the energy credit for a qualified intercity bus, see 1.48-9(q)(11).
(Sec. 38(b) (76 Stat. 963, 26 U.S.C. 38(b)), 48(l)(16) (94 Stat.
264, 26 U.S.C. 48(l)(16)), and 7805 (68A Stat. 917, 26 U.S.C. 7805))
(T.D. 7289, 38 FR 30554, Nov. 6, 1973, as amended by T.D. 7982, 49 FR
39544, Oct. 9, 1984; 49 FR 41246, Oct. 22, 1984)
26 CFR 1.381(c)(24)-1 Work incentive program credit carryovers in
certain corporate acquisitions.
The computation of carryovers and carrybacks of unused WIN credits in
a transaction to which section 381 applies shall be made under the
principles of 1.381(c)(23)-1 (relating to the computation of carryovers
and carrybacks of unused investment credits), except that the provisions
of paragraph (c)(4) and paragraph (e)(6), (7), and (8) of such section
shall not apply.
(Secs. 381(c)(23), 76 Stat. 971 (26 U.S.C. 381(c)(23), 381(c)(24)) 85
Stat. 557 (26 U.S.C. 381(c)(24)), 7805, 68A Stat. 917 (26 U.S.C. 7805))
(T.D. 7289, 38 FR 30557, Nov. 6, 1973)
26 CFR 1.381(c)(25)-1 Deficiency dividend of a qualified investment
entity.
(a) Carryover requirement. If a distributor or transferor
corporation in a transaction to which section 381(a) applies --
(1) Was a qualified investment entity (within the meaning of section
860(b)) for any taxable year ending on or before the date of
distribution or transfer, and
(2) A determination (as defined in section 860(e)) establishes that
the transferor or distributor corporation is liable for the tax imposed
by section 11(a), 56(a), 852(b), 857(b)(1), 857(b)(3)(A), or 1201(a) for
such taxable year,then in determining the liability for such tax the
deduction described in section 860 shall be allowed pursuant to section
381(c)(25) to such corporation for the amount of deficiency dividends
paid by the acquiring corporation with respect to the distributor or
transferor corporation. Except as otherwise provided in this section,
the provisions of section 860 and the regulations thereunder apply with
respect to a deficiency dividend deduction allowable pursuant to section
381(c)(25).
(b) Deficiency dividends paid by the acquiring corporation with
respect to the distributor or transferor corporation. A deficiency
dividend paid by the acquiring corporation with respect to the
distributor or transferor corporation must be a distribution that would
satisfy the definition of a deficiency dividend under section 860(f) if
paid by the distributor or transferor corporation to its own
shareholders. The distribution, however, shall be paid by the acquiring
corporation to its own shareholders. The distribution also shall be
paid after the date of distribution or transfer and on, or within 90
days after, the date of the determination but before the acquiring
corporation files a claim under paragraph (c) of this section.
(c) Claim for deduction. A claim for deduction under this section
shall be made by the acquiring corporation on Form 976 and shall be
filed within 120 days after the date of the determination. The form
shall contain, or be accompanied by, the information required under
1.860-2(b)(2) in sufficient detail to properly identify the facts with
respect to the distributor or transferor corporation and the acquiring
corporation. The required certified copy of the resolution authorizing
the payment of the dividend shall be that of the trustees, board of
directors, or other authority, of the acquiring corporation. Necessary
changes may be made in Form 976 in order to carry out the provisions of
this paragraph. The claim shall be filed with the district director, or
director of the internal revenue service center, with whom the return of
the distributor or transferor corporation to which the claim relates was
filed.
(d) Effect on dividends paid deduction. A deficiency dividend paid
by the acquiring corporation that is allowable as a deduction to a
distributor or transferor corporation pursuant to section 381(c)(25)
shall not become a part of the dividends paid deduction of the acquiring
corporation under section 561 for any taxable year.
(e) Successive transactions to which section 381(a) applies. The
provisions of this section shall apply in the case of successive
transactions to which section 381(a) applies. Thus, if X corporation
transfers its assets to Y corporation in a transaction to which section
381(a) applies and if Y corporation transfers its assets to Z
corporation in a subsequent transaction to which section 381(a) applies,
then, subject to the provisions of this section, X corporation may take
a deficiency dividend deduction for the amount of deficiency dividends
paid by Z corporation with respect to X corporation.
(Sec. 860(l) (92 Stat. 2849, 26 U.S.C. 860(l)); sec. 860(g) (92
Stat. 2850, 26 U.S.C. 860(g)); and sec. 7805 (68A Stat. 917, 26 U.S.C.
7805))
(T.D. 7767, 46 FR 11264, Feb. 6, 1981, as amended by T.D. 7936, 49 FR
2106, Jan. 18, 1984)
26 CFR 1.381(c)(26)-1 Credit for employment of certain new employees.
(a) Carryovers and carrybacks. For taxable years beginning before
January 1, 1984, the computation of carryovers and carrybacks of unused
targeted jobs credit (new jobs credit in the case of wages paid before
1979) under section 44B (as in effect prior to enactment of the Tax
Reform Act of 1984) in a transaction to which section 381(a) applies
shall be made under the principles of 1.381(c)(23)-1 (relating to the
computation of carryovers and carrybacks of unused investment credit),
except that the provisions of paragraph (c)(4) and paragraph (e) (6),
(7) and (8) of such section shall not apply.
(b) Other items. See 1.51-1(h) for a rule that applies to certain
transfers of a trade or business in which a member of a targeted group
is employed.
(T.D. 8062, 50 FR 46003, Nov. 6, 1985)
26 CFR 1.381(d)-1 Operations loss carryovers of life insurance
companies.
For the application of part V, subchapter C, chapter 1 of the Code to
operations loss carryovers of life insurance companies, see section
812(f) and 1.812-7 and section 381(c)(22) and 1.381(c)(22)-1.
(T.D. 6625, 27 FR 12543, Dec. 19, 1962)
26 CFR 1.382-0 Effective date.
(a) Temporary regulations 1.382-1T and 1.382-2T and the final
regulations under 382 (other than the regulations described in paragraph
(b) of this section) reflect the amendments made to sections 382 and 383
by the Tax Reform Act of 1986. See 1.382-2T(m) for effective date
rules.
(b) Sections 1.382-1A, 1.382-2A, 1.382-3A, and 1.382-4A do not
reflect the amendments made to sections 382 and 383 by the Tax Reform
Act of 1986.
(T.D. 8352, 56 FR 29433, June 27, 1991)
26 CFR 1.382-1 Limitations on the use of certain tax attributes following an ownership change. (Reserved)
26 CFR 1.382-1T Limitation on net operating loss carryforwards and
certain built-in losses following ownership change (temporary).
In order to facilitate use of 1.382-2T, this section lists the
paragraphs, subparagraphs, and subdivisions contained in 1.382-2T.
(a) Ownership change. (1) In general.
(2) Events requiring a determination of whether an ownership change
has occurred.
(i) Testing date.
(ii) Information statement required.
(iii) Records to be maintained by loss corporation.
(A) Exception.
(B) Statement with respect to prior periods.
(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) Director 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.
(xi) Certain transfers of options disregarded.
(xii) Exercise of an option that has not been treated as stock.
(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.
(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) Acquistions 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) Acquistions 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.
(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.
(T.D. 8149, 52 FR 29674, Aug. 11, 1987, as amended at T.D. 8264, 54
FR 38666, Sept. 20, 1989; T.D. 8352, 56 FR 29434, June 27, 1991)
26 CFR 1.382-2 Definition of ownership change under section 382 as
amended by the Tax Reform Act of 1986.
(a) Certain definitions for purposes of sections 382 and 383 and the
regulations thereunder. The following definitions apply for purposes of
sections 382 and 383 and the regulations thereunder.
(1) Loss corporation -- (i) In general. The term loss corporation
means a corporation which --
(A) Is entitled to use a net operating loss carryforward, a capital
loss carryover, a carryover of excess foreign taxes under section
904(c), a carryforward of a general business credit under section 39, or
a carryover of a minimum tax credit under section 53,
(B) For the taxable year in which an owner shift, equity structure
shift or other transaction described in 1.382-2T(a)(2)(i) in paragraph
(a)(1)(i)(B) occurs (determined for purposes of this paragraph (a)(1)
without regard to whether the corporation is a loss corporation) has a
net operating loss, a net capital loss, excess foreign taxes under
section 904(c), unused general business credits under section 38, or an
unused minimum tax credit under section 53, or
(C) Has a net unrealized built-in loss (determined for purposes of
this paragraph (a)(1) by treating the date on which such determination
is made as the change date). See section 382(h)(3) for the definition
of net unrealized built-in loss.
See section 383 and 1.383-1 for rules relating to a loss corporation
that has an ownership change and has capital losses, excess foreign
taxes, general business credits or minimum tax credits. Any predecessor
or successor to a loss corporation described in this paragraph (a)(1) is
also a loss corporation.
(ii) Distributor or transferor loss corporation in a transaction
under section 381. Notwithstanding that a loss corporation ceases to
exist under state law, if its net operating loss carryforwards, excess
foreign taxes, or other items described in section 381(c) are succeeded
to and taken into account by an acquiring corporation in a transaction
described in section 381(a), such loss corporation shall be treated as
continuing in existence until --
(A) Any pre-change losses (excluding pre-change credits described in
1.383-1(c)(3)), determined as if the date of such transaction were the
change date, are fully utilized or expire under either section 172 or
section 1212,
(B) Any net unrealized built-in losses, determined as if the date of
such transaction were the change date, may no longer be treated as
pre-change losses, and
(C) Any pre-change credits (described in 1.383-1(c)(3)), determined
as if the date of such transaction were the change date, are fully
utilized or expire under sections 39, 53, or 904(c).
Following a transaction described in the preceding sentence, the
stock of the acquiring corporation shall be treated as the stock of the
loss corporation for purposes of determining whether an ownership change
occurs with respect to the pre-change losses and net unrealized built-in
losses that may be treated as pre-change losses of the distributor or
transferor corporation.
(iii) Separate accounting required for losses and credits of an
acquiring corporation and a distributor or transferor loss corporation.
Pre-change losses (determined as if the testing date were the change
date and treating the amount of any net unrealized built-in loss as a
pre-change loss), that are succeeded to and taken into account by an
acquiring corporation in a transaction to which section 381(a) applies
must be accounted for separately from losses and credits of the
acquiring corporation for purposes of applying this section. See
Example (2) of 1.382-2T(e)(2)(iv) of this section.
(2) Pre-change loss. The term pre-change loss means --
(i) Any net operating loss carryforward of the old loss corporation
to the taxable year ending on the change date or in which the change
date occurs,
(ii) Any net operating loss of the old loss corporation for the
taxable year in which the ownership change occurs to the extent such
loss is allocable to the period in such year on or before the change
date.
(iii) Any recognized built-in loss for any recognition period taxable
year (within the meaning of 382(h)),
(iv) Any pre-change capital losses described in 1.383-1T(c)(2) (i)
and (ii), and
(v) Any pre-change credits described in 1.383-1T(c)(3)
(3) Entity. (i) In general -- An entity is any corporation, estate,
trust, association, company, partnership or similar organization. An
entity includes a group of persons who have a formal or informal
understanding among themselves to make a coordinated acquisition of
stock. A principal element in determining if such an understanding
exists is whether the investment decision of each member of a group is
based upon the investment decision of one or more other members.
However, the participation by creditors in formulating a plan for an
insolvency workout or a reorganization in a title 11 or similar case
(whether as members of a creditors' committee or otherwise) and the
receipt of stock by creditors in satisfaction of indebtedness pursuant
to the workout or reorganization do not cause the creditors to be
considered an entity.
(ii) Examples. The following examples illustrate the provisions of
paragraph (a)(3)(i) of this section.
Example 1. (i) L corporation has 1,000 shares of common stock
outstanding. For the three-year period ending on October 1, 1992, L's
stock was owned by unrelated individuals, none of whom owned five
percent or more of L. A group of 20 individuals who previously owned no
stock (the ''Group'') agree among themselves to acquire more than 5
percent of L's stock. The Group is not a corporation, trust,
association, partnership or company. On October 1, 1992, pursuant to
their understanding, the members of the Group purchase 600 shares of L
common stock from the old shareholders of L (a total of 60 percent of L
stock), with each member purchasing 30 shares.
(ii) Before the members of the Group acquired L's stock on October 1,
1992, no individual or entity owned, directly or indirectly, five
percent or more of the stock of L. As a result, all shareholders were
aggregated into a public group and L was considered to be owned by a
single 5-percent shareholder (''Public L'') in accordance with 1.382-2T
(g)(1) and (j)(1).
(iii) Under paragraph (a)(3)(i) of this section, the members of the
Group have a formal or informal understanding among themselves to make a
coordinated acquisition of stock and, therefore, the Group is an entity.
Thus, the acquisition of more than five percent of the stock of L on
October 1, 1992, by members of the Group is not disregarded under
1.382-2T(e)(1)(ii). Because no member of the Group owns, directly or
indirectly, five percent or more of the stock of L, 1.382-2T (g)(1)
and (j)(1) require that the members of the Group be aggregated into a
separate public group, which will be presumed to consist of persons
unrelated to the members of Public L. Because there is a shift of more
than fifty percentage points in the ownership of L stock during the
three-year testing period ending on October 1, 1992, an ownership change
occurs on October 1, 1992, as a result of the Group's purchase of the
600 shares.
Example 2. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. L's management is
concerned that L may become subject to a takeover bid. In separate
meetings, L's management meets with potential investors who own no stock
and are friendly to management to convince them to acquire L's stock
based on an understanding that L will assemble a group that in the
aggregate will acquire more than 50 percent of L's stock. On October 1,
1991, 15 of these investors each purchase 4 percent of L's stock.
(ii) Under paragraph (a)(3)(i) of this section, the 15 investors (the
''Group'') are treated as an entity because the members of the Group
purchase L stock pursuant to a formal or informal understanding among
themselves to make a coordinated acquisition of stock. Sections
1.382-2T (g)(1) and (j)(1) require that on October 1, 1992, the Group be
aggregated into a separate public group, which has increased its
ownership of L stock by 60 percentage points over its lowest level of
ownership in the three-year period ending on October 1, 1992.
Accordingly, an ownership change occurs on that date.
Example 3. (i) Prior to October 1, 1992, L's 1,000 shares of
outstanding stock were owned by unrelated individuals, none of whom
owned five percent or more of the stock of L. On October 1, 1992, an
investment advisor advises its clients that it believes L's stock is
undervalued and recommends that they acquire L stock. Acting on the
investment advisor's recommendation, 20 unrelated individuals purchase 6
percent of L's stock in aggregate, with each individual purchasing less
than 5 percent. Each client's decision was not based upon the
investment decisions made by one or more other clients.
(ii) Because there is no formal or informal understanding among the
clients to make a coordinated acquisition of L stock, their purchase of
stock is not made by an entity under paragraph (a)(3)(i) of this
section. As a result, they remain part of the public group which owns L
stock, and no owner shift results upon their purchase of L stock under
1.382-2T(e)(1)(ii).
(iii) The result in this example would be the same if the only
additional fact was that the investment advisor is also the underwriter
(without regard to whether it is a firm commitment or best efforts
underwriting) for a primary or secondary offering of L stock.
(iv) Assume that the facts are the same except that, instead of an
investment advisor recommending that clients purchase L stock, the
trustee of several trusts qualified under section 401(a) sponsored by
unrelated corporations causes each trust to purchase the L stock. In
this case, the result is the same, so long as the investment decision
made on behalf of each trust was not based on the investment decision
made on behalf of one or more of the other trusts.
(iii) Effective date. (A) In general. The second, third and fourth
sentences of paragraph (a)(3)(i) of this section and Examples 1, 2 and 3
of paragraph (a)(3)(ii) of this section apply to testing dates
(determined by applying such sentence and examples) on or after November
20, 1990, but with respect to any group of persons that pursuant to a
formal or informal understanding among themselves makes a coordinated
acquisition of stock before November 20, 1990, only if the group
increases or decreases its ownership of stock of the loss corporation
relative to its percentage ownership interest at the close of November
19, 1990, by five percentage points or more on or after November 20,
1990.
(B) Special rule. If pursuant to a formal or informal understanding
among themselves a group consisting only of regulated investment
companies under section 851, qualified trusts under section 401, common
trust funds under section 584, or trusts or estates that are clients of
a trust department of a bank under section 581, make a coordinated
acquisition of stock before November 20, 1990, the second, third and
fourth sentences of paragraph (a)(3)(i) of this section and Examples 1,
2, and 3 of this section apply for testing dates (determined by applying
such sentences and examples) on or after November 20, 1990, only if the
group increases its ownership of stock of the loss corporation relative
to its percentage ownership interest at the close of November 19, 1990,
by five percentage points or more on or after November 20, 1990.
(C) Example. The following example illustrates the provisions of
paragraph (a)(3)(iii) of this section.
Example. Prior to November 1, 1990, L, a loss, corporation, is owned
entirely by 1,000 unrelated individuals, none of whom owns as much as 5
percent of the stock of L (''Public L''). On November 1, 1990, 15
individuals (the ''Group'') each acquired 3 percent, or 45 percent, in
total, of L stock pursuant to an understanding among themselves to make
a coordinated acquisition of stock. The Group is not a corporation,
trust, association, partnership or company. On March 1, 1992, six
members of the Group each purchased an additional one percent of L
stock, or 6 percent, in total, pursuant to the understanding.
Accordingly, the Group increased its ownership in L stock by 51
percentage points during the three-year testing period ending on March
1, 1992. As a result, an ownership change of L occurs on March 1, 1992.
(T.D. 8352, 56 FR 29434, June 27, 1991, as amended by T.D. 8405, 57
FR 10740, Mar. 30, 1992)
26 CFR 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. A corporation is a new loss
corporation and thus subject to limitation under section 382 only if an
ownership change has occurred with respect to such corporation. An
ownership change occurs with respect to a corporation if it is a loss
corporation on a testing date and, immediately after the close of the
testing date, the percentage of stock of the corporation owned by one or
more 5-percent shareholders has increased by more than 50 percentage
points over the lowest percentage of stock of such corporation owned by
such shareholders at any time during the testing period. See paragraph
(a)(2)(i) of this secton for the definition of testing date. See
paragraph (d) of this section for the definition of testing period. See
1.382-2(a)(1) and paragraph (f)(3) of this section for the respective
definition of loss corporation and new loss corporation. See paragraph
(g) of this section for the definition of 5-percent shareholder. See
section 383 and 1.383-1 for rules relating to loss corporations that
have an ownership change and have capital loss carryovers, excess
foreign taxes carried over under section 904(c), carryovers of general
business credits under section 39, or unused minimum tax credits under
section 53.
(2) Events requiring a determination of whether an ownership change
has occurred -- (i) Testing date. Except as otherwise provided in this
paragraph (a)(2)(i), a loss corporation is required to determine whether
an ownership change has occurred immediately after any owner shift, any
equity structure shift, or any transaction in which an option with
respect to stock of the loss corporation is --
(A) Transferred to (or by) a 5-percent shareholder (or a person who
would be 5-percent shareholder if the option were treated as exercised),
or
(B) Issued by the loss corporation, a first tier entity, or a higher
tier entity that owns five percent or more of the loss corporation
(determined without regard to the application of paragraph (h)(2)(i)(A)
of this section). Notwithstanding the preceding sentence, any transfer
of stock of the loss corporation (or an option with respect to such
stock) in any of the circumstances described in section 382(l)(3)(B), or
any equity structure shift that is not also an owner shift, is not an
event that requires the loss corporation to make a determination of
whether an ownership change has occurred. For purposes of this section,
each date on which a loss corporation is required to make a
determination of whether an ownership change has occurred is referred to
as a testing date, all computations of increases in percentage ownership
are to be made as of the close of the testing date, and any transactions
described in this paragraph (a)(2)(i) that occur on that date are
treated as occurring simultaneously at the close of the testing date.
See paragraphs (e) (1) and (2) of this section for the respective
definitions of owner shift and equity structure shift. See paragraphs
(f) (9) and (14) of this section for the respective definitions of first
tier entity and higher tier entity.
(ii) Information statement required. A loss corporation must file a
statement with its income tax return for each taxable year that it is a
loss corporation in which an owner shift, equity structure shift or
other transaction described in paragraph (a)(2)(i) of this section
occurs. The statement must --
(A) Indicate whether any testing dates occurred during the taxable
year;
(B) Identify each testing date, if any, on which an ownership change
occurred;
(C) Identify the testing date, if any, that occurred during and
closest to the end of each of the three month periods ending on March
31, June 30, September 30 and December 31 during the taxable year,
regardless of whether an ownership change occurred on the testing date,
(D) Identify each 5-percent shareholder on each such testing date;
(E) State the percentage ownership of the stock of the loss
corporation for each 5-percent shareholder as of each such testing date
and the increase, if any, in such ownership during the testing period;
and
(F) Disclose the extent to which the loss corporation relied upon the
presumptions regarding stock ownership under paragraph (k)(i) of this
section to determine whether an ownership change occurred on any
identified testing date.
See 1.383-1(k) and paragraph (m)(4)(v) of this section for
transitional rules regarding the filing of information statements.
(iii) Records to be maintained by loss corporation. A loss
corporation shall keep such records as are necessary to determine: (A)
The identity of its 5-percent shareholders, (B) the percentage of its
stock owned by each such 5-percent shareholder, and (C) whether the
section 382 limitation is applicable. Such records shall be retained so
long as they may be material in the administration of any internal
revenue law.
(b) Nomenclature and assumptions. For purposes of the example in
this section --
(1) L is a loss corporation, and, if there is more than one loss
corporation, they are designated as L1, L2, L3, etc.
(2) P is a corporation that is not a loss corporation, and, if there
is more than one such corporation, they are designated as P1, P2, P3,
etc.
(3) HC is a corporation whose assets consist solely of the stock of
other corporations.
(4) E is an entity other than a corporation (e.g., a partnership),
and, if there is more than one such entity, they are designated as E1,
E2, E3, etc.
(5) Unless otherwise stated --
(i) A, B, C, D, AA, BB, CC, and DD are unrelated individuals who own
interests in corporations or other entities only to the extent expressly
stated,
(ii) All corporations have one class of stock outstanding and each
share of stock has the same fair maket value as each other share,
(iii) The capital structure of the loss corporation and its business
do not change over time, and
(iv) The rules of paragraphs (k) (2) and (4) of this section are not
applicable.
(6) Public L represents a group of unrelated individuals and entities
that own direct (and not indirect) stock ownership interests in loss
corporation L, each of whom owns less than five percent of the stock of
the loss corporation, and, if there is more than one loss corporation,
such groups are designated as Public L1, Public L2, Public L3, etc.
(7) Public P represents a group of unrelated individuals and entities
that own direct (and not indirect) stock ownership interests in
corporation P, each of whom owns less than five percent of the stock of
the corporation, and, if there is more than one corporation, such groups
are designated as Public P1, P2, P3, etc.
(8) Public E represents a group of unrelated individuals and entities
that own direct (and not indirect) ownership interests in entity E, each
of whom owns less than five percent of the entity, and, if there is more
than one entity, such groups are designated as Public E1, Public E2,
Public E3, etc.
(c) Computing the amount of increases in percentage ownership -- (1)
In general. In order to determine whether an ownership change has
occurred on a testing date, the loss corporation must identify each
5-percent shareholder whose percentage of stock ownership in the loss
corporation immediately after the close of the testing date has
increased, compared to such shareholder's lowest percentage of stock
ownership in such corporation at any time during the testing period.
The amount of the increase in the percentage of stock ownership in the
loss corporation of each 5-percent shareholder must be computed
separately by comparing the percentage ownership of each such 5-percent
shareholder immediately after the close of the testing date to such
shareholder's lowest percentage ownership at any time during the testing
period. Each such increase in the percentage ownership of a 5-percent
shareholder is then added together with any other such increases of
other 5-percent shareholders to determine whether an ownership change
has occurred. Because only those 5-percent shareholders whose
percentages of stock ownership have increased are taken into account, a
5-percent shareholder is disregarded if his percentage of stock
ownership, immediately after the close of the testing date, has
decreased (or has remained the same), compared to his lowest percentage
ownership interest on any previous date during the testing period.
(2) Example.
(i) A and B each own 40 percent of the outstanding L stock. The
remaining 20 percent of the L stock is owned by 100 unrelated
individuals, none of whom own as much as five percent of L stock
(''Public L''). C negotiates with A and B to purchase all their stock
in L.
(ii) The acquisitions from both A and B are completed on September
13, 1990. C's acquisition of 80 percent of L stock results in an
ownership change because C's percentage ownership has increased by 80
percentage points as of the testing date, compared to his lowest
percentage ownership in L at any time during the testing period (0
percent).
(3) Related and unrelated increases in percentage stock ownership.
The determination whether an ownership change has occurred is made
without regard to whether the changes in stock ownership of the loss
corporation (by one or more 5-percent shareholders) result from related
or unrelated events.
(4) Example.
(i) L has outstanding 200 shares of common stock. A, B and C
respectively own 100, 50 and 50 shares of the L stock. On January 2,
1988, A sells 60 shares of L stock to B. Thus, B's percentage ownership
interest in L increases by 30 percentage points, from 50 shares to 110
shares. On January 1, 1989, A purchases C's entire interest in L.
Thus, A's percentage ownership interest in L increases by 25 percentage
points, compared to his lowest percentage ownership interest in L, from
40 shares immediately following the January 2, 1988 sale to B to 90
shares. Even though A's ownership interest in L as of January 1, 1989
has decreased, compared to his 50 percent ownership interest at the
beginning of the testing period, A is a 5-percent shareholder who must
be taken into account for purposes of the computation required under
paragraph (c)(1) of this section because his interest in L on that
testing date (45 percent) has increased, compared to his lowest
percentage ownership interest in L at any time during the testing period
(20 percent following the sale to B).
(ii) Accordingly, although A and B jointly have increased their
aggregate total ownership interest in L between January 2, 1988 and
January 1, 1989 by only 25 percentage points (i.e., the total ownership
interest in L held by A and B at all times is not less than a 75 percent
interest), the total of their separate increases in the percentage stock
ownership of L, compared to their respective lowest percentage ownership
interests at any time during the testing period, is 55 percentage
points. Thus, an ownership change occurs as a result of A's acquisition
of L stock on January 1, 1989.
(d) Testing period -- (1) In general. Except as otherwise provided
in paragraphs (d) and (m) of this section, the testing period for any
testing date is the three-year period ending on the testing date. See
paragraph (a)(2)(i) of this section for the definition of testing date.
(2) Effect of a prior ownership change. Following an ownership
change, the testing period for determining whether a subsequent
ownership change has occurred shall begin no earlier than the first day
following the change date of the most recent ownership change. See
paragraph (f)(19) of this section for the definition of change date.
(3) Commencement of the testing period -- (i) In general. Except as
otherwise provided in paragraph (d)(3)(ii) of this section, the testing
period for any loss corporation shall not begin before the earlier of
the first day of either --
(A) The first taxable year from which there is a loss or excess
credit carryforward to the first taxable year ending after the testing
date, or
(B) The taxable year in which the testing date occurs.
(ii) Exception for corporations with net unrealized built-in loss.
Paragraph (d)(3)(i) of this section shall not apply if the corporation
has a net unrealized built-in loss (determined after application of
section 382(h)(3)(B)) on the testing date, unless the loss corporation
establishes the taxable year in which the net unrealized built-in loss
first accrued.
In that event, the testing period shall not begin before the earlier
of --
(A) The first day of the taxable year in which the net unrealized
built-in loss first accrued, or
(B) The day described in paragraph (d)(3)(i) of this section. See
section 382(h) for the definition of net unrealized built-in loss.
(4) Disregarding testing dates. Any testing date that occurs before
the beginning of the testing period shall be disregarded for purposes of
this section.
(5) Example.
(i) A owns all 100 outstanding shares of L stock. A sells 40 shares
to B on January 1, 1988. C purchases 20 shares of L stock from A on
July 1, 1991. In determining if an ownership change occurs on the July
1, 1991 testing date, B's acquisition of L stock is disregarded because
it occurred before the testing period that ends on such testing date.
Thus, B's ownership interest in L does not increase during the testing
period, and no ownership change results from C's acquisition.
(ii) The facts are the same as in (i), except that throughout the
period during which B negotiated his stock purchase transaction with A,
B knew that C intended to attempt to acquire a significant stock
interest in L. Also, B and C have been partners in a number of
significant business ventures. The result is the same as in (i).
(e) Owner shift and equity structure shift -- (1) Owner shift -- (i)
Defined. For purposes of this section, an owner shift is any change in
the ownership of the stock of a loss corporation that affects the
percentage of such stock owned by any 5-percent shareholder. See
paragraph (g) of this section for the definition of a 5-percent
shareholder. An owner shift includes, but is not limited to, the
following transactions:
(A) A purchase of disposition of loss corporation stock by a
5-percent shareholder,
(B) A section 351 exchange that affects the percentage of stock owned
by a 5-percent shareholder,
(C) A redemption or a recapitalization that affects the percentage of
stock owned by a 5-percent shareholder,
(D) An issuance of loss corporation stock that affects the percentage
of stock owned by a 5-percent shareholder, and
(E) An equity structure shift that affects the percentage of stock
owned by a 5-percent shareholder.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded. Transfers of loss corporation stock between persons who
are not 5-percent shareholders of such corporation (and between members
of separate public groups resulting from the application of the
segregation rules of paragraphs (j)(2) and (3)(iii) of this section) are
not owner shifts and thus are not taken into account. See paragraph
(h)(4)(xi) of this section for a similar rule applicable to transfers of
options.
(iii) Examples.
Example (1). A has owned all 1000 shares of outstanding L stock for
more than three years. On June 15, 1988, A sells 300 of his L shares to
B. This transaction is an owner shift. No other 5-percent shareholder
has increased his percentage ownership of L stock during the testing
period. Thus, the owner shift resulting from B's acquisition does not
result in an ownership change, because B has increased his stock
ownership in L by only 30 percentage points.
Example (2). The facts are the same as in Example (1). In addition,
on June 15, 1989, L issues 100 shares to each of C, D and AA. The stock
issuance is an owner shift. The transaction, however, does not result
in an ownership change, because B, C, D and AA (the 5-percent
shareholders whose stock ownership has increased as of the testing date,
compared to any other time during the testing period) have increased
their percentage of stock ownership in L by a total of only 46.2
percentage points during the testing period (by 23.1 percentage points
(300 shares/1300 shares) for B, and 7.7 percentage points (100
shares/1300 shares) for each of C, D and AA).
Example (3). All 1000 shares of L stock are owned by a group of 100
unrelated individuals, none of whom own as much as five percent of L
stock (''Public L''). Several of the members of Public L sell their L
stock, amounting to a 30 percent ownership interest in L, to B on June
15, 1988. The sale of stock to B is an owner shift. Between June 16,
1988 and June 15, 1989, each of the remaining individuals in Public L
sells his stock to another person who is not a 5-percent shareholder.
Under paragraph (e)(1)(ii) of this section, trading activity among the
members of Public L is disregarded and does not result in an owner
shift. On June 15, 1989, L issues 100 shares to each of C, D and AA.
The only sale transactions by members of Public L that are taken into
account in determining whether an ownership change occurs on June 15,
1989 are the sales to B on June 15, 1988. Because B, C, D and AA
together have increased their percentage ownership of L stock as a
result of B's purchase and the stock issuance by an amount not in excess
of 50 percentage points during the testing period ending on June 15,
1988, an ownership change does not occur on that date.
Example (4). The facts are the same as in Example (2). In addition,
on December 15, 1989, L redeems 200 of the L shares from A. The
redemption is an owner shift that results in an ownership change,
because B, C, D and AA are 5-percent shareholders whose percentage
ownership of L increase by a total of 54.6 percentage points during the
testing period (by 27.3 percentage points (300 shares/1100 shares) for B
and 9.1 percentage points (100 shares/1100 shares) for each of C, D and
AA).
Example (5). L is owned entirely by 10,000 unrelated shareholders,
none of whom owns as much as five percent of the stock of L (''Public
L''). Accordingly, Public L is L's only 5-percent shareholder. See
paragraph (j)(1) of this section. There are one million shares of
common stock outstanding. On December 1, 1988, L issues two million new
shares of its common stock to members of the public, none of whom owned
any L stock prior to the issuance. Following the public offering, no
shareholder of L owns, directly or indirectly, five percent or more of L
stock. Under paragraph (j)(2) of this section, however, all of the
newly issued stock is treated as acquired by a 5-percent shareholder
(''Public NL'') that is unrelated to Public L. Therefore, the public
offering constitutes an owner shift that results in an ownership change
because Public NL's percentage of stock ownership in L increased by 66
2/3 percentage points (two million shares acquired in the public
offering/three million shares outstanding following the offering) over
its lowest percentage ownership during the testing period (0 percent
prior to the offering).
Example (6). The facts are the same as in Example (5), except that L
issues only 500,000 new shares of L stock on December 1, 1988, and
Public NL's percentage ownership interest in L increases by only 33 1/3
percentage points (500,000 shares acquired in the public offering/1.5
million shares outstanding following the offering). During the two
years following December 2, 1988, 14 percent of the stock outstanding on
that date is sold over a public stock exchange. On December 3, 1990, A
purchases five percent of L stock (75,000 shares) over a public stock
exchange. The purchase of five percent of L stock by A is an owner
shift and is presumed to have been made proportionately from Public L
and Public NL under paragraph (j)(1)(vi) of this section. Under
paragraph (e)(1)(ii) of this section, transfers of L stock in
transactions not involving A (i.e., in transactions among or between
members of separate public groups resulting from the application of
paragraphs (j) (2) and (3) of this section) are not taken into account,
and do not constitute owner shifts. (Transfers between members of
Public NL and Public L, which are treated as separate 5-percent
shareholders solely by virtue of paragraph (j)(2) of this section, are
disregarded even if L has actual knowledge of any such transfers.) A and
Public NL, the only 5-percent shareholders whose interests in L have
increased during the testing period, have increased there respective
stock ownership by only 36 2/3 percentage points -- five percentage
points for A (75,000 shares/1.5 million shares outstanding) and 31 2/3
percentage points for Public NL (((500,000 shares issued in the public
offering) -- (5 percent 500,000 shares presumed to have been acquired
by A)) /1.5 million shares outstanding). Accordingly, there is no
ownership change with respect to L notwithstanding that, taking into
account the public trading, a change of more than 50 percentage points
in the ultimate beneficial ownership of L stock occurred during the
three-year period ending on the December 3, 1990 testing date.
Example 7. The facts are the same as in Example 6, except that five
percent of the L stock has always been owned by P which, in turn, has
always been owned by Public P. On December 6, 1990, P sells all of its
L stock over a public stock exchange. Although the trading of P stock
among persons that are not 5-percent share-holders (without regard to
the segregation rules of paragraph (j) of this section) are disregarded
under paragraph (e)(1)(ii) of this section, the disposition of the L
stock by P is not disregarded because the L stock is transferred in a
transaction that is subject to paragraph (j)(3)(i) of this section.
(2) Equity structure shift -- (i) Tax-free reorganizations. An
equity structure shift is any reorganization within the meaning of
section 368 with respect to which the loss corporation is a party to the
reorganization, except that such term does not include a reorganization
described in --
(A) Section 368(a)(1) (D) or (G) unless the requirements of section
354(b)(1) are met, or
(B) Section 368(a)(1)(F).
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts. (Reserved)
(iii) Overlap of owner shift and equity structure shift. Any equity
structure shift that affects the percentage of loss corporation stock
owned by a 5-percent shareholder also constitutes an owner shift. See
paragraph (e)(i)(E) of this section
(iv) Examples.
Example (1). A owns all of the stock of L and B owns all of the
stock of P. On October 13, 1988, L merges into P in a reorganization
described in section 368a(1)(A). As a result of the merger, A and B own
25 and 75 percent, respectively, of the stock of P. The merger is an
equity structure shift (and, because it affects the percentage of L
stock owned by 5-percent shareholders, it also constitutes an owner
shift). On the October 13, 1988 testing date, B is a 5-percent
shareholder whose stock ownership in the loss corporation following the
merger has increased by 75 percentage points over his lowest percentage
of stock ownership in L at any time during the testing period (0 percent
prior to the merger). Accordingly, an ownership change occurs as a
result of the merger. P is thus a new loss corporation and L's
pre-change losses are subject to limitation under section 382. See
1.382-2(a)(1)(iii) of this section requiring P to account separately for
L's pre-change losses.
Example (2). (i) A owns 100 percent of L1 stock and B owns 100
percent of L2 stock. On January 1, 1988, L1 merges into L2 in a
reorganization described in section 368(a)(1)(A). Immediately after the
merger, A and B own 40 percent and 60 percent, respectively, of the L2
stock. There is an equity structure shift (as well as an owner shift)
with respect to both L1 and L2 on January 1, 1988.
(ii) Because the percentage of L2 stock owned by B immediately after
the merger (60 percent) increases by more than 50 percentage points over
the lowest percentage of the stock of L1 owned by B during the testing
period (0 percent prior to the merger), there is an ownership change
with respect to L1. L2 is a new loss corporation and thus, under
1.382-2(a)(1)(iii) of this section, the pre-change losses of L1 must be
accounted for separately by L2 from the losses of L2 (immediately before
the ownership change) and are subject to limitation under section 382.
(iii) L2 is a new loss corporation because it is a successor
corporation to L1. There is no ownership change with respect to L2,
however, because A's stock ownership in L2 increased by only 40
percentage points (to 40 percent) over the amount owned by A prior to
the merger (0 percent). Therefore, the pre-change losses of L2 are not
limited under section 382 as a result of the merger, but must be
separately accounted for under 1.382-2(a)(1)(iii) of this section.
Example (3). The result in Example (2) would be the same if L1 had
survived the merger (i.e., L2 merged into L1) with A and B owning 40 and
60 percent, respectively, of L1 stock. L1's pre-change losses would be
accounted for separately and limited under section 382 and the
pre-change losses of 2 would be accounted for separately under
1.382-2(a)(1)(iii) of this section, but would not be limited under
section 382. See 1.382-2(a)(1)(ii) for the treatment of 2 following
the transaction.
Example (4). The facts are the same as Example (2), except, instead
of acquiring 1 in a merger, 2 acquires all of the 1 stock from A on
January 1, 1988, solely in exchange for stock representing a 40 percent
interest in 2, in a reorganization described in section 368(a)(1)(B).
The acquisition of stock by 2 is an equity structure shift (as well as
an owner shift) with respect to 1 that results in an ownership change
with respect to 1 because the percentage of 1 stock owned by B
immediately after the reorganization (60 percent, by virtue of B's
ownership of 2, through the operation of the constructive ownership
rules of paragraph (h) of this section) increases by more than 50
percentage points over the lowest percentage of 1 stock owned by B at
any time during the testing period (0 percent prior to the
reorganization). The acquisition also results in an equity structure
shift and an owner shift with respect to 2, but 2 incurs no ownership
change, because A's stock ownership in 2 increased by only 40 percentage
points over the percentage of 2 stock owned by A prior to the
reorganization (0 percent).
(f) Definitions. For purposes of this section --
(1) Loss corporation. See section 382 and 1.382-2(a)(1) for the
definition of a loss corporation.
(2) Old loss corporation. The term ''old loss corporation'' means
any corporation with respect to which there is an ownership change and
that was a loss corporation immediately before the ownership change.
(3) New loss corporation. The term ''new loss corporation'' means a
corporation with respect to which there is an ownership change if,
immediately after such change, it is a loss corporation. A successor
corporation to the corporation described in the preceding sentence also
is a new loss corporation.
(4) Successor corporation. A successor corporation is a distributee
or transferee corporation that succeeds to and takes into account items
described in section 381(c) from a loss corporation as the result of an
acquisition of assets described in section 381(a).
(5) Predecessor corporation. A predecessor corporation is a
distributor or transferor corporation that distributes or transfers its
assets to an acquiring corporation in a transaction described in section
381(a).
(6) Shift. As the context may require, a shift means an equity
structure shift, an owner shift or both.
(7) Entity. Sec 1.382-2(a)(3) for the definition of an entity.
(8) Direct ownership interest. A direct ownership interest means the
interest a person owns in an entity, including a loss corporation,
without regard to the constructive ownership rules of paragraph (h) of
this section.
(9) First tier entity. A first tier entity is an entity that, at any
time during the testing period, owns a five percent or more direct
ownership interest in the loss corporation.
(10) 5-percent owner. A 5-percent owner is any individual that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or a higher tier entity. See
paragraph (g) of this section for rules to determine whether, as a
result of the constructive ownership rules of paragraph (h) of this
section, a 5-percent owner is a 5-percent shareholder.
(11) Public shareholder. A public shareholder is any individual,
entity, or other person with a direct ownership interest in a loss
corporation of less than five percent at all times during the testing
period.
(12) Public owner. A public owner is any individual, entity, or
other person that, at all times during the testing period, owns less
than a five percent direct ownership interest in a first tier entity or
any higher tier entity.
(13) Public group. A public group is a group of individuals,
entities, or other persons each of whom owns, directly or
constructively, less than five percent of the loss corporation. See
paragraphs (g) and (j) of this section for the rules applicable to
identify public groups and to determine whether a public group is a
5-percent shareholder.
(14) Higher tier entity. A higher tier entity is any entity that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or in any higher tier entity.
(15) Indirect ownership interest. An indirect ownership is an
interest a person owns in an entity determined solely as a result of the
application of the constructive ownership rules of paragraph (h) of this
section and without regard to any direct ownership interest (or other
beneficial ownership interest) in the entity.
(16) Highest tier entity. A highest tier entity is a first tier
entity or a higher tier entity that is not owned, in whole or in part,
at any time during the testing period by a higher tier entity.
(17) Next lower tier entity. The next lower tier entity with respect
to a first tier entity is the loss corporation. The next lower tier
entity with respect to a higher tier entity is any first tier entity or
other higher tier entity in which the higher tier entity owns, at any
time during the testing period, a five percent or more direct ownership
interest.
(18) Stock -- (i) In general. Except as provided in this paragraph
(f)(18), the term ''stock'' means stock other than stock described in
section 1504(a)(4). Notwithstanding the preceding sentence, stock that
is not described in section 1504(a)(4) solely because it is entitled to
vote as a result of dividend arrearages shall be treated as so described
and thus shall not be considered stock. Stock described in section
1504(a)(4), however, is not excluded for purposes of determining the
value of the loss corporation under section 382(e). The determination
of the percentage of stock of any corporation owned by any person shall
be made on the basis of the relative fair market value of the stock
owned by such person to the total fair market value of the outstanding
stock of the corporation.
(ii) Treating stock as not stock. Any ownership interest that
otherwise would be treated as stock under paragraph (f)(18)(i) of this
section shall not be treated as stock if --
(A) As of the time of its issuance or transfer to (or by) a 5-percent
shareholder, the likely participation of such interest in future
corporate growth is disproportionately small when compared to the value
of such stock as a proportion of the total value of the outstanding
stock of the corporation,
(B) Treating the interest as not constituting stock would result in
an ownership change, and
(C) The amount of the pre-change loss (determined as if the testing
date were the change and treating the amount of any net unrealized
built-in loss as a pre-change loss) is more than twice the amount
determined by multiplying
(1) the value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) the long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
Stock that is not treated as stock under this paragraph (f)(18)(ii),
however, is taken into account for purposes of determining the value of
the loss corporation under section 382(e).
(iii) Treating interests not constituting stock as stock. Any
ownership interest that would not be treated as stock under paragraph
(f)(18)(i) of this section (other than an option that is subject to
paragraph (h)(4) of this section) shall be treated as constituting stock
if --
(A) As of the time of its issuance or transfer to (or by) a 5-percent
shareholder (or a person who would be a 5-percent shareholder if the
interest not constituting stock were treated as stock), such interest
offers a potential significant participation in the growth of the
corporation,
(B) Treating the interest as constituting stock would result in an
ownership change, and
(C) The amount of the pre-change losses (determined as if the testing
date were the change date and treating the amount of any net unrealized
built-in loss as a pre-change loss) is more than twice the amount
determined by multiplying
(1) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
An ownership interest is that treated as stock under this paragraph
(f)(18)(iii) is taken into account for purposes of determining the value
of the loss corporation under section 382(e).
(iv) Stock of the loss corporation. The stock of the loss
corporation means stock of such corporation within the meaning of this
paragraph (f)(18) and, as the context may require, includes any indirect
ownership interest in the loss corporation.
(19) Change date. The change date means the date on which a shift
(or any other transaction described in paragraph (a)(2)(i) of this
section) that is the last component of an ownership change occurs.
(20) Year. A year, or any multiple thereof, means a 365-day period
(or a 366-day period in the case of a leap year), or any multiple
thereof, unless the year is specifically identified as a taxable year.
(21) Old section 382. Old section 382 means section 382, as in
effect prior to the effective date of section 382 in the Tax Reform Act
of 1986 (the ''Act''), but taking into account section 621(f)(2) of the
Act.
(22) Pre-change loss. See section 382 and 1.382-2(a)(2) for the
definition of pre-change loss.
(23) Unrelated. Any two persons are unrelated if the constructive
ownership rules of paragraph (h) of this section do not apply to treat
either person as owning stock that is owned, directly or constructively,
by the other person.
(24) Percentage ownership interest. A person's percentage ownership
interest in --
(i) A corporation shall be determined under the rules of this section
that are applicable to the determination of a shareholder's percentage
stock ownership interest in a loss corporation (see paragraphs (f)(18)
(i) through (iii) of this section),
(ii) A partnership shall be equal to the relative fair market value
of such person's partnership interest to the total fair market value of
all outstanding partnership interests, determined without regard to any
limited and preferred partnership interest that is described in
paragraph (h)(2)(ii)(C) of this section,
(iii) A trust shall be determined in accordance with the principles
of section 318(a)(2)(B) for determining the constructive ownership of
stock,
(iv) An estate shall be determined in accordance with the principles
of section 318(a)(2)(A) for determining the constructive ownership of
stock, and
(v) All other entities shall be determined by reference to the
person's relative economic interest in the entity, taking into account
all of the relevant facts and circumstances.
(g) 5-percent shareholder -- (1) In general. Subject to the rules of
paragraphs (k) (2) and (4) of this section, the term ''5-percent
shareholder'' means --
(i) An individual that owns, at any time during the testing period,
(A) A direct ownership interest in the stock of the loss corporation
of five percent or more or
(B) An indirect ownership interest in the stock of the loss
corporation of five percent or more by virtue of an ownership interest
in any one first tier entity or higher tier entity,
(ii) A public group, of either a first tier entity or a higher tier
entity, identified as a 5-percent shareholder under paragraph (j)(1)(iv)
(A) or (B) of this section,
(iii) A public group of the loss corporation identified as a
5-percent shareholder under paragraph (j)(1)(iv)(C) of this section, and
(iv) A public group, of the loss corporation, a first tier entity or
a higher tier entity, identified as a 5-percent shareholder under
paragraph (j) (2) or (3) of this section. An individual owning five
percent or more of the stock of the loss corporation at any time during
the testing period is a 5-percent shareholder notwithstanding that the
individual may own less than five percent of the stock of the loss
corporation on the testing date. See paragraph (g)(5)(i)(B) of this
section for rules permitting a loss corporation to make an adjustment in
cases described in the preceding sentence.
(2) Determination of whether a person is a 5-percent shareholder.
Except as provided in paragraphs (k) (2) and (4) of this section, a
person shall be treated as constructively owning stock of the loss
corporation pursuant to paragraph (h)(2) of this section only if the
loss corporation stock is attributed to such person in the person's
capacity as a higher tier entity or a 5-percent owner of the first tier
entity or higher tier entity from which such stock is attributed. See
paragraph (k)(3) of this section for rules explaining the extent of the
obligation of the loss corporation to determine the identity of its
5-percent shareholders. Nothing in this paragraph (g)(2), however,
shall limit the attribution of loss corporation stock under section
318(a)(2) and paragraph (h) of this section to a public owner.
(3) Determination of the percentage stock ownership interest of a
5-percent shareholder. Subject to the rules of paragraphs (k)(2) and
(4) of this section, in determining a 5-percent shareholder's percentage
ownership interest in the loss corporation, the shareholder's direct
ownership interest, if any, and each indirect ownership interest that he
may have in the loss corporation in his capacity as a 5-percent owner of
any one first tier entity or higher tier entity, if any, are required to
be added together and taken into account with respect to such
shareholder only to the extent that each such direct or indirect
ownership interest constitutes five percent or more of the stock of the
loss corporation.
(4) Examples.
Example (1) (i) Twenty percent of L stock is owned by A, 10 percent
is owned by P1, 20 percent is owned by E, a joint venture, and the
remaining 50 percent of L stock is owned by Public L. P1 is owned 15
percent by B and 85 percent by Public P1. E is owned 30 percent by P2
and 70 percent by P3, which, in turn, are owned by Public P2 and Public
P3, respectively.
(ii) The ownership structure of L is illustrated by the following
chart:
Insert illus 0281A
(iii) P1 and E, each of which has a direct ownership interest in L of
five percent or more, are first tier entities. The shareholders with
direct ownership interests in L who individually own less than five
percent of L are public shareholders (Public L). B, who has a direct
ownership interest of five percent or more in P1, is a 5-percent owner
of P . P2 and P3, and P3, each of which has a direct ownership interest
in a first tier entity (E) of five percent or more, are higher tier
entities with respect to L and, because neither entity is owned at any
time during the testing period by a higher tier entity, they also are
highest tier entities. The shareholders of P2 and P3 (Public P2 and
Public P3, respectively) are public owners of such entities, because
none of those shareholders own five percent or more of either entity at
any time during the testing period.
(iv) A, who has a 20 percent direct ownership interest in L, is a
5-percent shareholder of L. Because, by application of the constructive
ownership rules of paragraph (h) of this section, B owns only 1.5
percent of L stock in his capacity as a 5-percent owner of P1 (15
percent ownership of P1 10 percent ownership of L), B is not a
5-percent shareholder of L, even though he is a 5-percent owner of P1.
Under the rules of paragraph (j) of this section, therefore, B is
treated as a member of Public P1. See Example (3) of paragraph
(j)(1)(vi) of this section for a determination of which public owners
and public shareholders constitute public groups that are treated as
5-percent shareholders of L.
Example (2) (i) The facts are the same as in Example (1), except that
P3 is owned 60 percent by C, 30 percent by P4, and 10 percent by Public
P3. The stock of P4 is owned by a group of persons (Public P4), none of
whom own five percent or more of the stock of P4.
(ii) The ownership structure of L is illustrated by the following
chart:
Insert illustration 0283
(iii) The defined terms are the same as in Example (1), except that
P3 is a higher tier entity, not a highest tier entity, because five
percent or more of P3 is, in turn, owned by another entity (P4 ). P4,
which owns five percent or more of a higher tier entity (P3), also is a
higher tier entity and, because it is not owned at any time during any
testing period by any entity that is also a higher tier entity, P4 is a
highest tier entity. All of the shareholders of P4, none of which own a
direct ownership interest of five percent or more in P4, are public
owners of P4.
(iv) C is a 5-percent owner of P3 and, under the constructive
ownership rules of paragraph (h) of this section, C indirectly owns 8.4
percent of L ((60 percent ownership of P3) (70 percent ownership of E)
(20 percent ownership of L)), in his capacity as a 5-percent owner of
P3. B is a 5-percent owner of P1 and, under the constructive ownership
rules of paragraph (h) of his section, B owns 1.5 percent of L ((15
percent ownership of P1) (10 percent ownership of L)) in his capacity
as a 5-percent owner of P1. Therefore, C is a 5-percent shareholder of
L, but B is not a 5-percent shareholder of L, even though he is a
5-percent owner of P1. See Example (4) of paragraph (j)(1)(vi) of this
section for a determination of which public owners and public
shareholders constitute public groups that are treated as separate
5-percent shareholders of L.
Example (3) (i) L is owned 30 percent by A and 70 percent by P. A
owns six percent of P stock and the balance (94 percent) is owned
equally by 500 unrelated shareholders (''Public P'').
(ii) A is a 5-percent shareholder because he directly owns 30 percent
of L. Even though A is a 5-percent owner of P, A's 4.2 percent indirect
ownership interest in L (six percent ownership interest in P P's 70
percent ownership of L) is generally not taken into account in
determining A's ownership interest, because such indirect ownership
interest is less than five percent. Instead, A's 4.2 percent indirect
interest is treated under paragraph (j)(1)(iv) of this section as owned
by Public P. If, however, L has actual knowledge of A's
less-than-five-percent indirect ownership interest in L and is thus
subject to paragraph (k)(2) of this section, or paragraph (k)(4) of this
section otherwise applies, L must take A's total 34.2 percent ownership
interest into account in determining A's percentage ownership in L.
Example (4). The facts are the same as in Example (3), except that A
owns ten percent of P's stock. Because A's indirect ownership interest
in L in his capacity as a 5-percent owner of P is five percent or more,
both A's 30 percent direct ownership interest in L and his seven percent
indirect ownership interest in L (10 percent ownership interest in P
P's 70 percent ownership of L) are taken into account in determining his
ownership interest in L, without regard to L's actual knowledge or
whether paragraph (k)(4) of this section applies.
Example 5 -- See 1.382-2(a)(3)(ii) for additional examples with
respect to the definition of an entity.
(5) Stock ownership presumptions in connection with certain
acquisitions, and dispositions of loss corporation stock -- (i) In
general. For purposes of this section --
(A) If an individual owns less than five percent of the stock of a
loss corporation during the testing period (excluding the testing date)
and acquires an amount of such stock so that the individual becomes a
5-percent shareholder on the testing date, the loss corporation may
treat any interest in the loss corporation owned by such individual
prior to that acquisition as owned by a public group during the period
of such individual's ownership of that interest and as not owned by the
5-percent shareholder during the same period, and
(B) If a 5-percent shareholder's percentage ownership interest in the
loss corporation is reduced to less than five percent, the loss
corporation may presume that the remaining stock owned by such 5-percent
shareholder immediately after such reduction is the stock owned by such
shareholder for each subsequent testing date having a testing period
that includes the date on which the reduction occurred as long as such
shareholder continues to own less than five percent of the stock of the
loss corporation. In that event, such ownership interest shall be
treated as owned by a separate public group for purposes of the rules of
paragraph (j)(2)(vi) of this section.
(ii) Example.
L has 100,000 shares of stock outstanding. All of the L stock is
owned equally by 40 unrelated, individual shareholders, including A (who
owns 2.5 percent of L stock). Because no person owns as much as five
percent of L stock, Public L is the only 5-percent shareholder of L.
See paragraph (j)(1) of this section. A purchases 5,000 shares of L
stock over a public stock exchange on June 8, 1989. The purchase is an
owner shift. When added to his ownership interest before that date (the
testing date), A owns 7,500 shares of L stock (7.5 percent). Under
paragraph (g)(5)(i)(A) of this section, L may treat A and Public L as
having owned 0 percent and 100 percent, respectively, at all times prior
to June 8, 1989 (rather than having owned 2.5 percent by A and 97.5
percent by Public L, even if L has actual knowledge of A's less than
five percent ownership interest). The increase in A's stock ownership
of L as of June 8, 1989 thus would be 7.5 percentage points, rather than
5.0 percentage points, for purposes of determining whether an ownership
change occurs on that testing date and any subsequent testing date.
(h) Constructive ownership of stock -- (1) In general. Subject to
certain modifications set forth in this section and section 382(l)(3),
the constructive ownership rules of section 318(a) generally apply for
purposes of determining ownership of loss corporation stock.
(2) Attribution from corporations, partnerships, estates and trusts
-- (i) In general. Stock owned (directly or indirectly) by an entity
shall be attributed to its owners --
(A) Except as otherwise provided in this section, by treating the
stock attributed pursuant to section 318(a)(2) as no longer being owned
by the entity from which it is attributed, and
(B) If attribution is from a corporation, without regard to the 50
percent stock ownership limitation contained in section 318(a)(2)(C).
(ii) Limitation on attribution from entities with respect to certain
interests. Section 318(a)(2) shall not apply to treat the stock of the
loss corporation that is owned directly by a first tier entity (or
indirectly by any higher tier entity) as being indirectly owned by any
person that has an ownership interest in the first tier entity (or any
higher tier entity) to the extent that such interest is (or is
attributable to) --
(A) Stock of any such entity that is described in section 1504(a)(4),
(B) Any ownership interest in any such entity that does not
constitute stock under paragraph (f)(18)(ii) of this section, or
(C) If the entity is not a corporation, any ownership interest in any
such entity that has characteristics similar to the interests described
in paragraph (h)(2)(ii) (A) or (B) of this section.
The ownership interests described in this paragraph (h)(2)(ii) shall
not be taken into account in determining a person's percentage ownership
interest in an entity under paragraph (f)(24) of this section.
(iii) Limitation on attribution from certain entities. For purposes
of this section, except as provided in paragraphs (k)(2) and (4) of this
section, each of the following shall be treated as an individual who is
unrelated to any other owner (direct or indirect) of the loss
corporation --
(A) Any entity other than a higher tier entity that owns five percent
or more of the loss corporation stock (determined without regard to
paragraph (h)(2)(i)(A) of this section) on a testing date, a first tier
entity or the loss corporation,
(B) A qualified trust described in section 401(a),
(C) Any State, any possession of the United States, the District of
Columbia, the United States (or any agency or instrumentality thereof),
any foreign government, or any political subdivision of any of the
foregoing, and
(D) Any other person designated by the Internal Revenue Service in
the Internal Revenue Bulletin.
Stock of a loss corporation that is owned by any such person shall
thus not be attributed to any other person for purposes of this section.
See paragraph (g)(2) of this section limiting attribution from a first
tier entity or a higher tier entity to any person that is not a
5-percent owner or a higher tier entity.
(iv) Examples.
Example (1). All the stock of L is owned by A. B and C respectively
own 70 and 30 percent of the outstanding P stock. P acquires 60 percent
of the outstanding L stock from A on July 1, 1988 (a testing date).
After the acquisition, P is a first tier entity and a higher tier entity
of L. B and C are each 5-percent owners of P and also are 5-percent
shareholders of L having a 42 percent and 18 percent stock ownership
interest in L, respectively, through the operation of the constructive
ownership rules of paragraph (h) of this section. Because B and C
together have increased their ownership in L by more than 50 percentage
points during the testing period ending on the testing date (60 percent
on the testing date and 0 percent prior thereto), an ownership change
occurs with respect to L on July 1, 1988.
Example (2). The facts are the same as in Example (1), except that B
and C are not shareholders in a corporation, but instead are partners in
a general partnership, E. B and C respectively own 70 percent and 30
percent of E. E acquires 60 percent of the L stock on July 1, 1988.
The results are the same as in Example (1).
Example (3). The facts are the same as in Example (1), except that
the acquisition is accomplished in a transaction that qualifies under
section 351(a). In that transaction, HC is formed through (i) a
contribution of money by P in exchange for 60 shares of HC common stock
and (ii) a contribution of all the outstanding shares of L stock plus
cash by A in exchange for 40 shares of HC common stock and 30 shares of
HC preferred stock that is described in section 1504(a)(4). The
respective values of each share of HC stock, common and preferred, are
equal. The stock of L is attributed to A through his interest in HC
common stock, but not through his interest in HC preferred stock (see
paragraph (h)(2)(ii)(A) of this section). Thus, A is treated as owning
indirectly only 40 percent of L. B and C are 5-percent shareholders of
L having indirect ownership interests in L of 42 percent and 18 percent,
respectively, through their ownership of HC common stock. The results
are therefore the same as in Example (1).
(3) Attribution to corporations, partnerships, estates and trusts.
Except as otherwise provided by regulation under section 382 or by the
Internal Revenue Service in the Internal Revenue Bulletin, the rules of
section 318(a)(3) shall not apply in determining the ownership of stock
under this section.
(4) Option attribution -- (i) In general. Solely for the purpose of
determining whether there is an ownership change on any testing date,
stock of the loss corporation that is subject to an option shall be
treated as acquired on any such date, pursuant to an exercise of the
option by its owner on that date, if such deemed exercise would result
in an ownership change. The preceding sentence shall be applied
separately with respect to --
(A) Each class of options (i.e., options with terms that are
identical, issued by the same issuer, and issued on the same date) owned
by each 5-percent shareholder (or person who would be a 5-percent
shareholder if the option were treated as exercised), and
(B) Each 5-percent shareholder, each owner of an option who would be
a 5-percent shareholder if the option were treated as exercised, and
each combination of such persons.
(ii) Examples.
Example (1) (i) A owns all of the 100 shares of outstanding L stock.
A grants options for the purchase of his L stock, exercisable for 10
years from the date of issuance, in the following transactions: An
option to B for four shares (issued January 1, 1988), an option to C for
six shares (issued June 1, 1989), and an option to D for 15 shares
(issued July 30, 1989). On July 30, 1990, A sells 41 shares of his L
stock to BB.
(ii) Pursuant to paragraph (a)(2)(i) of this section, the date on
which each option is acquired is a testing date. The issuance of
options to acquire L stock to each of B, C, and D is not treated as an
acquisition of the underlying stock on any such testing date since such
treatment with respect to any one of the option owners (or any
combination thereof) would not have resulted in an ownership change on
any of those testing dates.
(iii) The date on which BB acquires 41 shares also is a testing date.
BB's acquisition of 41 percent of the L stock, taken together with the
shift in ownership that would result if the options held by B, C and D
were exercised, would result in an ownership change, because the stock
owned or treated as owned by Public L (a group including only B, the
sole shareholder who owns less than five percent of L stock), C, D and
BB would have increased by 66 percentage points (four, six, 15, and 41
percentage points, respectively) during the testing period. Subject to
paragraph (h)(4)(ix) of this section, the options are treated as
exercised and an ownership change occurs on July 30, 1990, pursuant to
paragraph (h)(4)(i) of this section. Accordingly, no new testing period
can begin before July 31, 1990. Under paragraph (h)(4)(x)(F) of this
section, the option attribution rules of paragraph (h)(4)(i) of this
section shall not be applicable with respect to any of the options owned
by B, C, and D immediately before the ownership change until such time,
if any, that such options are transferred to (or by) 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised). In addition, the subsequent exercise of any of
those options by A, B, or C (the persons owning such options immediately
before the ownership change) is disregarded. See paragraph (h)(4)(vi)
of this section. Also see paragraph (h)(4)(viii) of this section for
the treatment of options that lapse or are forfeited.
(iv) The facts are the same as in (i), except that the sale of A's 41
shares of L stock to BB occurs on July 30, 1995. Because the options
are treated as exercised and the related stock is treated as acquired on
the July 30, 1995 testing date, the results are the same as described in
(iii).
Example (2) (i) A owns all of the outstanding 100 shares of the stock
of L. On July 22, 1988, the value of A's stock in L is $500 and the
following agreements are entered into: (i) A sells 40 shares of his L
stock to B for $200, (ii) in exchange for $10, A grants B an option to
acquire the balance of his L stock for $305 at any time before July 22,
1992, and (iii) L grants A an option to acquire 100 shares of L stock at
a price of $600 exercisable until such time as B's option is no longer
outstanding.
(ii) If the stock subject to the options owned by both A and B were
treated as acquired on the July 22, 1988 testing date, B would have
increased his ownership interest in L by only 50 percentage points to 50
percent ((40 shares purchased + 60 shares acquired pursuant to the
option)/200 outstanding shares of L stock, including 100 shares deemed
outstanding pursuant to the option issued to A by L) as compared with 0
percent prior to July 22, 1988. In determining whether the options with
respect to the stock of L would, if exercised, result in an ownership
change, paragraph (h)(4)(i)(B) of this section requires that such
options be treated as exercised separately with respect to each
5-percent shareholder, each person who would be a 5-percent shareholder
if the option were treated as exercised or each combination of such
persons. Therefore, by treating the option owned by A as not having
been exercised and the option owned by B as having been exercised, B's
interest in L increases by 100 percentage points during the testing
period. An ownership change with respect to L therefore results from
the transactions occurring on July 22, 1988.
(iii) Contingencies. Except as provided in paragraph (h)(4)(x)(D) of
this section, the extent to which an option is contingent or otherwise
not currently exercisable shall be disregarded for purposes of this
section.
(iv) Series of options. For purposes of this section, an option to
acquire an option with respect to the stock of the loss corporation, and
each one of a series of such options, shall be considered as an option
to acquire such stock.
(v) Interests that are similar to options. For purposes of this
section,
(A) An interest that is similar to an option includes, but is not
limited to, a warrant, a convertible debt instrument, an instrument
other than debt that is convertible into stock, a put, a stock interest
subject to risk of forfeiture, and a contract to acquire or sell stock,
and
(B) Any such interest shall be treated as an option.
(vi) Actual exercise of options -- (A) In general. The actual
exercise of any option in existence immediately before and after an
ownership change, whether or not the option was treated as exercised in
connection with the ownership change under paragraph (h)(4)(i) of this
section, shall be disregarded for purposes of this section, but only if
the option is exercised by the 5-percent shareholder (or person who
would have been a 5-percent shareholder if the options owned by such
person had been exercised immediately before the ownership change) who
owned the option immediately before and after such ownership change.
(B) Actual exercise within 120 days of deemed exercise. If the
actual exercise of an option occurs on or before the end of the period
which is 120 days after the date on which the option is treated as
exercised under paragraph (h)(4)(i) of this section, the loss
corporation may elect to treat paragraphs (h)(4)(i) and (vi)(A) of this
section as not applying to such option and take into account only the
acquisition of loss corporation stock resulting from the actual exercise
of the option. An election under this paragraph (h)(4)(vi)(B) shall
have no effect on the determination of whether an ownership change
occurs, but shall apply only for the purpose of determining the date on
which the change date occurs. An election under this paragraph
(h)(4)(vi)(B) shall be made in the statement described in paragraph
(a)(2)(ii) of this section.
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation -- (A) Right or obligation to issue stock.
Solely for purposes of determining whether an ownership change has
occurred under paragraph (h)(4)(i) of this section, the deemed exercise
of an option with respect to unissued stock (or treasury stock) of a
corporation shall result in a corresponding increase in the amount of
its total outstanding stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation. Solely for purposes of determining whether an ownership
change has occurred under paragraph (h)(4)(i) of this section, the
deemed exercise of a right to transfer outstanding stock to the issuing
corporation (or a right of the issuing corporation to acquire its stock)
shall result in a corresponding decrease in the amount of its total
outstanding stock.
(C) Effect on value of old loss corporation. The deemed exercise of
an option with respect to unissued stock (or treasury stock) under
paragraph (h)(4)(i) of this section shall have no effect on the
determination of the value of the old loss corporation and the
computation of the section 382 limitation. See section 382(l)(1)(B)
disregarding capital contributions made during the two-year period
preceding the change date for purposes of computing the section 382
limitation.
(viii) Options that lapse or are forfeited. If an option that is
treated as exercised under paragraph (h)(4)(i) of this section lapses
unexercised or the owner of such option irrevocably forfeits his right
to acquire stock pursuant to the option, the option shall be treated for
purposes of this section as if it never had been issued. In that case,
the loss corporation may file an amended return for prior years (subject
to any applicable statute of limitations) if the section 382 limitation
was thus inapplicable. If paragraph (h)(4)(i) of this section applied
to an option (or options) with respect to a taxable year for which an
income tax return has not been filed by the date that the option (or
options) lapses or is irrevocably forfeited, the loss corporation may
treat paragraph (h)(4)(i) of this section as inapplicable to such option
(or options).
(ix) Option rule inapplicable if pre-change losses are de minimis.
Paragraph (h)(4)(i) of this section shall not apply to treat the stock
of the loss corporation as acquired by the owner of an option if, on a
testing date, the amount of pre-change losses (determined as if the
testing date were a change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is less than twice the
amount determined by multiplying.
(A) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(B) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
(x) Options not subject to attribution. Paragraph (h)(4)(i) of this
section shall not apply to --
(A) Long-held options with respect to actively traded stock. Any
option with respect to stock of the loss corporation which stock is
actively traded on an established securities market (within the meaning
of section 1273(b)) for which market quotations are readily available,
if such option has been continuously owned by the same 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised) for at least three years, but only until the
earlier of such time as --
(1) The option is transferred by or to a 5-percent shareholder (or a
person who would be a 5-percent shareholder if such option were
exercised), or
(2) The fair market value of the stock that is subject to the option
exceeds the exercise price for such stock on the testing date. For
purposes of this paragraph (h)(4)(x)(A), options with respect to the
stock of a loss corporation that are assumed (or substituted) in a
reorganization and converted into options with respect to the stock of
another party to the reorganization shall not be treated as transferred,
provided that there are no changes in the terms of the options, other
than that the stock that may be acquired pursuant to the option is that
of another party to the reorganization and that the amount of stock
subject to the option is adjusted only to reflect the exchange ratio for
the exchange of stock of the loss corporation in the reorganization.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt. Any right to receive or
obligation to issue stock pursuant to the terms of a debt instrument
that, in economic terms, is equivalent to nonconvertible debt because
the right to receive stock of the issuer of a fixed dollar amount is
based upon the fair market value for such stock determined at or about
the date the stock is transferred pursuant to such right or obligation
(i.e., the amount of the stock transferred pursuant to the option is
equal to a fixed dollar amount, divided by the value of each share of
such stock at or about the date of the stock transfer). This paragraph
(h)(4)(x)(B) shall not apply if the method for determining the fair
market value of the stock of the issuer is intended to or, in fact,
provides the owner of the debt instrument with a participation in any
appreciation of any stock of the issuer.
(C) Right or obligation to redeem stock of the loss corporation. Any
right or obligation of the loss corporation to redeem any of its stock
at the time such stock is issued, but only to the extent such stock is
issued to persons who are not 5-percent shareholders immediately before
the issuance.
(D) Options exercisable only upon death, disability or mental
incompetency. Any option entered into between owners of the same entity
(or an owner and the entity in which the owner has a direct ownership
interest) with respect to such owner's ownership interest in the entity
that is exercisable only upon the death, complete disability or mental
incompetency of such owner.
(E) Right to receive or obligation to issue stock as interest or
dividends. Any right to receive or obligation to issue stock of a
corporation in payment of interest or dividends by the issuing
corporation. (For an example illustrating this exception, see paragraph
(j)(2)(iv)(B) of this section.)
(F) Options outstanding following an ownership change -- (1) In
general. Any option in existence immediately before and after an
ownership change, whether or not the option was treated as exercised in
connection with the ownership change under paragraph (h)(4)(i) of this
section, but only so long as the option continues to be owned by the
5-percent shareholder (or person who was treated as a 5-percent
shareholder) who owned the option immediately before and after such
ownership change.
(2) Example (i) A, B, C and D own all of the outstanding stock of L.
A owns 70 shares of L stock and each of B, C and D own 10 shares of L
stock. On July 12, 1988, L issues warrants to each of its shareholders
entitling them to acquire an additional 8.5 shares of L stock for each
share of stock owned.
(ii) If B, C and D, but not A, each exercise their respective rights
to acquire an additional 85 shares of L stock (10 shares 8.5 shares
that may be acquired for each share owned) on July 12, 1988, their
combined ownership interest in L on that date would exceed 80 percent
(255 shares deemed to be acquired + 30 shares actually owned)/355 shares
outstanding (actual and deemed)). B, C and D thus would increase their
ownership interest in L by 50.3 percentage points during the testing
period, causing an ownership change, because, under paragraph
(h)(4)(i)(B) of this section, the options are treated as exercised if
the exercise would cause an ownership change.
(iii) Following the ownership change, paragraph (h)(4)(i) of this
section applies to prevent A's right to acquire 595 shares of L stock
(70 shares x 8.5 shares that may be acquired for each share owned) or
the rights held by B, C, or D, to be treated as exercised on any
subsequent testing date, except to the extent that those rights are
transferred. To the extent any of those options are transferred
following the ownership change, paragraph (h)(4)(i) of this section will
apply to any such options on the date of the transfer and on any
subsequent testing date.
(G) Right to acquire loss corporation stock pursuant to a default
under a loan agreement. Any right to acquire stock of a corporation by
a bank (as that term is defined in section 581), an insurance company
(as that term is defined in 1.801-3(a)), or a trust qualified under
section 401(a) solely as the result of a default under a loan agreement
entered into in the ordinary course of the trade or business of such
bank, life insurance company or qualified trust.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement. Any option entered into between noncorporate owners of
the same entity (or a noncorporate owner and the entity in which the
owner has a direct ownership interest) with respect to such owner's
ownership interest in the entity, but only if each of such owners
actively participate in the management of the entity's trade or
business, the option is issued at a time that the loss corporation is
not a loss corporation and the option is exercisable solely upon the
retirement of such owner. An option with terms described in both this
paragraph (h)(4)(x)(H) and in paragraph (h)(4)(x)(D) of this section
shall also not be subject to paragraph (h)(4)(i) of this section.
(I)-(Y) (Reserved)
(Z) Options designated in the Internal Revenue Bulletin. Any option
designated by the Internal Revenue Service in the Internal Revenue
Bulletin as being excepted from the operation of 1.382-2T(h)(4)(i).
(xi) Certain transfers of options disregarded. Transfers of options
between persons who are not 5-percent shareholders (and between members
of separate public groups resulting from the application of the
segregation rules of paragraphs (j)(2) and (3)(iii) of this section) are
not taken into account. Transfers of options in any of the
circumstances described in section 382(l)(3)(B) are also disregarded and
the transferee shall be treated as having owned the option for the
period that it was owned by the transferor.
(xii) Exercise of an option that has not been treated as stock. The
acquisition of stock pursuant to the actual exercise of an option (other
than an option described in paragraph (h)(4)(vi)(A) of this section)
shall not be disregarded.
(5) Stock transferred under certain agreements. Notwithstanding
paragraph (h)(4) of this section, no shift results solely because under
section 1058(a) --
(i) A shareholder transfers stock of a corporation pursuant to an
agreement that meets the requirements of section 1058(b), or
(ii) A person having rights under such an agreement exchanges those
rights for stock identical to the stock transferred pursuant to the
agreement.
(6) Family attribution. For purposes of this section --
(i) Paragraphs (1) and (5)(B) of section 318(a) shall not apply,
(ii) An individual and all members of his family described in section
318(a)(1) shall be treated as one individual,
(iii) Subject to paragraph (k)(2) of this section, paragraph
(h)(6)(ii) of this section shall not apply to members of a family who,
without regard to that paragraph (h)(6)(ii), would not be 5-percent
shareholders, and
(iv) If under paragraph (h)(6)(ii) of this section, an individual may
be treated as a member of more than one family, and each family that is
treated as one individual is a 5-percent shareholder (or would be
treated as a 5-percent shareholder if such individual were treated as a
member of such family), then such individual shall be treated only as a
member of the family that results in the smallest increase in the total
percentage stock ownership of the 5-percent shareholders on the testing
date and shall not be treated as the member of any other family.
(i) (Reserved)
(j) Aggregation and segregation rules. For purposes of this section,
except as provided in paragraphs (k) (2) and (4) of this section --
(1) Aggregation of public shareholders and public owners into public
groups -- (i) Public group. Under this paragraph (j), a loss
corporation or other entity can be treated as owned, in whole or in
part, by one or more public groups. A public group can include public
shareholders, public owners, and 5-percent owners who are not 5-percent
shareholders of the loss corporation.
(ii) Treatment of a public group that is a 5-percent shareholder.
Each public group that is treated as a 5-percent shareholder under
paragraph (g)(1) (ii), (iii) or (iv) of this section shall be treated as
one individual. See paragraph (j)(2)(iv) for a rule combining certain
de minimis public groups.
(iii) Presumption of no cross-ownership. The public owners,
5-percent owners who are not 5-percent shareholders and public
shareholders in any public group, subject to paragraphs (j)(2)(iii),
(k)(2) and (k)(4) of this section, are presumed not to be members of any
other public group. It also is presumed that each such person is
unrelated to all other shareholders (direct and indirect) of the loss
corporation. See paragraph (h)(6)(iii) of this section. The members of
a public group that exists by virtue of its direct ownership interest in
an entity are presumed not to be members (and not to be related to a
member) of any other public group that exists at any time by virtue of
its direct ownership interest in any other entity. To the extent that
the presumptions adopted in this paragraph (j)(1)(iii) are not
applicable because the loss corporation has actual knowledge of facts to
the contrary and is thus subject to paragraph (k)(2) of this section,
public shareholders, public owners and 5-percent owners who are not
5-percent shareholders may be aggregated into additional public groups.
(iv) Identification of the public groups treated as 5-percent
shareholders -- (A) Analysis of highest tier entities. The loss
corporation must identify first tier entities and higher tier entities
in order to identify any highest tier entities that must be identified
under paragraph (k)(3) of this section. The loss corporation must then
identify any 5-percent owners of each such highest tier entity who
indirectly own, at any time during the testing period, five percent or
more of the loss corporation through the ownership interest in such
highest tier entity. Under paragraph (g)(1)(i)(B) of this section, any
such 5-percent owner is a 5-percent shareholder. See paragraph (k)(3)
of this section for rules explaining the extent of the obligation of the
loss corporation to determine the identity of its shareholders. Each
person who has an ownership interest in any highest tier entity and who
is not treated as a 5-percent shareholder (i.e., persons who are public
owners or 5-percent owners who are not 5-percent shareholders) is a
member of the public group of that highest tier entity. A public group,
so identified, that indirectly owns five percent or more of the loss
corporation on the testing date is treated under paragraph (g)(1)(ii) of
this section as a 5-percent shareholder. If the public group so
identified owns less than five percent of the loss corporation on the
testing date, such public group is treated as part of the public group
of the next lower tier entity.
(B) Analysis of other higher tier entities and first tier entities.
The analysis and aggregation of public groups described in paragraph
(j)(1)(iv)(A) of this section is repeated for any next lower tier entity
and successively for any next lower tier entity of any entity described
in this paragraph (j)(1)(iv)(B) until applied to each first tier entity.
(C) Aggregation of the public shareholders. The public shareholders
are aggregated and, under paragraph (g)(1)(iii) of this section, are
treated as a public group that is a 5-percent shareholder without regard
to whether such group, at any time during the testing period, owns five
percent or more of the loss corporation. For this purpose, if the
public group of any first tier entity indirectly owns less than five
percent of the loss corporation on the testing date, and is thus not
treated as a 5-percent shareholder, but is treated as part of the public
group of the loss corporation under paragraph (j)(1)(iv) (A) or (B) of
this section, the ownership interest of that group is included in the
public group of the loss corporation referred to in the preceding
sentence.
(v) Appropriate adjustments. A loss corporation may apply the
principles of paragraph (g)(5) of this section with respect to --
(A) Any public group that is treated as a 5-percent shareholder on
the testing date if such public group, at any time during the testing
period, was treated as part of the public group of the next lower tier
entity, or
(B) Any public group that is treated as part of the public group of a
next lower tier entity if such public group, at any time during the
testing period, was part of the public group of a higher tier entity
that was treated as a 5-percent shareholder and had a direct or indirect
ownership interest in such lower tier entity.
(vi) Examples.
Example (1)(i) All of the stock of L is owned by 1,000 shareholders,
none of whom own as much as five percent of L stock (''Public L''). All
of the stock of P is owned by 150,000 shareholders, none of whom own as
much as five percent of P stock (''Public P''). Between July 12, 1988
and August 13, 1988, P purchases all of the L stock through a series of
transactions on the public stock exchange. P's percentage of direct
stock ownership in L increases from 4.9 percent to five percent on July
15, 1988, and from 50 percent to 51 percent on July 30, 1988.
(ii) Before July 15, 1988, P is a public shareholder of L. On and
after July 15, 1988, P is a first tier entity (and a highest tier
entity) of L. Accordingly, under the rules of paragraph (j)(1) of this
section, Public P, on and after July 15, 1988, is treated as a public
group that is a 5-percent shareholder. Each acquisition by P on and
after such date affects the percentage of L stock that is owned by
Public P and thus constitutes an owner shift.
(iii) Immediately after the transaction on July 30, 1988, P owns 51
percent of L stock. Under paragraph (j)(1)(iv)(A) of this section,
Public P thus owns 51 percent of L. Under paragraph (j)(1)(iv)(C) of
this section, Public L, the public group that includes the public
shareholders of L, is treated as a 5-percent shareholder that owns 49
percent of L. Under paragraph (j)(1)(iii) of this section, Public L and
Public P are presumed not to have any common members and it is also
presumed that no member of either public group is related to any other
member of either of the two public groups.
(iv) Assuming that the presumption provided in paragraph (j)(1)(iii)
of this section (i.e., that no person owns stock in both P and L) is not
rebutted to any extent, Public P is treated as a 5-percent shareholder
whose stock ownership in L, as of the July 30, 1988 testing date, has
increased by 51 percentage points over its lowest percentage of stock
ownership in L at any time during the testing period (0 percent prior to
July 12, 1988). Accordingly, an ownership change with respect to L
occurs as a result of P's acquisition on July 30, 1988. L is thus a new
loss corporation and its pre-change losses are subject to limitation
under section 382.
Example (2)(i) All of the stock of P is owned by 1,000 unrelated
shareholders, none of whom owns as much as five percent of P stock. L1
is a wholly owned subsidiary of P. On January 2, 1988, P distributes
all of the L1 stock pro rata to its shareholders.
(ii) Prior to the stock distribution, the public owners of P are
members of a public group (''Public P'') that is treated as a 5-percent
shareholder owning 100 percent of the stock of L1.
See paragraph (j)(1)(iv)(A) of this section. Following the stock
distribution to the P shareholders, L1 is owned by 1,000 public
shareholders that are members of a public group (''Public L1'') that is
treated as a 5-percent shareholder owning 100 percent of the stock of
L1. See paragraph (j)(1)(iv)(C) of this section.
(iii) Public P and Public L1 are treated as unrelated, individual
5-percent shareholders under paragraph (j)(1)(iii) of this section.
Although the members of one public group are presumed not to be members
of any other public group under paragraph (j)(1)(iii) of this section,
L1 has actual knowledge that all of its public shareholders immediately
following the distribution (Public L1) received L1 stock pro rata in
respect to the outstanding P stock and thus were also members of Public
P. Applying paragraph (k)(2) of this section, the loss corporation may
take into account the identity of ownership interests between Public L1
and Public P to establish that Public L1 did not increase its percentage
ownership in L1. Accordingly, the transaction would not constitute an
owner shift.
Example (3)(i) The facts are the same as in Example (1) of paragraph
(g)(4) of this section. Thus, 20 percent of L stock is owned by A, 10
percent is owned by P1, 20 percent is owned by E, a joint venture, and
the remaining 50 percent of L stock is owned by Public L. P1 is owned
15 percent by B and 85 percent by Public P1. E is owned 30 percent by
P2 and 70 percent by P3, which are owned by Public P2 and Public P3,
respectively. See Example (1)(ii) of paragraph (g)(4) of this section
for a chart illustrating this ownership structure.
(ii) The public owners of P2 and P3 (Public P2 and Public P3,
respectively), are public groups that are treated as 5-percent
shareholders of L, because each such public group indirectly owns five
percent or more of L stock (six percent by Public P2 ((30 percent
ownership of E) (20 percent ownership of L)) and 14 percent by Public P3
((70 percent ownership of E) (20 percent ownership of L))). The public
owners of P1 (''Public P1''), who indirectly own 8.5 percent of L stock
((85 percent ownership of P1) (10 percent ownership of L)) and B, who
indirectly owns 1.5 percent of L and is thus included in Public P1 under
paragraph (j)(1)(iv)(A) of this section, are members of a public group
that is treated as a 5-percent shareholder of L that owns ten percent of
L stock. Finally, the public group of L (''Public L'') is a 5-percent
shareholder that owns 50 percent of L. Accordingly, A, Public L, Public
P1 (including B), Public P2, and Public P3 are the only 5-percent
shareholders of L.
Example (4)(i) The facts are the same as Example (3) above, except
that P3 is owned 60 percent by C, 30 percent by P4, and 10 percent by
P3. The stock of P4 is publicly traded and is owned by Public P4. The
facts are thus the same as in Example (2) in paragraph (g)(4) of this
section. See Example (2)(ii) of paragraph (g)(4) of this section for a
chart illustrating this ownership structure.
(ii) The public owners of P4 (a highest tier entity) are members of a
public group that indirectly owns 4.2 percent of L ((30 percent
ownership of P3) (70 percent ownership of E) (20 percent ownership of
L)). For purposes of identifying public groups that are 5-.percent
shareholders, L is not required to identify P4 as a highest tier entity
under paragraph (k)(3) of this section because P4 does not own five
percent or more of L stock. Moreover, under paragraph (h)(2)(iii) of
this section, P4 generally is treated as an individual from which there
is no attribution of loss corporation stock. The public group of P3
(including P4) indirectly owns 5.6 percent of L ((40 percent of P3) (70
percent ownership of E) (20 percent of L)), and is thus a 5-percent
shareholder of L. The public groups of P2 and P1 (both Public P1 and
B), respectively, also own five percent or more of L stock and are thus
5-percent shareholders of L. In addition, the public group of L is a
5-percent shareholder regardless of whether it owns five percent of L
stock. Accordingly, A, Public L, Public P3 (including P4), Public P2,
and Public P1 (including B), are the only 5-percent shareholders of L.
Example (5) (i) On September 4, 1987, L is owned 14 percent by each
of A and B, 30 percent by each of P1 and P2, four percent by each of C
and P3, and two percent by each of D and AA. P1 is owned 30 percent by
each of A, B, and P4 and 10 percent by D. P2 is owned 70 percent by A,
10 percent by each of B and D, six percent by DD and four percent by C.
AA owns 100 percent of the stock of P3. P4 is owned 60 percent by C and
20 percent by each of BB and CC.
(ii) The ownership structure of L is illustrated by the following
chart:
Insert illus 0316A
(iii) In order to identify L's 5-percent shareholders and their
respective ownership interests in L on September 4, 1987, the rules of
paragraph (j)(1) of this section apply to identify the public groups
that are treated as separate 5-percent shareholders. Analysis begins
with any highest tier entity, such as P4. Each of P4's shareholders is
a 5-percent owner of P4. C4 owns 5.4 percent of L in his capacity as a
5-percent owner of P4 and therefore is a 5-percent shareholder.
Notwithstanding that C actually owns, directly and by attribution, 10.6
percent of L (four percent directly, 5.4 percent indirectly through P4,
and 1.2 percent through P2), C's ownership interest in L as a 5-percent
shareholder is presumed to include only the 5.4 percent indirect
ownership through P4. (Under paragraphs (g) and (k)(2) of this section,
however, L must account for C's direct and indirect ownership interests
in determining whether an ownership change occurs on any testing date if
it has actual knowledge of such ownership on or berfore the date that
its income tax return is filed for the taxable year that includes the
testing date). Although BB and CC are each 5-percent owners of P4, they
are not 5-percent shareholders and therefore are members of the public
group of P4. Because the public group of P4 indirectly owns only 3.6
percent of L, it is treated under paragraph (j)(1)(iv)(A) of this
section as part of the public group of the next lower tier entity, P1.
(iv) With respect to P1, a first tier entity, each of its
shareholders are 5-percent owners. Because A and B each indirectly own
nine percent of L as 5-percent owners of P1 and A indirectly owns 21
percent of L as a 5-percent owner of P2, they are each 5-percent
shareholders without regard to their direct ownership interests in L.
A's ownership interest in L as a 5-percent shareholder is 44 percent (14
percent directly, nine percent in his capacity as a 5-percent owner of
P1, and 21 percent in his capacity as a 5-percent owner of P2). B's
ownership interest in L as a 5-percent shareholder is 23 percent (14
percent directly and nine percent in his capacity as a 5-percent and
nine percent in his capacity as a 5-percent owner of P1). B's ownership
interest as a 5-percent shareholder does not include the three percent
interest he owns indirectly through P2. (Under paragraphs (g) and
(k)(2) of this section, however, L must account for B's direct and
indirect ownership interests, including his three percent interest
through P2, in determining whether an ownership change occurs on any
testing date if L has actual knowledge of such ownership on or before
the date that its income tax return is filed for the taxable year that
includes the testing date.) D is a 5-percent owner of P1. Although D
owns eight percent of L (two percent directly, three percent indirectly
through P1, and three percent indirectly through P2), he is not a
5-percent shareholder because he does not own five percent or more of L
stock either directly or in his capacity as a 5-percent owner of either
P1 or P2. (Under paragraphs (g) and (k)(2) of this section, however, L
must account for D's direct and indirect ownership interests in
determining whether an ownership change occurs on any testing date to
the extent L has actual knowledge of such ownership amounting to five
percent or more of L stock before the date that its income tax return is
filed for the taxable year that includes the testing date.) The public
group of P1 (comprised of the public group of P4 and D's direct
ownership interest in P1) has a 6.6 percent interest in L and is
therefore treated as a separate 5-percent shareholder.
(v) With respect to highest tier entity P2, D is a 5-percent owner
who is not a 5-percent shareholder for the reason described in the
preceding subdivision. DD is a 5-percent owner of P2, who is not a
5-percent shareholder, because DD indirectly owns only 1.8 percent of L.
Assuming that L does not have actual knowledge of B's and C's direct
ownership interest in P2, those interests are accounted for in computing
the ownership interest are accounted for in computing the ownership
interest of the public group of P2. Therefore, each of P2's
shareholders, except A who is a 5-percent shareholder in his capacity as
a 5-percent owner of P2, are treated as members of the public group of
P2 that owns nine percent of L and is thus treated as a separate
5-percent shareholder.
(vi) Because the direct ownership interest of P3 is less than five
percent, it is a public shareholder. Therefore, assuming that L does
not have actual knowledge of C's, D's, or AA's direct and/or indirect
ownership interests in L, the public group of L is a separate 5-percent
shareholder owning 12 percent of L (comprised of the direct ownership
interests of C, D, AA and P3).
(2) Segregation rules applicable to transactions involving the loss
corporation -- (i) In general. For purposes of this section, if --
(A) A transaction is described in paragraph (j)(2)(iii) of this
section, and
(B) The loss corporation has one or more direct public groups
immediately before and after the transaction,
the stock owned by such direct public group or groups is subject to
the segregation rules described in paragraph (j)(2)(iii) of this section
for purposes of determining whether an ownership change has occurred on
the date of the transaction (and on any subsequent testing date with a
testing period that includes the date of such transaction). See
paragraph (j)(3) of this section for the application of the rules of
this paragraph (j)(2) to transactions involving first tier entities or
higher tier entities.
(ii) Direct public group. For purposes of this section, a direct
public group is any public group of the loss corporation described in
paragraph (j)(1)(iv)(C) of this section or any public group of the loss
corporation resulting from the application of paragraph (j)(2)(iii) or
(j)(3)(i) of this section.
(iii) Transactions to which segregation rules apply -- (A) In
general. The segregation rules of this paragraph (j)(2)(iii) apply to
any transaction described in paragraph (j)(2)(iii) (B), (C), (D), (E),
or (F) of this section in the manner specified. The presumptions
adopted by this paragraph (j)(2)(iii) shall not apply only if, and to
the extent that, the loss corporation either has actual knowledge of
facts to the contrary regarding its stock ownership and is thus subject
to paragraph (k)(2) of this section, or is subject to paragraph (k)(4)
of this section. Any direct public group that is required to be
identified as a result of a transaction described in paragraph
(j)(2)(iii) of this section shall be treated as a 5-percent shareholder
under paragraph (g)(1)(iv) of this section without regard to whether
such group, at any time during the testing period, owns five percent or
more of the loss corporation stock. To the extent that the presumptions
are rebutted, the public shareholders, public owners and 5-percent
owners who are not 5-percent shareholders may be aggregated into
additional public groups.
(B) Certain equity structure shifts and transactions to which section
1032 applies -- (1) In general. In the case of --
(i) A transaction that is an equity structure shift that also is
described in section 381(a)(2) and in which the loss corporation is a
party to the reorganization, or
(ii) A transfer of the stock of the loss corporation (including
treasury stock) by the loss corporation in any other transaction to
which section 1032 applies,
each direct public group that exists immediately after such
transaction shall be segregated so that each direct public group that
existed immediately before the transaction is treated separately from
the direct public group that acquires stock of the loss corporation in
the transaction. The direct public group that acquires stock of the
loss corporation in the transaction is presumed not to include any
members of any direct public group that existed immediately before the
transaction. For purposes of this paragraph (j)(2)(iii)(B), a person is
treated as acquiring stock of the loss corporation in a reorganization
as the result of the person's ownership interest in another corporation
that succeeds to the loss corporation's pre-change losses (determined as
if the testing date were the change date and treating the amount of any
net unrealized built-in loss as a pre-change loss) in a transaction to
which section 381(a)(2) applies. In determining whether a transaction
is described in section 1032 for purposes of this paragraph
(j)(2)(iii)(B), the transfer by the loss corporation of any interest not
constituting stock that is treated as stock under paragraph (f)(18)(iii)
of this section shall be treated as the transfer of stock.
(2) Examples.
Example (1) (i) P1 owns 60 percent of the stock of L. The remaining
L stock (40 percent) is owned by Public L. A owns 40 percent of the P1
stock. The remaining P1 stock (60 percent) is owned by Public P1. P2
is a publicly traded corporation owned by shareholders who each own less
than five percent of P2 stock (Public P2).
(ii) On May 22, 1988, L merges into P2 in a transaction described in
section 368(a)(1)(A), with the shareholders of L receiving an amount of
P2 stock equal to 70 percent of the value of P2 immediately after the
reorganization.
(iii) Immediately before the merger, L's 5-percent shareholders were
Public L (40 percent), Public P1 (36 percent), and A (24 percent).
Although the shareholders of P2 (immediately before the merger) do not
acquire any stock in the merger, they are treated as acquiring a direct
ownership interest in the loss corporation in the reorganization because
P2 succeeds to the pre-change losses of L in a transaction to which
section 381(a)(2) applies. As a result of the merger, which constitutes
a transaction described in (j)(2)(iii)(B)(1) of this section, L's direct
public group, Public L, must be segregated from the direct public group
that would otherwise exist after the transaction (Public L and Public
P2). Public L, the direct public group that exists before the merger,
has a continuing 28 percent interest in the loss corporation (70 percent
of P2 shares received in the merger x 40 percent shares of L owned prior
to the merger) that must be segregated from the interests acquired by
Public P2.
(iv) In addition, Public P1, which owns five percent or more of the
stock of P2 through P1's ownership interest in P2, also is segregated
from any other public group (i.e., both Public L and Public P2) under
paragraph (j)(1) of this section. Therefore, under paragraphs (j)(1)
and (2) of this section, Public P2 (excluding the members of Public L
and Public P1 immediately before the merger) is treated as a separate
public group and 5-percent shareholder.
(v) The only 5-percent shareholder whose interest in the loss
corporation, P2, has increased during the testing period is Public P2.
Its interest has increased by 30 percentage points. Accordingly, no
ownership change results from the merger. For purposes of measuring the
shift in ownership of P2 on any subsequent testing date with a testing
period that includes May 22, 1988 (the date on which L merged into P2),
Public P2 will continue to be treated as a direct public group, separate
from Public L (the members of which own P2 stock as a result of the
merger) and Public P1.
Example (2)(i) P and L are each owned by 21 equal shareholders. Each
of 14 of the shareholders of P and L are owners of both corporations
(''common owners''). L has actual knowledge of this cross ownership.
therefore, as a group, these persons own 66 2/3 percent of each of P and
L. P stock has a value of $600 and L stock has a value of $400.
(ii) P merges into L under section 368(a)(1)(A) on June 10, 1988.
Ordinarily, the direct public group of L that exists immediately before
the transaction would be segregated from the direct public group that
acquires stock in the merger (the public group of P immediately before
the merger). In view of the common ownership of P and L, however, a
third group may be created under paragraph (j)(2)(iii)(A) of this
section so that L's owners following the merger would be: The common
owners (66 2/3 percent), Public L, less the common owners, 13 1/3
percent), and Public P, less the common owners (20 percent).
Accordingly, the only 5-percent shareholder increasing its ownership
interest by 20 percentage points and no ownership change occurs as a
result of the merger.
Example (3)(i) L is entirely owned by Public L. L commences and
completes a public offering of common stock on January 22, 1988, with
the result that its outstanding stock increases from 100,000 shares to
300,000 shares. No person owns as much as five percent of L stock
following the public offering.
(ii) The public offering of L stock is a transaction to which section
1032 applies. Immediately before the public offering, L's only
5-percent shareholder was Public L, a direct public group. Therefore,
Public L (as in existence immediately before the transaction) must be
segregated from the direct public group that would otherwise exist
immediately after the transaction. Under paragraph (j)(2)(iii)(B)(1) of
this section, the acquisition of 200,000 shares of L stock in the public
offering must be treated as acquired by a direct public group (''New
Public L'') that is separate from Public L. Each such public group is
treated as an individual that is a separate 5-percent shareholder. See
paragraphs (g)(1)(iv) and (j)(1)(ii) of this section.
(iii) As a result of the public offering, L has two 5-percent
shareholders, Public L and New Public L, which own 33 1/3 percent and 66
2/3 percent of the stock of L, respectively. Because the members of New
Public L are presumed not to be members of Public L (and not to be
related to any such members), the ownership interest of New Public L
immediately prior to the offering of stock was 0 percent.
(iv) New Public L is a 5-percent shareholder that has increased its
ownership interest in L by more than 50 percentage points during the
testing period (by 66 2/3 percentage points). Thus, there is an
ownership change with respect to L. For purposes of subsequent
transactions, Public L and New Public L will not be segregated into two
public groups because a new testing period commences on the day
following the change date, January 23, 1988 (i.e., any subsequent
testing date will not have a testing period that includes the date of
the public offering).
Example (4). The facts are the same as in Example (3), but L
establishes that 60,000 shares of the newly issued L stock were acquired
by its shareholders of record on the date of the stock issuance (i.e.,
members of Public L, referred to as Acquiring Public L) by persons
owning 27 percent of the L stock immediately before the stock issuance.
Accordingly, L has actual knowledge that New Public L acquired no more
than 140,000 shares of L stock in the public offering. Under paragraphs
(j)(2)(iii) and (k)(2) of this section, New Public L may be treated as
having increased its ownership interest in L by 46 2/3 percentage points
(140,000 shares acquired in the offering/300,000 shares outstanding). L
also has actual knowledge that the members of Public L owning 27 percent
of L stock immediately before the stock issuance (27,000 shares/100,000
shares outstanding) own 29 percent of L stock immediately after such
issuance ((27,000 shares + 60,000 shares acquired in the
offering)/300,000 shares outstanding). Assuming that L chooses to take
its actual knowledge into account for purposes of determining whether an
ownership change occurred on January 22, 1988, Public L is segregated
into two direct public groups immediately before the stock issuance so
that the two percentage point increase in the ownership interest in L by
Acquiring Public L is taken into account. The total increased ownership
interest in L by New Public L and Acquiring Public L on the testing date
over their lowest ownership interest during the testing period is 48 2/3
percent. Thus, no ownership change occurs with respect to L.
Example (5)(i) L is owned entirely by 10,000 unrelated individuals,
none of whom own as much as five percent of L stock (''Public L''). P
is owned entirely by 1,500 unrelated individuals, none of whom own as
much as five percent of P stock (''Public P''). On December 22, 1988, L
acquires all of the P stock from Public P in exchange for L stock
representing 25 percent of the value of L, in a transaction described in
section 368(a)(1)(B).
(ii) Under paragraph (j)(2)(iii)(B)(1) of this section, Public L, the
direct public group that owns L stock immediately before and after the
transaction to which section 1032 applies, is treated separately from
Public P, the direct public group that acquires L stock in the
transaction. Because Public P's percentage ownership interest in L
increases to only 25 percent (as compared with 0 percent before the
acquisition), no ownership change occurs. For purposes of determining
whether an ownership change occurs on any testing date with a testing
period that includes December 22, 1988, Public L and Public P will
continue to be treated as separate 5-percent shareholders.
(iii) See Example (4) in paragraph (j)(3)(iv) of this section for the
application of paragraph (j)(2)(iii)(B) of this section to a
reorganization under section 368(a)(1)(B) in which the loss corporation
is acquired.
(C) Redemption-type transactions -- (1) In general. In the case of a
transaction in which the loss corporation acquires its stock in exchange
for property, each direct public group that exists immediately before
the transaction shall be segregated at that time (and thereafter) so
that the stock that is acquired in the transaction is treated as owned
by a separate public group from each public group that owns the stock
that is not acquired. For purposes of the preceding sentence, the term
property shall include stock described in section 1504(a)(4) and stock
described in paragraph (f)(18)(ii) of this section. Each direct public
group that owned the stock that is acquired in the transaction is
presumed not to own any such stock immediately after the transaction.
(2) Examples.
Example (1). L is entirely owned by Public L. There are 500,000
shares of L stock outstanding. On July 12, 1988, L acquires 150,000
shares of its stock for cash. Because L's acquisition is a redemption,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the redeemed interests
(''Public RL'') are treated as part of a public group that is separate
from the ownership interests that are not redeemed (''Public CL'').
Therefore, as a result of the redemption, Public CL's interest in L
increases by 30 percentage points (from 70 percent (350,000/500,000) to
100 percent) on the July 12, 1988 testing date. Because the resulting
increase is not more than 50 percentage points, no ownership change
occurs. For purposes of determining whether an ownership change occurs
on any subsequent testing date having a testing period that includes
such redemption, Public CL is treated as a 5-percent shareholder whose
percentage ownership interests in L increased by 30 percentage points as
a result of the redemption.
Example (2). L is entirely owned by Public L. There are 250,000
shares of L common stock outstanding. On April 22, 1988, L acquires
100,000 shares of its outstanding common stock in exchange for 100,000
shares of preferred stock described in section 1504(a)(4). (The
transaction thus constitutes a recapitalization within the meaning of
section 368(a)(1)(E).) As a result of the recapitalization, which is a
transaction described in paragraph (j)(2)(iii)(C) of this section,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the stock acquired by L
is treated as owned by a public group (''Public RL'') that is separate
from the public group that owns the stock that is not so acquired
(''Public CL''). Therefore, as a result of the transaction, Public CL's
interest in L increases by 40 percentage points (from 60 percent to 100
percent). Because the resulting increase is not more than 50 percentage
points, no ownership change occurs. For purposes of determining whether
an ownership change occurs on any subsequent testing date with a testing
period that includes the date of the recapitalization, Public CL is
treated as a separate 5-percent shareholder whose percentage ownership
interest increased by 40 percentage points as a result of the redemption
type transaction.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock -- (1) In general. In the case of
a deemed acquisition of stock of the loss corporation as the result of
the ownership of a right issued by the loss corporation to acquire such
stock (see paragraph (h)(4) of this section), each direct public group
that exists immediately after such acquisition shall be segregated so
that each direct public group that existed immediately before the
transaction is treated separately from the direct public group that is
deemed to acquire stock of the loss corporation as a result of the
ownership of the right to acquire such stock. The direct public group
that is treated as acquiring stock of the loss corporation in the
transaction is presumed not to include any members of any direct public
group that existed immediately before the transaction. In applying the
rules of paragraph (h)(4) of this section, the segregation rules of this
paragraph (j)(2)(iii)(D) shall apply before making the determination
required under that paragraph (h)(4) of this section.
(2) Example.
(i) L has 700,000 shares of common stock outstanding. Public L owns
all of the outstanding L common stock. On May 20, 1988, L issues a
class of debentures to the public that, in the aggregate, may be
converted into 300,000 shares of L common stock. On September 7, 1988,
P1 acquires 210,000 shares of L common stock over a public stock
exchange. None of the L debentures have been converted as of that date.
(ii) By virtue of L's issuance of convertible debentures, May 20,
1988 is a testing date. See paragraph (a)(2)(i) of this section.
Immediately before the issuance of the convertible debentures, L's only
5-percent shareholder was Public L, a direct public group. Therefore,
under paragraph (j)(2)(iii)(D) of this section, Public L must be
segregated from the direct public group that would otherwise exist
immediately after the transaction for the purpose of applying paragraph
(h)(4) of this section, so that any acquisition of L stock through the
conversion of L's debentures is treated as made by a public group other
than Public L (''New Public L''). Assuming the largest increase in the
total percentage stock ownership of New Public L on the testing date
(see paragraph (h)(4) of this section), New Public L would have
increased its ownership interest in L by 30 percentage points.
Therefore, the stock of L would not be treated as acquired pursuant to a
deemed conversion of the L debentures on May 20, 1988, under paragraph
(h)(4) of this section, because the conversion would not cause an
ownership change.
(iii) P1's acquisition of L common stock results in second testing
date. For the purpose of applying paragraph (h)(4) of this section,
Public L must again be segregated from the direct public group that
would otherwise result from conversion of the debentures, so that a
deemed acquisition of L stock through the conversion of L's debentures
on September 7, 1988 is treated as made by a public group other than
Public L (''New Public L''). As on the previous testing date, New
Public L would have increased its ownership interest in L by 30
percentage points if it were treated as having acquired L common stock
pursuant to the conversion of the L debentures. The increase in New
Public L's ownership, taken together with P1's 21 percentage point
ownership increase in L during the testing period (210,000 shares deemed
converted/(700,000 (actual) + 300,000 (deemed) shares outstanding)),
results in an ownership change.
(E) Transactions identified in the Internal Revenue Bulletin. Any
transaction that is designated by the International Revenue Service in
the Internal Revenue Bulletin shall be subject to the rules, as provided
in such bulletin, similar to the rules described in this paragraph
(j)(2)(iii).
(F) Issuance of rights to acquire loss corporation stock -- (1) In
general. In the case of any transaction that is described in paragraph
(j)(2)(iii) (B), (D) or (E) of this section in which the loss
corporation issues rights to acquire its stock to the members of more
than one public group, those rights shall be presumed to be exercised
pro rata by each such public group as those rights are actually
exercised.
(2) Example.
(i) L, which has six million shares outstanding, is owned entirely by
Public L and P is owned entirely by Public P. On November 30, 1988, P
merges into L in a transaction qualifying under section 368(a)(1)(A)
with Public P receiving four million shares of L stock as a result of
the reorganization. Under paragraph (j)(2)(iii)(B) of this section,
Public L and Public P continue to be treated as separate public groups
following the merger. Pursuant to the plan of reorganization, L also
issues an amount of warrants in L stock pro rata to Public L and Public
P that, if exercised, would result in the issuance of an additional two
million shares of L stock. On November 30, 1989, when only one-half of
the outstanding warrants have been exercised, A acquires all of the
unexercised warrants.
(ii) Without regard to the warrants distributed in reorganization,
Public P's ownership interest in L increases by 40 percentage points on
November 30, 1988, relative to its lowest ownership interest in L at any
time during the testing period (0 percent prior to the merger). For
purposes of determining whether an ownership change occurs on November
30, 1988, the segregation rules of paragraphs (j)(2)(iii) (B) and (D) of
this section does not require that a third direct public group be
separately identified and treated as acquiring the warrants, because L
has actual knowledge that Public L and Public P acquired the distributed
warrants in proportion to their respective ownership interests in L
stock. Because the largest increase in the ownership of L on the
testing date results from treating only Public P as exercising the
distributing warrants, in which event, its ownership interest would
increase by 44.4 percentage points ((four million shares acquired in the
merger + 800,000 shares deemed acquired)/10.8 million (actual and
deemed) shares outstanding), the issuance of the warrants by L does not
cause an ownership change on November 30, 1988.
(iii) Under paragraph (j)(2)(iii)(F)(1) of this section, each actual
exercise of warrants to acquire one million shares of L stock between
November 30, 1988 and November 30, 1989 is treated as made pro rata by
Public L and Public P (600,000 shares to Public L and 400,000 shares to
Public P). Accordingly, as a result of the actual exercises of warrants
during that period the ownership interests of the only 5-percent
shareholders, Public L and Public P, are proportionately increased.
(iv) A's acquisition of the all of the outstanding warrants on
November 30, 1989 requires the determination whether there has been an
ownership change with respect to L, because A would be 5-percent
shareholder under paragraph (g)(1)(i) of this section owning 8 1/3
percent of the L stock if the acquired warrants were exercised (one
million shares deemed acquired/12 million (actual and deemed) shares
outstanding). See paragraph (a)(2)(i) of this section. Under paragraph
(h)(4)(i) of this section, A is not treated as having exercised those
warrants, because an ownership change would not results. (Public P's 36
2/3 percentage point increase ((four million shares acquired in the
merger + 400,000 shares deemed acquired)/12 million (actual and deemed)
shares outstanding) and A's 8 1/3 percentage point increase is not
greater than 50 percentage points).
(iv) Combination of de minimis public groups -- (A) In general.
Notwithstanding paragraph (j)(2)(iii)(A) of this section, any public
group first identified during a taxable year, as a result of any
transaction described in paragraph (j)(2)(iii) (B), (D), (E), or (F) of
this section, that owns less than five percent of loss corporation stock
may be combined, at the option of the loss corporation, with any other
such groups also first identified as a result of any such transaction
that occurs during such taxable year.
(B) Example.
(i) L is widely held with no person owning as much as five percent of
the L stock at any time (''Public L''). L's taxable year ends on
December 31. On January 1, 1989, L issues a class of debt maturing on
December 31, 2019 (''Class A Debentures'') with respect to which it will
semi-annually issue L stock in discharge of its interest obligation. In
addition, L issues an amount of L stock to the public in two separate
transactions during 1989. As a percentage of the L stock outstanding at
the close of L's taxable year on December 31, 1989, L issued .45 percent
of its stock on each of two dates in payment of interest with respect to
the Class A Debentures, 4.5 percent of its stock in the first stock
offering and six percent of its stock in the second stock offering.
During 1990, L did not issue stock other than in payment of interest
with respect to the Class A Debentures. As a percentage of L stock
outstanding on December 31, 1990, L issued .41 percent of its stock on
each of two dates during 1990 with respect to its outstanding debt.
(ii) Under paragraph (h)(4)(x)(E) of this section, L's obligation to
issue stock in satisfaction of the interest with respect to the Class A
Debentures until December 31, 2019, is not subject to paragraph
(h)(4)(i) of this section and thus is taken into account only as such
stock is issued.
(iii) The application of the segregation rules of paragraphs (j)(2)
(iii)(B) and (iv) of this section require the identification of at least
two additional, separate direct public groups during 1989. First, the
persons who acquire six percent of L stock in a public offering to which
section 1032 applies must be treated as a separate 5-percent shareholder
(''Public 1L''). See paragraph (j)(2)(iii)(B) of this section. Even
though this group was first identified in 1989, it may not be combined
with other public groups also first identified in 1989 because it owns
five percent or more of L stock. Second, although each of the three
other issuances of L stock during the year ordinarily result in the
identification of an additional, separate direct public group, each such
direct public group may be combined with the two other such groups into
a single public group (''Public 2L''). As of the end of 1989, Public 2L
would own a total of 5.4 percent of the stock of L.
(iv) The application of the segregation rules of paragraphs (j)(2)
(iii)(B) and (iv) of this section require the identification of at least
one additional, direct public group during 1990. Because each
additional, direct public group first identified in 1990 acquires less
than five percent of L stock, they may be combined into a single public
group (''Public 3L'') owning .82 percent of the stock of L. Public 3L
is treated as a five percent shareholder even though it owns less than
five percent of the stock of L. See paragraph (j)(2)(iv)(A) of this
section.
(v) Multiple transactions -- (A) In general. If a transaction (or
any part thereof) is described by more than one subdivision of paragraph
(j)(2)(iii) of this section, each such subdivision shall apply to the
transaction (or each part of the transaction) in the manner that results
in the largest increase in the percentage stock ownership by the
5-percent shareholders.
(B) Example.
(i) All of the common stock of L is owned by 1,000 unrelated persons,
none of whom owns as much as five percent of the L stock (''Public
CL''). L has outstanding a class of preferred stock described in
section 1504(a)(4) that is owned in equal amounts by 500 unrelated
persons (''Public PL'').
(ii) On September 4, 1988, L rearranges its capital structure by
redeeming 70 percent of the common stock owned by 700 of the
shareholders in exchange for cash. In addition, all of the preferred
stock is exchanged for a new class of common stock (nonvoting)
representing 40 percent of the value of L.
(iii) With respect to the part of the transaction that is treated as
a redemption under paragraph (j)(2)(iii)(C) of this section (the
exchange of common stock for cash), Public CL is segregated into two
different public groups immediately before the transaction (and
thereafter) so that the owners of the redeemed stock (''Public RCL'')
are treated as part of a public group that is separate from the public
group comprised of the owners of the stock that is not redeemed
(''Public CCL''). As a result of the redemption, Public CCL's
percentage ownership interest in L thus increases by 30 percentage
points from 30 percent to 60 percent (taking into account all
transactions occurring on the testing date, because the change in
ownership is measured under paragraph (a)(1)(i) of this section by
reference to each 5-percent shareholder's ownership interest immediately
after the testing date). In addition, the exchange of preferred stock
for nonvoting common stock is a transaction to which section 1032
applies. Under paragraph (j)(2)(v) of this section, the part of the
transaction to which section 1032 applies is also subject to the
segregation rules in the manner specified in paragraph (j)(2)(iii)(B) of
this section. Accordingly, Public PL, the direct public group that
acquires L nonvoting common stock in exchange for L preferred stock,
must be treated as a separate public group from the other direct public
groups, Public CCL and Public RCL. As a separate public group, Public
PL's percentage stock ownership in L increases by 40 points (as compared
to 0 percent prior to the transaction).
(iv) In summary, Public CCL increases its percentage ownership in L
by 30 percentage points and Public PL increases its percentage ownership
by 40 percentage points. Consequently, an ownership change occurs with
respect to L on September 4, 1988.
(vi) Acquisitions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules. Unless a
different proportion is established by either the loss corporation or
the Internal Revenue Service, the acquisition of loss corporation stock
by either a 5-percent shareholder or the loss corporation on any date on
which more than one public group of the loss corporation exists by
virtue of the application of the rules of this paragraph (j)(2) shall be
treated as being made proportionately from each public group existing
immediately before such acquisition. See paragraph (g)(5)(i)(B) of this
section for the application of this paragraph to the ownership interest
of a 5-percent shareholder that owns less than five percent of the stock
of the loss corporation on the testing date.
(3) Segregation rules applicable to transactions involving first tier
entities or higher tier entities -- (i) Dispositions. If a loss
corporation is owned, in whole or in part, by a public group (or
groups), the rules of paragraphs (j)(2) (iii)(B) and (iv) of this
section shall apply to any transaction in which a first tier entity or
an individual that owns a direct ownership interest in the loss
corporation of five percent or more transfers a direct ownership
interest in the loss corporation to public shareholders. Therefore,
each direct public group that exists immediately after such a
disposition shall be segregated so that the ownership interests of each
public group that existed immediately before the transaction are treated
separately from the public group that acquires stock of the loss
corporation as a result of the disposition by the individual or first
tier entity. The principles of this paragraph (j)(3)(i) shall also
apply to transactions in which an ownership interest in a higher tier
entity that owns five percent or more of the loss corporation
(determined without regard to the application of paragraph (h)(2)(i)(A)
of this section) or a first tier entity is transferred to a public owner
or 5-percent owner who is not a 5-percent shareholder.
(ii) Example.
(A) L is owned equally by Public L, P and E. Public L consists of
150 equal, unrelated shareholders. P is owned by Public P, a group
consisting of 1,500 equal, unrelated shareholders. E is a partnership
and none of its partners are 5-percent owners. On October 22, 1988, E
sells its entire interest in L over a public stock exchange. No
individual or entity acquires as much as five percent of L's stock as
the result of E's disposition of the L stock.
(B) The disposition of the L stock by E is a transaction that causes
the segregation of L's direct public group that exists immediately
before the transaction (Public L) from the direct public group that
acquires L stock in the transaction (Public EL). As a result, L has
three 5-percent shareholders, Public L, Public P (through the
application of paragraph (j)(1) of this section) and Public EL, each of
which owns 33 1/3 percent of L stock. Therefore, Public EL is a
5-percent shareholder that has increased its ownership interest in L by
33 1/3 percentage points during the testing period. For purposes of
subsequent transactions, Public L and Public EL will continue to be
treated as separate direct public groups until any subsequent testing
date that does not have a testing period that includes E's disposition
of L stock.
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity. The rules of paragraphs (j)(2) (i),
(iii), (iv) and (v) of this section shall apply to transactions
described in such paragraphs that involve either a higher tier entity
that owns five percent or more of the loss corporation (determined
without regard to the application of paragraph (h)(2)(i)(A) of this
section) or a first tier entity. In applying those rules for purposes
of this paragraph (j)(3)(iii), each direct public group of a first tier
entity or a higher tier entity is any public group of any such entity
identified in paragraph (j)(1)(iv) (A) or (B) of this section or
resulting from the application of this paragraph (j)(3)(iii). The
principles of paragraph (j)(2)(iii)(C) of this section also shall apply
to any transaction that has the effect of a redemption-type transaction
(e.g., an acquisition by the loss corporation of stock in a first tier
entity).
(iv) Examples.
Example (1). The facts are the same as in Example (1) of paragraph
(j)(2)(iii)(B)(2) of this section, except that Public L and P1 own 40
percent and 60 percent, respectively, of the stock of HC which, in turn,
owns 100 percent of L and HC merges into P2. Under paragraph
(j)(3)(iii) of this section, the rules of paragraph (j)(2)(iii)(B) of
this section apply to segregate HC's direct public group (Public L)
immediately before the merger from the direct public group (Public P2)
that acquires loss corporation stock in the merger. The consequences of
the merger of HC into P2 are thus the same as in Example (1) of
paragraph (j)(2)(iii)(B)(2) of this section.
Example (2) (i) Twenty-five individual shareholders each own four
percent of L (''Public L''). Public L is therefore the only 5-percent
shareholder of L. Each of the shareholders of L contribute their L
stock to a newly formed corporation, HC. In exchange for their
contribution of L stock, HC issues 100 percent of each of its two
classes of common stock (voting and nonvoting).
(ii) The formation of HC, a first tier entity of L, is a transaction
to which section 1032 applies. Under paragraph (j)(3)(iii) of this
section, the rules of paragraphs (j)(1)(iii) and (j)(2)(iii)(B) of this
section are applied to this transaction with the result that the
shareholders of HC, immediately after the issuance of HC stock, are
presumed not to include any persons that previously had a direct or
indirect ownership interest in L. The presumption underlying those
rules, however, is rebutted by establishing that all of the HC stock
outstanding immediately after the transaction was issued solely in
exchange for L stock. Thus, Public HC (immediately after the
transaction) and Public L (immediately before the transaction) would be
treated owned by the same direct public group.
Example (3) (i) All of the stock of L is owned by unrelated
shareholders, none of whom owns as much as five percent of L stock. P
also is owned by unrelated shareholders, none of whom owns as much as
five percent of P stock. On November 22, 1988, P incorporates P1 with a
contribution of P stock. Immediately thereafter, P1 acquires all of the
properties of L in exchange for its P stock in a forward triangular
merger qualifying under sections 368 (a)(1)(A) and (a)(2)(D). The P
stock transferred by P1 equals 45 percent of the total outstanding P
stock.
(ii) Immediately before the merger of L into P1, P's only 5-percent
shareholder was Public P, a direct public group of P. The rules of
paragraph (j)(2)(iii)(B) of this section thus apply to the transaction
under paragraph (j)(3)(i) of this section since P, a first tier entity,
is a party to the reorganization described in such paragraph. Although
Public P does not acquire any stock in the merger, it is treated as
acquiring stock in the loss corporation, P1, because such corporation
succeeds to the pre-change losses of L in a transaction to which 381(a)
applies. As a result of the merger, Public P, the direct public group
of P that exists immediately before the merger, must be segregated from
the direct public groups acquiring P stock in the reorganization.
Public P is, therefore, treated as acquiring 55 percent of the
outstanding stock of the loss corporation, P1, in the transaction. The
transaction, therefore, results in an ownership change for P1.
Example (4) (i) L is owned 20 percent by A and 80 percent by 1,000
unrelated individuals and entities, none of whom owns as much as five
percent of L stock (''Public L''). P is owned 10 percent by B, 40
percent by E, and 50 percent by 5,000 unrelated individuals, none of
whom owns as much as five percent of P stock (''Public P''). E is owned
30 percent by C and 70 percent by 30 unrelated individuals, none of whom
owns as much as five percent of E (''Public E'').
(ii) On October 31, 1987, P acquires all of the L stock from A and
Public L in exchange for P stock representing 20 percent of the value of
P (determined immediately after the acquisition) in a transaction
described in section 368(a)(1)(B). After the acquisition, P is owned
eight percent by B, 32 percent by E, four percent by A, and 56 percent
by 6,000 unrelated individuals, none of whom owns as much as five
percent of P. Because L is wholly owned by P immediately after the
acquisition, L, under paragraph (j)(1) of this section, is treated as
owned as follows: Eight percent by B, 9.6 percent by C (through C's
ownership interest in E, a highest tier entity, and E's ownership
interest in P, a first tier entity), 22.4 percent by Public E (through
its ownership interest in E and E's ownership interest in P), four
percent by A, and 56 percent by the shareholders who each own less than
five percent of L through their ownership interest in P.
(iii) Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to the reorganization
since the transaction involved a first tier entity of L. Thus, the
direct public group of P that exists immediately after the transaction
must be segregated into two public groups -- the direct public group of
P that existed immediately before the acquisition (Public P) is treated
separately from the direct public group consisting of the persons who
acquire P stock in the transaction (Public L). Accordingly, immediately
after the reorganization, Public P and Public L own 40 percent and 16
percent of L, respectively. See paragraph (h) of this section. (Under
paragraph (g)(5)(ii)(B) of this section, L may treat the four percent of
L stock owned by A immediately after the reorganization as the amount of
L stock owned by A for each subsequent testing date having a testing
period that includes the reorganization.)
(iv) In summary, after applying the rules of paragraphs (j) (1) and
(3) of this section, L is treated as owned as follows:
(v) The reorganization results in an ownership change, because B, C,
Public E and Public P, all of whom are 5-percent shareholders, together
have increased their percentage ownership in L by 80 percentage points
as compared to their lowest percentage ownership in L at any time during
the testing period (0 percent prior to the acquisition).
(v) Acquisitions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules. The rules of paragraph (j)(2)(vi) of this section shall apply to
the acquisition of an ownership interest in a first tier entity (or
higher tier entity) if more than one direct public group of any such
entity are segregated under the rules of this paragraph (j)(3).
Accordingly, an acquisition by such an entity or a 5-percent shareholder
of any ownership interest in such an entity shall be treated as made
proportionately from the direct public groups resulting from the
application of this paragraph (j)(3).
(k) Operating rules -- (1) Presumptions regarding stock ownership.
Subject to paragraphs (k) (2) and (4) of this section, for purposes of
applying paragraphs (f), (g), (h), and (j)(1) of this section --
(i) Stock subject to regulation by the Securities and Exchange
Commission. With respect to loss corporation stock that is described in
Rule 13d-1(d) of Regulation 13D-G (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities and Exchange Act of 1934 (''registered
stock''), a loss corporation may rely on the existence and absence of
filings of Schedules 13D and 13G (or any similar schedules) as of any
date to identify all of the corporation's shareholders who have a direct
ownership interest of five percent or more (both individuals and first
tier entities) on such date. A loss corporation may similarly rely on
the existence and absence of such filings as of any date with respect to
registered stock of any first tier entity or any higher tier entity to
identify the 5-percent owners of any such entities on such date who
indirectly own five percent or more of the loss corporation stock, and
are thus 5-percent shareholders, and to identify any higher tier
entities of such entities.
(ii) Statements under penalties of perjury. A loss corporation may
rely on a statement, signed under penalties of perjury, by an officer,
director, partner, trustee, executor or similar responsible person, on
behalf of a first tier entity or a higher tier entity to establish the
extent, if any, to which the ownership interests of any 5-percent owners
or higher tier entities with respect to such entities have changed
during a testing period. A loss corporation may not rely on such a
statement (A) that it knows to be false or (B) that is made by either a
first tier entity or higher tier entity that owns 50 percent or more of
the stock of the loss corporation. For purposes of the preceding
sentence, any first tier entities and higher tier entities that are
known by the loss corporation to be members of the same controlled group
(within the meaning of section 267(f)) shall be treated as one
corporation.
(2) Actual knowledge regarding stock ownership. For purposes of this
section (other than paragraphs (g)(5) and (j)(1)(v) of this section), to
the extent that the loss corporation has actual knowledge of stock
ownership on any testing date (or acquires such knowledge before the
date that the income tax return is filed for the taxable year in which
the testing date occurs) by --
(i) An individual who would be a 5-percent shareholder, but for the
application of paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(2) of this
section, or
(ii) A 5-percent shareholder that would be taken into account, but
for paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(3) of this section,
the loss corporation must take such stock ownership into account for
purposes of determining whether an ownership change has occurred on that
testing date. If a loss corporation acquires such knowledge after such
income tax return is filed, the loss corporation may take such ownership
into account for purposes of determining whether an ownership change
occurred on that testing date and, if appropriate, file an amended
income tax return (subject to any applicable statute of limitations).
To the extent the loss corporation has actual knowledge on or after any
testing date regarding the ownership interest in the loss corporation by
members of one public group (described in paragraphs (g)(1) (ii), (iii)
or (iv) of this section) and the ownership interest of those members in
the loss corporation as members in another such public group, the loss
corporation may take such ownership into account for purposes of
determining whether an ownership change occurred on that testing date.
(3) Duty to inquire as to actual stock ownership in the loss
corporation. For purposes of this section, the loss corporation is
required to determine the stock ownership on each testing date (and,
except as otherwise provided in this section, the changes in the stock
ownership during the testing period) of --
(i) Any individual shareholder who has a direct ownership interest of
five percent or more in the loss corporation,
(ii) Any first tier entity,
(iii) Any higher tier entity that has an indirect ownership interest
of five percent or more in the loss corporation (determined without
regard to paragraph (h)(2)(i)(A) of this section), and
(iv) Any 5-percent owner who indirectly owns five percent or more of
the stock of the loss corporation in his capacity as a 5-percent owner
in any one first tier entity or higher tier entity.
The loss corporation does not have any obligation to inquire or to
determine facts relating to the stock ownership of any shareholders
other than those described in the preceding sentence. In addition, the
loss corporation does not have any obligation to inquire or to determine
if the actual facts relating to the stock ownership of any shareholder
are consistent with the ownership interests of the loss corporation as
determined by applying the presumptions and other rules of paragraphs
(g), (h), (j) or (k)(1) of this section.
(4) Ownership interest structured to avoid the section 382
limitation. For purposes of this section, if the ownership interests in
a loss corporation are structured by a person with a direct or indirect
ownership interest in the loss corporation to avoid treating a person as
a 5-percent shareholder (or to permit the loss corporation to rely on
the presumption provided in paragraph (g)(5)(i)(B) of this section) for
a principal purpose of circumventing the section 382 limitation, then --
(i) Paragraph (h)(2)(iii) of this section shall not apply with
respect to the ownership interests so structured and the constructive
ownership rules of paragraph (h)(2)(i) of this section shall thus apply
to attribute stock from any entity without regard to the amount of stock
it owns in the loss corporation or any other corporation,
(ii) Paragraphs (g) (2) and (3) of this section shall be modified
with respect to the ownership interests so structured so that the
ownership interest of a person includes all of an individual's direct
and indirect ownership in the loss corporation, without regard to
whether each such interest represents five percent or more of the stock
of the loss corporation, and
(iii) Paragraph (g)(5)(i)(B) of this section shall not apply with
respect to the ownership interests so structured so that the ownership
interest of a person takes into account his actual ownership interest in
the loss corporation.
This paragraph (k)(4) shall apply, however, only if application would
result in an ownership change.
(5) Example.
L is owned by 25 individuals who each own four percent of the
outstanding L stock. A purchases 40 percent of L stock from such
shareholders on August 13, 1988. Thereafter, B plans to acquire 15
percent of the L stock. B is advised concerning the potential
application of section 382 to L. On February 1, 1989, B acquires a 15
percent interest in L pursuant to a program in which each of four
corporations, P1 through P4, each of which is wholly-owned by B, acquire
a 3.75 percent interest in L. A principal purpose of acquiring the L
stock through four corporations is to avoid treating B as owning any
ownership interest in L amounting to as much as five percent, and thus
to circumvent the section 382 limitation by avoiding an ownership
change. Under paragraph (k)(4) of this section, the limitation on the
constructive ownership rules of paragraph (h)(2)(iii) of this section
are disregarded and B is treated as a 5-percent shareholder owning 15
percent of the stock of L by virtue of his ownership interests in P1
through P4, notwithstanding paragraph (g)(2) of this section.
Accordingly, an ownership change occurs with respect to L.
(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. Except as provided in this
paragraph (m), section 382 shall apply to any ownership change that
occurs immediately after an owner shift or an equity structure shift
that occurs after December 31, 1986, or any other event occurring after
such date that requires the determination of whether an ownership change
has occurred under paragraph (a)(2)(i) of this section. In the case of
an equity structure shift (including an equity structure shift that also
constitutes an owner shift), any equity structure shift completed
pursuant to a plan of reorganization adopted before January 1, 1987,
shall be treated as occurring on the date such plan was adopted.
Therefore, section 382 shall apply to any ownership change occurring
immediately after --
(i) An owner shift (excluding an owner shift that also constitutes an
equity structure shift) that occurs on or after January 1, 1987,
(ii) An equity structure shift that occurs after December 31, 1986,
if it is completed pursuant to a plan of reorganization adopted on or
after January 1, 1987, or
(iii) Any transfer or issuance of an option, or other interest that
is similar to an option, that occurs on or after January l, 1987 and
that is taken into account under paragraph (a)(2)(i) of this section.
With respect to equity structure shifts completed pursuant to plans
adopted before January 1, 1987, section 382 shall be inapplicable only
if the equity structure shift that is treated as occurring on the date
the plan of reorganization for such shift was adopted (or other event
occurring after the adoption of such plan) results in an ownership
change before January 1, 1987. In that event, a new testing period for
the loss corporation shall begin on the day after such ownership change.
(2) Plan of reorganization. For purposes of paragraph (m)(1) of this
section, a plan of reorganization shall be treated as adopted on the
earlier of --
(i) The first date that the boards of directors of all the parties to
the reorganization have adopted the plan or have recommended adoption to
their shareholders, or
(ii) The date the shareholders approve such reorganization.
If there is an ownership change with respect to a subsidiary as the
result of a reorganization of the parent, the treatment of the
subsidiary under this paragraph (m)(2) shall be governed by the
classification of the parent-level transaction. For purposes of the
preceding sentence, a corporation shall be treated as a subsidiary of
another corporation only if the other corporation owns stock in that
corporation meeting the requirements of section 1504(a)(2).
(3) Earliest commencement of the testing period. For purposes of
determining if an ownership change has occurred at any time after May 5,
1986, the testing period shall begin no earlier than May 6, 1986. Under
paragraph (d)(4) of this section, therefore, shifts in the ownership of
stock of the loss corporation prior to May 6, 1986 are disregarded.
(4) Transitional rules -- (i) Rules provided in paragraph (j) of this
section for testing dates before September 4, 1987. For purposes of
determining whether an ownership change occurs for any testing date
before September 4, 1987.
(A) The rules of paragraph (j)(1) of this section shall apply only to
stock of the loss corporation acquired after May 5, 1986, by any first
tier entity or higher tier entity and shall not apply to any stock
acquired by such an entity on or before that date,
(B) The rules of paragraph (j)(2) of this section shall apply only to
equity structure shifts in which more than one corporation is a party to
the reorganization and shall not apply to any other transactions, and
(C) The rules of paragraph (j)(3) of this section shall apply only to
--
(1) Dispositions of stock acquired by an individual, a first tier
entity or higher tier entity after May 5, 1986 (and shall not apply to
dispositions of stock acquired on or before such date), and
(2) Equity structure shifts in which more than one corporation is a
party to the reorganization (and shall not apply to any other
transactions).
For any testing date before September 4, 1987, however, the loss
corporation is permitted to apply all of the rules of paragraph (j) of
this section. A loss corporation that applies the rules of paragraph
(j) of this section under the preceding sentence must apply all of the
rules of such paragraph in determining whether any ownership change
occurs on any testing dates after May 5, 1986.
(ii) Example.
(i) L is owned entirely by 10,000 unrelated individuals, none of whom
owns as much as five percent of the stock of L (''Public L''). P is
owned entirely by 1,000 unrelated individuals, none of whom owns as much
as five percent of the stock of P (''Public P'').
(ii) Between March 1, 1987 and June 1, 1987, P acquires 45 percent of
L stock in a series of transactions. On June 15, 1987, L redeems 20
percent of the L stock from Public L.
(iii) Under paragraph (m)(4)(i)(A) of this section, the rules of
paragraph (j)(1) of this section apply to the acquisitions made by P,
because they occurred after May 5, 1986. Accordingly, following those
acquisitions, the stock of L is owned 45 percent by Public P and 55
percent by Public L. Because the increase in the percentage ownership
by Public P as a result of P's stock purchases is not more than 50
percent, no ownership change occurs as the result of P's purchases.
(iv) On or after September 4, 1987, the rules of paragraph
(j)(2)(iii)(C) of this section apply to treat any L stock that is
redeemed as owned by a public group that is separate from the public
group owning the stock that is not redeemed. (Under paragraph
(j)(2)(iii)(C) of this section, the continuing shareholders of Public L,
who owned 35 percent of the stock of L before the redemption ((55
percent -- 20 percent)/100 percent) increase their ownership interest in
L by 8.8 percentage points as a result of such redemption (43.8 percent
-- 35 percent)). Those rules, however, do not apply to the June 15,
1987 redemption because it occurs before the date that paragraph
(j)(2)(iii) of this section generally is effective. (Until September 4,
1987, paragraph (j)(2)(iii) of this section generally is effective only
for equity structure shifts in which more than one corporation is a
party to the reorganization.) Solely because of the application of
paragraph (j)(1) of this section to P's acquisitions of L stock, Public
P's ownership interest in L as a result of the redemption has increased
from 45 percentage points to 56.2 percentage points which, compared to
its lowest percentage ownership interest at any time during the testing
period (0 percent prior to March 1, 1987), is a more than 50 percentage
point increase thus causing an ownership change with respect to L on
June 15, 1987.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987. For purposes of determining
whether an ownership change occurs for any testing date on or after
September 4, 1987, the rules of paragraphs (j) (2) and (3) of this
section shall not apply to identify any public group resulting from --
(A) Any transaction described in such paragraphs (j) (2) and (3),
unless that transaction is also described in paragraph (m)(4)(i) (B) or
(C) of this section, or
(B) Any disposition of stock acquired on or before May 5, 1986, but
only if such disposition or other transaction occurs before September 4,
1987. Thus, for example, the rules of paragraph (j)(2)(iii)(D) of this
section shall apply only to rights to acquire stock of the loss
corporation issued on or after such date.
(iv) Rules provided in paragraphs (f)(18) (ii) and (iii) of this
section. For purposes of determining whether an ownership change occurs
for any testing date, the rules of paragraphs (f)(18) (ii) and (iii) of
this section apply only to stock (or any other ownership interest) that
is --
(A) Issued on or after September 4, 1987, or
(B) Transferred to (or by) a person who is a 5-percent shareholder
(or would be a 5-percent shareholder if paragraph (f)(18)(iii) of this
section were applicable) on or after September 4, 1987.
(v) Rules provided in paragraph (a)(2)(ii) of this section. The
information statement required under paragraph (a)(2)(ii) of this
section is not required to be filed with respect to any taxable year for
which the due date (including extensions) of the income tax return of
the loss corporation is on or before October 5, 1987.
(5) Bankruptcy proceedings -- (i) In general. In the case of a
reorganization described in section 368(a)(1)(G) or an exchange of debt
for stock in a Title 11 or similar case (within the meaning of section
368(a)(3)), section 382 shall not apply to any ownership change
resulting from such a reorganization or proceeding if a petition in such
case was filed with the court before August 14, 1986. Accordingly, any
shift in ownership in the loss corporation arising out of such
reorganization or proceeding shall not be taken into account for
purposes of determining whether an ownership change occurs on any
testing date that occurs after December 31, 1986.
(ii) Example.
(i) L filed a petition in bankruptcy on September 29, 1985. As a
result of a title 11 bankruptcy reorganization of L that is confirmed by
a court on February 2, 1988, there is a shift in the ownership of L so
that JK increased her interest in L by 24 percentage points relative to
her lowest ownership interest in L during the testing period. JK is the
only 5-percent shareholder of L following the reorganization whose
interest in L increased as a result of the transaction. On December 25,
1988, GK purchases 42 percent of the outstanding stock of L from
shareholders other than JK.
(ii) There is no ownership change on December 25, 1988 because the 24
percentage point increase in JK's ownership interest in L is not taken
into account under paragraph (m)(6)(i) of this section.
(iii) The facts are the same as in (i), except that the acquisitions
by JK and GK occurred on August 5, 1986 and September 26, 1986,
respectively. Because paragraph (m)(6)(i) of this section is only
applicable with respect to the determination of whether an ownership
change has occurred on any testing date that occurs after December 31,
1986, there is an ownership change as a result of GK's acquisition on
September 26, 1986. Accordingly, section 382 is inapplicable to such
ownership change under paragraph (m)(1) of this section because it
occurred prior to January 1, 1987. Under paragraph (d)(2) of this
section, the testing period for determining whether an ownership change
occurs on any subsequent testing date shall commence no earlier than
September 27, 1986.
(6) Transactions of domestic building and loan associations. The
rules of paragraph (j)(2)(iii)(B) of this section (and the application
of those rules by virtue of paragraph (j)(3) of this section) shall not
apply to a public offering of stock by a domestic building and loan
association described in section 591 (or any corporation that owns stock
in the association meeting the requirements of section 1504(a)(2)) prior
to January 1, 1989. In the case of any transaction described in the
preceding sentence, any transitory ownership of stock by any entity that
is an underwriter shall be disregarded so that the rules of paragraph
(j)(1) of this section shall not apply to treat such stock as owned by
the owners of the underwriter and thus the rules of paragraph (j)(3)(i)
of this section shall not apply to the disposition of such stock by the
underwriter. For purposes of this paragraph (m)(7) --
(i) Ownership shall be considered transitory only with respect to an
underwriter acquiring stock in a firm commitment underwriting to the
extent the stock is disposed of pursuant to the offer (but in no event
later than sixty (60) days after the initial offering) and,
(ii) To the extent a transaction may be described both by paragraph
(j)(2)(iii)(B) of this section and any other provision of paragraph (j)
(2)(iii) or (3) of this section, paragraph (j)(2)(v)(A) of this section
shall not apply and the transaction shall be treated as described solely
by paragraph (j)(2)(iii)(B) of this section.
(7) Transactions not subject to section 382 -- (i) Application of old
section 382. Old section 382 shall not apply to a loss corporation on
or after the date on which an ownership change occurs, but only if such
ownership change results in the application of the section 382
limitation (as defined in section 382(b)) with respect to the loss
corporation.
(ii) Effect on testing period. The application of old section 382 to
a transaction is disregarded for purposes of paragraph (d)(2) of this
section unless the transaction that results in such application is the
last component of an ownership change after May 5, 1986 that is not
subject to section 382 under the effective date rules of this paragraph
(m) (e.g., an ownership change occurring as the result of an
individual's purchase of more than 50 percent of L stock on any date on
or before December 31, 1986).
(iii) Termination of old section 382. (Reserved)
(8) Options issued or transferred before January 1, 1987 -- (i)
Options issued before May 6, 1986. An option issued before May 6, 1986,
is subject to the rules of paragraph (h)(4) of this section only if it
is transferred by (or to) a 5-percent shareholder (or a person who would
be a 5-percent shareholder if the option were treated as exercised) on
or after such date. In all other cases, such an option shall not be
subject to paragraph (h)(4)(i) of this section, but shall be subject to
paragraph (h)(4)(xii) of this section. Thus, for example, a warrant to
acquire stock of the loss corporation issued before May 6, 1986 shall
not be subject to paragraph (h)(4) of this section unless the warrant is
transferred by (or to) a 5-percent shareholder. The exercise of such a
warrant, however, would be taken into account as required by this
paragraph (m)(8)(i) and paragraph (h)(4)(xii) of this section.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986. An option issued or transferred on or after May 6, 1986, and
before September 18, 1986, is subject to the rules of paragraph (h)(4)
of this section.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987. An option issued or transferred on or after September
18, 1986, and before January 1, 1987, is subject to the rules of
paragraph (h)(4) of this section, except that the option shall be
treated for purposes of this section as if it never had been issued in
the event that either --
(A) The option lapses unexercised or is irrevocably forfeited by the
holder thereof, or
(B) On the date the option was issued, there was no significant
likelihood that such option would be exercised within the five-year
period from the date of such issuance and a purpose for the issuance of
the option was to cause an ownership change prior to January 1, 1987.
(9) Examples. The rules of this paragraph (m) may be illustrated by
the following examples.
Example (1) (i) A owns all 100 outstanding shares of L stock. A
sells 11 shares to B on January 1, 1986. The January 1, 1986 testing
date is disregarded under paragraph (m)(3) of this section. A sells
another 40 shares to B on January 1, 1988. B's second stock purchase is
an owner shift that does not result in an ownership change. B's
percentage ownership interest on the testing date (51 percent) is only
40 percentage points greater than the lowest percentage of L stock owned
by B at any time during the testing period (11 percent on and after May
6, 1986).
(ii) The facts are the same as in (i). In addition A sells 20 shares
of his L stock to C on July 1, 1990. C's stock purchase is an owner
shift. Because B and C together have increased their respective
ownership interests in L by 40 and 20 percentage points relative to
their lowest percentage stock ownership interests in L at any time
during the testing period, C's purchase causes an ownership change. The
testing period for any subsequent ownership change begins on the first
day following C's acquisition, July 2, 1990.
Example (2) (i) C has owned 100 percent of L since March 22, 1980.
On October 13, 1986, P merges into L. As a result of the merger, 40
percent of L stock is acquired by A, the sole shareholder of P. The
merger of P into L is both an equity structure shift and an owner shift.
The transaction, however, is not an ownership change with respect to L,
because A's percentage ownership interest has increased by only 40
percentage points. On August 22, 1987, B purchases 15 percent of the L
stock from C. B's purchase constitutes an owner shift resulting in an
ownership change that is subject to section 382 because the aggregate
increases in percentage ownership by B and C (respectively 40 percent
and 15 percent) is more than 50 percentage points.
(ii) The facts are the same as in (i), except that the plan of
reorganization is adopted on October 13, 1986, and the merger is
completed on July 22, 1987. The result is the same as in (i).
(iii) The facts are the same as in (ii), except that the
reorganization is completed on August 22, 1987, and B's purchase of the
L stock occurs one month earlier, on July 22, 1987. Assume that after
the reorganization on August 22, 1987, A and B own 40 percent and 15
percent, respectively, of L stock. Although the merger occurred
pursuant to a plan of reorganization adopted before 1987, L is subject
to section 382 following the equity structure shift, because the merger
would not have caused an ownership change if it had been completed in
1986 after the commencement of the L's testing period.
(iv) The facts are the same as in (ii), except that B's purchase
occurs on June 7, 1986. Assume that immediately after the
reorganization on August 22, 1987, A and B own 40 percent and 15
percent, respectively, of L stock. Since the reorganization pursuant to
a plan adopted before 1987, taken together with the other shifts in the
ownership of L's stock between May 5, 1986, and December 31, 1986, would
have caused an ownership change, section 382 does not apply as a result
of the merger. Since an ownership change occurs as a result of the
merger, L's testing period for purposes of any subsequent ownership
change begins on October 14, 1986.
(v) The facts are the same as in (iv), except that B makes an
additional purchase from C of one percent of L's stock on February 14,
1987. The result is the same as in (iv). B's additional purchase,
however, is taken into account for the purpose of determining whether
there is a second ownership change with respect to L.
(T.D. 8149, 52 FR 29675, Aug. 11, 1987, as amended at T.D. 8264, 54
FR 38666, Sept. 20, 1989; T.D. 8277, 54 FR 52936, Dec. 26, 1989; T.D.
8352, 56 FR 29434, June 27, 1991; T.D. 8405, 57 FR 10741, Mar. 30,
1992)
26 CFR 1.382-3 Special rules under section 382 for corporations under
the jurisdiction of a court in a title 11 or similar case.
(a) Introduction. Either section 382(l)(5) or section 382(l)(6) may
apply to an ownership change which occurs in a title 11 or similar case
(as defined in section 368(a)(3)(A)) if the transaction resulting in the
ownership change is ordered by the court or is pursuant to a plan
approved by the court. Terms and nomenclature used in this section, and
not otherwise defined herein, have the same respective meanings as in
section 382 and the regulations thereunder.
(b) Application of section 382(l)(5). section 382(a) does not apply
to any ownership change if --
(1) The old loss corporation is (immediately before the ownership
change) under the jurisdiction of the court in a title 11 or similar
case; and
(2) The pre-change shareholders and qualified creditors of the old
loss corporation (determined immediately before the ownership change)
own (after the ownership change and as a result of being pre-change
shareholders or qualified creditors immediately before the ownership
change) stock of the new loss corporation (or stock of a controlling
corporation if also in bankruptcy) that meets the requirements of
section 1504(a)(2) (determined by substituting ''50 percent'' for ''80
percent'' each place it appears).
(c) -- (l) (Reserved)
(m) Continuity of business requirement -- (1) Under section
382(l)(5). If section 382(l)(5) applies to an ownership change of a
loss corporation, section 382(c) and the regulations thereunder do not
apply with respect to the ownership change.
(2) (Reserved)
(n) (Reserved)
(T.D. 8388, 57 FR 346, Jan. 6, 1992)
26 CFR 1.382-3 Regulations Applicable to Taxable Years Prior to Tax Reform Act of 1986
26 CFR 1.382-1A Purchase of a corporation and change in its trade or
business (Pre-Tax Reform Act of 1986).
(a) In general. (1) Section 382(a) provides for the complete
elimination of the net operating loss carryovers of a corporation
(here-inafter called a ''loss corporation'') if certain circumstances
exist. In general, section 382(a) applies only if, at the end of a loss
corporation's taxable year, there has been a change (occurring in
specified ways) since the beginning of such year, or since the beginning
of the prior taxable year, of at least 50 percent in the ownership of
the corporation's outstanding stock (hereinafter called a ''change of
ownership''), and only if the corporation has not continued to carry on
substantially the same trade or business as that conducted before such
change. If section 382(a) is applicable at the end of a taxable year,
then the entire net operating loss carryovers from prior taxable years
of such corporation are excluded in computing the net operating loss
deduction for such taxable year and for subsequent taxable years.
(2) For purposes of this section, (i) section 318(a) shall apply in
determining ownership of stock, except that section 318(a)(2)(C) and
(3)(C) shall be applied without regard to the 50-percent limitation
contained therein, and (ii) stock acquired by the exercise of an option
shall be considered as having been acquired on the date the option was
acquired. Thus, if A acquires on December 15, 1959, an option to
purchase 50 percent of the outstanding stock of X Corporation and if A
acquires the stock by exercising the option on January 15, 1961, A will
be considered as having purchased the stock on December 15, 1959.
(3) For the definition of the term ''stock'' as used in this section,
see 1.382(c)-1.
(b) Circumstances under which section 382(a) is applicable. Section
382(a) applies if, at the end of a taxable year of a loss corporation,
all of the following circumstances exist:
(1) Any one or more of those persons described in paragraph (c) of
this section own, actually and constructively, a percentage of the total
fair market value of the outstanding stock of such corporation which is
at least 50 percentage points more than such person or persons owned at
the beginning of such taxable year or at the beginning of the prior
taxable year;
(2) The increase in percentage points referred to in subparagraph (1)
of this paragraph is attributable to (i) a purchase or purchases (as
defined in section 382(a)(4) and paragraph (e) of this section) by the
person or persons specified in subparagraph (1) of this paragraph of
such stock or the stock of another corporation owning stock in such loss
corporation, (ii) the purchase or purchases by such person or persons of
an interest in a partnership or trust owning stock in such loss
corporation, (iii) a decrease in the amount of outstanding stock of such
loss corporation or in the amount of outstanding stock of another
corporation owning stock in such loss corporation, except a decrease
resulting from a redemption to pay death taxes to which section 303
applies, or (iv) a combination of the transactions described in
subdivisions (i), (ii), and (iii) of this subparagraph; and
(3) The loss corporation has not continued to carry on a trade or
business substantially the same as that conducted before any increase in
percentage points described in subparagraph (2) of this paragraph.
(c) Description of person or persons. (1) The persons specified in
paragraph (b)(1) of this section shall be the 10 persons who own,
actually and constructively, the greatest percentage of the fair market
value of the outstanding stock of a loss corporation at the end of a
taxable year (or such lesser number as there are persons owning the
outstanding stock at the end of such taxable year), except that if any
two or more persons own the same percentage of such stock and it is
necessary to include one such person in order to select the 10 persons,
then all of such persons shall be included. Any such persons so
selected who are so related that stock owned by one is attributed to
another under the constructive ownership rule specified in paragraph
(a)(2) of this section shall be considered as only one person solely for
the purpose of selecting such 10 persons. Although considered as one
person for purposes of selecting such 10 persons, such related persons
are considered as separate persons for all other purposes of section
382(a).
(2) In selecting the 10 persons (more or less) described in
subparagraph (1) of this paragraph, the following procedure shall be
used:
(i) First, determine those persons who own, actually and
constructively, stock of the loss corporation and determine the fair
market value of the stock owned, actually and constructively by such
persons.
(ii) Second, select from such persons the number of persons required
by the first sentence of subparagraph (1) of this paragraph.
(iii) Third, if any of the persons so selected are so related that
stock of one is attributed to another under the rule specified in
paragraph (a)(2) of this section, such persons shall be considered as
one person.
(iv) Fourth, if, as the result of considering two or more persons as
one person, the number of persons previously selected drops below ten,
additional persons shall be selected in the manner prescribed in
subdivision (ii) of this subparagraph.
(v) Finally, if any such additional persons are related under the
rule specified in paragraph (a)(2) of this section to persons previously
selected, or to one another, then the principles of subdivisions (iii)
and (iv) of this subparagraph shall again be applied.
(3) The application of this paragraph may be illustrated by the
following example:
Example. (i) Assume that the outstanding stock of a loss corporation
(based on fair market value) is owned, actually and constructively, at
the end of a taxable year by the following individuals and partnership:
(ii) The persons selected under subparagraph (2)(ii) of this
paragraph are the following 12 persons: A, B, C, D, partnership GH, E,
F, G, H, I, J, and K (1, J, and K must all be included because each owns
the same percentage of stock). However, A, B, C, and D are considered
as one person for purposes of this paragraph because they are related
under the rule specified in paragraph (a)(2) of this section, and G, H,
and partnership GH are considered as one person for the same reason.
Therefore, it is necessary to select three additional persons, L, M, and
N, in order to reach the required number of ten. However, since L is
related to one of the persons previously selected, he cannot be
considered a separate person. It therefore becomes necessary to select
an additional person and since O, P, Q, and R each owns the same
percentage of stock, they all must be selected. Accordingly, the 10
persons (more or less) who own the greatest percentage of the fair
market value of the outstanding stock are individuals A through R and
partnership GH.
(d) Change of ownership. (1) The determination of whether a change
of ownership has occurred under section 382(a) is made as of the close
of a taxable year of a loss corporation. A ''change of ownership'' has
occurred only if the stock ownership of the 10 persons (more or less)
selected under paragraph (c) of this section has increased at least 50
percentage points during a prescribed period and such increase is
attributable to a transaction or transactions described in section
382(a)(1)(B) and in paragraphs (e), (f), and (g) of this section. The
aggregate increase of at least 50 percentage points may occur at any one
time during the taxable year or during the prior taxable year, or may
take place in several transactions occurring during such 2-year period.
An increase of 50 percentage points is not the same thing as an increase
of 50 percent. Thus, a stockholder who owns 4 percent of the fair
market value of the stock of a corporation and who increases his
ownership to 6 percent has had a 50-percent increase in ownership but an
increase in percentage points of only 2.
(2)(i) It is unnecessary to determine whether a ''change of
ownership'' has occurred unless, as of the end of any taxable year
(hereinafter called a ''current taxable year''), the loss corporation
has changed its trade or business after the date of the first increase
in percentage points during such taxable year, or during the prior
taxable year, which would be taken into account under subparagraph (3)
of this paragraph in determining whether a ''change of ownership'' has
occurred.
(ii) If, as of the end of the current taxable year, the loss
corporation has changed its trade or business after the date of the
first increase in percentage points during such current year, then in
determining whether a ''change of ownership'' has occurred it is first
necessary to compare ownership of the outstanding stock at the end of
the current taxable year with such ownership at the beginning of such
current taxable year. If a ''change of ownership'' has not occurred as
a result of such comparison, then it is necessary to compare ownership
of the outstanding stock at the end of the current taxable year with
such ownership at the beginning of the prior taxable year.
(iii) If, as of the end of the current taxable year, the loss
corporation has not changed its trade or business after the date of the
first increase in percentage points during such current year, but the
corporation has changed its trade or business after the date of the
first increase in percentage points during the prior taxable year, then
in determining whether a ''change of ownership'' has occurred it is
necessary to compare ownership of the outstanding stock at the end of
the current taxable year with such ownership at the beginning of the
prior taxable year.
(iv) For purposes of subdivisions (ii) and (iii) of this
subparagraph, an increase in percentage points means only an increase in
percentage ownership which would be taken into account under
subparagraph (3) of this paragraph in determining whether a ''change of
ownership'' has occurred.
(v) A loss corporation has changed its trade or business during a
period between one date and another date only if, as of the later date,
the corporation has not continued to carry on a trade or business
substantially the same as that conducted immediately before the earlier
date. See paragraph (h) of this section for rules relating to change in
trade or business.
(3) In determining whether a ''change of ownership'' has occurred,
the following procedure shall be used:
(i) First, as of the close of a taxable year, the percentage of the
total fair market value of stock owned, actually and constructively, by
each of the 10 persons (more or less) selected under paragraph (c) of
this section shall be computed. For this purpose, each person included
in selecting such 10 persons shall be treated as a separate person even
though any such persons are considered as only one person under such
paragraph (c) in selecting the 10 persons who own the greatest
percentage of the fair market value of the outstanding stock.
(ii) Second, the percentage of the total fair market value of stock
owned, actually and constructively, by each of such persons as of the
beginning of the current taxable year or the prior taxable year,
whichever is applicable, shall be computed.
(iii) Third, after computing the percentage of the total fair market
value of stock owned by each of the persons as of the close of the
current taxable year and as of the beginning of the applicable year, a
comparison shall be made between the percentages owned by each such
person as of each such date.
(iv) Fourth, with respect to each person who sustained an increase in
percentage ownership, the portion of such increase which is attributable
to a transaction or transactions described in paragraphs (e), (f), and
(g) of this section shall be determined.
(v) Finally, the increases in percentage ownership attributable to
such transaction or transactions shall be totaled and the resulting
figure shall be used in determining whether a ''change of ownership''
has occurred.
(4) This paragraph may be illustrated by the following examples:
Example (1). Assume that a loss corporation has changed its trade or
business during the current taxable year ending on December 31, 1960.
Assume further that the following table shows the percentage of the fair
market value of the outstanding stock owned by each stockholder as of
December 31, 1960, and the percentages owned by such stockholders as of
January 1, 1960, and January 1, 1959. The percentage of stock actually
owned is followed in parentheses by the percentage owned actually and
constructively under section 318(a). It is assumed that all increases
in actual ownership are attributable to a purchase or purchases of stock
described in paragraph (e) of this section.
(i) The 10 persons (more or less) who own the greatest percentage of
the fair market value of the outstanding stock on December 31, 1960 (as
selected under paragraph (c) of this section), are A through N and S.
Each of such persons is treated as a separate person in computing
increases in percentage ownership.
(ii) A and B each owns, actually and constructively, 23 percent of
the outstanding stock on December 31, 1960, 15 percent on January 1,
1960, and 15 percent on January 1, 1959. Therefore, as of December 31,
1960, A and B each has sustained an increase of 8 percentage points
since January 1, 1960, and a similar increase since January 1, 1959.
A's increase is not attributable to a purchase by him. B's increase,
however, is attributable to a purchase by her of 10 percent of the
outstanding stock. Therefore, B's increase of 8 percentage points is
taken into account in determining whether a ''change of ownership'' has
occurred.
(iii) C owns, actually and constructively, 25 percent of the
outstanding stock on December 31, 1960, 25 percent on January 1, 1960,
and none on January 1, 1959. Therefore, as of December 31, 1960, C has
sustained no increase since January 1, 1960, but he has sustained an
increase of 25 percentage points since January 1, 1959. Of this
increase 10 percentage points are attributable to a purchase by C.
(iv) D owns, actually and constructively, 25 percent of the
outstanding stock on December 31, 1960, 25 percent on January 1, 1960,
and 10 percent on January 1, 1959. Therefore, as of December 31, 1960,
D has sustained no increase since January 1, 1960, but she has sustained
an increase of 15 percentage points since January 1, 1959. Of this
increase 5 percentage points are attributable to a purchase by D.
(v) E and F each owns, actually and constructively, 20 percent of the
outstanding stock on December 31, 1960, 20 percent on January 1, 1960,
and none on January 1, 1959. Therefore, as of December 31, 1960, E and
F each has sustained an increase of 20 percentage points since January
1, 1959, of which 5 percentage points in each case are attributable to a
purchase.
(vi) G has sustained an increase of 10 percentage points since
January 1, 1959, all of which are attributable to a purchase by G.
(vii) H, I, J, and K each has sustained an increase of 5 percentage
points since January 1, 1960, and a similar increase since January 1,
1959, all of which are attributable to purchases.
(viii) L has sustained no increase in percentage points.
(ix) M and N each has sustained an increase of 4 percentage points
since January 1, 1960, and a similar increase since January 1, 1959, all
of which are attributable to purchases.
(x) S has sustained an increase of 5 percentage points since January
1, 1959, but the increase is not attributable to a purchase by S.
(xi) The aggregate increase in percentage ownership (attributable to
purchases) since January 1, 1960, is 36 percentage points (8 points from
B, 5 each from H, I, J, and K, and 4 each from M and N).
(xii) Since an aggregate increase (attributable to transactions
described in paragraph (e)) in stock ownership of at least 50 percentage
points has not occurred since January 1, 1960, the beginning of the
taxable year, it is necessary to determine whether such an increase has
occurred since January 1, 1959, the beginning of the prior taxable year.
The aggregate increase in percentage ownership (attributable to
purchases) since January 1, 1959, is 71 percentage points (8 from B, 10
each from C and G, 5 each from D, E, F, H, I, J, and K, and 4 each from
M and N). Therefore, section 382(a) applies as of December 31, 1960, to
eliminate any net operating loss carryovers from 1959 and earlier
taxable years to 1960 and subsequent taxable years.
Example (2). Assume that a loss corporation has changed its trade or
business during the current taxable year ending on December 31, 1960.
Assume further that the following table shows the percentage of the fair
market value of the outstanding stock owned by each stockholder as of
December 31, 1960, and the percentages owned by such stockholders as of
January 1, 1960. The percentage of stock actually owned is followed in
parentheses by the percentage owned actually and constructively under
section 318(a). It is assumed that all increases in actual ownership
are attributable to a purchase or purchases of stock described in
paragraph (e) of this section.
(i) Since there are less than 10 stockholders as of December 31,
1960, all of such stockholders are included among the persons who own
the greatest percentage of stock.
(ii) Since partnership AB owns, actually and constructively, 100
percent of the outstanding stock on December 31, 1960, and 40 percent on
January 1, 1960, AB has sustained an increase of 60 percentage points.
Of this increase 20 percentage points are attributable to a purchase by
AB.
(iii) A has sustained an increase of 30 percentage points, but none
of such increase is attributable to a purchase by A.
(iv) B has sustained an increase of 50 percentage points, of which 30
are attributable to a purchase by B.
(v) C has sustained an increase of 50 percentage points, of which 10
are attributable to a purchase by C.
(vi) Since there has been an aggregate increase (attributable to
transactions described in paragraph (e) of this section) of 60
percentage points since January 1, 1960, section 382(a) applies as of
December 31, 1960, to eliminate any net operating loss carryovers from
1959 and earlier taxable years to 1960 and subsequent taxable years.
Example (3). (i) Assume that on June 15, 1959, A, an individual,
purchases (within the meaning of section 382(a)(4) and paragraph (e) of
this section) 100 percent of the outstanding stock of X Corporation, a
loss corporation which makes its return on the basis of the calendar
year. On June 30, 1959, A transfers such stock to Y Corporation, the
entire outstanding stock of which is owned by A. During September 1959,
the business of X Corporation is changed.
(ii) Since, as of December 31, 1959, A is considered under section
318(a) as owning 100 percent of the outstanding stock of X Corporation
and he owned none of such stock on January 1, 1959, and since A's
increase in percentage points is attributable to a purchase of such
stock by him, section 382(a) applies as of December 31, 1959, to
eliminate any net operating loss carryovers from 1958 and earlier
taxable years to 1959 and subsequent taxable years.
(e) Meaning of ''purchase''. (1) In determining whether a ''change
of ownership'' has occurred, an increase in stock ownership which is
attributable to an acquisition of stock by the person sustaining the
increase (whether the stock acquired is stock of the loss corporation or
of a corporation owning stock in the loss corporation) shall be taken
into account only if such increase is attributable to a purchase (or
purchases) by such person, as defined in section 382(a)(4) and this
paragraph. There is a ''purchase'' of stock only if --
(i) The basis of such stock is determined solely by reference to its
cost to the acquirer thereof, and
(ii) Immediately before its acquisition the ownership of such stock
would not be attributed to the acquirer by application of the
constructive ownership rule of paragraph (a)(2) of this section.
For purposes of subdivision (i) of this subparagraph, if the basis of
the stock is determined by reference to its basis in the hands of the
transferor thereof or of another person, or by reference to the basis of
property (other than cash or its equivalent) exchanged for such stock,
then the basis of such stock is not determined solely by reference to
its cost to the acquirer. Thus, an acquisition of stock by gift or
bequest is not a purchase. However, if stock is received in a taxable
exchange, its basis is considered to be determined solely by reference
to its cost to the acquirer. Thus, if A owns a house which he exchanges
for stock in a loss corporation, the basis of the stock is determined
solely by reference to its cost to A. For purposes of subdivision (ii)
of this subparagraph, if, immediately before any acquisition of stock,
the acquirer would be considered under the constructive ownership rule
of paragraph (a)(2) of this section as owning less than 100 percent of
the stock owned by the transferor, then the acquirer shall be considered
as owning, immediately before such acquisition, only that proportion of
the stock so acquired as is equal to the proportion of the total stock
owned by the transferor which the acquirer would be so considered as
owning at such time. Thus, if A acquires stock from B, his wife, A has
not made a ''purchase'' because all the stock so acquired would be
considered as owned by A immediately before the acquisition. However,
if C and D (who are otherwise unrelated) are equal partners in a
partnership and if C acquires 50 shares of stock from D, only 25 of such
shares will be considered as owned by C immediately before the
acquisition.
(2) If a person acquires stock (or an interest in a partnership,
trust, or estate) with a view to invoking the constructive ownership
rule of paragraph (a)(2) of this section so that a later acquisition of
stock by, or from, such person will not qualify as a ''purchase'' under
section 382(a)(4), the earlier acquisition will be disregarded solely
for the purpose of determining whether the later acquisition is a
''purchase''. Moreover, in determining whether an acquisition of stock
is a ''purchase'' under section 382(a)(4), negligible holdings of stock
or of an interest in a partnership, trust, or estate will be
disregarded. This subparagraph may be illustrated by the following
example:
Example. A owns all or part of the outstanding stock of X
Corporation, a loss corporation. A desires to sell his stock to Y
Corporation and Y Corporation desires to purchase such stock. However,
Y Corporation wishes to avoid the provisions of section 382(a).
Therefore, A buys stock of Y Corporation and thereafter Y Corporation
acquires for cash all or part of A's stock in X Corporation. Since the
purpose of A's acquisition of stock in Y Corporation is avoidance of the
provisions of section 382(a), such acquisition is ignored and Y
Corporation's acquisition from A of stock in X Corporation is considered
a ''purchase'' under section 382(a)(4).
(f) Increase in percentage points attributable to an indirect
purchase of stock. (1) An increase in percentage points may be
attributable to a purchase of stock of a corporation which owns stock of
the loss corporation. For example, if X Corporation owns 100 shares of
stock of Y Corporation and if A purchases 20 percent in value of the
outstanding stock of X Corporation, this will be considered a purchase
by A of 20 shares of stock of Y Corporation.
(2) An increase in percentage points may also be attributable to a
purchase of an interest in a partnership or trust which owns stock of
the loss corporation. For example, if a partnership owns 100 shares of
the stock of Y Corporation, a purchase by A of a 20-percent interest in
the partnership will be considered a purchase by A of 20 shares of the
stock of Y Corporation. Similarly, if a trust owns 100 shares of stock
of a loss corporation, and if A purchases an interest in the trust which
on an actuarial basis is worth 20 percent, this will be considered a
purchase by A of 20 shares of stock of the loss corporation.
(g) Increase in percentage points attributable to a decrease in
outstanding stock. (1) An increase in percentage points may be
attributable to a decrease in the amount of outstanding stock of a loss
corporation. For example, if A and B each owns 50 percent in value of
the outstanding stock of X Corporation, a redemption by X Corporation of
all of B's stock will increase A's ownership of stock by 50 percentage
points.
(2) An increase in percentage points may also be attributable to a
decrease in the outstanding stock of a corporation owning, directly or
indirectly, stock in the loss corporation. For example, if X
Corporation owns 100 percent of the outstanding stock of Y Corporation,
a loss corporation, and if A and B each owns 50 percent of the value of
the outstanding stock of X Corporation, a redemption by X Corporation of
all of B's stock will increase A's indirect ownership of the outstanding
stock of Y Corporation by 50 percentage points.
(3) If a decrease in the amount of outstanding stock of a corporation
(whether a loss corporation or a corporation owning, directly or
indirectly, stock in a loss corporation) results from a redemption to
pay death taxes to which section 303 applies, such decrease shall not be
taken into account in determining whether there has occurred an increase
of at least 50 percentage points under paragraph (d) of this section.
For purposes of the preceding sentence, a decrease in outstanding stock
results from a redemption to which section 303 applies only to the
extent that the amount distributed in redemption does not exceed the sum
of the items described in paragraphs (1) and (2) of section 303(a).
Thus, if the amount of $100,000 is distributed in redemption of 100
shares and if the sum of the items described in paragraphs (1) and (2)
of section 303(a) is $60,000, a decrease in outstanding stock of only 60
shares will be considered to result from a redemption to which section
303 applies.
(h) Change in trade or business. (1) The provisions of section
382(a) are applicable only if the loss corporation has not continued to
carry on a trade or business substantially the same as that conducted
before any increase in stock ownership which is taken into account in
determining under paragraph (d) of this section whether a change of
ownership has occurred. The change in trade or business may occur at
any time on or after the date of the earliest such increase during the
period beginning on the first day of the loss corporation's prior
taxable year. For example, assume that on December 31, 1958 (the end of
the corporation's taxable year), the following shareholders own a
percentage of the fair market value of the outstanding stock which is
greater than each owned at the beginning of the corporation's prior
taxable year (January 1, 1957) and that all increases are attributable
to purchases within the meaning of paragraph (e) of this section. The
increase in percentage points and the date of purchase is shown for each
such shareholder:
Since there have been increases in stock ownership which aggregate at
least 50 percentage points, section 382(a) is applicable if the
corporation has not continued to carry on a trade or business
substantially the same as that conducted immediately before June 15,
1957, the date on which the first purchase occurred during the 2-year
period.
(2) Section 382(a) may apply as of the close of a taxable year even
though neither a change of ownership nor a change in trade or business
has occurred during such year. For example, if during 1958 there is a
purchase of at least 50 percent of the fair market value of a
corporation's outstanding stock followed by a change in the
corporation's trade or business, section 382(a) will apply as of
December 31, 1958, to eliminate any net operating loss carryovers from
1957 and prior taxable years to 1958 and subsequent taxable years, and,
even though no changes in stock ownership occur during 1959, section
382(a) will also apply as of December 31, 1959, to eliminate any net
operating loss carryover from 1958 to 1959 and subsequent taxable years.
(3) A change in the trade or business of a corporation made in
contemplation of a change in stock ownership will be treated as if such
change in trade or business had occurred after such change in stock
ownership. For example, if a loss corporation changes its business as
part of a plan initiated by, or on behalf of, prospective buyers of the
loss corporation's stock who wish to avoid the provisions of section
382(a), a subsequent sale of stock to such buyers will cause the change
in business to be treated as if it had occurred after the sale.
(4) For purposes of this paragraph, the holding, purchase, or sale
for investment purposes of stock, securities, or similar property shall
not be considered a trade or business unless such activities
historically have constituted the primary activities of the corporation.
(5) In determining whether a corporation has not continued to carry
on a trade or business substantially the same as that conducted before
any increase in the ownership of its stock, all the facts and
circumstances of the particular case shall be taken into account. Among
the relevant factors to be taken into account are changes in the
corporation's employees, plant, equipment, product, location, customers,
and other items which are significant in determining whether there is,
or is not, a continuity of the same business enterprise. These factors
shall be evaluated in the light of the general objective of section
382(a) to disallow net operating loss carryovers where there is a
purchase of the stock of a corporation and its loss carryovers are used
to offset gains of a business unrelated to that which produced the
losses. However, the prohibited utilization of net operating loss
carryovers to offset gains of a business unrelated to that which
produced the losses is not dependent upon considerations of purpose,
motive, or intent, but rather is established by the objective facts of
the particular case. The principles set forth in this subparagraph
shall be applied in accordance with the rules set forth in the following
subparagraphs of this paragraph.
(6) A corporation has not continued to carry on a trade or business
substantially the same as that conducted before any increase in the
ownership of its stock if the corporation is not carrying on an active
trade or business at the time of such increase in ownership. Thus, if
the corporation is inactive at the time of such an increase and
subsequently is reactivated in the same line of business as that
originally conducted, the corporation has not continued to carry on a
trade or business substantially the same as that conducted before such
increase in stock ownership. This subparagraph may be illustrated by
the following examples:
Example (1). X Corporation is engaged in the business of
manufacturing and selling machinery. On January 1, 1958, the
corporation suspends its manufacturing activities and begins to reduce
its inventory of finished products because of general adverse business
conditions and lack of profits. During the period between January 1 and
September 1, 1958, the business of the corporation remains dormant. On
September 1, 1958, A, an individual, purchases at least 50 percent in
value of X Corporation's outstanding stock. On October 1, 1958, the
corporation begins to manufacture the same type of machinery it
manufactured before January 1, 1958. The reactivation of the
corporation in the same line of business as that conducted before
January 1, 1958, does not constitute the carrying on of a trade or
business substantially the same as that conducted before the increase in
stock ownership.
Example (2). Y Corporation is engaged in the business of
manufacturing machinery. On January 1, 1958, the corporation suspends
its manufacturing activities because of a fire which disrupts the
operation of its plant. During the period between January 1 and June 1,
1958, substantial efforts are made to reactivate the business of the
corporation by reconstructing the damaged plant. On June 1, 1958, A, an
individual, purchases at least 50 percent in value of Y Corporation's
outstanding stock. On July 1, 1958, the corporation resumes its normal
manufacturing activities. The fact that the corporation's normal
activities are temporarily suspended at the time of the increase in
ownership does not of itself constitute a failure to carry on a trade or
business substantially the same as that conducted before the increase in
stock ownership.
(7) A corporation has not continued to carry on a trade or business
substantially the same as that conducted before an increase in the
ownership of its stock if the corporation discontinues more than a minor
portion of its business carried on before such increase. In determining
whether the discontinued activities are more than ''minor'' for purposes
of the preceding sentence, consideration shall be given to whether the
discontinuance of the activities has the effect of utilizing loss
carryovers to offset gains of a business unrelated to that which
produced the losses. This subparagraph may be illustrated by the
following examples:
Example (1). X Corporation, a calendar-year taxpayer, is engaged in
three separate businesses, A, B, and C. Approximately one-half of X
Corporation's total business activities (measured in terms of capital
invested, gross income, size of payroll, and similar factors) relates to
business A, 30 percent to business B, and the remaining 20 percent to
business C. On December 31, 1957, X Corporation has substantial net
operating loss carryovers all of which are attributable to the operation
of business C. On June 1, 1958, Y Corporation purchases at least 50
percent in value of X Corporation's outstanding stock and during 1959 X
Corporation discontinues business C. As of December 31, 1959, X
Corporation has not continued to carry on substantially the same trade
or business as that conducted prior to the increase in ownership.
Example (2). Assume the same facts as in example (1), except that
all of X Corporation's net operating loss carryovers are attributable to
business A and that the capital released by the discontinuance of
business C is used to revitalize business A. Since the discontinuance
of business C does not result in the utilization of net operating losses
attributable to one business to offset gains of a business unrelated to
that which produced the losses, the discontinuance of such business does
not of itself constitute the failure to carry on substantially the same
trade or business as that conducted prior to the increase in ownership.
(8) If, after an increase in ownership, the corporation continues to
carry on its prior business activities substantially undiminished, the
addition by the corporation of a new trade or business does not
constitute a failure to carry on substantially the same trade or
business. This subparagraph may be illustrated by the following
example:
Example. X Corporation, a calendar-year taxpayer, is engaged in the
manufacture and sale of electrical appliances and has sustained
substantial net operating losses. On June 30, 1958, Y Corporation
purchases 100 percent of X Corporation's outstanding stock. During
1959, X Corporation continues substantially undiminished its activities
in the manufacture and sale of electrical appliances and also
diversifies its activities by acquiring a cement manufacturing plant.
The addition of the cement manufacturing business by X Corporation does
not of itself constitute a failure to carry on substantially the same
trade or business even though net operating loss carryovers attributable
to the electrical appliance business are used to offset profits of the
cement manufacturing business. See, however, section 269 and the
regulations thereunder.
(9) A corporation has not continued to carry on a trade or business
substantially the same as that conducted before any increase in the
ownership of its stock if the corporation changes the location of a
major portion of its activities and as a result of such change in
location the business of the corporation is substantially altered. This
subparagraph may be illustrated by the following examples:
Example (1). X Corporation, a calendar- year taxpayer, is engaged in
the business of manufacturing in State A and has sustained substantial
net operating losses. On June 30, 1958, Y Corporation purchases all of
X Corporation's outstanding stock. During 1959, X Corporation transfers
its operations to State B which is several hundred miles distant from
State A. In order to effect the change in location, X Corporation
disposes of its plant and a large portion of its machinery located in
State A. The distance between State A and State B makes it necessary
for the majority of the employees of X Corporation to terminate their
employment with X Corporation. During 1959, X Corporation resumes its
manufacturing activities in State B and continues to make the same
product and to serve substantially the same group of customers.
However, by reason of the changes in location, employees, plant, and
equipment, X Corporation, on December 31, 1959, is not carrying on
substantially the same trade or business as that conducted prior to the
increase in ownership.
Example (2). Y Corporation, a calendar- year taxpayer, is engaged in
the operation of a department store in city A. On June 30, 1958, Z
Corporation purchases all of the outstanding stock of Y Corporation.
During 1959, Y Corporation transfers its operations to town B, a suburb
of city A. By reason of the change in location, Y Corporation disposes
of its interest in the building formerly occupied by it in city A and
also substitutes new equipment for a major portion of the equipment
formerly utilized by it in city A. After the change in location, Y
Corporation continues to sell substantially the same products to
substantially the same customers or to customers drawn from
substantially the same area and retains substantially all of the
employees formerly employed in city A. Under such circumstances, the
change of location does not result in a failure to carry on
substantially the same trade or business as that conducted before the
increase in ownership.
Example (3). Z Corporation, a calendar- year taxpayer, operates a
retail liquor store in town M, utilizing the services of 10 employees.
On June 30, 1958, individual A purchases all of the stock of Z
Corporation. During 1959, Z Corporation transfers its operations to
town O, a distance of 5 miles from its former location. By reason of
the change in location, Z Corporation disposes of its interest in the
premises formerly occupied by it and also disposes of the license and
franchise issued by town M. During 1959, Z Corporation transfers its
inventory of liquor to its new location and resumes its retail liquor
activities under a license and franchise issued by town O. Z
Corporation continues to employ 5 of the 10 employees formerly employed
in town M, but the corporation does not serve substantially the same
customers or customers drawn from substantially the same area. Under
these circumstances, the change of location results in a failure to
carry on substantially the same trade or business as that conducted
before the increase in ownership.
(10) A corporation has not continued to carry on a trade or business
substantially the same as that conducted before any increase in the
ownership of its stock if the corporation is primarily engaged in the
rendition of services by a particular individual or individuals and,
after the increase in ownership, the corporation is primarily engaged in
the rendition of services by different individuals. This subparagraph
may be illustrated by the following examples:
Example (1). X Corporation, a calendar- year taxpayer, is engaged in
the business of selling real estate and insurance primarily through the
services of individual A as broker. On June 30, 1958, individual B
purchases all of the stock of X Corporation, and individual A retires
from the business. During the latter part of 1958, X Corporation is
engaged primarily in rendering the brokerage services of individual B in
the sale of insurance and real estate. On December 31, 1958, the
corporation has not continued to carry on a trade or business
substantially the same as that conducted before the increase in
ownership.
Example (2). Y Corporation, a calendar- year taxpayer, is engaged in
the business of operating a beauty salon with 10 employees under the
supervision of individual A, who owns all of the stock of Y Corporation
and who is held out to the public as the corporation's principal beauty
consultant. However, the quality of the services rendered by each of
the 10 employees is primarily responsible for attracting the
corporation's clientele. On June 30, 1958, individual B purchases all
of the outstanding stock of Y Corporation and individual A retires from
the business. During 1959, Y Corporation continues to operate the
beauty salon in the same location and continues to serve substantially
the same group of customers with substantially the same employees under
the supervision of individual B, who is held out to the public as the
corporation's principal beauty consultant. On December 31, 1959, Y
Corporation has continued to carry on substantially the same trade or
business as that conducted before the increase in ownership.
(T.D. 6616, 27 FR 10733, Nov. 3, 1962, as amended by T.D. 6969, 33 FR
12000, Aug. 23, 1968. Redesignated and amended by T.D. 8352, 56 FR
29433, June 27, 1991)
26 CFR 1.382-2A Change of ownership as the result of a reorganization
(Pre-Tax Reform Act of 1986).
(a) In general. (1) Section 382(b)(1) provides that if, in the case
of a reorganization described in section 381(a)(2), either the
transferor corporation or the acquiring corporation has a net operating
loss carryover which is a carryover to the first taxable year of the
acquiring corporation ending after the date of transfer, the amount of
such carryover which may be used by the acquiring corporation is reduced
unless the stockholders (immediately before the reorganization) of the
corporation possessing the carryover (hereinafter called the ''loss
corporation'') own, immediately after the reorganization, at least 20
percent of the fair market value of the outstanding stock of the
acquiring corporation. See paragraph (b) of 1.381(b)-1 for
determination of the date of transfer, and paragraph (b) of this section
for computation of the amount of the reduction.
(2) The ownership of at least 20 percent of the fair market value of
the stock of the acquiring corporation after the reorganization must
result from the ownership of stock in the loss corporation immediately
before the reorganization. Thus, if stockholders of a transferor-loss
corporation before the reorganization also own stock of the acquiring
corporation at such time, such stock of the acquiring corporation is not
considered as owned after the reorganization by such stockholders as a
result of owning stock in the loss corporation in determining whether
the 20-percent requirement is satisfied. Moreover, the stockholders
(immediately before the reorganization) of a transferor-loss corporation
shall not be regarded as owning, immediately after the reorganization,
any stock of the acquiring corporation which is not distributed to such
stockholders pursuant to the plan of reorganization.
(3) If the net operating loss carryovers of a loss corporation are
reduced under section 382(b)(1), then in computing the net operating
loss deduction of the acquiring corporation for its first taxable year
ending after the date of transfer, that portion of such deduction which
is attributable to the net operating loss carryovers of the loss
corporation is limited to the amount of such carryovers minus the
reduction. Thus, if the net operating loss carryovers of the loss
corporation are $100,000 and if the amount of the reduction is $60,000,
only $40,000 of such carryovers may be used by the acquiring corporation
in computing its net operating loss deduction under section 172(a) for
its first taxable year ending after the date of transfer. The reduction
provided in section 382(b)(1) is applied to the aggregate of the
allowable net operating loss carryovers of the loss corporation without
regard to the taxable years in which the net operating losses were
sustained.
(4) See paragraph (e) of this section for the effect of the reduction
in subsequent taxable years of the acquiring corporation.
(5) The reduction provided by section 382(b)(1) may apply to the
carryovers of more than one corporation as party to the reorganization.
For example, assume that X Corporation acquires the assets of Y
Corporation and of Z Corporation in a reorganization described in
section 381(a)(2) and that both X Corporation and Y Corporation have net
operating loss carryovers at the date of the reorganization. The
reduction under section 382(b)(1) will apply to the net operating loss
carryovers of X Corporation unless the stockholders (immediately before
the reorganization) of X Corporation own, immediately after the
reorganization, at least 20 percent of the fair market value of the
outstanding stock of X Corporation. Similarly, the reduction under
section 382(b)(1) will apply to the net operating loss carryovers from Y
Corporation unless the stockholders (immediately before the
reorganization) of Y Corporation own, immediately after the
reorganization, at least 20 percent of the fair market value of the
outstanding stock of X Corporation.
(6) Section 382(b) applies only with respect to those reorganizations
described in section 381(a)(2). However, a series of transactions which
purport to be a reorganization qualifying under section 368(a)(1)(B)
followed by a liquidation qualifying under section 332, but which in
substance comprise a reorganization qualifying under section
368(a)(1)(C), will be considered as a reorganization of the
last-described type for purposes of section 382(b)(1) and this section.
(7) See 1.382(c)-1 for definition of the term ''stock'' as used in
this section.
(b) Amount of reduction. (1) The amount of the reduction provided in
section 382(b)(1) shall be determined as follows:
(i) Determine the percentage of the fair market value of the
outstanding stock of the acquiring corporation owned, immediately after
the reorganization, by the stockholders (immediately before the
reorganization) of the loss corporation, which is attributable to their
ownership of stock in the loss corporation immediately before the
reorganization.
(ii) If the percentage determined under subdivision (i) of this
subparagraph is less than 20 percent, compute the difference between
such percentage and 20 percent, and multiply such difference by five.
The resulting product is the percentage by which the net operating loss
carryovers are reduced.
(2) Subparagraph (1) of this paragraph may be illustrated by the
following example:
Example. Assume that X Corporation acquires the assets of Y
Corporation, a loss corporation, in a reorganization described in
section 381(a)(2), and that immediately after the reorganization the
former stockholders of Y Corporation, as the result of owning stock of Y
Corporation, own 8 percent of the fair market value of X Corporation's
outstanding stock. The difference between 8 percent and 20 percent is
12 percent, which when multiplied by five produces 60 percent.
Therefore, the amount of the reduction is equal to 60 percent of the net
operating loss carryovers from the loss corporation, so that if the net
operating loss carryovers from Y Corporation amounted to $100,000, the
amount of the reduction would be $60,000.
(c) Acquisitions designed to avoid section 382(b). The purpose of
the 20- percent requirement of section 382(b)(1) is to ensure that the
net operating loss carryovers from a corporation a party to a
reorganization will be allowed in full only when the shareholders of the
loss corporation have a substantial continuing interest in the acquiring
corporation, thereby ensuring that the carryovers will be utilized to
some extent for the benefit of those persons who were owners of the loss
corporation before the reorganization. Therefore, in applying section
382(b)(1), any acquisition of stock of a loss corporation will be
disregarded if made for the purpose of avoiding the 20-percent
continuity of interest requirement. Moreover, two or more successive
reorganizations will be treated as if they had occurred simultaneously
in cases where they are undertaken with a view to avoiding the
20-percent continuity requirement. These rules may be illustrated by
the following examples:
Example (1). Assume that X Corporation desires to merge into Y
Corporation, a loss corporation, in a reorganization. A and B, who are
the controlling stockholders of X Corporation, with a view to avoiding
the 20- percent continuity of interest requirement of section 382(b)(1),
acquire for cash 40 percent of the fair market value of the outstanding
stock of Y Corporation (or acquire an option to purchase such stock,
which option they exercise shortly after the merger). Thereafter, Y
Corporation acquires the assets of X Corporation in a reorganization to
which section 381(a) applies. In determining whether the 20-percent
continuity requirement is satisfied (and, if not, the amount of the
reduction under section 382(b)(2)), the stock of Y Corporation purchased
by A and B (or acquired upon their exercise of the option) will be
considered as outstanding immediately after the reorganization but will
not be considered as owned by persons who were stockholders of Y
Corporation immediately before the reorganization.
Example (2). Assume that X Corporation, which has a net worth of
$2,000,000, desires to acquire the assets of Y Corporation, a loss
corporation, which has a net worth of $100,000. X Corporation also
desires to acquire the assets of Z Corporation, which has a net worth of
$400,000. With a view to avoiding the 20-percent continuity
requirement, Z Corporation acquires the assets of Y Corporation in a
reorganization to which section 381(a) applies. Immediately after the
reorganization, the former stockholders of Y Corporation own 20 percent
of the fair market value of the outstanding stock of Z Corporation.
Shortly thereafter, X Corporation acquires the assets of Z Corporation
in a reorganization to which section 381(a) applies. Immediately after
the reorganization, the former stockholders of Y Corporation own 4
percent of the fair market value of the outstanding stock of X
Corporation. Under these circumstances, the application of section
382(b)(1) to the net operating loss carryovers of Y Corporation shall be
determined by reference to the fair market value of the outstanding
stock of X Corporation owned, immediately after the successive
reorganizations, by the stockholders (immediately before the successive
reorganizations) of Y Corporation. Therefore, the net operating loss
carryovers from Y Corporation will be reduced by 80 percent.
(d) Exception to application of section 382(b). (1) Section
382(b)(3) provides an exception to the application of the reduction
provided in section 382(b)(1). Under this exception there is no
reduction if, immediately before the reorganization, the transferor
corporation and the acquiring corporation are owned substantially by the
same persons in the same proportion. If the acquiring corporation is
not in existence immediately before the reorganization (as in the case
of a statutory consolidation), the requirements of section 382(b)(3) are
not met unless the transferor corporations immediately before the
reorganization are owned substantially by the same persons in the same
proportion.
(2) The transferor corporation and the acquiring corporation will be
considered as owned substantially by the same persons in the same
proportion only if the same persons own substantially all the stock of
the corporations in substantially the same proportion. This rule may be
illustrated by the following examples:
Example (1). A and B each owns 50 percent of the fair market value
of the outstanding stock of X Corporation. A owns 52 percent and B owns
48 percent of the fair market value of the outstanding stock of Y
Corporation. Y Corporation acquires the assets of X Corporation in a
reorganization to which section 381(a) applies. The exception provided
in section 382(b)(3) is applicable.
Example (2). A and B each owns 50 percent of the fair market value
of the outstanding stock of X Corporation. A owns 60 percent and B owns
40 percent of the fair market value of the outstanding stock of Y
Corporation. Y Corporation acquires the assets of X Corporation in a
reorganization to which section 381(a) applies. The exception provided
in section 382(b)(3) is not applicable.
Example (3). A and B each owns 48 percent of the fair market value
of the outstanding stock of X Corporation and of Y Corporation. C owns
the remaining 4 percent of X Corporation and D owns the remaining 4
percent of Y Corporation. Y Corporation acquires the assets of X
Corporation in a reorganization to which section 381(a) applies. The
exception provided in section 382(b)(3) is applicable.
Example (4). A and B each owns 40 percent of the fair market value
of the outstanding stock of X Corporation and of Y Corporation. C owns
the remaining 20 percent of X Corporation and D owns the remaining 20
percent of Y Corporation. Y Corporation acquires the assets of X
Corporation in a reorganization to which section 381(a) applies. The
exception provided in section 382(b)(3) is not applicable.
(3) If stock of the transferor or acquiring corporation is acquired
or disposed of for the purpose of meeting the requirements of section
382(b)(3), then for purposes of such section such stock shall not be
considered to be owned by the person who acquired it. For example, if
A, owning 100 percent of the outstanding stock of X Corporation and 75
percent of the outstanding stock of Y Corporation, a loss corporation,
acquires the remaining 25 percent of the outstanding stock of Y
Corporation with a view to merging the two corporations, then for
purposes of section 382(b)(3) such 25 percent shall not be considered to
be owned by A.
(e) Carryovers to subsequent years. (1) The reduction provided in
section 382(b)(1) applies only to net operating loss carryovers to the
first taxable year of the acquiring corporation ending after the date of
transfer. However, section 382(b)(4) contains a rule to ensure that the
portion of the carryovers equal to the amount of the reduction will not
be available for deduction in subsequent taxable years of the acquiring
corporation. This rules provides that if a reduction is applicable
under section 382(b)(1), then in computing net operating loss carryover
from taxable years of the transferor and acquiring corporations ending
on or before the date of transfer to taxable years of the acquiring
corporation subsequent to the first taxable year ending after the date
of transfer, the income of the acquiring corporation for such first
taxable year, as computed under section 172(b)(2) (without regard to the
fact that the deduction under section 172(a) is reduced by the amount
computed under section 382(b)(2)), shall be increased by the amount of
the reduction computed under section 382(b)(2) for that year. The
preceding rule may be illustrated by the following example:
Example. X Corporation and Y Corporation are organized on January 1,
1957, and each makes its return on the basis of the calendar year. On
December 31, 1958, Y Corporation acquires the assets of X Corporation in
a reorganization to which section 381(a) applies. Immediately after the
reorganization, those persons who were stockholders of X Corporation
immediately before the reorganization own 10 percent of the fair market
value of the outstanding stock of Y Corporation. The net operating
losses and the taxable income (computed without any net operating loss
deduction) of the two corporations are as follows:
(v) Summary of carryovers to 1960. The aggregate of the net
operating loss carryovers to 1960 is $11,000, computed as follows:
(2) If the date of transfer is on a day other than the last day of a
taxable year of the acquiring corporation, and if the reduction provided
in section 382(b)(1) applies to net operating loss carryovers of the
transferor corporation, then for purposes of section 381(c)(1)(C), the
adjustment provided in section 382(b)(4) shall be considered as an
increase in income of the ''postacquisition part year'' and no portion
of such adjustment shall be considered as an increase in income of the
''preacquisition part year.''
(f) Attribution of ownership. (1) Section 382(b)(5) provides a
special rule for determining whether the reduction provided in section
382(b)(1) applies in cases where, immediately before the reorganization,
either the transferor corporation or the acquiring corporation owns
outstanding stock of the loss corporation. Under this rule, the
transferor or acquiring corporation (whichever owns stock of the loss
corporation) is treated as owning, immediately after the reorganization,
a percentage, A, of the fair market value of the acquiring corporation's
outstanding stock which bears the same ratio to B (the percentage of the
fair market value of the stock of the loss corporation owned,
immediately before the reorganization, by such transferor or acquiring
corporation) as C (the fair market value of the outstanding stock of the
loss corporation immediately before the reorganization) bears to D (the
fair market value of the outstanding stock of the acquiring corporation
immediately after the reorganization). Stated algebraically, the
percentage of the fair market value of the acquiring corporation's
outstanding stock treated as owned by the transferor or acquiring
corporation immediately after the reorganization, A, equals --
Value of stock of loss corporation immediately before reorganization
(C)/Value of stock of acquiring corporation immediately after
reorganization (D) Percentage of stock of loss corporation owned by
transferor or acquiring corporation immediately before reorganization
(B).
The preceding rule may be illustrated by the following examples:
Example (1). Assume that X Corporation owns 25 percent of the fair
market value of the outstanding stock of Y Corporation, a loss
corporation; that X Corporation acquires the assets of Y Corporation in
a reorganization to which section 381(a) applies; that immediately
before the reorganization the total outstanding stock of Y Corporation
has a fair market value of $10,000; and that immediately after the
reorganization the total outstanding stock of X Corporation has a fair
market value of $50,000. For the purpose of determining whether the
reduction provided in section 382(b)(1) is applicable (and, if so, the
amount of the reduction computed under section 382(b)(2)), X Corporation
is treated as owning (immediately after the reorganization) 5 percent of
the fair market value of its outstanding stock, determined as follows:
Thus, if the other former stockholders of Y Corporation own, after
the reorganization at least 15 percent of the fair market value of the
outstanding stock of X Corporation as the result of owning stock in Y
Corporation, there will be no reduction under section 382(b)(1).
Example (2). Assume the same facts as in example (1), except that Y
Corporation acquires the assets of X Corporation in a reorganization to
which section 381(a) applies and that immediately after the
reorganization the total outstanding stock of Y Corporation has a fair
market value of $50,000. The result is the same as that in example (1).
X Corporation is treated as owning (immediately after the
reorganization) 5 percent of the fair market value of the outstanding
stock of Y Corporation. Thus, there will be no reduction under section
382(b)(1) if those persons (other than X Corporation) who were
stockholders of Y Corporation immediately before the reorganization own
at least 15 percent of the fair market value of the outstanding stock of
Y Corporation immediately after the reorganization.
(2) The provisions of paragraph (5) of section 382(b) do not apply
with respect to an interest in a loss corporation which is acquired for
the purpose of avoiding the 20-percent continuity of interest
requirement of section 382(b)(1). Thus, paragraph (5) of section 382(b)
does not apply with respect to stock of a loss corporation which is
acquired by another corporation with a view to causing a merger of the
two corporations. For example, if X Corporation owns 15 percent of the
fair market value of the outstanding stock of Y Corporation, a loss
corporation, and if X Corporation purchases an additional 15 percent
with a view to causing a merger of the two corporations, paragraph (5)
of section 382(b) applies only with respect to the stock previously held
by X Corporation and not to the stock so purchased.
(g) Stock of corporation controlling acquiring corporation. (1)
Section 382(b)(6) provides a special rule for determining whether the
reduction provided in section 382(b)(1) applies in cases where the
transferor corporation is a loss corporation and the former stockholders
of the loss corporation own, as a result of the reorganization, stock in
a corporation which controls (within the meaning of section 368(c)) the
acquiring corporation. In such cases, the former stockholders of the
loss corporation are treated as owning, after the reorganization, stock
of the acquiring corporation equal in value to the fair market value of
their stock in the controlling corporation. This rule may be
illustrated by the following example:
Example. X Corporation owns 100 percent of the stock of Y
Corporation. In a reorganization to which section 381(a) applies, Y
Corporation acquires the assets of Z Corporation, a loss corporation, in
exchange for stock of X Corporation. Immediately after the
reorganization the total outstanding stock of Y Corporation has a fair
market value of $50,000, and the stockholders (immediately before the
reorganization) of the loss corporation own, as a result of the
reorganization, stock of X Corporation having a fair market value of
$20,000. For the purpose of determining whether the reduction provided
in section 382(b)(1) is applicable (and, if so, the amount of the
reduction computed under section 382(b)(2)), the former stockholders of
the loss corporation are treated as owning stock of Y Corporation worth
$20,000 (the value of their stock in X Corporation), which is 40 percent
($20,000 divided by $50,000) of the fair market value of the outstanding
stock of the acquiring corporation.
(2) The 20-percent continuity of interest requirement of section
382(b)(1) applies with respect to an interest in the corporation
desiring to utilize the net operating loss carryovers from the loss
corporation. Thus, the provisions of section 382(b)(6) and of
subparagraph (1) of this paragraph apply only if, at the time of the
reorganization, it is intended that the acquiring corporation itself,
and not the corporation which controls the acquiring corporation, shall
make use of the net operating loss carryovers from the loss corporation.
Section 382(b)(6) and subparagraph (1) of this paragraph do not apply
if the loss corporation is acquired by a controlled corporation with a
view to the liquidation of the controlled corporation into its parent at
a time when a substantial part of the net operation loss carryovers from
the loss corporation remain to be utilized. (This requirement is
satisfied in any case in which such action was contemplated at the time
of the reorganization by those persons in a position to determine the
policies of the controlled corporation.) In such case, it is the
controlling corporation, instead of the controlled corporation, in which
the former stockholders of the loss corporation must own a 20-percent
interest. Thus, assume in the example appearing in subparagraph (1) of
this paragraph, that the total fair market value of the outstanding
stock of X Corporation immediately after the reorganization is $200,000
and that X Corporation causes Y Corporation to be liquidated at a time
when a substantial part of the loss carryovers from Z Corporation remain
to be utilized. Under these circumstances, the former stockholders of
the loss corporation would own after the reorganization only 10 percent
($20,000 divided by $200,000) of the fair market value of the
outstanding stock of the controlling corporation and the net operating
loss carryovers from Z Corporation to the first taxable year of Y
Corporation ending after the date of transfer would accordingly be
reduced by 50 percent.
(h) Minimum tax for tax preferences. For purposes of the tax imposed
under section 56, the acquiring corporation succeeding to and taking
into account any net operating loss carryovers of the transferor
corporation shall also succeed to and take into account along with such
net operating loss carryover any deferred tax liability under section
56(b) and the regulations thereunder attributable to such net operating
loss carryover. Any reduction of net operating loss effected pursuant
to section 382 and the regulations thereunder shall, for purposes of
section 56(b) and the regulations thereunder and section 1.58-7, be
deemed to reduce the portions of such net operating loss described in
such provisions proportionately.
(T.D. 6616, 27 FR 10738, Nov. 3, 1962, as amended by T.D. 7564, 43 FR
40493, Sept. 12, 1978. Redesignated and amended by T.D. 8352, 56 FR
29433, June 27, 1991)
26 CFR 1.382-3A Definition of stock (Pre-Tax Reform Act of 1986).
Section 382(c) contains the definition of the term ''stock'' for
purposes of section 382 (a) and (b). For these purposes, the term
''stock'' means all outstanding shares except nonvoting stock which is
limited and preferred as to dividends.
(T.D. 6616, 27 FR 10741, Nov. 3, 1962. Redesignated and amended by
T.D. 8352, 56 FR 29433, June 27, 1991)
26 CFR 1.382-4A Election of application of sections 382 and 383, as
amended by the Tax Reform Act of 1976.
(a) In general. (1) An election may be made under this section to
have sections 382(a) and 383 (as it relates to section 382(a)), as
amended by the Tax Reform Act of 1976, apply with respect to
transactions specified in section 382(a), as so amended, occurring --
(i) During the first taxable year beginning after June 30, 1978, of
the loss corporation; and
(ii) Pursuant to a written binding contract or option entered into
before September 27, 1978.
(2) An election may be made under this section to have sections
382(b) and 383 (as it relates to section 382(b)), as amended by the Tax
Reform Act of 1976, apply with respect to any reorganization specified
in section 382(b), as so amended, occurring --
(i) Pursuant to a plan adopted on or after January 1, 1978, and
before the end of the first taxable year beginning after June 30, 1978,
of either the acquired or the acquiring corporation, whichever ends
later; and
(ii) Pursuant to a written binding contract or option entered into
before September 27, 1978.
(b) Taxpayer making election. (1) The election described in
paragraph (a)(1) of this section shall be made by the loss corporation.
(2) In the case of a reorganization described in section
368(a)(1)(B), the election described in paragraph (a)(2) of this section
shall be made by the loss corporation. In the case of all other
reorganizations specified in section 382(b), as amended, the election
shall be made by the acquiring corporation, as defined in
1.381(a)-1(b)(2).
(3) For rules in the case where the loss corporation becomes a member
of an affiliated group of corporations which files a consolidated
return, see paragraph (d) of this section.
(c) Time and manner of making (1)(i) Except as provided in paragraph
(c)(2) of this section, the taxpayer shall make the election described
in paragraph (a) of this section by making a written statement on its
income tax return for the taxable year in which the transaction(s) or
reorganization occurs. For the election to be valid, this return must
be filed no later than the time prescribed by law (including extensions)
for filing the return (hereafter ''timely filed''). If the taxpayer
takes a net operating loss deduction on this return, the statement shall
be made on the schedule showing the compututation of this deduction.
Otherwise, the statement shall be made on a separate sheet of paper
physically attached to the return. The statement shall briefly describe
the transaction(s) or reorganization involved, and indicate that the
taxpayer elects to have section 382 (a) or (b) and section 383, as
amended by the Tax Reform Act of 1976, apply with respect to such
transaction(s) or reorganization.
(ii) If the taxpayer's return for the taxable year in which the
transaction(s) or reorganization occurs is timely filed on or before
November 26, 1979, and the election described in paragraph (a) of this
section is made with that return, the election will be valid regardless
of whether the election is made in the manner provided in paragraph
(c)(1)(i) of this section.
(2) If the taxpayer's return for the taxable year in which the
transaction(s) or reorganization occurs was due before February 6, 1979,
and the taxpayer made the election described in paragraph (a) of this
section before February 6, 1979, the election is valid regardless of
whether the election was made with the taxpayer's timely-filed return
for that year.
(d) Consolidated returns. If the loss corporation becomes a member
of an affiliated group of corporations which files a consolidated return
for the taxable year in which the transaction(s) or reorganization
occurs, the election described in paragraph (a) of this section may be
made by the common parent. If this paragraph (d) applies, the election
shall be made as provided in paragraph (c) of this section, treating the
common parent as the taxpayer and the consolidated return for the
taxable year in which the trans action(s) or reorganization occurs as
the relevant income tax return.
(e) Effect of election. (1) Generally, a person who acquires more
than one loss corporation during the period in which the effective dates
of the amendments to sections 382 and 383, made by the Tax Reform Act of
1976, would be postponed by section 368(a) of the Revenue Act of 1978
may not choose to have the 1976 Act amendments apply with respect to
some but not all of these acquisitions. Accordingly, if an election is
made under paragraph (a) of this section, sections 382 and 383, as
amended, shall apply with respect to all such acquisitions made by that
person during this period.
(2) For purposes of this paragraph, an acquisition means either of
the following:
(i) An increase in ownership of the total fair market value of the
outstanding stock of the loss corporation of 50 percentage points or
more, during the period described in section 381(a), as amended,
attributable to transactions described in that section. For purposes of
this subdivision, ''stock'' means all shares except nonvoting stock
which is limited and preferred as to dividends. In addition, as under
section 382(a), a person's increase in stock ownership in the loss
corporation shall be taken into account under this subdivision only to
the extent the increase is reflected in that person's stock ownership on
the last day of the corporation's taxable year.
(ii) A reorganization specified in section 382(b), as amended, in
which the person, directly or indirectly, is the acquiring corporation.
(T.D. 7650, 44 FR 61593, Oct. 26, 1979. Redesignated and amended by
T.D. 8352, 56 FR 29433, June 27, 1991)
26 CFR 1.383-0 Effective date.
(a) The regulations under section 383 (other than the regulations
described in paragraph (b) of this section) reflect the amendments made
to sections 382 and 383 by the Tax Reform Act of 1986. See 1.383-1(j)
for effective date rules.
(b) Sections 1.383-1A, 1.383-2A, and 1.383-3A do not reflect the
amendments made to sections 382 and 383 by the Tax Reform Act of 1986.
(T.D. 8352, 56 FR 29434, June 27, 1991)
26 CFR 1.383-1 Special limitations on certain capital losses and excess
credits.
(a) Outline of topics. In order to facilitate the use of this
section, this paragraph lists the paragraphs, subparagraphs and
subdivisions contained in this section.
(a) Outline of topics.
(b) In general.
(c) Definitions.
(1) Coordination with definitions and nomenclature used in section
382.
(2) Pre-change capital loss.
(3) Pre-change credit.
(4) Pre-change loss.
(5) Regular tax liability.
(6) Section 383 credit limitation.
(i) Definition.
(ii) Example.
(d) Limitation on use of pre-change losses and pre-change credits.
(1) In general.
(2) Ordering rules for utilization of pre-change losses and
pre-change credits and for absorption of the section 382 limitation and
the section 383 credit limitation.
(3) Coordination with other limitations.
(i) In general.
(ii) Examples.
(e) Carryforward of unused section 382 limitation.
(1) Computation of carryforward amount.
(2) Section 383 credit reduction amount.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988.
(4) Special rules for determining the section 383 credit reduction
amount.
(i) Ordering rules.
(ii) Special rule for credits under section 38(a).
(f) Examples.
(g) Coordination with section 382 and the regulations thereunder.
(h) Alternative minimum tax.
(i) (Reserved)
(j) Effective date.
(k) Transitional rules regarding information statements
(b) In general. Under section 383, if an ownership change occurs
with respect to a loss corporation, the section 382 limitation and the
section 383 credit limitation (as defined in paragraph (c)(6) of this
section) for a post-change year shall apply to limit the amount of
taxable income and regular tax liability, respectively, that can be
offset by pre-change capital losses and pre-change credits of the new
loss corporation. The section 383 credit limitation for a post-change
year bears a direct relationship to the amount, if any, of the section
382 limitation that remains after taking into account the reduction in
the loss corporation's taxable income during a post-change year as a
result of its pre-change losses (as defined in paragraph (c)(4) of this
section). In general, the section 383 credit limitation is an amount
equal to the tax liability of the new loss corporation for the
post-change year which is attributable to so much of the corporation's
taxable income that would be reduced by allowing as a deduction its
section 382 limitation remaining after accounting for the use of
pre-change losses. As pre-change losses and pre-change credits of a
corporation are used, they absorb the section 382 limitation and the
section 383 credit limitation, respectively, in the manner prescribed by
paragraph (d) of this section. See also section 382 and the regulations
thereunder.
(c) Definitions -- (1) Coordination with definitions and nomenclature
used in section 382. Terms and nomenclature used in this section, and
not otherwise defined herein, shall have the same respective meanings as
in section 382 and the regulations thereunder, taking into account that
the limitations of section 383 and this section apply to pre-change
capital losses and pre-change credits.
(2) Pre-change capital loss. The term ''pre-change capital loss''
means --
(i) Any capital loss carryover under section 1212 of the old loss
corporation to the taxable year ending on the change date or in which
the change date occurs,
(ii) Any net capital loss of the old loss corporation for the taxable
year in which the ownership change occurs, to the extent such loss is
allocable to the period in such year ending on or before the change
date, and
(iii) If the old loss corporation has a net unrealized built-in loss,
any recognized built-in loss for any recognition period taxable year
(within the meaning of section 382(h)) that is a capital loss.
(3) Pre-change credit. The term ''pre-change credit'' means --
(i) Any excess foreign taxes under section 904(c) of the old loss
corporation --
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from the taxable year that includes the change
date, to the extent such credit is allocable to the period in such year
ending on or before the change date,
(ii) Any credit under section 38 of the old loss corporation --
(A) carried forward to the taxable year ending on the change date or
in which the change date occurs, or
(B) carried forward from a taxable year that includes the change date
to the extent such credit is allocable to the period in such year ending
on or before the change date, and
(iii) The available minimum tax credit of the old loss corporation
under section 53 to the extent attributable to periods ending on or
before the change date.
(4) Pre-change loss. Solely for purposes of this section, the term
''prechange loss'' means any pre-change loss described in 1.382-2(a)(2)
other than pre-change credits described in paragraph (c)(3) of this
section.
(5) Regular tax liability. For purposes of this section, the term
''regular tax liability'' has the same meaning as provided in section
26(b).
(6) Section 383 credit limitation -- (i) Definition. The ''section
383 credit limitation'' for a post-change year of a new loss corporation
is an amount equal to the excess of --
(A) The new loss corporation's regular tax liability for the
post-change year, over
(B) The new loss corporation's regular tax liability for the
post-change year computed, for this purpose, by allowing as an
additional deduction an amount equal to the section 382 limitation
remaining after the application of paragraphs (d)(2) (i) through (iv) of
this section.
(ii) Example. L, a new loss corporation, is a calendar year
taxpayer. L has an ownership change on December 31, 1987. For 1988, L
has taxable income (prior to the use of any pre-change losses) of
$100,000. In addition, L has a section 382 limitation of $25,000, a
pre-change net operating loss carryover of $12,000, a pre-change minimum
tax credit of $50,000, and no pre-change capital losses. L's section
383 credit limitation is the excess of its regular tax liability
computed after allowing a $12,000 net operating loss deduction (taxable
income of $88,000; regular tax liability of $18,170), over its regular
tax liability computed after allowing an additional deduction in the
amount of L's section 382 limitation remaining after the application of
paragraphs (d)(2) (i) through (iv) of this section, or $13,000 (taxable
income of $75,000; regular tax liability of $13,750). L's section 383
credit limitation is therefore $4,420 ($18,170 minus $13,750).
(d) Limitation on use of pre-change losses and pre-change credits --
(1) In general. The amount of taxable income of a new loss corporation
for any post-change year that may be offset by pre-change losses shall
not exceed the amount of the section 382 limitation for the post-change
year. The amount of the regular tax liability of a new loss corporation
for any post-change year that may be offset by pre-change credits shall
not exceed the amount of the section 383 credit limitation for the
post-change year.
(2) Ordering rules for utilization of pre-change losses and
pre-change credits and for absorption of the section 382 limitation and
the section 383 credit limitation. Pre-change losses described in any
subdivision of this paragraph (d)(2) can offset taxable income in a
post-change year only to the extent that the section 382 limitation for
that year has not been absorbed by pre-change losses described in any
lower-numbered subdivisions. Pre-change credits described in any
subdivision of this paragraph (d)(2) can offset regular tax liability in
a post-change year only to the extent that the section 383 credit
limitation for that year has not been absorbed by pre-change credits
described in any lower numbered subdivisions. The section 382
limitation is absorbed by one dollar for each dollar of pre-change loss
that is used to offset taxable income. The section 383 credit
limitation is absorbed by one dollar for each dollar of pre-change
credit that is used to offset regular tax liability. For each
post-change year, the section 382 limitation and the section 383 credit
limitation of a new loss corporation are absorbed by such corporation's
pre-change losses and pre-change credits in the following order:
(i) Pre-change capital losses described in paragraph (c)(2)(iii) of
this section that are recognized and are subject to the section 382
limitation in such post-change year,
(ii) Pre-change capital losses described in paragraphs (c)(2) (i) and
(ii) of this section,
(iii) Pre-change losses that are described in 1.382-2(a)(2) (other
than losses that are pre-change capital losses) that are recognized and
are subject to the section 382 limitation in such post-change year,
(iv) Pre-change losses not described in paragraphs (d)(2) (i) through
(iii) of this section,
(v) Pre-change credits described in paragraph (c)(3)(i) of this
section (excess foreign taxes),
(vi) Pre-change credits described in paragraph (c)(3)(ii) of this
section (business credits), and
(vii) Pre-change credits described in paragraph (c)(3)(iii) of this
section (minimum tax credit).
(3) Coordination with other limitations -- (i) In general.
Paragraphs (d) (1) and (2) of this section shall be applied after the
application of all other limitations contained in subtitle A which are
applicable to the use of a pre-change loss or pre-change credit in a
post-change year. Thus, only otherwise currently allowable pre-change
losses and pre-change credits will result in the absorption of the
section 382 limitation and the section 383 credit limitation.
(ii) Examples:
Example (1). L is a calendar year taxpayer and has an ownership
change on December 31, 1987. For 1988, L has taxable income of
$300,000, a regular tax liability of $100,250 and a tentative minimum
tax of $90,000. L has no pre-change losses, but has a business credit
carryforward from 1985 of $25,000, no portion of which is due to the
regular percentage of the investment tax credit under section 46. L has
a section 382 limitation for 1988 of $50,000. L's section 383 credit
limitation is $19,500, i.e., an amount equal to the excess of L's
regular tax liability ($100,250) over its regular tax liability
calculated by allowing an additional deduction of $50,000. Pursuant to
the limitation contained in section 38(c), however, L is entitled to use
only $10,250 of its business credit carryforward in 1988. The
unabsorbed portion of L's section 382 limitation (computed pursuant to
paragraph (e) of this section) is carried forward under section
382(b)(2). The unused portion of L's business credit carryforward,
$14,750, is carried forward to the extent provided in section 39.
Example (2). Assume the same facts as in Example (1), except that
L's tentative minimum tax is $70,000. L's use of its investment tax
credit carryforward is no longer limited by section 38(c); however,
pursuant to section 383 and this section, L is entitled to use only
$19,500 of its business credit carryforward in 1988. The unused portion
of L's business credit carryforward, $5,500, is carried forward to the
extent provided in section 39. There is no unused section 382
limitation to be carried forward.
(e) Carryforward of unused section 382 limitation -- (1) Computation
of carryforward amount. The section 382 limitation that can be carried
forward under section 382(b)(2) is the excess, if any, of (i) the
section 382 limitation for the post-change year remaining after the
application of paragraphs (d)(2) (i) through (iv) of this section, over
(ii) the section 383 credit reduction amount for that post-change year.
(2) Section 383 credit reduction amount. The section 383 credit
reduction amount for a post-change year is equal to the amount of
taxable income attributable to the portion of the new loss corporation's
regular tax liability for the year that is offset by pre-change credits.
Each dollar of regular tax liability that is offset by a dollar of
pre-change credit is divided by the effective marginal rate at which
that dollar of tax was imposed to determine the amount of taxable income
that resulted in that particular dollar of regular tax liability. The
sum of these ''grossed-up'' amounts for the taxable year is the section
383 credit reduction amount. In determining the effective marginal rate
at which a dollar of tax was imposed, special rules regarding rates of
tax (e.g., sections 11(b) (2) and (15) or taxable income brackets (e.g.,
section 1561), or both, shall be taken into account. See Example (3) in
paragraph (f) of this section illustrating the effect of section
1561(a). Paragraph (e)(3) of this section illustrates the gross-up
computation of the section 383 credit reduction amount based on the tax
table and the rates of tax prescribed by section 11(b) as in effect for
taxable years beginning on January 1, 1988.
(3) Computation of section 383 credit reduction amount; illustration
using tax rates and brackets in effect for calendar year 1988. (i)
Assuming no special rules regarding rates of tax or taxable income
brackets apply, the section 383 credit reduction amount for a new loss
corporation is the sum of the amounts determined under paragraphs (e)(3)
(ii), (iii), (iv), (v), and (vi) of this section.
(ii) The amount determined under this subdivision (ii) is the amount
(if any) by which pre-change credits offset so much of the new loss
corporation's regular tax liability as exceeds $113,900, divided by
0.34.
(iii) The amount determined under this subdivision (e)(3)(iii) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $22,250 (but does
not exceed $113,900), divided by 0.39.
(iv) The amount determined under this subdivision (e)(3)(iv) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $13,750 (but does
not exceed $22,250), divided by 0.34.
(v) The amount determined under this subdivision (e)(3)(v) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as exceeds $7,500 (but does not
exceed $13,750), divided by 0.25.
(vi) The amount determined under this subdivision (e)(3)(vi) is the
amount (if any) by which pre-change credits offset so much of the new
loss corporation's regular tax liability as does not exceed $7,500,
divided by 0.15.
(4) Special rules for determining the section 383 credit reduction
amount -- (i) Ordering rules. For purposes of this paragraph (e),
credits, including pre-change credits, are considered to offset regular
tax liability in the order that such credits are applied under the
ordering rules of part IV of subchapter A of chapter 1 and section 904.
For example, for purposes of this paragraph (e), excess foreign taxes
carried over under section 904(c) (whether or not a pre-change credit)
are considered (under section 38(c)) to offset regular tax liability
before the general business credit carryovers to the taxable year are
considered (under section 39) to offset regular tax liability before
general business credits arising in the taxable year.
(ii) Special rule for credits under section 38(a). For purposes of
applying this paragraph (e), credits under section 38(a) that, under
section 38(c)(2) as applicable, taking into account amendments made by
section 11813 of the Revenue Reconciliation Act of 1990, effectively
offset both regular tax liability and the tax imposed by section 55
(relating to minimum tax), are considered to offset regular tax
liability.
(f) Examples. The following examples illustrate the operation of
paragraphs (b) through (e) of this section. For purposes of these
examples, the term ''modified tax liability'' means the amount
determined under paragraph (c)(6)(i)(B) of this section.
Example (1). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. Before the application of carryovers, L, a
new loss corporation, has $60,000 of capital gain, $100,000 of ordinary
taxable income and a section 382 limitation of $100,000 for its first
post-change year beginning after the change date. L's only carryovers
are an $80,000 capital loss carryover and a $100,000 net operating loss
carryover. Both carryovers are from taxable years ending before the
change date and thus are pre-change losses.
(ii) L first uses $60,000 of its pre-change capital loss carryover to
offset its capital gain. This reduces its section 382 limitation to
$40,000 (i.e., $100,000^$60,000). L's pre-change net operating loss
carryover can therefore be used only to the extent of $40,000. L's
remaining $20,000 pre-change capital loss carryover and remaining
$60,000 pre-change net operating loss carryover are carried to later
years to the extent permitted under this section and sections 172,
382(l)(2) and 1212.
Example (2). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. L has $750,000 of ordinary taxable income
(before the application of carryovers) and a section 382 limitation of
$1,500,000 for 1988. L's only carryovers are from pre-1987 taxable
years and consist of a $500,000 net operating loss (''NOL'') carryover
and a $200,000 foreign tax credit carryover, all of which may be used
under the section 904 limitation. The NOL carryover is a pre-change
loss, and the foreign tax credit carryover is a pre-change credit. L
has no other credits which can be used for 1988 and is not liable for an
alternative minimum tax for 1988.
(ii) The following computation illustrates the application of this
section for 1988:
Example (3). (i) Assume the same facts as in Example (2), except
that, for purposes of section 1561(a), L is a component member of a
controlled group of corporations and the taxable income of the
controlled group of corporations for 1988 is $2,000,000.
(ii) The following computation illustrates the application of this
section for 1988:
Example (4). (i) L, a calendar year taxpayer, has an ownership
change on December 31, 1987. L has $80,000 of ordinary taxable income
(before the application of carryovers) and a section 382 limitation of
$25,000 for 1988, a post-change year. L's only carryover is from a
pre-1987 taxable year and is a general business credit carryforward
under section 39 in the amount of $10,000 (no portion of which is
attributable to the investment tax credit under section 46). The
general business credit carryforward is a pre-change credit. L has no
other credits which can be used for 1988 and is not liable for an
alternative minimum tax for 1988.
(ii) The following computation illustrates the application of this
section:
(g) Coordination with section 382 and the regulations thereunder.
The rules and principles of section 382 (including, for example, section
382(b)(3) and section 382(l)(2)) and the regulations thereunder shall
also apply with respect to section 383 and this section. To the extent
section 382(h)(6) applies to credits, the principles of this section
apply to such credits. In applying the rules and principles of section
382 and the regulations thereunder, appropriate adjustments shall be
made to take into account that section 383 and this section apply to
pre-change capital losses and pre-change credits. For example, in
applying 1.382-2T (f)(18)(ii)(C), (f)(18)(iii)(C) and (h)(4)(ix), any
pre-change credits, as defined in paragraph (c)(3) of this section, must
be converted to a deduction equivalent by dividing the amount of such
credits by the maximum effective rate of tax provided for under section
11 (e.g., 0.34 for taxable years beginning in 1989).
(h) Alternative minimum tax. See 1.383-2T for the application of
the limitations contained in sections 382 and 383 in computing the
alternative minimum tax under section 55.
(i) (Reserved)
(j) Effective date. Subject to any exception from the application of
section 382 or the section 382 limitation with respect to a loss
corporation, section 383 and this section apply to any loss corporation
with respect to which an ownership change occurs after December 31,
1986. See 1.382-2T(m) for effective date rules relating to ownership
changes. If section 383 was not taken into account or was applied other
than in accordance with this section in a prior taxable year with
respect to which section 383 applies, the taxpayer should, within the
period of limitation, file an amended return and pay any additional tax
due plus interest.
(k) Transitional rules regarding information statements -- (1)
Exception. An information statement described in 1.382-2T(a)(2)(ii) of
this section that would be required to be filed solely by reason of the
loss corporation having pre-change capital losses (as defined in
1.382-2T (a)(2)(ii) (A) and (B) or pre-change credits (as defined in
paragraph (c)(3) of this section) is not required to be filed with the
income tax return of the loss corporation for any taxable year for which
the due date (including extensions) of the income tax return is on or
before November 20, 1989, or for which the income tax return is filed on
or before October 10, 1989.
(2) Statement with respect to prior periods. A corporation which is
a loss corporation for any taxable year ending in 1987, 1988 or 1989
solely because it has pre-change capital losses (as defined in
paragraphs (c)(2) (i) and (ii) of this section or pre-change credits (as
defined in paragraph (c)(3) of this section) must attach a separate
information statement to its 1988 and 1989 income tax returns. Such
information statement must (i) include the information specified in
1.382-2T (a)(2)(ii) (A) and (B) (without regard to testing dates before
May 6, 1986) for each taxable year ending on or after May 6, 1986 for
which the corporation was a loss corporation, (ii) state whether and to
what extent pre-change capital losses (as defined in paragraphs (c)(2)
(i) and (ii) of this section) or pre-change credits (as defined in
paragraph (c)(3) of this section) utilized by the corporation in a
taxable year to which the section 382 limitation applied, exceeded the
amount permitted under this section, and (iii) be labeled ''Information
Statement with Respect to Transition Periods.'' For purposes of the
preceding sentence, information previously reported in an information
statement, including a statement filed with a 1988 return, may be
excluded. The requirements of this paragraph (k)(2) apply only with
respect to 1988 and 1989 taxable years with respect to which the due
date of the income tax return (including extensions) is after November
20, 1989, and for which the income tax return is not filed on or before
October 10, 1989.
(T.D. 8264, 54 FR 38668, Sept. 20, 1989; T.D. 8264, 54 FR 46187,
Nov. 1, 1989; T.D. 8264, 54 FR 50043, Dec. 4, 1989. Redesignated and
amended by T.D. 8352, 56 FR 29434, June 27, 1991)
1.383-2T Limitations on certain capital losses and excess credits in
computing alternative minimum tax (Reserved).
26 CFR 1.383-1A Special limitations on carryovers of unused investment
credits, work incentive program credits, foreign taxes, and capital
losses (Pre-Tax Reform Act of 1986).
Section 383 provides that if the ownership and business of a
corporation are changed in the manner described in section 382(a)(1) or,
in the case of a reorganization specified in section 381(a)(2), if there
is a change in ownership described in section 382(b)(1)(B), then the
limitations provided in section 382 in such cases with respect to the
carryover of net operating losses shall apply in the same manner, as
provided under regulations prescribed by the Secretary or his delegate,
with respect to any unused investment credit of the corporation which
can otherwise be carried forward under section 46(b), to any unused work
incentive program credit of the corporation which can otherwise be
carried forward under section 50A(b), to any unused foreign taxes of the
corporation which can otherwise be carried forward under section 904(d),
and to any net capital loss of the corporation which can otherwise be
carried forward under section 1212. Sections 1.383-2A and 1.383-3A are
prescribed pursuant to the authority granted the Secretary or his
delegate by section 383 to prescribe regulations governing the manner in
which the limitations provided in section 382 shall apply with respect
to the above-mentioned items. For the election to apply sections 382
and 383, as amended by the Tax Reform Act of 1976, see 1.382-4A.
(T.D. 7343, 40 FR 1698, Jan. 9, 1975, as amended by T.D. 7650, 44 FR
61573, May 26, 1979. Redesignated and amended by T.D. 8352, 56 FR 29434,
June 27, 1991)
26 CFR 1.383-2A Purchase of a corporation and change in its trade or
business (Pre-Tax Reform Act of 1986).
(a) In general. If the ownership and business of a corporation are
changed in the manner described in section 382(a) and the regulations
thereunder, then the limitation applicable in such cases to the
carryover of the net operating losses of such corporation shall also
apply to the carryover of the unused investment credits of such
corporation which could otherwise be carried forward under section
46(b), the unused work incentive program credits of such corporation
which could otherwise be carried forward under section 50A(b), the
unused foreign taxes of such corporation which could otherwise be
carried forward under section 904(d), and the net capital losses of such
corporation which could otherwise be carried forward under section 1212.
Thus, if the limitation provided in section 382(a) is applicable at the
end of a corporation's taxable year, then all investment credit
carryovers, all work incentive program credit carryovers, all unused
foreign tax carryovers, and all capital loss carryovers from prior
taxable years of such corporation are excluded in computing tax
liability for such taxable year and for subsequent taxable years.
(b) Effective date. (1) The limitation provided in this section
shall apply only with respect to changes in ownership occurring after
December 10, 1971, pursuant to a contract entered into on or after
September 29, 1971.
(2) For purposes of applying section 382(a) in determining whether
the limitation provided in this section applies, the beginning of the
taxable years specified in clauses (i) and (ii) of section 382(a)(1)(A)
shall be the beginning of such taxable years or December 10, 1971,
whichever occurs later. Thus, if X Corporation made its returns for
1971 and 1972 on the basis of the calendar year, then in determining
whether section 382(a) would apply as of December 31, 1971, the
beginning of the taxable years specified in clauses (i) and (ii) of
section 382(a)(1)(A) would be December 10, 1971, and in determining
whether section 382(a) would apply as of December 31, 1972, the
beginning of the taxable year specified in clause (i) of section
382(a)(1)(A) would be January 1, 1972, and the beginning of the taxable
year specified in clause (ii) of section 382(a)(1)(A) would be December
10, 1971.
(T.D. 7343, 40 FR 1698, Jan. 9, 1975. Redesignated and amended by
T.D. 8352, 56 FR 29434, June 27, 1991)
26 CFR 1.383-3A Change in ownership as the result of a reorganization
(Pre-Tax Reform Act of 1986).
(a) In general. (1) If, in the case of a reorganization specified in
section 381(a)(2), (i) the transferor corporation or the acquiring
corporation has an unused investment credit, an unused work incentive
program credit, an unused foreign tax or a net capital loss which may be
carried forward to the first taxable year of the acquiring corporation
ending after the date of transfer, and (ii) as a result of the
reorganization there is a change in ownership of such corporation within
the meaning of section 382(b)(1)(B), then the limitation applicable in
such cases to the carryover of the net operating losses of such
corporation shall apply in the manner provided in this section to the
carryover of any unused investment credits, any unused work incentive
program credits, any unused foreign taxes, and any net capital losses of
such corporation. Thus, if the limitation provided in section 382(b)(1)
would apply in such a case to the net operating loss carryovers of a
corporation (whether or not such corporation has any such carryovers), a
similar limitation, computed with the modifications provided in this
paragraph, shall apply to the investment credit carryovers, to the work
incentive program credit carryovers, to the foreign tax carryovers, and
to the capital loss carryovers of such corporation.
(2)(i) If there is a change in ownership of a corporation within the
meaning of section 382(b)(1)(B), then the amount of the reduction
provided in section 382(b)(1) shall be determined with respect to the
total carryovers of such corporation from taxable years ending on or
before the date of transfer which may otherwise be carried to the first
taxable year of the acquiring corporation ending after such date. In
such a case, for purposes of computing carryovers of the transferor and
acquiring corporations from taxable years ending on or before the date
of transfer to taxable years of the acquiring corporation ending after
the date of transfer, the amount of the reduction shall be applied
against the earliest carryover, whether a carryover of the transferor
corporation or of the acquiring corporation, which may otherwise be
carried to the acquiring corporation's first taxable year ending after
the date of transfer, then against the next earliest carryover which may
otherwise be carried to such first taxable year, etc. To the extent of
the amount of the reduction, such carryovers shall be eliminated and
shall not be included in computing the total carryover to the acquiring
corporation's first taxable year ending after the date of transfer or to
subsequent taxable years.
(ii) For purposes of this subparagraph, if the date of transfer is on
a day other than the last day of a taxable year of the acquiring
corporation, then the amount of the reduction shall be applied only
against the carryovers of the transferor corporation or of the acquiring
corporation which may be carried to the acquiring corporation's
postacquisition part year under the principles of 1.381(c)(23)-1(e)
(relating to investment credit carryovers).
(iii) For purposes of this subparagraph, a carryover from a taxable
year of the transferor corporation ending on or before the last day of a
taxable year of the acquiring corporation shall be considered to be a
carryover from a taxable year prior to such taxable year of the
acquiring corporation.
(3) The provisions of paragraph (a)(2) of this section may be
illustrated by the following example dealing with the carryover of
unused investment credit:
Example. X Corporation and Y Corporation are organized on January 1,
1970, and each makes its return on the basis of the calendar year. On
December 31, 1972, Y acquires the assets of X in a reorganization
described in section 381(a)(2). Immediately after the reorganization,
those persons who were stockholders of X immediately before the
reorganization, as the result of owning stock of X, own 10 percent of
the fair market value of the outstanding stock of Y, so that the
investment credit carryovers of X as of the close of the date of
transfer are reduced under section 382(b)(2) by 50 percent. The
investment credit carryovers as of the close of the date of transfer of
X Corporation and Y Corporation for taxable years 1970 through 1972 are
as follows:
For the first taxable year ending after the date of transfer, the
acquiring corporation has an excess limitation of $500 (i.e., the excess
of the limitation based on the amount of tax for such year over the
amount of credit earned for such year). The computation of investment
credit carryovers from prior taxable years of the transferor and
acquiring corporations to the acquiring corporation's first taxable year
ending after the date of transfer and to subsequent taxable years is as
follows:
(i) The amount of the reduction computed under subparagraph (1) of
this paragraph with respect to the investment credit carryovers from
prior taxable years of X Corporation is $350 ($700 50%). One hundred
dollars of such reduction is first applied against and eliminates X's
$100 carryover from 1970; $100 of such reduction is applied against and
eliminates Y's $100 carryover from 1970; $100 of such reduction is
applied against and eliminates X's $100 carryover from 1971; the
remaining $50 of such reduction is applied against Y's $100 carryover
from 1971 and reduces such carryover to $50. After the reduction, the
total carryover to the first taxable year of the acquiring corporation
ending after the date of transfer is $750 (i.e., Y's $50 carryover from
1971, X's $500 carryover from 1972, and Y's $200 carryover from 1972).
(ii) Since the excess limitation for the acquiring corporation's
first taxable year ending after the date of transfer is $500, Y's $50
carryover from 1971 and $450 of X's carryover from 1972 may be added to
the amount of credit allowed by section 38 for such year. The total
carryover to taxable years of the acquiring corporation subsequent to
such first taxable year is $250 (i.e., the remainder of X's carryover
from 1972, $50, plus Y's $200 carryover from 1972).
(b) Special rules for foreign tax carryovers. (1) The amount of
unused foreign tax of a transferor corporation which may be carried to
taxable years of the acquiring corporation ending after the date of
transfer shall be determined under the principles of section 381(c)(23)
and the regulations thereunder (relating to the carryover of unused
investment credit). Thus, to determine the amount of such carryovers as
of the close of the date of transfer, and to integrate them with any
carryovers and carrybacks of the acquiring corporation for purposes of
determining the amount of credit allowed by section 901 to the acquiring
corporation for taxable years ending after the date of transfer, it is
necessary to apply the provisions of section 904(d) in accordance with
the principles of section 381(c)(23) and the regulations thereunder.
(2) If the limitation provided in section 382(b)(1) applies to the
carryover of unused foreign taxes of a corporation, then for purposes of
computing the amount of the reduction under paragraph (a) of this
section, the following rules shall apply. If all of the unused foreign
tax carryovers from prior taxable years of the corporation are of the
same origin, the amount of the reduction shall be determined by applying
the percentage computed under section 382(b)(2) to the total of such
carryovers. If the unused foreign tax carryovers from prior taxable
years of the corporation are not of the same origin, that is, where one
or more carryovers originated in taxable years to which the per-country
limitation applied and one or more carryovers originated in taxable
years to which the overall limitation applied, or where, even though all
the carryovers originated in per-country limitation years, all of such
carryovers are not attributable to taxes paid or accrued to the same
foreign country or possession of the United States, the amount of the
reduction shall be determined separately with respect to carryovers of
the same origin. That is, the percentage computed under section
382(b)(2) shall be applied separately to the total of the carryovers
originating in overall limitation years and separately to the total of
the carryovers attributable to taxes paid or accrued to each particular
country or United States possession in per-country limitation years.
Thus, if a corporation has (as of the close of the date of transfer)
total unused foreign tax carryovers of $200 attributable to taxes paid
or accrued to country X and total unused foreign tax carryovers of $150
attributable to taxes paid or accrued to country Y from one or more
taxable years to which the per-country limitation applied, and also has
total unused foreign tax carryovers of $100 from taxable years to which
the overall limitation applied, and if the percentage computed under
section 382(b)(2) is 50 percent, then the amount of reduction in
carryovers attributable to taxes paid or accrued to country X is $100,
the amount of reduction in carryovers attributable to taxes paid or
accrued to country Y is $75, and the amount of reduction in carryovers
from taxable years to which the overall limitation applied is $50.
(3) After having determined the reduction or reductions under
subparagraph (2) of this paragraph, it is necessary, for purposes of
computing unused foreign tax carryovers of the transferor and acquiring
corporations from taxable years ending on or before the date of transfer
to taxable years of the acquiring corporation ending after the date of
transfer, to apply such reduction or reductions against the earliest
carryover of the same origin, whether a carryover of the transferor
corporation or of the acquiring corporation, which may otherwise be
carried to the first taxable year of the acquiring corporation ending
after the date of transfer, then against the next earliest carryover of
the same origin which may otherwise be carried to such first taxable
year, etc. To the extent of the amount of the reduction, such
carryovers shall be eliminated and shall not be included in computing
the total carryover to the acquiring corporation's first taxable year
ending after the date of transfer or to subsequent taxable years.
(4) The provisions of subparagraphs (2) and (3) of this paragraph may
be illustrated by the following example:
Example. T, a domestic corporation, and S, a domestic corporation,
are organized on January 1, 1970, and each makes its return on the basis
of the calendar year. On December 31, 1972, S Corporation acquires the
assets of T Corporation in a reorganization described in section
381(a)(2). Immediately after the reorganization, those persons who were
stockholders of T Corporation immediately before the reorganization, as
the result of owning stock of T, own 10 percent of the fair market value
of the outstanding stock of S, so that T's foreign tax carryovers as of
the close of the date of transfer are reduced by 50 percent. The unused
foreign tax carryovers as of the close of the date of transfer of T
Corporation and S Corporation for taxable years 1970 through 1972 are as
follows:
For the first taxable year ending after the date of transfer, the
acquiring corporation, which has elected the overall limitation, has an
excess limitation of $200 (i.e., the excess of the limitation based on
amount of tax for such year over the amount of credit earned for such
year). The computation of unused foreign tax carryovers from prior
taxable years of the transferor and acquiring corporations to the
acquiring corporation's first taxable year ending after the date of
transfer and to subsequent taxable years is as follows:
(i) Unused foreign tax carryovers attributable to country X. The
amount of the reduction computed under subparagraph (2) of this
paragraph with respect to the total unused foreign tax carryovers from
prior taxable years of T Corporation attributable to taxes paid or
accrued to country X is $100 ($200 50%). Fifty dollars of such
reduction is applied against and eliminates T's $50 carryover from 1970.
The remaining $50 of such reduction is then applied against S's $100
carryover from 1970 and reduces such carryover to $50. After the
reduction, the total carryover to the first taxable year of the
acquiring corporation ending after the date of transfer attributable to
taxes paid or accrued to country X is $200 (i.e., S's $50 carryover from
1970 and T's $150 carryover from 1971). Since the acquiring corporation
has elected the overall limitation for its first taxable year ending
after the date of transfer, the carryovers attributable to country X
from per-country limitation years may not be applied in such first
taxable year and the total $200 is carried to the next succeeding
taxable year.
(ii) Unused foreign tax carryovers attributable to country Y. The
amount of the reduction computed under subparagraph (2) of this
paragraph with respect to the total unused foreign tax carryovers from
prior taxable years of T Corporation attributable to taxes paid or
accrued to country Y is $100 ($200 50%). The total $100 reduction is
applied against and eliminates T's carryover from 1970. After the
reduction, the total carryover to the first taxable year of the
acquiring corporation ending after the date of transfer attributable to
taxes paid or accrued to country Y is $150 (i.e., S's $50 carryover from
1970 and T's $100 carryover from 1971). Since the acquiring corporation
has elected the overall limitation for its first taxable year ending
after the date of transfer, the carryovers attributable to country Y
from per-country limitation years may not be applied in such first
taxable year and the total $150 is carried to the next succeeding
taxable year.
(iii) Unused foreign tax carryovers attributable to country Z. The
amount of reduction computed under subparagraph (2) of this paragraph
with respect to the total unused foreign tax carryovers from prior
taxable years of T Corporation attributable to taxes paid or accrued to
country Z is $50 ($100 50%). The total $50 reduction is applied
against T's $100 carryover from 1970 and thus reduces such carryover to
the first taxable year of the acquiring corporation ending after the
date of transfer to $50. Since the acquiring corporation has elected
the overall limitation for its first taxable year ending after the date
of transfer, the carryover attributable to country Z from the
per-country limitation year may not be applied in such first taxable
year and the total $50 is carried to the next succeeding taxable year.
(iv) Unused foreign tax carryovers from overall limitation years.
The amount of the reduction computed under subparagraph (2) of this
paragraph with respect to the total unused foreign tax carryovers from
prior taxable years of T Corporation to which the overall limitation
applied is $100 ($200 50%). Fifty dollars of such reduction is
applied against and eliminates S's $50 carryover from 1971 and the
remaining $50 of such reduction is applied against T's $200 carryover
from 1972 and reduces such carryover to $150. After the reduction, the
total carryover to the first taxable year of the acquiring corporation
ending after the date of transfer attributable to taxes paid or accrued
in taxable years to which the overall limitation applied is $250 (i.e.,
T's $150 carryover from 1972 and S's $100 carryover from 1972). Since
for such first taxable year the acquiring corporation has an excess
limitation of $200 with respect to carryovers arising in overall
limitation years, T's $150 carryover from 1972 and $50 of S's $100
carryover from 1972 may be added to the amount of credit allowed by
section 901 for such year. The total carryover to taxable years of the
acquiring corporation subsequent to such first taxable year attributable
to taxes paid or accrued in overall limitation years is $50 (i.e., the
remainder of S's carryover from 1972, $50).
(c) Effective date. (1) The limitation provided in this section
shall apply only with respect to reorganizations occurring after
December 10, 1971, pursuant to a plan of reorganization or a contract
entered into on or after September 29, 1971.
(2) For purposes of subparagraph (1) of this paragraph, a
reorganization shall be considered to occur on the date of transfer as
defined in section 381(b)(2) and 1.381(b)-1(b).
(3) For purposes of subparagraph (1) of this paragraph, a plan of
reorganization or a contract shall be considered to have been entered
into on the date on which the duly authorized representatives of the
transferor and acquiring corporations enter into an agreement evidencing
the plan of reorganization, or on the date on which the plan of
reorganization is adopted by the shareholders of the transferor and
acquiring corporations, whichever occurs earlier.
(Sec. 383, 85 Stat. 521 (26 U.S.C. 383); sec. 7805, 68A Stat. 917
(26 U.S.C. 7805) of the Internal Revenue Code of 1954)
(T.D. 7343, 40 FR 1699, Jan. 9, 1975. Redesignated and amended by
T.D. 8352, 56 FR 29434, June 27, 1991)
26 CFR 1.383-3A FINDING AIDS
A list of CFR titles, subtitles, chapters, subchapters and parts and
an alphabetical list of agencies publishing in the CFR are included in
the CFR Index and Finding Aids volume to the Code of Federal Regulations
which is published separately and revised annually.
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
Chap.
26 CFR 1.383-3A Table of CFR Titles and Chapters
26 CFR 1.383-3A Title 1 -- General Provisions
I Administrative Committee of the Federal Register (Parts 1 -- 49)
II Office of the Federal Register (Parts 50 -- 299)
III Administrative Conference of the United States (Parts 300 -- 399)
IV Miscellaneous Agencies (Parts 400 -- 500)
26 CFR 1.383-3A Title 2 -- (Reserved)
26 CFR 1.383-3A Title 3 -- The President
I Executive Office of the President (Parts 100 -- 199)
26 CFR 1.383-3A Title 4 -- Accounts
I General Accounting Office (Parts 1 -- 99)
II Federal Claims Collection Standards (General Accounting Office --
Department of Justice) (Parts 100 -- 299)
III General Accounting Office (CASB) (Parts 300 -- 499)
26 CFR 1.383-3A Title 5 -- Administrative Personnel
I Office of Personnel Management (Parts 1 -- 1199)
II Merit Systems Protection Board (Parts 1200 -- 1299)
III Office of Management and Budget (Parts 1300 -- 1399)
IV Advisory Committee on Federal Pay (Parts 1400 -- 1499)
V The International Organizations Employees Loyalty Board (Parts 1500
-- 1599)
VI Federal Retirement Thrift Investment Board (Parts 1600 -- 1699)
VII Advisory Commission on Intergovernmental Relations (Parts 1700 --
1799)
VIII Office of Special Council (Parts 1800 -- 1899)
IX Appalachian Regional Commission (Parts 1900 -- 1999)
XI United States Soldiers' and Airmen's Home (Parts 2100 -- 2199)
XIV Federal Labor Relations Authority, General Counsel of the Federal
Labor Relations Authority and Federal Service Impasses Panel (Parts 2400
-- 2499)
XV Office of Administration, Executive Office of the President (Parts
2500 -- 2599)
XVI Office of Government Ethics (Parts 2600 -- 2699)
26 CFR 1.383-3A Title 6 -- Economic Stabilization (Reserved)
26 CFR 1.383-3A Title 7 -- Agriculture
Subtitle A -- Office of the Secretary of Agriculture (Parts 0 -- 26)
Subtitle B -- Regulations of the Department of Agriculture
I Agricultural Marketing Service (Standards, Inspections, Marketing
Practices), Department of Agriculture (Parts 27 -- 209)
II Food and Nutrition Service, Department of Agriculture (Parts 210
-- 299)
III Animal and Plant Health Inspection Service, Department of
Agriculture (Parts 300 -- 399)
IV Federal Crop Insurance Corporation, Department of Agriculture
(Parts 400 -- 499)
V Agricultural Research Service, Department of Agriculture (Parts 500
-- 599)
VI Soil Conservation Service, Department of Agriculture (Parts 600 --
699)
VII Agricultural Stabilization and Conservation Service (Agricultural
Adjustment), Department of Agriculture (Parts 700 -- 799)
VIII Federal Grain Inspection Service, Department of Agriculture
(Parts 800 -- 899)
IX Agricultural Marketing Service (Marketing Agreements and Orders;
Fruits, Vegetables, Nuts), Department of Agriculture (Parts 900 -- 999)
X Agricultural Marketing Service (Marketing Agreements and Orders;
Milk), Department of Agriculture (Parts 1000 -- 1199)
XI Agricultural Marketing Service (Marketing Agreements and Orders;
Miscellaneous Commodities), Department of Agriculture (Parts 1200 --
1299)
XIV Commodity Credit Corporation, Department of Agriculture (Parts
1400 -- 1499)
XV Foreign Agricultural Service, Department of Agriculture (Parts
1500 -- 1599)
XVI Rural Telephone Bank, Department of Agriculture (Parts 1600 --
1699)
XVII Rural Electrification Administration, Department of Agriculture
(Parts 1700 -- 1799)
XVIII Farmers Home Administration, Department of Agriculture (Parts
1800 -- 2099)
XXI Foreign Economic Development Service, Department of Agriculture
(Parts 2100 -- 2199)
XXII Office of International Cooperation and Development, Department
of Agriculture (Parts 2200 -- 2299)
XXV Office of the General Sales Manager, Department of Agriculture
(Parts 2500 -- 2599)
XXVI Office of Inspector General, Department of Agriculture (Parts
2600 -- 2699)
XXVII Office of Information Resources Management, Department of
Agriculture (Parts 2700 -- 2799)
XXVIII Office of Operations, Department of Agriculture (Parts 2800 --
2899)
XXIX Office of Energy, Department of Agriculture (Parts 2900 -- 2999)
XXX Office of Finance and Management, Department of Agriculture
(Parts 3000 -- 3099)
XXXI Office of Environmental Quality, Department of Agriculture
(Parts 3100 -- 3199)
XXXII Office of Grants and Program Systems, Department of Agriculture
(Parts 3200 -- 3299)
XXXIII Office of Transportation, Department of Agriculture (Parts
3300 -- 3399)
XXXIV Cooperative State Research Service, Department of Agriculture
(Parts 3400 -- 3499)
XXXVI National Agricultural Statistics Service, Department of
Agriculture (Parts 3600 -- 3699)
XXXVII Economic Research Service, Department of Agriculture (Parts
3700 -- 3799)
XXXVIII World Agricultural Outlook Board, Department of Agriculture
(Parts 3800 -- 3899)
XXXIX Economic Analysis Staff, Department of Agriculture (Parts 3900
-- 3999)
XL Economics Management Staff, Department of Agriculture (Parts 4000
-- 4099)
XLI National Agricultural Library, Department of Agriculture (Part
4100)
26 CFR 1.383-3A Title 8 -- Aliens and Nationality
I Immigration and Naturalization Service, Department of Justice
(Parts 1 -- 499)
26 CFR 1.383-3A Title 9 -- Animals and Animal Products
I Animal and Plant Health Inspection Service, Department of
Agriculture (Parts 1 -- 199)
II Packers and Stockyards Administration, Department of Agriculture
(Parts 200 -- 299)
III Food Safety and Inspection Service, Meat and Poultry Inspection,
Department of Agriculture (Parts 300 -- 399)
26 CFR 1.383-3A Title 10 -- Energy
I Nuclear Regulatory Commission (Parts 0 -- 199)
II Department of Energy (Parts 200 -- 699)
III Department of Energy (Parts 700 -- 999)
X Department of Energy (General Provisions) (Parts 1000 -- 1099)
XV Office of the Federal Inspector for the Alaska Natural Gas
Transportation System (Parts 1500 -- 1599)
XVII Defense Nuclear Facilities Safety Board (Parts 1700 -- 1799)
26 CFR 1.383-3A Title 11 -- Federal Elections
I Federal Election Commission (Parts 1 -- 9099)
26 CFR 1.383-3A Title 12 -- Banks and Banking
I Comptroller of the Currency, Department of the Treasury (Parts 1 --
199)
II Federal Reserve System (Parts 200 -- 299)
III Federal Deposit Insurance Corporation (Parts 300 -- 399)
IV Export-Import Bank of the United States (Parts 400 -- 499)
V Office of Thrift Supervision, Department of The Treasury (Parts 500
-- 599)
VI Farm Credit Administration (Parts 600 -- 699)
VII National Credit Union Administration (Parts 700 -- 799)
VIII Federal Financing Bank (Parts 800 -- 899)
IX Federal Housing Finance Board (Parts 900 -- 999)
XI Federal Financial Institutions Examination Council (Parts 1100 --
1199)
XIII Farm Credit System Assistance Board (Parts 1300 -- 1399)
XIV Farm Credit System Insurance Corporation (Parts 1400 -- 1499)
XV Thrift Depositor Protection Oversight Board (Parts 1500 -- 1599)
XVI Resolution Trust Corporation (Parts 1600 -- 1699)
26 CFR 1.383-3A Title 13 -- Business Credit and Assistance
I Small Business Administration (Parts 1 -- 199)
III Economic Development Administration, Department of Commerce
(Parts 300 -- 399)
26 CFR 1.383-3A Title 14 -- Aeronautics and Space
I Federal Aviation Administration, Department of Transportation
(Parts 1 -- 199)
II Office of the Secretary, Department of Transportation (Aviation
Proceedings) (Parts 200 -- 399)
III Office of Commercial Space Transportation, Department of
Transportation (Parts 400 -- 499)
V National Aeronautics and Space Administration (Parts 1200 -- 1299)
26 CFR 1.383-3A Title 15 -- Commerce and Foreign Trade
Subtitle A -- Office of the Secretary of Commerce (Parts 0 -- 29)
Subtitle B -- Regulations Relating to Commerce and Foreign Trade
I Bureau of the Census, Department of Commerce (Parts 30 -- 199)
II National Institute of Standards and Technology, Department of
Commerce (Parts 200 -- 299)
III International Trade Administration, Department of Commerce (Parts
300 -- 399)
IV Foreign-Trade Zones Board (Parts 400 -- 499)
VII Bureau of Export Administration, Department of Commerce (Parts
700 -- 799)
VIII Bureau of Economic Analysis, Department of Commerce (Parts 800
-- 899)
IX National Oceanic and Atmospheric Administration, Department of
Commerce (Parts 900 -- 999)
XI Technology Administration, Department of Commerce (Parts 1100 --
1199)
XII United States Travel and Tourism Administration, Department of
Commerce (Parts 1200 -- 1299)
XIII East-West Foreign Trade Board (Parts 1300 -- 1399)
XIV Minority Business Development Agency (Parts 1400 -- 1499)
Subtitle C -- Regulations Relating to Foreign Trade Agreements
XX Office of the United States Trade Representative (Parts 2000 --
2099)
Subtitle D -- Regulations Relating to Telecommunications and
Information
XXIII National Telecommunications and Information Administration,
Department of Commerce (Parts 2300 -- 2399)
26 CFR 1.383-3A Title 16 -- Commercial Practices
I Federal Trade Commission (Parts 0 -- 999)
II Consumer Product Safety Commission (Parts 1000 -- 1799)
26 CFR 1.383-3A Title 17 -- Commodity and Securities Exchanges
I Commodity Futures Trading Commission (Parts 1 -- 199)
II Securities and Exchange Commission (Parts 200 -- 399)
IV Department of the Treasury (Parts 400 -- 499)
26 CFR 1.383-3A Title 18 -- Conservation of Power and Water Resources
I Federal Energy Regulatory Commission, Department of Energy (Parts 1
-- 399)
III Delaware River Basin Commission (Parts 400 -- 499)
VI Water Resources Council (Parts 700 -- 799)
VIII Susquehanna River Basin Commission (Parts 800 -- 899)
XIII Tennessee Valley Authority (Parts 1300 -- 1399)
26 CFR 1.383-3A Title 19 -- Customs Duties
I United States Customs Service, Department of the Treasury (Parts 1
-- 199)
II United States International Trade Commission (Parts 200 -- 299)
III International Trade Administration, Department of Commerce (Parts
300 -- 399)
26 CFR 1.383-3A Title 20 -- Employees' Benefits
I Office of Workers' Compensation Programs, Department of Labor
(Parts 1 -- 199)
II Railroad Retirement Board (Parts 200 -- 399)
III Social Security Administration, Department of Health and Human
Services (Parts 400 -- 499)
IV Employees' Compensation Appeals Board, Department of Labor (Parts
500 -- 599)
V Employment and Training Administration, Department of Labor (Parts
600 -- 699)
VI Employment Standards Administration, Department of Labor (Parts
700 -- 799)
VII Benefits Review Board, Department of Labor (Parts 800 -- 899)
VIII Joint Board for the Enrollment of Actuaries (Parts 900 -- 999)
IX Office of the Assistant Secretary for Veterans' Employment and
Training, Department of Labor (Parts 1000 -- 1099)
26 CFR 1.383-3A Title 21 -- Food and Drugs
I Food and Drug Administration, Department of Health and Human
Services (Parts 1 -- 1299)
II Drug Enforcement Administration, Department of Justice (Parts 1300
-- 1399)
26 CFR 1.383-3A Title 22 -- Foreign Relations
I Department of State (Parts 1 -- 199)
II Agency for International Development, International Development
Cooperation Agency (Parts 200 -- 299)
III Peace Corps (Parts 300 -- 399)
IV International Joint Commission, United States and Canada (Parts
400 -- 499)
V United States Information Agency (Parts 500 -- 599)
VI United States Arms Control and Disarmament Agency (Parts 600 --
699)
VII Overseas Private Investment Corporation, International
Development Cooperation Agency (Parts 700 -- 799)
IX Foreign Service Grievance Board Regulations (Parts 900 -- 999)
X Inter-American Foundation (Parts 1000 -- 1099)
XI International Boundary and Water Commission, United States and
Mexico, United States Section (Parts 1100 -- 1199)
XII United States International Development Cooperation Agency (Parts
1200 -- 1299)
XIII Board for International Broadcasting (Parts 1300 -- 1399)
XIV Foreign Service Labor Relations Board; Federal Labor Relations
Authority; General Counsel of the Federal Labor Relations Authority;
and the Foreign Service Impasse Disputes Panel (Parts 1400 -- 1499)
XV African Development Foundation (Parts 1500 -- 1599)
XVI Japan-United States Friendship Commission (Parts 1600 -- 1699)
26 CFR 1.383-3A Title 23 -- Highways
I Federal Highway Administration, Department of Transportation (Parts
1 -- 999)
II National Highway Traffic Safety Administration and Federal Highway
Administration, Department of Transportation (Parts 1200 -- 1299)
III National Highway Traffic Safety Administration, Department of
Transportation (Parts 1300 -- 1399)
26 CFR 1.383-3A Title 24 -- Housing and Urban Development
Subtitle A -- Office of the Secretary, Department of Housing and
Urban Development (Parts 0 -- 99)
Subtitle B -- Regulations Relating to Housing and Urban Development
I Office of Assistant Secretary for Equal Opportunity, Department of
Housing and Urban Development (Parts 100 -- 199)
II Office of Assistant Secretary for Housing-Federal Housing
Commissioner, Department of Housing and Urban Development (Parts 200 --
299)
III Government National Mortgage Association, Department of Housing
and Urban Development (Parts 300 -- 399)
V Office of Assistant Secretary for Community Planning and
Development, Department of Housing and Urban Development (Parts 500 --
599)
VI Office of Assistant Secretary for Community Planning and
Development, Department of Housing and Urban Development (Parts 600 --
699)
VII Office of the Secretary, Department of Housing and Urban
Development (Section 8 Housing Assistance Programs and Public and Indian
Housing Programs) (Parts 700 -- 799)
VIII Office of the Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Section 8
Housing Assistance Programs and Section 202 Direct Loan Program) (Parts
800 -- 899)
IX Office of Assistant Secretary for Public and Indian Housing,
Department of Housing and Urban Development (Parts 900 -- 999)
X Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Interstate
Land Sales Registration Program) (Parts 1700 -- 1799)
XI Solar Energy and Energy Conservation Bank, Department of Housing
and Urban Development (Parts 1800 -- 1899)
XII Office of Inspector General, Department of Housing and Urban
Development (Parts 2000 -- 2099)
XV Mortgage Insurance and Loan Programs under the Emergency
Homeowners' Relief Act, Department of Housing and Urban Development
(Parts 2700 -- 2799)
XX Office of Assistant Secretary for Housing -- Federal Housing
Commissioner, Department of Housing and Urban Development (Parts 3200 --
3699)
XXV Neighborhood Reinvestment Corporation (Parts 4100 -- 4199)
26 CFR 1.383-3A Title 25 -- Indians
I Bureau of Indian Affairs, Department of the Interior (Parts 1 --
299)
II Indian Arts and Crafts Board, Department of the Interior (Parts
300 -- 399)
III National Indian Gaming Commission (Parts 500 -- 599)
IV Office of Navajo and Hopi Indian Relocation (Parts 700 -- 799)
26 CFR 1.383-3A Title 26 -- Internal Revenue
I Internal Revenue Service, Department of the Treasury (Parts 1 --
799)
26 CFR 1.383-3A Title 27 -- Alcohol, Tobacco Products and Firearms
I Bureau of Alcohol, Tobacco and Firearms, Department of the Treasury
(Parts 1 -- 299)
26 CFR 1.383-3A Title 28 -- Judicial Administration
I Department of Justice (Parts 0 -- 199)
III Federal Prison Industries, Inc., Department of Justice (Parts 300
-- 399)
V Bureau of Prisons, Department of Justice (Parts 500 -- 599)
VI Offices of Independent Counsel, Department of Justice (Parts 600
-- 699)
VII Office of Independent Counsel (Parts 700 -- 799)
26 CFR 1.383-3A Title 29 -- Labor
Subtitle A -- Office of the Secretary of Labor (Parts 0 -- 99)
Subtitle B -- Regulations Relating to Labor
I National Labor Relations Board (Parts 100 -- 199)
II Bureau of Labor-Management Relations and Cooperative Programs,
Department of Labor (Parts 200 -- 299)
III National Railroad Adjustment Board (Parts 300 -- 399)
IV Office of Labor-Management Standards, Department of Labor (Parts
400 -- 499)
V Wage and Hour Division, Department of Labor (Parts 500 -- 899)
IX Construction Industry Collective Bargaining Commission (Parts 900
-- 999)
X National Mediation Board (Parts 1200 -- 1299)
XII Federal Mediation and Conciliation Service (Parts 1400 -- 1499)
XIV Equal Employment Opportunity Commission (Parts 1600 -- 1699)
XVII Occupational Safety and Health Administration, Department of
Labor (Parts 1900 -- 1999)
XX Occupational Safety and Health Review Commission (Parts 2200 --
2499)
XXV Pension and Welfare Benefits Administration, Department of Labor
(Parts 2500 -- 2599)
XXVI Pension Benefit Guaranty Corporation (Parts 2600 -- 2699)
XXVII Federal Mine Safety and Health Review Commission (Parts 2700 --
2799)
26 CFR 1.383-3A Title 30 -- Mineral Resources
I Mine Safety and Health Administration, Department of Labor (Parts 1
-- 199)
II Minerals Management Service, Department of the Interior (Parts 200
-- 299)
III Board of Surface Mining and Reclamation Appeals, Department of
the Interior (Parts 300 -- 399)
IV Geological Survey, Department of the Interior (Parts 400 -- 499)
VI Bureau of Mines, Department of the Interior (Parts 600 -- 699)
VII Office of Surface Mining Reclamation and Enforcement, Department
of the Interior (Parts 700 -- 999)
26 CFR 1.383-3A Title 31 -- Money and Finance: Treasury
Subtitle A -- Office of the Secretary of the Treasury (Parts 0 -- 50)
Subtitle B -- Regulations Relating to Money and Finance
I Monetary Offices, Department of the Treasury (Parts 51 -- 199)
II Fiscal Service, Department of the Treasury (Parts 200 -- 399)
IV Secret Service, Department of the Treasury (Parts 400 -- 499)
V Office of Foreign Assets Control, Department of the Treasury (Parts
500 -- 599)
VI Bureau of Engraving and Printing, Department of the Treasury
(Parts 600 -- 699)
VII Federal Law Enforcement Training Center, Department of the
Treasury (Parts 700 -- 799)
VIII Office of International Investment, Department of the Treasury
(Parts 800 -- 899)
26 CFR 1.383-3A Title 32 -- National Defense
Subtitle A -- Department of Defense
I Office of the Secretary of Defense (Parts 1 -- 399)
V Department of the Army (Parts 400 -- 699)
VI Department of the Navy (Parts 700 -- 799)
VII Department of the Air Force (Parts 800 -- 1099)
Subtitle B -- Other Regulations Relating to National Defense
XII Defense Logistics Agency (Parts 1200 -- 1299)
XVI Selective Service System (Parts 1600 -- 1699)
XIX Central Intelligence Agency (Parts 1900 -- 1999)
XX Information Security Oversight Office (Parts 2000 -- 2099)
XXI National Security Council (Parts 2100 -- 2199)
XXIV Office of Science and Technology Policy (Parts 2400 -- 2499)
XXVII Office for Micronesian Status Negotiations (Parts 2700 -- 2799)
XXVIII Office of the Vice President of the United States (Parts 2800
-- 2899)
26 CFR 1.383-3A Title 33 -- Navigation and Navigable Waters
I Coast Guard, Department of Transportation (Parts 1 -- 199)
II Corps of Engineers, Department of the Army (Parts 200 -- 399)
IV Saint Lawrence Seaway Development Corporation, Department of
Transportation (Parts 400 -- 499)
26 CFR 1.383-3A Title 34 -- Education
Subtitle A -- Office of the Secretary, Department of Education (Parts
1 -- 99)
Subtitle B -- Regulations of the Offices of the Department of
Education
I Office for Civil Rights, Department of Education (Parts 100 -- 199)
II Office of Elementary and Secondary Education, Department of
Education (Parts 200 -- 299)
III Office of Special Education and Rehabilitative Services,
Department of Education (Parts 300 -- 399)
IV Office of Vocational and Adult Education, Department of Education
(Parts 400 -- 499)
V Office of Bilingual Education and Minority Languages Affairs,
Department of Education (Parts 500 -- 599)
VI Office of Postsecondary Education, Department of Education (Parts
600 -- 699)
VII Office of Educational Research and Improvement, Department of
Education (Parts 700 -- 799)
26 CFR 1.383-3A Title 35 -- Panama Canal
I Panama Canal Regulations (Parts 1 -- 299)
26 CFR 1.383-3A Title 36 -- Parks, Forests, and Public Property
I National Park Service, Department of the Interior (Parts 1 -- 199)
II Forest Service, Department of Agriculture (Parts 200 -- 299)
III Corps of Engineers, Department of the Army (Parts 300 -- 399)
IV American Battle Monuments Commission (Parts 400 -- 499)
V Smithsonian Institution (Parts 500 -- 599)
VII Library of Congress (Parts 700 -- 799)
VIII Advisory Council on Historic Preservation (Parts 800 -- 899)
IX Pennsylvania Avenue Development Corporation (Parts 900 -- 999)
XI Architectural and Transportation Barriers Compliance Board (Parts
1100 -- 1199)
XII National Archives and Records Administration (Parts 1200 -- 1299)
26 CFR 1.383-3A Title 37 -- Patents, Trademarks, and Copyrights
I Patent and Trademark Office, Department of Commerce (Parts 1 --
199)
II Copyright Office, Library of Congress (Parts 200 -- 299)
III Copyright Royalty Tribunal (Parts 300 -- 399)
IV Assistant Secretary for Technology Policy, Department of Commerce
(Parts 400 -- 499)
V Under Secretary for Technology, Department of Commerce (Parts 500
-- 599)
26 CFR 1.383-3A Title 38 -- Pensions, Bonuses, and Veterans' Relief
I Department of Veterans Affairs (Parts 0 -- 99)
26 CFR 1.383-3A Title 39 -- Postal Service
I United States Postal Service (Parts 1 -- 999)
III Postal Rate Commission (Parts 3000 -- 3099)
26 CFR 1.383-3A Title 40 -- Protection of Environment
I Environmental Protection Agency (Parts 1 -- 799)
V Council on Environmental Quality (Parts 1500 -- 1599)
26 CFR 1.383-3A Title 41 -- Public Contracts and Property Management
Subtitle B -- Other Provisions Relating to Public Contracts
50 Public Contracts, Department of Labor (Parts 50-1 -- 50-999)
51 Committee for Purchase from the Blind and Other Severely
Handicapped (Parts 51-1 -- 51-99)
60 Office of Federal Contract Compliance Programs, Equal Employment
Opportunity, Department of Labor (Parts 60-1 -- 60-999)
61 Office of the Assistant Secretary for Veterans Employment and
Training, Department of Labor (Parts 61-1 -- 61-999)
Subtitle C -- Federal Property Management Regulations System
101 Federal Property Management Regulations (Parts 101-1 -- 101-99)
105 General Services Administration (Parts 105-1 -- 105-999)
109 Department of Energy Property Management Regulations (Parts 109-1
-- 109-99)
114 Department of the Interior (Parts 114-1 -- 114-99)
115 Environmental Protection Agency (Parts 115-1 -- 115-99)
128 Department of Justice (Parts 128-1 -- 128-99)
132 Department of the Air Force (Parts 132-1 -- 132-99)
Subtitle D -- Other Provisions Relating to Property Management
(Reserved)
Subtitle E -- Federal Information Resources Management Regulations
System
201 Federal Information Resources Management Regulation (Parts 201-1
-- 201-99)
Subtitle F -- Federal Travel Regulation System
301 Travel Allowances (Parts 301-1 -- 301-99)
302 Relocation Allowances (Parts 302-1 -- 302-99)
303 Payment of Expenses Connected with the Death of Certain Employees
(Parts 303-1 -- 303-2)
304 Payment from a non-Federal source for travel expenses (Parts
304-1 -- 304-99)
26 CFR 1.383-3A Title 42 -- Public Health
I Public Health Service, Department of Health and Human Services
(Parts 1 -- 199)
IV Health Care Financing Administration, Department of Health and
Human Services (Parts 400 -- 499)
V Office of Inspector General-Health Care, Department of Health and
Human Services (Parts 1000 -- 1999)
26 CFR 1.383-3A Title 43 -- Public Lands: Interior
Subtitle A -- Office of the Secretary of the Interior (Parts 1 --
199)
Subtitle B -- Regulations Relating to Public Lands
I Bureau of Reclamation, Department of the Interior (Parts 200 --
499)
II Bureau of Land Management, Department of the Interior (Parts 1000
-- 9999)
26 CFR 1.383-3A Title 44 -- Emergency Management and Assistance
I Federal Emergency Management Agency (Parts 0 -- 399)
IV Department of Commerce and Department of Transportation (Parts 400
-- 499)
26 CFR 1.383-3A Title 45 -- Public Welfare
Subtitle A -- Department of Health and Human Services, General
Administration (Parts 1 -- 199)
Subtitle B -- Regulations Relating to Public Welfare
II Office of Family Assistance (Assistance Programs), Family Support
Administration, Department of Health and Human Services (Parts 200 --
299)
III Office of Child Support Enforcement (Child Support Enforcement
Program), Family Support Administration, Department of Health and Human
Services (Parts 300 -- 399)
IV Office of Refugee Resettlement, Administration for Children and
Families Department of Health and Human Services (Parts 400 -- 499)
V Foreign Claims Settlement Commission of the United States,
Department of Justice (Parts 500 -- 599)
VI National Science Foundation (Parts 600 -- 699)
VII Commission on Civil Rights (Parts 700 -- 799)
VIII Office of Personnel Management (Parts 800 -- 899)
X Office of Community Services, Family Support Administration,
Department of Health and Human Services (Parts 1000 -- 1099)
XI National Foundation on the Arts and the Humanities (Parts 1100 --
1199)
XII ACTION (Parts 1200 -- 1299)
XIII Office of Human Development Services, Department of Health and
Human Services (Parts 1300 -- 1399)
XVI Legal Services Corporation (Parts 1600 -- 1699)
XVII National Commission on Libraries and Information Science (Parts
1700 -- 1799)
XVIII Harry S. Truman Scholarship Foundation (Parts 1800 -- 1899)
XX Commission on the Bicentennial of the United States Constitution
(Parts 2000 -- 2099)
XXI Commission on Fine Arts (Parts 2100 -- 2199)
XXII Christopher Columbus Quincentenary Jubilee Commission (Parts
2200 -- 2299)
XXIV James Madison Memorial Fellowship Foundation (Parts 2400 --
2499)
26 CFR 1.383-3A Title 46 -- Shipping
I Coast Guard, Department of Transportation (Parts 1 -- 199)
II Maritime Administration, Department of Transportation (Parts 200
-- 399)
III Coast Guard (Great Lakes Pilotage), Department of Transportation
(Parts 400 -- 499)
IV Federal Maritime Commission (Parts 500 -- 599)
26 CFR 1.383-3A Title 47 -- Telecommunication
I Federal Communications Commission (Parts 0 -- 199)
II Office of Science and Technology Policy and National Security
Council (Parts 200 -- 299)
III National Telecommunications and Information Administration,
Department of Commerce (Parts 300 -- 399)
26 CFR 1.383-3A Title 48 -- Federal Acquisition Regulations System
1 Federal Acquisition Regulation (Parts 1 -- 99)
2 Department of Defense (Parts 200 -- 299)
3 Department of Health and Human Services (Parts 300 -- 399)
4 Department of Agriculture (Parts 400 -- 499)
5 General Services Administration (Parts 500 -- 599)
6 Department of State (Parts 600 -- 699)
7 Agency for International Development (Parts 700 -- 799)
8 Department of Veterans Affairs (Parts 800 -- 899)
9 Department of Energy (Parts 900 -- 999)
10 Department of the Treasury (Parts 1000 -- 1099)
12 Department of Transportation (Parts 1200 -- 1299)
13 Department of Commerce (Parts 1300 -- 1399)
14 Department of the Interior (Parts 1400 -- 1499)
15 Environmental Protection Agency (Parts 1500 -- 1599)
16 Office of Personnel Management Federal Employees Health Benefits
Acquisition Regulation (Parts 1600 -- 1699)
17 Office of Personnel Management (Parts 1700 -- 1799)
18 National Aeronautics and Space Administration (Parts 1800 -- 1899)
19 United States Information Agency (Parts 1900 -- 1999)
22 Small Business Administration (Parts 2200 -- 2299)
24 Department of Housing and Urban Development (Parts 2400 -- 2499)
25 National Science Foundation (Parts 2500 -- 2599)
28 Department of Justice (Parts 2800 -- 2899)
29 Department of Labor (Parts 2900 -- 2999)
34 Department of Education Acquisition Regulation (Parts 3400 --
3499)
35 Panama Canal Commission (Parts 3500 -- 3599)
44 Federal Emergency Management Agency (Parts 4400 -- 4499)
51 Department of the Army Acquisition Regulations (Parts 5100 --
5199)
52 Department of the Navy Acquisition Regulations (Parts 5200 --
5299)
53 Department of the Air Force Federal Acquisition Regulation
Supplement (Parts 5300 -- 5399)
57 African Development Foundation (Parts 5700 -- 5799)
61 General Services Administration Board of Contract Appeals (Parts
6100 -- 6199)
63 Department of Transportation Board of Contract Appeals (Parts 6300
-- 6399)
99 Cost Accounting Standards Board, Office of Federal Procurement
Policy, Office of Management and Budget (Parts 9900 -- 9999)
26 CFR 1.383-3A Title 49 -- Transportation
Subtitle A -- Office of the Secretary of Transportation (Parts 1 --
99)
Subtitle B -- Other Regulations Relating to Transportation
I Research and Special Programs Administration, Department of
Transportation (Parts 100 -- 199)
II Federal Railroad Administration, Department of Transportation
(Parts 200 -- 299)
III Federal Highway Administration, Department of Transportation
(Parts 300 -- 399)
IV Coast Guard, Department of Transportation (Parts 400 -- 499)
V National Highway Traffic Safety Administration, Department of
Transportation (Parts 500 -- 599)
VI Urban Mass Transportation Administration, Department of
Transportation (Parts 600 -- 699)
VII National Railroad Passenger Corporation (AMTRAK) (Parts 700 --
799)
VIII National Transportation Safety Board (Parts 800 -- 899)
X Interstate Commerce Commission (Parts 1000 -- 1399)
26 CFR 1.383-3A Title 50 -- Wildlife and Fisheries
I United States Fish and Wildlife Service, Department of the Interior
(Parts 1 -- 199)
II National Marine Fisheries Service, National Oceanic and
Atmospheric Administration, Department of Commerce (Parts 200 -- 299)
III International Regulatory Agencies (Fishing and Whaling) (Parts
300 -- 399)
IV Joint Regulations (United States Fish and Wildlife Service,
Department of the Interior and National Marine Fisheries Service,
National Oceanic and Atmospheric Administration, Department of
Commerce); Endangered Species Committee Regulations (Parts 400 -- 499)
V Marine Mammal Commission (Parts 500 -- 599)
VI Fishery Conservation and Management, National Oceanic and
Atmospheric Administration, Department of Commerce (Parts 600 -- 699)
26 CFR 1.383-3A CFR Index and Finding Aids Subject/Agency Index
List of Agency Prepared Indexes Parallel Table of Statutory Authorities
and Rules Acts Requiring Publication in the Federal Register List of CFR
Titles, Chapters, Subchapters, and Parts
26 CFR 1.383-3A Alphabetical List of Agencies Appearing in the CFR
CFR Title, Subtitle or
Agency
Chapter
ACTION 45, XII
Administrative Committee of the Federal Register 1, I
Administrative Conference of the United States 1, III
Advisory Commission on Intergovernmental Relations 5, VII
Advisory Committee on Federal Pay 5, IV
Advisory Council on Historic Preservation 36, VIII
African Development Foundation 22, XV; 48, 57
Agency for International Development 22, II; 48, 7
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Agriculture Department
Agricultural Marketing Service 7, I, IX, X, XI
Agricultural Research Service 7, V
Agricultural Stabilization and Conservation Service 7, VII
Animal and Plant Health Inspection Service 7, III; 9, I
Commodity Credit Corporation 7, XIV
Cooperative State Research Service 7, XXXIV
Economic Analysis Staff 7, XXXIX
Economic Research Service 7, XXXVII
Economics Management Staff 7, XL
Energy, Office of 7, XXIX
Environmental Quality, Office of 7, XXXI
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 4
Federal Crop Insurance Corporation 7, IV
Federal Grain Inspection Service 7, VIII
Finance and Management, Office of 7, XXX
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Economic Development Service 7, XXI
Forest Service 36, II
General Sales Manager, Office of 7, XXV
Grants and Program Systems, Office of 7, XXXII
Information Resources Management, Office of 7, XXVII
Inspector General, Office of 7, XXVI
International Cooperation and Development Office 7, XXII
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
Operations Office 7, XXVIII
Packers and Stockyards Administration 9, II
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Secretary of Agriculture, Office of 7, Subtitle A
Soil Conservation Service 7, VI
Transportation, Office of 7, XXXIII
World Agriculture Outlook Board 7, XXXVIII
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Federal Acquisition Regulation Supplement 48, 53
Alaska Natural Gas Transportation System, Office of the Federal
Inspector 10, XV
Alcohol, Tobacco and Firearms, Bureau of 27, I
AMTRAK 49, VII
American Battle Monuments Commission 36, IV
Animal and Plant Health Inspection Service 7, III; 9, I
Appalachian Regional Commission 5, IX
Architectural and Transportation Barriers Compliance Board 36, XI
Arms Control and Disarmament Agency, U.S. 22, VI
Army Department 32, V
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 51
Assistant Secretary for Technology Policy, Department of Commerce 37,
IV
Benefits Review Board 20, VII
Bicentennial of the United States Constitution, Commission on the 45,
XX
Bilingual Education and Minority Languages Affairs, Office of 34, V
Blind and Other Severely Handicapped, Committee for Purchase from 41,
51
Board for International Broadcasting 22, XIII
Budget, Office of Management and 5, III
Census Bureau 15, I
Central Intelligence Agency 32, XIX
Child Support Enforcement, Office of 45, III
Christopher Columbus Quincentenary Jubilee Commission 45, XXII
Civil Rights Commission 45, VII
Civil Rights, Office for (Education Department) 34, I
Claims Collection Standards, Federal 4, II
Coast Guard 33, I; 46, I, III; 49, IV
Commerce Department 44, IV
Census Bureau 15, I
Assistant Secretary for Technology Policy 37, IV
Economic Affairs, Under Secretary 37, V
Economic Analysis, Bureau of 15, VIII
Economic Development Administration 13, III
Endangered Species Committee 50, IV
Export Administration Bureau 15, VII
Federal Acquisition Regulation 48, 13
Fishery Conservation and Management 50, VI
International Trade Administration 15, III; 19, III
National Institute of Standards and Technology 15, II
National Marine Fisheries Service 50, II, IV
National Oceanic and Atmospheric Administration 15, IX; 50, II, III,
IV, VI
National Telecommunications and Information Administration 15, XXIII;
47, III
Patent and Trademark Office 37, I
Productivity, Technology and Innovation, Assistant Secretary for 37,
IV
Secretary of Commerce, Office of 15, Subtitle A
Technology Administration 15, XI
Under Secretary for Technology 37, V
United States Travel and Tourism Administration 15, XII
Commercial Space Transportation, Office of, Department of
Transportation 14, III
Commission on the Bicentennial of the United States Constitution 45,
XX
Committee for Purchase from the Blind and Other Severely Handicapped
41, 51
Commodity Credit Corporation 7, XIV
Commodity Futures Trading Commission 17, I
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Community Services, Office of 45, X
Comptroller of the Currency 12, I
Construction Industry Collective Bargaining Commission 29, IX
Consumer Product Safety Commission 16, II
Cooperative State Research Service 7, XXXIV
Copyright Office 37, II
Copyright Royalty Tribunal 37, III
Cost Accounting Standards Board, Office of Federal Procurement Policy
48, 99
Council on Environmental Quality 40, V
Customs Service, United States 19, I
Defense Department 32, Subtitle A
Air Force Department 32, VII; 41, Subtitle C, Ch. 132
Army Department 32, V; 33, II; 36, III, 48, 51
Engineers, Corps of 33, II; 36, III
Federal Acquisition Regulation 48, 2
Navy Department 32, VI; 48, 52
Secretary of Defense, Office of 32, I
Defense Logistics Agency 32, XII
Defense Nuclear Facilities Safety Board 10, XVII
Delaware River Basin Commission 18, III
Drug Enforcement Administration 21, II
East-West Foreign Trade Board 15, XIII
Economic Affairs, Under Secretary (Commerce) 37, V
Economic Analysis, Bureau of 15, VIII
Economic Analysis Staff, Department of Agriculture 7, XXXIX
Economic Development Administration 13, III
Economics Management Staff 7, XL
Economic Research Service 7, XXXVII
Education, Department of
Bilingual Education and Minority Languages Affairs, Office of 34, V
Civil Rights, Office for 34, I
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Federal Acquisition Regulation 48, 34
Postsecondary Education, Office of 34, VI
Secretary of Education, Office of 34, Subtitle A
Special Education and Rehabilitative Services, Office of 34, III
Vocational and Adult Education, Office of 34, IV
Educational Research and Improvement, Office of 34, VII
Elementary and Secondary Education, Office of 34, II
Employees' Compensation Appeals Board 20, IV
Employees Loyalty Board, International Organizations 5, V
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Endangered Species Committee 50, IV
Energy, Department of 10, II, III, X; 41, 109
Federal Acquisition Regulation 48, 9
Federal Energy Regulatory Commission 18, I
Energy, Office of, Department of Agriculture 7, XXIX
Engineers, Corps of 33, II; 36, III
Engraving and Printing, Bureau of 31, VI
Environmental Protection Agency 40, I; 41, 115; 48, 15
Environmental Quality, Office of (Agriculture Department) 7, XXXI
Equal Employment Opportunity Commission 29, XIV
Equal Opportunity, Office of Assistant Secretary for 24, I
Executive Office of the President 3, I
Administration, Office of 5, XV
Export Administration Bureau 15, VII
Export-Import Bank of the United States 12, IV
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Farm Credit Administration 12, VI
Farm Credit System Assistance Board 12, XIII
Farm Credit System Insurance Corporation 12, XIV
Farmers Home Administration 7, XVIII
Federal Acquisition Regulation 48, 1
Federal Aviation Administration 14, I
Federal Claims Collection Standards 4, II
Federal Communications Commission 47, I
Federal Contract Compliance Programs, Office of 41, 60
Federal Crop Insurance Corporation 7, IV
Federal Deposit Insurance Corporation 12, III
Federal Election Commission 11, I
Federal Emergency Management Agency 44, I; 48, 44
Federal Energy Regulatory Commission 18, I
Federal Financial Institutions Examination Council 12, XI
Federal Financing Bank 12, VIII
Federal Grain Inspection Service 7, VIII
Federal Highway Administration 23, I, II; 49, III
Federal Home Loan Mortgage Corporation 1, IV
Federal Housing Finance Board 12, IX
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Inspector for the Alaska Natural Gas Transportation System,
Office of 10, XV
Federal Labor Relations Authority, and General Counsel of the Federal
Labor Relations Authority 5, XIV; 22, XIV
Federal Law Enforcement Training Center 31, VII
Federal Maritime Commission 46, IV
Federal Mediation and Conciliation Service 29, XII
Federal Mine Safety and Health Review Commission 29, XXVII
Federal Pay, Advisory Committee on 5, IV
Federal Prison Industries, Inc. 28, III
Federal Procurement Policy Office 48, 99
Federal Property Management Regulations 41, 101
Federal Property Management Regulations System 41, Subtitle C
Federal Railroad Administration 49, II
Federal Register, Administrative Committee of 1, I
Federal Register, Office of 1, II
Federal Reserve System 12, II
Federal Retirement Thrift Investment Board 5, VI
Federal Service Impasses Panel 5, XIV
Federal Trade Commission 16, I
Federal Travel Regulation System 41, Subtitle F
Finance and Management, Department of Agriculture 7, XXX
Fine Arts Commission 45, XXI
Fiscal Service 31, II
Fish and Wildlife Service, United States 50, I, IV
Fishery Conservation and Management 50, VI
Fishing and Whaling, International Regulatory Agencies 50, III
Food and Drug Administration 21, I
Food and Nutrition Service 7, II
Food Safety and Inspection Service 9, III
Foreign Agricultural Service 7, XV
Foreign Assets Control, Office of 31, V
Foreign Claims Settlement Commission of United States 45, V
Foreign Economic Development Service 7, XXI
Foreign Service Grievance Board 22, IX
Foreign Service Impasse Disputes Panel 22, XIV
Foreign Service Labor Relations Board 22, XIV
Foreign-Trade Zones Board 15, IV
Forest Service 36, II
General Accounting Office 4, I, II, III
General Sales Manager, Office of 7, XXV
General Services Administration
Contract Appeals Board 48, 61
Federal Acquisition Regulation 48, 5
Federal Information Resources Management Regulations 41, Subtitle E,
Ch. 201
Federal Property Management Regulations System 41, 101, 105
Federal Travel Regulation System 41, Subtitle F
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Reduction in Meeting and Training Allowance Payments 41, 304
Relocation Allowances 41, 302
Travel Allowances 41, 301
Geological Survey 30, IV
Government Ethics, Office of 5, XVI
Government National Mortgage Association 24, III
Grants and Program Systems, Office of 7, XXXII
Great Lakes Pilotage 46, III
Harry S. Truman Scholarship Foundation 45, XVIII
Health and Human Services, Department of 45, Subtitle A
Child Support Enforcement, Office of 45, III
Community Services, Office of 45, X
Family Assistance, Office of 45, II
Family Support Administration 45, II, III, IV, X
Federal Acquisition Regulation 48, 3
Food and Drug Administration 21, I
Health Care Financing Administration 42, IV
Human Development Services Office 45, XIII
Inspector General, Office of 42, V
Public Health Service 42, I
Refugee Resettlement, Office of 45, IV
Social Security Administration 20, III; 45, IV
Health Care Financing Administration 42, IV
Housing and Urban Development, Department of
Community Planning and Development, Office of Assistant Secretary for
24, V, VI
Equal Opportunity, Office of Assistant Secretary for 24, I
Federal Acquisition Regulation 48, 24
Government National Mortgage Association 24, III
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Inspector General, Office of 24, XII
Mortgage Insurance and Loan Programs Under Emergency Homeowners'
Relief Act 24, XV
Public and Indian Housing, Office of Assistant Secretary for 24, IX
Secretary, Office of 24, Subtitle B, VII
Solar Energy and Energy Conservation Bank 24, XI
Housing -- Federal Housing Commissioner, Office of Assistant
Secretary for 24, II, VIII, X, XX
Human Development Services Office 45, XIII
Immigration and Naturalization Service 8, I
Indian Affairs, Bureau of 25, I
Indian Arts and Crafts Board 25, II
Information Agency, United States 22, V; 48, 19
Information Resources Management, Office of, Agriculture Department
7, XXVII
Information Security Oversight Office 32, XX
Inspector General, Office of, Agriculture Department 7, XXVI
Inspector General, Office of, Health and Human Services Department
42, V
Inspector General, Office of, Housing and Urban Development
Department 24, XII
Inter-American Foundation 22, X
Intergovernmental Relations, Advisory Commission on 5, VII
Interior Department
Endangered Species Committee 50, IV
Federal Acquisition Regulation 48, 14
Federal Property Management Regulations System 41, 114
Fish and Wildlife Service, United States 50, I, IV
Geological Survey 30, IV
Indian Affairs, Bureau of 25, I
Indian Arts and Crafts Board 25, II
Land Management Bureau 43, II
Minerals Management Service 30, II
Mines, Bureau of 30, VI
National Park Service 36, I
Reclamation Bureau 43, I
Secretary of the Interior, Office of 43, Subtitle A
Surface Mining and Reclamation Appeals, Board of 30, III
Surface Mining Reclamation and Enforcement, Office of 30, VII
United States Fish and Wildlife Service 50, I, IV
Internal Revenue Service 26, I
International Boundary and Water Commission, United States and Mexico
22, XI
International Cooperation and Development Office, Department of
Agriculture 7, XXII
International Development, Agency for 22, II
International Development Cooperation Agency 22, XII
International Development, Agency for 22, II
Overseas Private Investment Corporation 22, VII
International Joint Commission, United States and Canada 22, IV
International Organizations Employees Loyalty Board 5, V
International Regulatory Agencies (Fishing and Whaling) 50, III
International Trade Administration 15, III; 19, III
International Trade Commission, United States 19, II
Interstate Commerce Commission 49, X
Japan-United States Friendship Commission 22, XVI
Joint Board for the Enrollment of Actuaries 20, VIII
Justice Department 28, I; 41, 128
Drug Enforcement Administration 21, II
Federal Acquisition Regulation 48, 28
Federal Claims Collection Standards 4, II
Federal Prison Industries, Inc. 28, III
Foreign Claims Settlement Commission of the United States 45, V
Immigration and Naturalization Service 8, I
Offices of Independent Counsel 28, VI
Prisons, Bureau of 28, V
Labor Department
Benefits Review Board 20, VII
Employees' Compensation Appeals Board 20, IV
Employment and Training Administration 20, V
Employment Standards Administration 20, VI
Federal Acquisition Regulation 48, 29
Federal Contract Compliance Programs, Office of 41, 60
Federal Procurement Regulations System 41, 50
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Mine Safety and Health Administration 30, I
Occupational Safety and Health Administration 29, XVII
Pension and Welfare Benefits Administration 29, XXV
Public Contracts 41, 50
Secretary of Labor, Office of 29, Subtitle A
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Wage and Hour Division 29, V
Workers' Compensation Programs, Office of 20, I
Labor-Management Relations and Cooperative Programs, Bureau of 29, II
Labor-Management Standards, Office of 29, IV
Land Management, Bureau of 43, II
Legal Services Corporation 45, XVI
Library of Congress 36, VII
Copyright Office 37, II
Management and Budget, Office of 5, III; 48, 99
Marine Mammal Commission 50, V
Maritime Administration 46, II
Merit Systems Protection Board 5, II
Micronesian Status Negotiations, Office for 32, XXVII
Mine Safety and Health Administration 30, I
Minerals Management Service 30, II
Mines, Bureau of 30, VI
Minority Business Development Agency 15, XIV
Miscellaneous Agencies 1, IV
Monetary Offices 31, I
Mortgage Insurance and Loan Programs Under the Emergency Homeowners'
Relief Act, Department of Housing and Urban Development 24, XV
National Aeronautics and Space Administration 14, V; 48, 18
National Agricultural Library 7, XLI
National Agricultural Statistics Service 7, XXXVI
National Archives and Records Administration 36, XII
National Bureau of Standards 15, II
National Capital Planning Commission 1, IV
National Commission for Employment Policy 1, IV
National Commission on Libraries and Information Science 45, XVII
National Credit Union Administration 12, VII
National Foundation on the Arts and the Humanities 45, XI
National Highway Traffic Safety Administration 23, II, III; 49, V
National Indian Gaming Commission 25, III
National Institute of Standards and Technology 15, II
National Labor Relations Board 29, I
National Marine Fisheries Service 50, II, IV
National Mediation Board 29, X
National Oceanic and Atmospheric Administration 15, IX; 50, II, III,
IV, VI
National Park Service 36, I
National Railroad Adjustment Board 29, III
National Railroad Passenger Corporation (AMTRAK) 49, VII
National Science Foundation 45, VI; 48, 25
National Security Council 32, XXI
National Security Council and Office of Science and Technology Policy
47, II
National Telecommunications and Information Administration 15, XXIII;
47, III
National Transportation Safety Board 49, VIII
Navy Department 32, VI; 48, 52
Neighborhood Reinvestment Corporation 24, XXV
Nuclear Regulatory Commission 10, I
Occupational Safety and Health Administration 29, XVII
Occupational Safety and Health Review Commission 29, XX
Office of Independent Counsel 28, VII
Office of Navajo and Hopi Indian Relocation 25, IV
Offices of Independent Counsel, Department of Justice 28, VI
Operations Office, Department of Agriculture 7, XXVIII
Overseas Private Investment Corporation 22, VII
Oversight Board 12, XV
Packers and Stockyards Administration 9, II
Panama Canal Commission 48, 35
Panama Canal Regulations 35, I
Patent and Trademark Office 37, I
Payment of Expenses Connected With the Death of Certain Employees 41,
303
Peace Corps 22, III
Pennsylvania Avenue Development Corporation 36, IX
Pension and Welfare Benefits Administration, Department of Labor 29,
XXV
Pension Benefit Guaranty Corporation 29, XXVI
Personnel Management, Office of 5, I; 45, VIII; 48, 17
Federal Employees Health Benefits Acquisition Regulation 48, 16
Postal Rate Commission 39, III
Postal Service, United States 39, I
Postsecondary Education, Office of 34, VI
President's Commission on White House Fellowships 1, IV
Presidential Documents 3
Prisons, Bureau of 28, V
Productivity, Technology and Innovation, Assistant Secretary
(Commerce) 37, IV
Property Management Regulations System, Federal 41, Subtitle C
Public Contracts, Department of Labor 41, 50
Public Health Service 42, I
Railroad Retirement Board 20, II
Reclamation Bureau 43, I
Reduction in Meeting and Training Allowance Payments 41, 304
Refugee Resettlement, Office of 45, IV
Regional Action Planning Commissions 13, V
Relocation Allowances 41, 302
Research and Special Programs Administration 49, I
Resolution Trust Corporation 12, XVI
Rural Electrification Administration 7, XVII
Rural Telephone Bank 7, XVI
Saint Lawrence Seaway Development Corporation 33, IV
Science and Technology Policy, Office of 32, XXIV
Science and Technology Policy, Office of, and National Security
Council 47, II
Secret Service 31, IV
Securities and Exchange Commission 17, II
Selective Service System 32, XVI
Small Business Administration 13, I; 48, 22
Smithsonian Institution 36, V
Social Security Administration 20, III; 45, IV
Soil Conservation Service 7, VI
Solar Energy and Energy Conservation Bank, Department of Housing and
Urban Development 24, XI
Soldiers' and Airmen's Home, United States 5, XI
Special Counsel, Office of 5, VIII
Special Education and Rehabilitative Services, Office of 34, III
State Department 22, I
Federal Acquisition Regulation 48, 6
Surface Mining and Reclamation Appeals, Board of 30, III
Susquehanna River Basin Commission 18, VIII
Technology Administration 15, XI
Tennessee Valley Authority 18, XIII
Thrift Supervision Office, Department of the Treasury 12, V
Trade Representative, United States, Office of 15, XX
Transportation, Department of 44, IV
Coast Guard 33, I; 46, I, III; 49, IV
Commercial Space Transportation, Office of 14, III
Contract Appeals Board 48, 63
Federal Acquisition Regulation 48, 12
Federal Aviation Administration 14, I
Federal Highway Administration 23, I, II; 49, III
Federal Railroad Administration 49, II
Maritime Administration 46, II
National Highway Traffic Safety Administration 23, II, III; 49, V
Research and Special Programs Administration 49, I
Saint Lawrence Seaway Development Corporation 33, IV
Secretary of Transportation, Office of 14, II; 49, Subtitle A
Urban Mass Transportation Administration 49, VI
Transportation, Office of, Department of Agriculture 7, XXXIII
Travel Allowance 41, 301
Travel and Tourism Administration, United States 15, XII
Treasury Department 17, IV
Alcohol, Tobacco and Firearms, Bureau of 27, I
Comptroller of the Currency 12, I
Customs Service, United States 19, I
Engraving and Printing, Bureau of 31, VI
Federal Acquisition Regulation 48, 10
Federal Law Enforcement Training Center 31, VII
Fiscal Service 31, II
Foreign Assets Control, Office of 31, V
Internal Revenue Service 26, I
Monetary Offices 31, I
Secret Service 31, IV
Secretary of the Treasury, Office of 31, Subtitle A
Thrift Supervision Office 12, V
United States Customs Service 19, I
Truman, Harry S. Scholarship Foundation 45, XVIII
Under Secretary for Technology, Department of Commerce 37, V
United States and Canada, International Joint Commission 22, IV
United States Arms Control and Disarmament Agency 22, VI
United States Customs Service 19, I
United States Fish and Wildlife Service 50, I, IV
United States Information Agency 22, V; 48, 19
United States International Development Cooperation Agency 22, XII
United States International Trade Commission 19, II
United States Postal Service 39, I
United States Soldiers' and Airmen's Home 5, XI
United States Trade Representative, Office of 15, XX
United States Travel and Tourism Adminstration 15, XII
Urban Mass Transportation Administration 49, VI
Veterans Affairs Department 38, I; 48, 8
Veterans' Employment and Training, Office of the Assistant Secretary
for 41, 61; 20, IX
Vice President of the United States, Office of 32, XXVIII
Vocational and Adult Education, Office of 34, IV
Wage and Hour Division 29, V
Water Resources Council 18, VI
Workers' Compensation Programs, Office of 20, I
World Agriculture Outlook Board 7, XXXVIII
26 CFR 1.383-3A 26 CFR (4-1-92 Edition)
26 CFR 1.383-3A OMB Control Numbers
26 CFR 1.383-3A
26 CFR 1.383-3A
26 CFR 1.383-3A Table of OMB Control Numbers
The OMB control numbers for Chapter I of Title 26 were consolidated
into 601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. Sections
601.9000 and 602.101 are reprinted below for the convenience of the
user.
26 CFR 1.383-3A Subpart J -- OMB Control Numbers Under the Paperwork Reduction Act
26 CFR 601.9000 OMB control numbers for the statement of procedural
rules.
(a) Purpose. This section collects and displays the control numbers
assigned to Internal Revenue Service collections of information in the
Statement of Procedural Rules (26 CFR Part 601) by the Office of
Management and Budget (OMB) under the Paperwork Reduction Act of 1980.
The Internal Revenue Service intends that this section (together with 26
CFR Part 602) comply with the requirements of 1320.7(f), 1320.12,
1320.13, and 1320.14 of 5 CFR Part 1320 (OMB regulations implementing
the Paperwork Reduction Act of 1980) for the display of control numbers
assigned by OMB to collections of information of the Internal Revenue
Service in the Statement of Procedural Rules. This section does not
display control numbers assigned by OMB to collections of information of
the Bureau of Alcohol, Tobacco, and Firearms in the Statement of
Procedural Rules.
(b) Cross-reference. For display of control numbers assigned by the
Office of Management and Budget to collections of information of the
Internal Revenue Service in regulations elsewhere than in the Statement
of Procedural Rules, see 26 CFR Part 602.
(c) Display.
(Sec. 7805 of the Internal Revenue Code of 1954 (68A Stat. 917; 26
U.S.C. 7805))
(T.D. 8011, 50 FR 10222, Mar. 14, 1985, as amended at 51 FR 7442,
Mar. 4, 1986. Redesignated at 53 FR 19187, May 26, 1988)
26 CFR 601.9000 Pt. 602
26 CFR 601.9000 PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
26 CFR 602.101 OMB Control Numbers.
(a) Purpose. This part collects and displays the control numbers
assigned to collections of information in Internal Revenue Service
regulations by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980. The Internal Revenue Service intends
that this part (together with 26 CFR 601.9000) comply with the
requirements of 1320.7(f), 1320.12, 1320.13, and 1320.14 of 5 CFR part
1320 (OMB regulations implementing the Paperwork Reduction Act), for the
display of control numbers assigned by OMB to collections of information
in Internal Revenue Service regulations. This part does not display
control numbers assigned by the Office of Management and Budget to
collections of information of the Bureau of Alcohol, Tobacco, and
Firearms.
(b) Cross-reference. For display of control numbers assigned by the
Office of Management and Budget to Internal Revenue Service collections
of information in the Statement of Procedural Rules (26 CFR part 601),
see 26 CFR 601.9000.
(c) Display.
(26 U.S.C. 7805)
(T.D. 8011, 50 FR 10222, Mar. 14, 1985)
Editorial Note: For Federal Register citations affecting 602.101,
see the List of CFR Sections Affected in the Findings Aids section of 26
CFR part 600 -- End.
26 CFR 602.101 26 CFR (4-1-92 Edition)
26 CFR 602.101 List of CFR Sections Affected
26 CFR 602.101 List of CFR Sections Affected
All changes to the sections of Part 1 ( 1.301 to 1.400) of Title 26
of the Code of Federal Regulations which were made by documents
published in the Federal Register since January 1, 1986, are enumerated
in the following list. Entries indicate the nature of the changes
effected. Page numbers refer to Federal Register pages. The user
should consult the entries for chapters and parts as well as sections
for revisions.
For the period before January 1, 1986, see the ''List of CFR Sections
Affected, 1949-1963, 1964-1972, and 1973-1985'' published in seven
separate volumes.
26 CFR 602.101 1986
26 CFR
51 FR
Page
Chapter I
1.338-1T (c), (e)(1)(i)(B) and (C), (ii), (2)(ii) and (3),
(f)(7)(ii), (h), and (j)(2) amended; (e)(2)(i) revised; (e)(1)(i)(D)
added (temporary) 748
(b)(8) and (f)(3)(i) amended; (f)(9) added (temporary) 3587, 10621
(c), (d) heading and (2), (e)(1), (2)(i) and (ii) and (3), (j),
(k)(1), (2)(v), (4) heading and (5) revised; (d)(1) introductory text,
(i), and (iv), (e)(2)(iv), and (k)(2)(i) amended; (k)(3)(iii) and (6)
removed; (d)(1)(v) and (k)(7) redesignated as (d)(1)(vi) and new
(k)(6); new (k)(6)(i) and (ii) revised; (b)(9), new (d)(1)(v), and
(k)(7) added; (d)(3) and (k)(4) nomenclature changes 5190
(c), (e)(1)(ii) (A) and (B), (2)(ii)(A), (f)(7)(ii), (h) (1), (2),
and (4) Examples (1) and (2), (j) (2) and (4), and (k)(1) and (7) (iv)
and (v) amended; (m) added (temporary) 17932
(m)(1) introductory text and (7)(iii)(B) corrected 20274
(m)(15) Example (10) corrected 20480
(c), (e)(1)(ii)(A) and (2) heading, (ii), and (iii), (h)(2)(ii), and
(k)(1) revised; (d)(3), (e)(1)(ii)(B) and (2)(iv), (j)(4)(ii),
(k)(2)(i), and (l)(3)(i) amended; (e)(2)(vi) added (temporary) 23739
(d)(3) and (k)(1)(ii)(C) corrected 34469
1.338-2T (j) Examples (1) and (2) amended (temporary) 17936
1.338-3T (b)(2) revised (temporary) 23741
1.338-4T (f)(5) Answer (vii)(A), (6)(iv) Answer 1 (i)(C)(1), and
(j)(2) Answer 5 (i) amended (temporary) 749
(h)(1), (2)(i) and (iii), and (3) Answer 1 (i), Answer 2 (vi), and
(j)(1) and (2) Answer 6 amended; (h)(2)(vi) and (3) Answer 2 (vi)
Examples (4) through (9) added (temporary) 3587, 10621
(a)(2) and (3) and (b)(1)(ii) and (2) amended (temporary) 5193
(c)(1) Answers 2 and 4, (2) Question and Answer, (4) Answer, and (5)
Answer, and (f)(1)(ii) Question 2, (3) Answer, (4) Question 4, (5)
Answer, and (6)(ii) Answers 1 and 2 and (iv) Answers 2 and 3 amended;
(f)(6)(i)(A) revised (temporary) 5194
(g)(2) Answer, (h)(2)(iii), (3) Answers 1, 2, and 3, (j)(1), (2)
Answers 4 and 5, (k)(1) Questions 1 and 4 and Answer 3, and (l)(1)
Question amended (temporary) 5194
(f)(6)(ii) Answer 1 corrected 6219
(f)(6)(iv) Answer 3 corrected 11017
(a) (3) and (4) table, (f)(6)(iv) Answer, and (j)(2) Answer 5
amended; (l)(5) added (temporary) 17936
(f)(6)(ii) Answers 1 and 2, (h)(2)(iii) and (3) Answers 2 and 3 and
(j)(2) Answer 5 amended (temporary) 23741
(h)(3) Answer 3 Example (i) correctly designated 33033
1.338-5T Added (temporary) 5173
(j)(7)(vii) Examples (1) and (2) corrected 6219
(j)(7)(iii) corrected 9005
(c)(2)(iii)(A), (c)(6) Examples (8) and (17), (j)(6)(ii)(A) corrected
11017
(c)(2)(iii)(A), (6) Examples (8) and (17), and (j)(6)(ii)(A)
corrected 11017
(a)(2), (c)(2)(v)(C), and (j)(8)(ii) heading and text, and (iii)
heading and text amended (temporary) 17936
(c)(2)(v)(C) and (j)(8)(ii) revised (temporary) 23742
1.338(b)-1T Added (temporary) 3589, 10623
1.338(b)-2T Added (temporary) 3591, 10624
(a)(3) added (temporary) 23742
(a)(3) corrected 33033
1.338(b)-3T Added (temporary) 3592, 10626
1.338(b)-4T Added (temporary) 23742
(a)(3) corrected 33033
(c)(1)(vii) corrected 34469
1.338(h)(10)-1T Added (temporary) 743
(f)(4) amended; (f)(5) added (temporary) 3589, 10623
(d)(3) and (d)(4) amended (temporary) 5196
(d)(3), (e)(5), (g) Example (7), and (j)(2)(iii) corrected 8671
(g) Example (7) correctly designated and corrected 10381
(e)(8)(i), (g) Example (7), and (j)(5) Example (1) corrected 10540
(d)(7) (i) and (ii) amended; (d)(9) added (temporary) 17936
(f)(2)(ii) revised; (g) Examples (2) and (7) amended (temporary)
23744
1.367(a)-1 Removed 17938
1.367(a)-1T Added (temporary) 17938
1.367(a)-2T Added (temporary) 17942
1.367(a)-3T Added (temporary) 17943
1.367(a)-4T Redesignated as 1.367(a)-7T (temporary) 17938
Added (temporary) 17947
1.367(a)-5T Added (temporary) 17949
1.367(a)-6T Added (temporary) 17950
1.367(a)-7T Redesignated from 1.367(a)-4T (temporary) 17938
1.367(d)-1T Added (temporary) 17953
1.368-2 Technical correction 3466
(j)(4) corrected 6400
1.381(c)(4)-1 (a)(1)(ii) amended 2481
26 CFR 602.101 1987
26 CFR
52 FR
Page
Chapter I
1.382-1T Added (temporary) 29674
1.382-2T Added (temporary) 29675
26 CFR 602.101 1988
26 CFR
53 FR
Page
Chapter I
1.304-4T Added (temporary) 22171
1.338(b)-3T (g)(1)(ii) and (j) Examples (6) and (7) amended; (j)
Example (8) added (temporary) 27043
Comment time extended 32899
1.367(d)1-T Intercompany pricing rules study 43522
26 CFR 602.101 1989
26 CFR
54 FR
Page
Chapter I
1.355-0 Added 289
1.355-1 Revised 289
1.355-2 Revised 290
(c)(2), Examples 3 and 4, (d)(1), and (5)(iv) corrected 5577
1.355-3 Revised 294
1.355-4 Revised 296
1.355-6 Heading added 296
1.382-1T (a)(2)(iv) added (temporary) 38666
1.382-2T (a)(1), (2)(ii), (f)(18)(ii)(C), and (iii)(C), (22) (ii) and
(iii), and (h)(4)(ix) introductory text amended; (a)(2)(iv), (f)(22)
(iv), and (v) added; (f)(1) revised 38666
(h)(4)(x)(Z) added (temporary) 52936
1.383-1T Added (temporary) 38668
(f) Examples (1), (2), and (4) and (g) corrected 46187
Example 1 corrected 50043
1.383-2T Heading added (temporary) 38671
26 CFR 602.101 1990
26 CFR
55 FR
Page
Chapter I
1.337(d)-1 Added 49031
1.337(d)-1T Added (temporary) 9432
Removed 49031
1.337(d)-2T Added (temporary) 49034
1.367(a)-1T (e) redesignated as (g); new (e) and (f) added
(temporary) 1408
1.367(e)-0T Added (temporary) 1409
1.367(e)-1T Added (temporary) 1409
1.367(e)-2T Added (temporary) 1412
1.381(b)-1 (a)(1) revised (temporary) 1417
26 CFR 602.101 1991
26 CFR
56 FR
Page
Chapter I
1.337(d)-1 (a)(3), (5) Example 8, (b)(3), (d)(1) and (e)(1) revised;
(e)(3) added 47389
1.337(d)-2 Added 47390
1.337(d)-2T Removed 47390
1.338-6T Added 11095
1.382-0 Added 29433
1.382-1 Heading added 29434
1.382-1T Amended 29434
1.382-2 Redesignated as 1.382-4A; new 1.382-2 added; (a)(1) and (2)
redesignated from 1.382-2T (f)(1) and (22) 29434
1.382(a)-1 Redesignated as 1.382-1A 29433
Correctly designated 52120
1.382(b)-1 Redesignated as 1.382-2A 29433
Correctly designated 52120
1.382(c)-1 Redesignated as 1.382-3A 29433
1.382-2T Nomenclature change; (a)(1) introductory text, (i)(B),
(iii), (2)(ii), (e)(2)(iv) Examples 1, 2, and 3, (f)(1)(i), (ii),
(18)(ii)(C), (iii)(C), (22)(iv), (v) and (h)(4)(ix) amended; (f)(1) and
(22) redesignated as 1.382-2 (a)(1) and (2); new (f)(1) and (22) added
29434
(a)(2)(iv) redesignated as 1.383-1 (k) 29435
1.382-1A -- 1.382-4A Undesignated center heading added 29434
1.382-1A Redesignated from 1.382(a)-1; heading revised 29433
1.382-2A Redesignated from 1.382(b)-1; heading revised 29433
1.382-3A Redesignated from 1.382(c)-1; heading revised 29433
1.382-4A Redesignated from 1.382-2; heading revised 29433
1.383-0 Added 29434
1.383-1 Redesignated as 1.383-1A; new 1.383-1 redesignated from
1.383-1T; (a), (c)(2)(ii), (3)(i)(B), (ii)(B), (4), (d)(2)(iii),
(e)(4)(i), (ii) and (g) amended 29434
1.383-1T Redesignated as 1.383-1 29434
(k) redesignated from 1.382-2T (a)(2)(iv); (k) heading revised;
(k)(1) amended; nomenclature change 29435
1.383-2 Redesignated as 1.383-2A 29434
Redesignated from 1.383-2T; heading amended 29435
1.383-2T Redesignated as 1.383-2 29435
1.383-3 Redesignated as 1.383-3A 29434
Correctly redesignated as 1.383-3A 52120
1.383-1A Redesignated from 1.383-1; Heading revised; amended 29434
1.383-2A Redesignated from 1.383-2; Heading revised; amended 29434
1.383-3A Redesignated from 1.383-3; Heading revised; amended 29434
Correctly redesignated from 1.383-3 52120
26 CFR 602.101 1992
26 CFR
57 FR
Page
Chapter I
1.367(b)-2 Added 6555
1.367(b)-7 Added 6555
1.367(b)-8 Added 6555
1.367(b)-9 Added 6556
1.382-2 (a)(3) added 10740
1.382-2T (f)(7) revised; (g)(4) Example 5 added 10741
1.382-3 Added 346
26
Internal Revenue
PART 1 ( 1.301 TO 1.400)
Revised as of April 1, 1992
CONTAINING
A CODIFICATION OF DOCUMENTS
OF GENERAL APPLICABILITY
AND FUTURE EFFECT
AS OF APRIL 1, 1992
With Ancillaries
Published by
the Office of the Federal Register
National Archives and Records
Administration
as a Special Edition of
the Federal Register
Washington, DC 20402-9328
26 CFR 602.101 Table of Contents
Page
Explanation v
Title 26:
Chapter I -- Internal Revenue Service, Department of the Treasury
(Continued)
Finding Aids:
Table of CFR Titles and Chapters
Alphabetical List of Agencies Appearing in the CFR
Table of OMB Control Numbers
List of CFR Sections Affected
26 CFR 602.101 Explanation
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16 as of January 1
Title 17 through Title 27 as of April 1
Title 28 through Title 41 as of July 1
Title 42 through Title 50 as of October 1
The appropriate revision date is printed on the cover of each volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
issues of the Federal Register. These two publications must be used
together to determine the latest version of any given rule.
To determine whether a Code volume has been amended since its
revision date (in this case, April 1, 1992), consult the ''List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ''Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
dates and effective dates are usually not the same and care must be
exercised by the user in determining the actual effective date. In
instances where the effective date is beyond the cut-off date for the
Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires Federal
agencies to display an OMB control number with their information
collection request. Many agencies have begun publishing numerous OMB
control numbers as amendments to existing regulations in the CFR. These
OMB numbers are placed as close as possible to the applicable
recordkeeping or reporting requirements.
OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
the cover of each volume are not carried. Code users may find the text
of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 1986, consult either the List of CFR Sections Affected,
1949-1963, 1964-1972, or 1973-1985, published in seven separate volumes.
For the period beginning January 1, 1986, a ''List of CFR Sections
Affected'' is published at the end of each CFR volume.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Statutory
Authorities and Agency Rules (Table I), and Acts Requiring Publication
in the Federal Register (Table II). A list of CFR titles, chapters, and
parts and an alphabetical list of agencies publishing in the CFR are
also included in this volume.
An index to the text of ''Title 3 -- The President'' is carried
within that volume.
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ''Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES AND SALES
For a summary, legal interpretation, or other explanation of any
regulation in this volume, contact the issuing agency. Inquiries
concerning editing procedures and reference assistance with respect to
the Code of Federal Regulations may be addressed to the Director, Office
of the Federal Register, National Archives and Records Administration,
Washington, DC 20408 (telephone 202-523-3517). All mail order sales are
handled exclusively by the Superintendent of Documents, Attn: New
Orders, P.O. Box 371954, Pittsburgh, PA 15250-7954. Charge orders may
be telephoned to the Government Printing Office order desk at
202-783-3238.
Martha L. Girard,
Director,
Office of the Federal Register.
April 1, 1992.
26 CFR 602.101 THIS TITLE
Title 26 -- Internal Revenue is composed of eighteen volumes. The
contents of these volumes represent all current regulations issued by
the Internal Revenue Service, Department of the Treasury, as of April 1,
1992. The first eleven volumes comprise part 1 (Subchapter A -- Income
Tax) and are arranged by sections as follows: 1.0-1 -- 1.60;
1.61-1.169; 1.170-1.300; 1.301-1.400; 1.401-1.500;
1.501-1.640; 1.641-1.850; 1.851-1.907; 1.908-1.1000;
1.1001-1.1400 and 1.1401 to End. The twelfth volume containing parts
2-29, includes the remainder of Subchapter A and all of Subchapter B --
Estate and Gift Taxes. The last six volumes contain parts 30-39
(Subchapter C -- Employment Taxes and Collection of Income Tax at
Source); parts 40-49; parts 50-299 (Subchapter D -- Miscellaneous
Excise Taxes); parts 300-499 (Subchapter F -- Procedure and
Administration); parts 500-599 (Subchapter G -- Regulations under Tax
Conventions); and part 600 to End (Subchapter H -- Internal Revenue
Practice).
The OMB control numbers for title 26 appear in 601.9000 and 602.101
of this chapter. For the convenience of the user, 601.9000 and
602.101 appear in the Finding Aids section of the volumes containing
parts 1 to 599.
For this volume, Don Zero II was Chief Editor. The Code of Federal
Regulations publication program is under the direction of Richard L.
Claypoole, assisted by Alomha S. Morris.
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 0.0 Title 26 -- Internal Revenue
26 CFR 0.0 (This book contains part 1, 1.401 to 1.500)
Part
chapter i -- Internal Revenue Service, Department of the Treasury
(continued) 1
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 0.0 CHAPTER I -- INTERNAL REVENUE SERVICE,
26 CFR 0.0 DEPARTMENT OF THE TREASURY
26 CFR 0.0 (Continued)
26 CFR 0.0 (Part 1, 1.401 to 1.500)
Editorial Note: IRS published a document at 45 FR 6088, Jan. 25,
1980, deleting statutory sections from their regulations. In Chapter I
cross references to the deleted material have been changed to the
corresponding sections of the IRS Code of 1954 or to the appropriate
regulations sections. When either such change produced a redundancy,
the cross reference has been deleted. For further explanation, see 45
FR 20795, Mar. 31, 1980.
26 CFR 0.0 SUBCHAPTER A -- INCOME TAX (continued)
Part
Page
1 Income tax; taxable years beginning after December 31, 1953
(continued) 4
Supplementary Publication: Internal Revenue Service Looseleaf
Regulations System.
Additional supplementary publications are issued covering Alcohol and
Tobacco Tax Regulations, and Regulations Under Tax Conventions.
26 CFR 0.0 SUBCHAPTER A -- INCOME TAX (Continued)
DECEMBER 31, 1953 (Continued)
26 CFR 0.0 Normal Taxes and Surtaxes (Continued)
26 CFR 0.0 DEFERRED COMPENSATION, ETC.
26 CFR 0.0 Pension, Profit-Sharing, Stock Bonus Plans, etc.
26 CFR 0.0 Pt. 1
Sec.
1.401-0 Scope and definitions.
1.401-1 Qualified pension, profit-sharing, and stock bonus plans.
1.401-2 Impossibility of diversion under the trust instrument.
1.401-3 Requirements as to coverage.
1.401-4 Discrimination as to contributions or benefits (before 1992).
1.401-5 Period for which requirements of section 401(a) (3), (4),
(5), and (6) are applicable with respect to plans put into effect before
September 2, 1974.
1.401-6 Termination of a qualified plan.
1.401-7 Forfeitures under a qualified pension plan.
1.401-8 Custodial Accounts prior to January 1, 1974.
1.401-9 Face-amount certificates -- nontransferable annuity
contracts.
1.401-10 Definitions relating to plans covering self-employed
individuals.
1.401-11 General rules relating to plans covering self-employed
individuals.
1.401-12 Requirements for qualification of trusts and plans
benefiting owner-employees.
1.401-13 Excess contributions on behalf of owner-employees.
1.401-14 Inclusion of medical benefits for retired employees in
qualified pension or annuity plans.
1.401(a)-1 Post-ERISA qualified plans and qualified trusts; in
general.
1.401(a)-2 Impossibility of diversion under qualified plan or trust.
1.401(a)-4 Optional forms of benefit (before 1992).
1.401(a)-11 Qualified joint and survivor annuities.
1.401(a)-12 Mergers and consolidation of plans and transfers of plan
assets.
1.401(a)-13 Assignment or alienation of benefits.
1.401(a)-14 Commencement of benefits under qualified trusts.
1.401(a)-15 Requirement that plan benefits are not decreased on
account of certain Social Security increases.
1.401(a)-16 Limitations on benefits and contributions under qualified
plans.
1.401(a)-19 Nonforfeitability in case of certain withdrawals.
1.401(a)-20 Requirements of qualified joint and survivor annuity and
qualified preretirement survivor annuity.
1.401(a)-30 Limit on elective deferrals.
1.401(a)-50 Puerto Rican trusts; election to be treated as a
domestic trust.
1.401(a)(4)-0 Table of contents.
1.401(a)(4)-1 Nondiscrimination requirements of section 401(a)(4).
1.401(a)(4)-2 Nondiscrimination in amount of contributions under a
defined contribution plan.
1.401(a)(4)-3 Nondiscrimination in amount of benefits under a defined
benefit plan.
1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights, and
features.
1.401(a)(4)-5 Plan amendments and plan terminations.
1.401(a)(4)-6 Contributory defined benefit plans.
1.401(a)(4)-7 Imputation of permitted disparity.
1.401(a)(4)-8 Cross-testing.
1.401(a)(4)-9 Plan aggregation and restructuring.
1.401(a)(4)-10 Testing of former employees.
1.401(a)(4)-11 Additional rules.
1.401(a)(4)-12 Definitions.
1.401(a)(4)-13 Effective dates and fresh-start rules.
1.401(a)(5)-1 Special rules relating to nondiscrimination
requirements.
1.401(a)(17)-1 Limitation on annual compensation.
1.401(a)(26)-0 Table of contents.
1.401(a)(26)-1 Minimum participation requirements.
1.401(a)(26)-2 Minimum participation rule.
1.401(a)(26)-3 Rules applicable to a defined benefit plan's prior
benefit structure.
1.401(a)(26)-4 Testing former employees.
1.401(a)(26)-5 Employees who benefit under a plan.
1.401(a)(26)-6 Excludable employees.
1.401(a)(26)-7 Testing methods.
1.401(a)(26)-8 Definitions.
1.401(a)(26)-9 Effective dates and transition rules.
1.401(b)-1 Certain retroactive changes in plan.
1.401(e)-1 Definitions relating to plans covering self-employed
individuals.
1.401(e)-2 General rules relating to plans covering self-employed
individuals.
1.401(e)-3 Requirements for qualification of trusts and plans
benefiting owner-employees.
1.401(e)-4 Contributions for premiums on annuity, etc., contracts and
transitional rule for certain excess contributions.
1.401(e)-5 Limitation of contribution and benefit bases to first
$100,000 of annual compensation in case of plans covering self-employed
individuals.
1.401(e)-6 Special rules for shareholders-employers.
1.401(f)-1 Certain custodial accounts on annuity contracts.
1.401(k)-0 Certain cash or deferred arrangements, table of contents.
1.401(k)-1 Certain cash or deferred arrangements.
1.401(l)-0 Table of contents.
1.401(l)-1 Permitted disparity in employer-provided contributions or
benefits.
1.401(l)-2 Permitted disparity for defined contribution plans.
1.401(l)-3 Permitted disparity for defined benefit plans.
1.401(l)-4 Special rules for railroad plans.
1.401(l)-5 Overall permitted disparity limits.
1.401(l)-6 Effective dates and transition rules.
1.401(m)-0 Employee and matching contributions, table of contents.
1.401(m)-1 Employee and matching contributions.
1.401(m)-2 Multiple use of alternative limitation.
1.402(a)-1 Taxability of beneficiary under a trust which meets the
requirements of section 401(a).
1.402(a)(5)-1T Rollovers of partial distributions from qualified
trusts and annuities. (Temporary)
1.402(b)-1 Treatment of beneficiary of a trust not exempt under
section 501(a).
1.402(c)-1 Taxability of beneficiary of certain situs trusts.
1.402(d)-1 Effect of section 402(d).
1.402(e)-1 Certain plan terminations.
1.402(f)-1 Required explanation of rollovers, capital gains, and the
separate tax on lump sum distributions.
1.402(g)-0 Limitation on exclusion for elective deferrals, table of
contents.
1.402(g)-1 Limitation on exclusion for elective deferrals.
1.403(a)-1 Taxability of beneficiary under a qualified annuity plan.
1.403(a)-2 Capital gains treatment for certain distributions.
1.403(b)-1 Taxability of beneficiary under annuity purchased by a
section 501(c)(3) organization or public school.
1.403(c)-1 Taxability of beneficiary under a nonqualified annuity.
1.403(d)-1 Taxability of employee when rights under contracts
purchased by exempt organizations change from forfeitable to
nonforfeitable rights.
1.404(a)-1 Contributions of an employer to an employees' trust or
annuity plan and compensation under a deferred payment plan; general
rule.
1.404(a)-1(T) Questions and answers relating to deductibility of
deferred compensation and deferred benefits for employees. (Temporary)
1.404(a)-2 Information to be furnished by employer claiming
deductions; taxable years ending before December 31, 1971.
1.404(a)-2A Information to be furnished by an employer; taxable
years ending on or after December 31, 1971 and before December 31, 1975.
1.404(a)-3 Contributions of an employer to or under an employees'
pension trust or annuity plan that meets the requirements of section
401(a); application of section 404(a)(1).
1.404(a)-4 Pension and annuity plans; limitations under section
404(a)(1)(A).
1.404(a)-5 Pension and annuity plans; limitations under section
404(a)(1)(B).
1.404(a)-6 Pension and annuity plans; limitations under section
404(a)(1)(C).
1.404(a)-7 Pension and annuity plans; contributions in excess of
limitations under section 404(a)(1); application of section
404(a)(1)(D).
1.404(a)-8 Contributions of an employer under an employees' annuity
plan which meets the requirements of section 401(a); application of
section 404(a)(2).
1.404(a)(8)-1T Deductions for plan contributions on behalf of
self-employed individuals. (Temporary)
1.404(a)-9 Contributions of an employer to an employees'
profit-sharing or stock bonus trust that meets the requirements of
section 401(a); application of section 404(a)(3)(A).
1.404(a)-10 Profit-sharing plan of an affiliated group; application
of section 404(a)(3)(B).
1.404(a)-11 Trusts created or organized outside the United States;
application of section 404(a)(4).
1.404(a)-12 Contributions of an employer under a plan that does not
meet the requirements of section 401(a); application of section
404(a)(5).
1.404(a)-13 Contributions of an employer where deductions are
allowable under section 404(a) (1) or (2) and also under section
404(a)(3); application of section 404(a)(7).
1.404(b)-1 Method of contribution, etc., having the effect of a plan;
effect of section 404(b).
1.404(b)-1T Method or arrangement of contributions, etc., deferring
the receipt of compensation or providing for deferred benefits.
(Temporary)
1.404(c)-1 Certain negotiated plans; effect of section 404(c).
1.404(d)-1T Questions and answers relating to deductibility of
deferred compensation and deferred benefits for independent contractors.
(Temporary)
1.404(e)-1 Contributions on behalf of a self-employed individual to
or under a pension, annuity, or profit-sharing plan meeting the
requirements of section 401; application of section 404(a) (8), (9),
and (10) and section 404 (e) and (f).
1.404(e)-1A Contributions on behalf of a self-employed individual to
or under a qualified pension, annuity, or profit-sharing plan.
1.404(g)-1 Deduction of employer liability payments.
1.404(k)-1T Questions and answers relating to the deductibility of
certain dividend distributions. (Temporary)
1.405-1 Qualified bond purchase plans.
1.405-2 Deduction of contributions to qualified bond purchase plans.
1.405-3 Taxation of retirement bonds.
1.406-1 Treatment of certain employees of foreign subsidiaries as
employees of the domestic corporation.
1.407-1 Treatment of certain employees of domestic subsidiaries
engaged in business outside the United States as employees of the
domestic parent corporation.
1.408-1 General rules.
1.408-2 Individual retirement accounts.
1.408-3 Individual retirement annuities.
1.408-4 Treatment of distributions from individual retirement
arrangements.
1.408-5 Annual reports by trustees or issuers.
1.408-6 Disclosure statements for individual retirement arrangements.
1.408-7 Reports on distributions from individual retirement plans.
1.409-1 Retirement bonds.
1.410(a)-1 Minimum participation standards; general rules.
1.410(a)-2 Effective dates.
1.410(a)-3 Minimum age and service conditions.
1.410(a)-3T Minimum age and service conditions (temporary).
1.410(a)-4 Maximum age conditions and time of participation.
1.410(a)-5 Year of service; break in service.
1.410(a)-6 Amendment of break in service rules; Transition period.
1.410(a)-7 Elapsed time.
1.410(a)-8 Five consecutive 1-year breaks in service, transitional
rules under the Retirement Equity Act of 1984.
1.410(a)-8T Year of service; break in service (temporary).
1.410(a)-9 Maternity and paternity absence.
1.410(a)-9T Elapsed time (temporary).
1.410(b)-0 Table of Contents.
1.410(b)-1 Minimum coverage requirements (before 1989).
1.410(b)-2 Minimum coverage requirements (after 1988).
1.410(b)-3 Employees and former employees who benefit under a plan.
1.410(b)-4 Nondiscriminatory classification test.
1.410(b)-5 Average benefit percentage test.
1.410(b)-6 Excludable employees.
1.410(b)-7 Definition of plan and rules governing plan disaggregation
and aggregation.
1.410(b)-8 Additional rules.
1.410(b)-9 Definitions.
1.410(b)-10 Effective dates and transition rules.
1.410(d)-1 Election by church to have participation, vesting,
funding, etc. provisions apply.
1.411(a)-1 Minimum vesting standards; general rules.
1.411(a)-2 Effective dates.
1.411(a)-3 Vesting in employer-derived benefits.
1.411(a)-4 Forfeitures, suspensions, etc.
1.411(a)-3T Vesting in employer-derived benefits (temporary).
1.411(a)-4T Forfeitures, suspensions, etc. (temporary).
1.411(a)-5 Service included in determination of nonforfeitable
percentage.
1.411(a)-6 Year of service; hours of service; breaks in service.
1.411(a)-7 Definitions and special rules.
1.411(a)-8 Changes in vesting schedule.
1.411(a)-8T Changes in vesting schedule (temporary).
1.411(a)-9 Amendment of break in service rules; transitional period.
1.411(a)-11 Restriction and valuation of distributions.
1.411(b)-1 Accrued benefit requirements.
1.411(c)-1 Allocation of accrued benefits between employer and
employee contributions.
1.411(d)-1 Coordination of vesting and discrimination requirements.
(Reserved)
1.411(d)-2 Termination or partial termination; discontinuance of
contributions.
1.411(d)-3 Other special rules.
1.411(d)-4 Section 411(d)(6) protected benefits.
1.411(d)-5 Class year plans; plan years beginning after October 22,
1986.
1.412(b)-2 Amortization of experience gains in connection with
certain group deferred annuity contracts.
1.412(b)-5 Election of the alternative amortization method of
funding.
1.412(c)(1)-1 Determinations to be made under funding method -- terms
defined.
1.412(c)(1)-2 Shortfall method.
1.412(c)(1)-3T Applying the minimum funding requirements to restored
plans (Temporary).
1.412(c)(2)-1 Valuation of plan assets; reasonable actuarial
valuation methods.
1.412(c)(3)-1 Reasonable funding methods.
1.412(c)(3)-2 Effective dates and transitional rules relating to
reasonable funding methods.
1.412(i)-1 Certain insurance contract plans.
1.413-1 Special rules for collectively bargained plans.
1.413-2 Special rules for plans maintained by more than one employer.
1.414(b)-1 Controlled group of corporations.
1.414(c)-1 Commonly controlled trades or businesses.
1.414(c)-2 Two or more trades or businesses under common control.
1.414(c)-3 Exclusion of certain interests or stock in determining
control.
1.414(c)-4 Rules for determining ownership.
1.414(c)-5 Effective date.
1.414(e)-1 Definition of church plan.
1.414(f)-1 Definition of multiemployer plan.
1.414(g)-1 Definition of plan administrator.
1.414(l)-1 Mergers and consolidation of plans or transfers of plan
assets.
1.414(q)-1T Highly compensated employee (temporary).
1.414(r)-0 Table of contents.
1.414(r)-1 Requirements applicable to qualified separate lines of
business.
1.414(r)-2 Line of business.
1.414(r)-3 Separate line of business.
1.414(r)-4 Qualified separate line of business -- fifty employee and
notice requirements.
1.414(r)-5 Qualified separate line of business -- administrative
scrutiny requirement -- safe harbors.
1.414(r)-6 Qualified separate line of business -- administrative
scrutiny requirement -- individual determinations.
1.414(r)-7 Determination of the employees of an employer's qualified
separate lines of business.
1.414(r)-8 Separate application of section 410(b).
1.414(r)-9 Separate application of section 401(a)(26).
1.414(r)-10 Separate application of section 129(d)(8). (Reserved)
1.414(r)-11 Definitions and special rules.
1.414(s)-1 Definition of compensation.
1.415-1 General rules with respect to limitations on benefits and
contributions under qualified plans.
1.415-2 Definitions and special rules.
1.415-3 Limitations for defined benefit plans.
1.415-4 Transitional rule for defined benefit plans.
1.415-6 Limitation for defined contribution plans.
1.415-7 Limitation in case of defined benefit and defined
contribution plan for same employee.
1.415-8 Combining and aggregating plans.
1.415-9 Disqualification of plans and trusts.
1.415-10 Special aggregation rules.
1.416-1 Questions and answers on top-heavy plans.
1.417(e)-1 Restrictions and valuations of distributions from plans
subject to sections 401(a)(11) and 417.
1.419-1T Treatment of welfare benefit funds. (Temporary)
1.419A-1T Qualified asset account limitation of additions to account.
(Temporary)
1.419A-2T Qualified asset account limitation for collectively
bargained funds. (Temporary)
1.421-1 Effective dates and meaning and use of certain terms.
1.421-2 Restricted stock option.
1.421-3 Exercise of restricted stock option.
1.421-4 Modification, extension, or renewal.
1.421-5 Operation of section 421.
1.421-6 Options to which section 421 does not apply.
1.421-7 Meaning and use of certain terms.
1.421-8 General rules.
1.422-4 Qualified stock options (prior law).
1.422-5 Stockholder approval of incentive stock option plans.
1.423-1 Applicability of section 421(a).
1.423-2 Employee stock purchase plan defined.
1.424-1 Applicability of section 421(a).
1.424-2 Restricted stock option.
1.425-1 Definitions and special rules applicable to statutory
options.
1.441-1T Period for computation of taxable income (temporary).
1.441-2T Election of year consisting of 52-53 weeks (temporary).
1.441-3T Special rules for certain adoptions of, retentions of, or
changes to or from a 52-53-week taxable year (Temporary).
1.441-4T Taxable year of a personal service corporation (temporary).
1.442-1 Change of annual accounting period.
1.442-2T Special limitations on certain changes of annual accounting
period (Temporary).
1.442-3T Special limitations on certain adoptions and retentions of a
taxable year.
1.443-1 Returns for periods of less than 12 months.
1.444-0T Table of contents (temporary).
1.444-1T Election to use a taxable year other than the required
taxable year (temporary).
1.444-2T Tiered structure (temporary).
1.444-3T Manner and time of making section 444 election (temporary).
1.446-1 General rule for methods of accounting.
1.448-1T Limitation on the use of the cash receipts and disbursements
method of accounting (temporary).
1.448-2T Nonaccrual of certain amounts by service providers
(temporary).
1.451-1 General rule for taxable year of inclusion.
1.451-2 Constructive receipt of income.
1.451-3 Long-term contracts.
1.451-4 Accounting for redemption of trading stamps and coupons.
1.451-5 Advance payments for goods and long-term contracts.
1.451-6 Election to include crop insurance proceeds in gross income
in the taxable year following the taxable year of destruction or damage.
1.451-6T Election to include crop insurance proceeds in gross income
in the taxable year following the taxable year of destruction or damage
(Temporary).
1.451-7 Election relating to livestock sold on account of drought.
1.453-1 (Reserved)
1.453-2 (Reserved)
1.453-3 Purchaser evidences of indebtedness payable on demand or
readily tradable.
1.453-4 Sale of real property involving deferred periodic payments.
1.453-5 Sale of real property treated on installment method.
1.453-6 Deferred payment sale of real property not on installment
method.
1.453-7 (Reserved)
1.453-8 (Reserved)
1.453-9 Gain or loss on disposition of installment obligations.
1.453-10 Effective date.
1.453A-0 Table of contents.
1.453A-1 Installment method of reporting income by dealers on
personal property
1.453A-2 Treatment of revolving credit plans; taxable years
beginning on or before December 31, 1986
1.453A-3 Requirements for adoption of or change to installment method
by dealers in personal property.
1.453C-0T Table of contents (temporary).
1.453C-1T Overview of limitation on installment method of reporting
(temporary).
1.453C-2T Applicable installment obligations (temporary).
1.453C-3T Allocable installment indebtedness (temporary).
1.453C-4T Indebtedness (temporary).
1.453C-5T Mechanics of limitation on installment method (temporary).
1.453C-6T Aggregation rules (temporary).
1.453C-7T Special rules (temporary).
1.453C-8T Sales of timeshares and residential lots (temporary).
1.453C-9T Effective dates and transitional rules (temporary).
1.453C-10T Questions and answers relating to section 811(c)(2) of the
Tax Reform Act of 1986 (temporary).
1.454-1 Obligations issued at discount.
1.455-1 Treatment of prepaid subscription income.
1.455-2 Scope of election under section 455.
1.455-3 Method of allocation.
1.455-4 Cessation of taxpayer's liability.
1.455-5 Definitions and other rules.
1.455-6 Time and manner of making election.
1.456-1 Treatment of prepaid dues income.
1.456-2 Scope of election under section 456.
1.456-3 Method of allocation.
1.456-4 Cessation of liability or existence.
1.456-5 Definitions and other rules.
1.456-6 Time and manner of making election.
1.456-7 Transitional rule.
1.457-1 Compensation deferred under eligible State deferred
compensation plans.
1.457-2 Eligible State deferred compensation plan defined.
1.457-3 Tax treatment of participants where plan is not an eligible
plan.
1.457-4 Transitional rules.
1.458-10 Manner of and time for making election.
1.460-0 Outline of regulations under section 460.
1.460-1 Accounting for long-term contracts in general. (Reserved)
1.460-2 Definition of long-term contract. (Reserved)
1.460-3 Percentage of completion method. (Reserved)
1.460-4 Percentage of completion-capitalized cost method. (Reserved)
1.460-5 Cost allocation rules. (Reserved)
1.460-6 Look-back method.
1.460-7 Exempt long-term contracts. (Reserved)
1.460-8 Changes in method of accounting. (Reserved)
1.461-1 General rule for taxable year of deduction.
1.461-2 Timing of deductions in certain cases where asserted
liabilities are contested.
1.461-3T Questions and answers relating to the effective dates of
section 461(h)(Temporary).
1.461(h)-4T Questions and answers relating to the economic
performance requirement for certain employee benefits. (Temporary)
1.463-1T Transitional rule for vested accrued vacation pay.
(Temporary)
1.465-1T Aggregation of certain activities (temporary).
1.466-1 Method of accounting for the redemption cost of qualified
discount coupons.
1.466-2 Special protective election for certain taxpayers.
1.466-3 Manner of and time for making election under section 466.
1.466-4 Manner of and time for making election under section 373(c)
of the Revenue Act of 1978.
1.468A-0 Nuclear decommissioning costs; table of contents.
1.468A-1 Nuclear decommissioning costs; general rules.
1.468A-2 Treatment of electing taxpayer.
1.468A-3 Ruling amount.
1.468A-4 Treatment of nuclear decommissioning fund.
1.468A-5 Nuclear decommissioning fund qualification requirements;
prohibitions against self-dealing; disqualification of nuclear
decommissioning fund; termination of fund upon substantial completion
of decommissioning.
1.468A-6 Disposition of an interest in a nuclear power plant.
(Reserved)
1.468A-7 Manner of and time for making election.
1.468A-8 Effective date and transitional rules.
1.469-OT Table of contents (temporary).
1.469-1T General rules (temporary).
1.469-2T Passive activity loss (temporary).
1.469-3T Passive activity credit (temporary).
1.469-4T Definition of activity (temporary).
1.469-5T Material participation (temporary).
1.469-6T Treatment of losses upon certain dispositions (temporary).
(Reserved)
1.469-7T Treatment of self-charged items of income and expense
(temporary). (Reserved)
1.469-8T Application of section 469 to trusts, estates, and their
beneficiaries (temporary). (Reserved)
1.469-9T Treatment of income, deductions, and credits from certain
rental real estate activities (temporary). (Reserved)
1.469-10T Application of section 469 to publicly traded partnerships
(temporary). (Reserved)
1.469-11T Effective date and transition rules (temporary).
1.471-1 Need for inventories.
1.471-2 Valuation of inventories.
1.471-3 Inventories at cost.
1.471-4 Inventories at cost or market, whichever is lower.
1.471-5 Inventories by dealers in securities.
1.471-6 Inventories of livestock raisers and other farmers.
1.471-7 Inventories of miners and manufacturers.
1.471-8 Inventories of retail merchants.
1.471-9 Inventories of acquiring corporations.
1.471-10 Applicability of long-term contract methods.
1.471-11 Inventories of manufacturers.
1.472-1 Last-in, first-out inventories.
1.472-2 Requirements incident to adoption and use of LIFO inventory
method.
1.472-3 Time and manner of making election.
1.472-4 Adjustments to be made by taxpayer.
1.472-5 Revocation of election.
1.472-6 Change from LIFO inventory method.
1.472-7 Inventories of acquiring corporations.
1.472-8 Dollar-value method of pricing LIFO inventories.
1.481-1 Adjustments in general.
1.481-2 Limitation on tax.
1.481-3 Adjustments attributable to pre-1954 Code years where change
was not initiated by taxpayer.
1.481-4 Adjustments attributable to pre-1954 Code years where change
was initiated by taxpayer.
1.481-5 Adjustments taken into account with consent.
1.481-6 Election to return to former method of accounting.
1.482-1 Allocation of income and deductions among taxpayers.
1.482-2 Determination of taxable income in specific situations.
1.483-1 Computation of interest on certain deferred payments.
1.483-2 Treatment as interest for purposes of Code; exceptions and
limitations to application of section 483.
1.483-2T Adequate stated interest for certain contracts entered into
after February 28, 1985 (temporary).
Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805.
1.401(a)(5)-1 also issued under 26 U.S.C. 401(a)(5).
1-401(a)(17)-1 also issued under 26 U.S.C. 401(a)(17).
1.401(a)(26)-1 through (a)(26)-9 also issued under 26 U.S.C.
401(a)(26).
1.401(l)-0 through 1.401(l)-6 also issued under 26 U.S.C. 401(l).
1.410(b)-2 through 1.410(b)-10 also issued under 26 U.S.C.
410(b)(6).
1.411(d)-4 also issued under 26 U.S.C. 422(d)(6).
1.414(c)-1 through 1.414(c)-5 also issued under 26 U.S.C. 414(c).
1.414(q)-1T is also issued under 26 U.S.C. 414(q).
1.414(s)-1 also issued under 26 U.S.C. 414(s).
1.441-2T also issued under 26 U.S.C. 441(f).
1.441-3T also issued under 26 U.S.C. 441.
1.442-2T and 1.442-3T also issued under 26 U.S.C. 422, 706, and
1378.
1.444-0T through 1.444-3T and 1.706-3T are also issued under 26
U.S.C. 444(f).
1.451-3 and 1.451-5 amended under 96 Stat. 324, 493.
1.460-6 is also issued under 26 U.S.C. 460(h).
1.461-3T also issued under 26 U.S.C. 461(h).
1.466-1 through 1.466-4 also issued under 26 U.S.C. 466.
1.468A-5 also issued under 26 U.S.C. 468A(e)(5).
1.469-1T, 1.469-2T, 1.469-3T, 1.469-5T, and 1.469-11T also issued
under 26 U.S.C. 469(1).
1.471 also issued under 26 U.S.C. 471.
1.482-2 also issued under 26 U.S.C. 482.
26 CFR 0.0 26 CFR Ch. I (4-1-92 Edition)
26 CFR 0.0 Internal Revenue Service, Treasury
26 CFR 0.0 DEFERRED COMPENSATION, ETC.
26 CFR 0.0 Pension, Profit-Sharing, Stock Bonus Plans, etc.
26 CFR 1.401-0 Scope and definitions.
(a) In general. Sections 1.401 through 1.401-14 (inclusive) reflect
the provisions of section 401 prior to amendment by the Employee
Retirement Income Security Act of 1974. The sections following
1.401-14 and preceding 1.402(a)-1 (hereafter referred to in this
section as the ''Post-ERISA Regulations'') reflect the provisions of
section 401 after amendment by such Act.
(b) Definitions. For purposes of the Post-ERISA regulations --
(1) Qualified plan. The term ''qualified plan'' means a plan which
satisfies the requirements of section 401(a).
(2) Qualified trust. The term ''qualified trust'' means a trust
which satisfies the requirements of section 401(a).
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C.
411))
(T.D. 7501, 42 FR 42320, Aug. 23, 1977)
26 CFR 1.401-1 Qualified pension, profit-sharing, and stock bonus
plans.
(a) Introduction. (1) Sections 401 through 405 relate to pension,
profit- sharing, stock bonus, and annuity plans, compensation paid under
a deferred-payment plan, and bond purchase plans. Section 401(a)
prescribes the requirements which must be met for qualification of a
trust forming part of a pension, profit-sharing, or stock bonus plan.
(2) A qualified pension, profit-sharing, or stock bonus plan is a
definite written program and arrangement which is communicated to the
employees and which is established and maintained by an employer --
(i) In the case of a pension plan, to provide for the livelihood of
the employees or their beneficiaries after the retirement of such
employees through the payment of benefits determined without regard to
profits (see paragraph (b)(1)(i) of this section);
(ii) In the case of a profit-sharing plan, to enable employees or
their beneficiaries to participate in the profits of the employer's
trade or business, or in the profits of an affiliated employer who is
entitled to deduct his contributions to the plan under section
404(a)(3)(B), pursuant to a definite formula for allocating the
contributions and for distributing the funds accumulated under the plan
(see paragraph (b)(1)(ii) of this section); and
(iii) In the case of a stock bonus plan, to provide employees or
their beneficiaries benefits similar to those of profit-sharing plans,
except that such benefits are distributable in stock of the employer,
and that the contributions by the employer are not necessarily dependent
upon profits. If the employer's contributions are dependent upon
profits, the plan may enable employees or their beneficiaries to
participate not only in the profits of the employer, but also in the
profits of an affiliated employer who is entitled to deduct his
contributions to the plan under section 404(a)(3)(B) (see paragraph
(b)(1)(iii) of this section).
(3) In order for a trust forming part of a pension, profit-sharing,
or stock bonus plan to constitute a qualified trust under section
401(a), the following tests must be met:
(i) It must be created or organized in the United States, as defined
in section 7701(a)(9), and it must be maintained at all times as a
domestic trust in the United States;
(ii) It must be part of a pension, profit-sharing, or stock bonus
plan established by an employer for the exclusive benefit of his
employees or their beneficiaries (see paragraph (b)(2) through (5) of
this section);
(iii) It must be formed or availed of for the purpose of distributing
to the employees or their beneficiaries the corpus and income of the
fund accumulated by the trust in accordance with the plan, and, in the
case of a plan which covers (as defined in paragraph (a)(2) of
1.401-10) any self-employed individual, the time and method of such
distribution must satisfy the requirements of section 401(a)(9) with
respect to each employee covered by the plan (see paragraph (e) of
1.401-11);
(iv) It must be impossible under the trust instrument at any time
before the satisfaction of all liabilities with respect to employees and
their beneficiaries under the trust, for any part of the corpus or
income to be used for, or diverted to, purposes other than for the
exclusive benefit of the employees or their beneficiaries (see
1.401-2);
(v) It must be part of a plan which benefits prescribed percentages
of the employees, or which benefits such employees as qualify under a
classification set up by the employer and found by the Commissioner not
to be discriminatory in favor of certain specified classes of employees
(see 1.401-3 and, in addition, see 1.401-12 for special rules as to
plans covering owner-employees);
(vi) It must be part of a plan under which contributions or benefits
do not discriminate in favor of certain specified classes of employees
(see 1.401-4);
(vii) It must be part of a plan which provides the nonforfeitable
rights described in section 401(a)(7) (see 1.401-6);
(viii) If the trust forms part of a pension plan, the plan must
provide that forfeitures must not be applied to increase the benefits
any employee would receive under such plan (see 1.401-7);
(ix) It must, if the plan benefits any self-employed individual who
is an owner-employee, satisfy the additional requirements for
qualification contained in section 401(a)(10) and (d).
(4) For taxable years beginning after December 31, 1962,
self-employed individuals may be included in qualified plans. See
1.401-10 through 1.401-13.
(b) General rules. (1)(i) A pension plan within the meaning of
section 401(a) is a plan established and maintained by an employer
primarily to provide systematically for the payment of definitely
determinable benefits to his employees over a period of years, usually
for life, after retirement. Retirement benefits generally are measured
by, and based on, such factors as years of service and compensation
received by the employees. The determination of the amount of
retirement benefits and the contributions to provide such benefits are
not dependent upon profits. Benefits are not definitely determinable if
funds arising from forfeitures on termination of service, or other
reason, may be used to provide increased benefits for the remaining
participants (see 1.401-7, relating to the treatment of forfeitures
under a qualified pension plan). A plan designed to provide benefits
for employees or their beneficiaries to be paid upon retirement or over
a period of years after retirement will, for the purposes of section
401(a), be considered a pension plan if the employer contributions under
the plan can be determined actuarially on the basis of definitely
determinable benefits, or, as in the case of money purchase pension
plans, such contributions are fixed without being geared to profits. A
pension plan may provide for the payment of a pension due to disability
and may also provide for the payment of incidental death benefits
through insurance or otherwise. However, a plan is not a pension plan
if it provides for the payment of benefits not customarily included in a
pension plan such as layoff benefits or benefits for sickness, accident,
hospitalization, or medical expenses (except medical benefits described
in section 401(h) as defined in paragraph (a) of 1.401-14).
(ii) A profit-sharing plan is a plan established and maintained by an
employer to provide for the participation in his profits by his
employees or their beneficiaries. The plan must provide a definite
predetermined formula for allocating the contributions made to the plan
among the participants and for distributing the funds accumulated under
the plan after a fixed number of years, the attainment of a stated age,
or upon the prior occurrence of some event such as layoff, illness,
disability, retirement, death, or severance of employment. A formula
for allocating the contributions among the participants is definite if,
for example, it provides for an allocation in proportion to the basic
compensation of each participant. A plan (whether or not it contains a
definite predetermined formula for determining the profits to be shared
with the employees) does not qualify under section 401(a) if the
contributions to the plan are made at such times or in such amounts that
the plan in operation discriminates in favor of officers, shareholders,
persons whose principal duties consist in supervising the work of other
employees, or highly compensated employees. For the rules with respect
to discrimination, see 1.401-3 and 1.401-4. A profit-sharing plan
within the meaning of section 401 is primarily a plan of deferred
compensation, but the amounts allocated to the account of a participant
may be used to provide for him or his family incidental life or accident
or health insurance.
(iii) A stock bonus plan is a plan established and maintained by an
employer to provide benefits similar to those of a profit-sharing plan,
except that the contributions by the employer are not necessarily
dependent upon profits and the benefits are distributable in stock of
the employer company. For the purpose of allocating and distributing
the stock of the employer which is to be shared among his employees or
their beneficiaries, such a plan is subject to the same requirements as
a profit-sharing plan.
(iv) As to inclusion of full-time life insurance salesmen within the
class of persons considered to be employees, see section 7701(a)(20).
(2) The term ''plan'' implies a permanent as distinguished from a
temporary program. Thus, although the employer may reserve the right to
change or terminate the plan, and to discontinue contributions
thereunder, the abandonment of the plan for any reason other than
business necessity within a few years after it has taken effect will be
evidence that the plan from its inception was not a bona fide program
for the exclusive benefit of employees in general. Especially will this
be true if, for example, a pension plan is abandoned soon after pensions
have been fully funded for persons in favor of whom discrimination is
prohibited under section 401(a). The permanency of the plan will be
indicated by all of the surrounding facts and circumstances, including
the likelihood of the employer's ability to continue contributions as
provided under the plan. In the case of a profit-sharing plan, other
than a profit-sharing plan which covers employees and owner-employees
(see section 401(d)(2)(B)), it is not necessary that the employer
contribute every year or that he contribute the same amount or
contribute in accordance with the same ratio every year. However,
merely making a single or occasional contribution out of profits for
employees does not establish a plan of profit-sharing. To be a
profit-sharing plan, there must be recurring and substantial
contributions out of profits for the employees. In the event a plan is
abandoned, the employer should promptly notify the district director,
stating the circumstances which led to the discontinuance of the plan.
(3) If the plan is so designed as to amount to a subterfuge for the
distribution of profits to shareholders, it will not qualify as a plan
for the exclusive benefit of employees even though other employees who
are not shareholders are also included under the plan. The plan must
benefit the employees in general, although it need not provide benefits
for all of the employees. Among the employees to be benefited may be
persons who are officers and shareholders. However, a plan is not for
the exclusive benefit of employees in general if, by any device
whatever, it discriminates either in eligibility requirements,
contributions, or benefits in favor of employees who are officers,
shareholders, persons whose principal duties consist in supervising the
work of other employees, or the highly compensated employees. See
section 401(a) (3), (4), and (5). Similarly, a stock bonus or
profit-sharing plan is not a plan for the exclusive benefit of employees
in general if the funds therein may be used to relieve the employer from
contributing to a pension plan operating concurrently and covering the
same employees. All of the surrounding and attendant circumstances and
the details of the plan will be indicative of whether it is a bona fide
stock bonus, pension, or profit-sharing plan for the exclusive benefit
of employees in general. The law is concerned not only with the form of
a plan but also with its effects in operation. For example, section
401(a)(5) specifies certain provisions which of themselves are not
discriminatory. However, this does not mean that a plan containing
these provisions may not be discriminatory in actual operation.
(4) A plan is for the exclusive benefit of employees or their
beneficiaries even though it may cover former employees as well as
present employees and employees who are temporarily on leave, as, for
example, in the Armed Forces of the United States. A plan covering only
former employees may qualify under section 401(a) if it complies with
the provisions of section 401(a)(3)(B), with respect to coverage, and
section 401(a)(4), with respect to contributions and benefits, as
applied to all of the former employees. The term ''beneficiaries'' of
an employee within the meaning of section 401 includes the estate of the
employee, dependents of the employee, persons who are the natural
objects of the employee's bounty, and any persons designated by the
employee to share in the benefits of the plan after the death of the
employee.
(5)(i) No specific limitations are provided in section 401(a) with
respect to investments which may be made by the trustees of a trust
qualifying under section 401(a). Generally, the contributions may be
used by the trustees to purchase any investments permitted by the trust
agreement to the extent allowed by local law. However, such a trust
will be subject to tax under section 511 with respect to any ''unrelated
business taxable income'' (as defined in section 512) realized by it
from its investments.
(ii) Where the trust funds are invested in stock or securities of, or
loaned to, the employer or other person described in section 503(b),
full disclosure must be made of the reasons for such arrangement and the
conditions under which such investments are made in order that a
determination may be made whether the trust serves any purpose other
than constituting part of a plan for the exclusive benefit of employees.
The trustee shall report any of such investments on the return which
under section 6033 it is required to file and shall with respect to any
such investment furnish the information required by such return. See
1.6033-1.
(c) Portions of years. A qualified status must be maintained
throughout the entire taxable year of the trust in order for the trust
to obtain any exemption for such year. But see section 401(a)(6) and
1.401-3.
(d) Plan of several employers. A trust forming part of a plan of
several employers for their employees will be qualified if all the
requirements are otherwise satisfied.
(e) Determination of exemptions and returns. (1) An employees' trust
may request a determination letter as to its qualification under section
401 and exemption under section 501. For the procedure for obtaining
such a determination letter see paragraph (l) of 601.201 of this
chapter (Statement of Procedural Rules).
(2) A trust which qualifies under section 401(a) and which is exempt
under section 501(a) must file a return in accordance with section 6033
and the regulations thereunder. See 1.6033-1 and 1.6033-2(a)(3). In
case such a trust realizes any unrelated business taxable income, as
defined in section 512, such trust is also required to file a return
with respect to such income. See paragraph (e) of 1.6012-2 and
paragraph (a)(5) of 1.6012-3 for requirements with respect to such
returns. For information required to be furnished periodically by an
employer with respect to the qualification of a plan, see 1.404(a)-2,
1.404(a)-2A, and 1.6033-2(a)(2)(ii)(i).
(T.D. 6500, 25 FR 11670, Nov. 26, 1960, as amended by T.D. 6675, 28
FR 10118, Sept. 17, 1963; T.D. 6722, 29 FR 5071, Apr. 14, 1964; T.D.
7168, 37 FR 5024, Mar. 9, 1972; T.D. 7428, 41 FR 34619, Aug. 16, 1976)
26 CFR 1.401-2 Impossibility of diversion under the trust instrument.
(a) In general. (1) Under section 401(a)(2) a trust is not qualified
unless under the trust instrument it is impossible (in the taxable year
and at any time thereafter before the satisfaction of all liabilities to
employees or their beneficiaries covered by the trust) for any part of
the trust corpus or income to be used for, or diverted to, purposes
other than for the exclusive benefit of such employees or their
beneficiaries. This section does not apply to funds of the trust which
are allocated to provide medical benefits described in section 401(h) as
defined in paragraph (a) of 1.401-14. For the rules prohibiting
diversion of such funds and the requirement of reversion to the employer
after satisfaction of all liabilities under the medical benefits
account, see paragraph (c) (4) and (5) of 1.401-14. For rules
permitting reversion to the employer of amounts held in a section 415
suspense acount, see 1.401(a)-2(b).
(2) As used in section 401(a)(2), the phrase ''if under the trust
instrument it is impossible'' means that the trust instrument must
definitely and affirmatively make it impossible for the nonexempt
diversion or use to occur, whether by operation or natural termination
of the trust, by power of revocation or amendment, by the happening of a
contingency, by collateral arrangement, or by any other means. Although
it is not essential that the employer relinquish all power to modify or
terminate the rights of certain employees covered by the trust, it must
be impossible for the trust funds to be used or diverted for purposes
other than for the exclusive benefit of his employees or their
beneficiaries.
(3) As used in section 401(a)(2), the phrase ''purposes other than
for the exclusive benefit of his employees or their beneficiaries''
includes all objects or aims not solely designed for the proper
satisfaction of all liabilities to employees or their beneficiaries
covered by the trust.
(b) Meaning of ''liabilities''. (1) The intent and purpose in
section 401(a)(2) of the phrase ''prior to the satisfaction of all
liabilities with respect to employees and their beneficiaries under the
trust'' is to permit the employer to reserve the right to recover at the
termination of the trust, and only at such termination, any balance
remaining in the trust which is due to erroneous actuarial computations
during the previous life of the trust. A balance due to an ''erroneous
actuarial computation'' is the surplus arising because actual
requirements differ from the expected requirements even though the
latter were based upon previous actuarial valuations of liabilities or
determinations of costs of providing pension benefits under the plan and
were made by a person competent to make such determinations in
accordance with reasonable assumptions as to mortality, interest, etc.,
and correct procedures relating to the method of funding. For example,
a trust has accumulated assets of $1,000,000 at the time of liquidation,
determined by acceptable actuarial procedures using reasonable
assumptions as to interest, mortality, etc., as being necessary to
provide the benefits in accordance with the provisions of the plan.
Upon such liquidation it is found that $950,000 will satisfy all of the
liabilities under the plan. The surplus of $50,000 arises, therefore,
because of the difference between the amounts actuarially determined and
the amounts actually required to satisfy the liabilities. This $50,000,
therefore, is the amount which may be returned to the employer as the
result of an erroneous actuarial computation. If, however, the surplus
of $50,000 had been accumulated as a result of a change in the benefit
provisions or in the eligibility requirements of the plan, the $50,000
could not revert to the employer because such surplus would not be the
result of an erroneous actuarial computation.
(2) The term ''liabilities'' as used in section 401(a)(2) includes
both fixed and contingent obligations to employees. For example, if
1,000 employees are covered by a trust forming part of a pension plan,
300 of whom have satisfied all the requirements for a monthly pension,
while the remaining 700 employees have not yet completed the required
period of service, contingent obligations to such 700 employees have
nevertheless arisen which constitute ''liabilities'' within the meaning
of that term. It must be impossible for the employer (or other non
employee) to recover any amounts other than such amounts as remain in
the trust because of ''erroneous actuarial computations'' after the
satisfaction of all fixed and contingent obligations. Furthermore, the
trust instrument must contain a definite affirmative provision to this
effect, irrespective of whether the obligations to employees have their
source in the trust instrument itself, in the plan of which the trust
forms a part, or in some collateral instrument or arrangement forming a
part of such plan, and regardless of whether such obligations are,
technically speaking, liabilities of the employer, of the trust, or of
some other person forming a part of the plan or connected with it.
(T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6722, 29
FR 5072, Apr. 14, 1964; T.D. 7748, 46 FR 1695, Jan. 7, 1981)
26 CFR 1.401-3 Requirements as to coverage.
(a)(1) In order to insure that stock bonus, pension, and
profit-sharing plans are utilized for the welfare of employees in
general, and to prevent the trust device from being used for the
principal benefit of shareholders, officers, persons whose principal
duties consist in supervising the work of other employees, or highly
paid employees, or as a means of tax avoidance, a trust will not be
qualified unless it is part of a plan which satisfies the coverage
requirements of section 401(a)(3). However, if the plan covers any
individual who is an owner- employee, as defined in section 401(c)(3),
the requirements of section 401(a)(3) and this section are not
applicable to such plan, but the plan must satisfy the requirements of
section 401(d) (see 1.401-12).
(2) The percentage requirements in section 401(a)(3)(A) refer to a
percentage of all the active employees, including employees temporarily
on leave, such as those in the Armed Forces of the United States, if
such employees are eligible under the plan.
(3) The application of section 401(a)(3)(A) may be illustrated by the
following example:
Example. A corporation adopts a plan at a time when it has 1,000
employees. The plan provides that all full-time employees who have been
employed for a period of two years and have reached the age of 30 shall
be eligible to participate. The plan also requires participating
employees to contribute 3 percent of their monthly pay. At the time the
plan is made effective 100 of the 1,000 employees had not been employed
for a period of two years. Fifty of the employees were seasonal
employees whose customary employment did not exceed five months in any
calendar year. Twenty-five of the employees were part-time employees
whose customary employment did not exceed 20 hours in any one week. One
hundred and fifty of the full-time employees who had been employed for
two years or more had not yet reached age 30. The requirements of
section 401(a)(3)(A) will be met if 540 employees are covered by the
plan, as shown by the following computation:
If only 70 percent, or 578, of the 825 employees satisfied the age
and service requirements, then 462 (80 percent of 578) participating
employees would satisfy the percentage requirements.
(b) If a plan fails to qualify under the percentage requirements of
section 401(a)(3)(A), it may still qualify under section 401(a)(3)(B)
provided always that (as required by section 401(a) (3) and (4)) the
plan's eligibility conditions, benefits, and contributions do not
discriminate in favor of employees who are officers, shareholders,
persons whose principal duties consist in supervising the work of other
employees, or the highly compensated employees.
(c) Since, for the purpose of section 401, a profit-sharing plan is a
plan which provides for distributing the funds accumulated under the
plan after a fixed number of years, the attainment of a stated age, or
upon the prior occurrence of some event such as illness, disability,
retirement, death, layoff, or severance of employment, employees who
receive the amounts allocated to their accounts before the expiration of
such a period of time or the occurrence of such a contingency shall not
be considered covered by a profit-sharing plan in determining whether
the plan meets the coverage requirements of section 401(a)(3) (A) and
(B). Thus, in case a plan permits employees to receive immediately the
amounts allocated to their accounts, or to have such amounts paid to a
profit- sharing plan for them, the employees who receive the shares
immediately shall not, for the purpose of section 401, be considered
covered by a profit-sharing plan.
(d) Section 401(a)(5) sets out certain classifications that will not
in themselves be considered discriminatory. However, those so
designated are not intended to be exclusive. Thus, plans may qualify
under section 401(a)(3)(B) even though coverage thereunder is limited to
employees who have either reached a designated age or have been employed
for a designated number of years, or who are employed in certain
designated departments or are in other classifications, provided the
effect of covering only such employees does not discriminate in favor of
officers, shareholders, employees whose principal duties consist in
supervising the work of other employees, or highly compensated
employees. For example, if there are 1,000 employees, and the plan is
written for only salaried employees, and consequently only 500 employees
are covered, that fact alone will not justify the conclusion that the
plan does not meet the coverage requirements of section 401(a)(3)(B).
Conversely, if a contributory plan is offered to all of the employees
but the contributions required of the employee participants are so
burdensome as to make the plan acceptable only to the highly paid
employees, the classification will be considered discriminatory in favor
of such highly paid employees.
(e)(1) Section 401(a)(5) contains a provision to the effect that a
classification shall not be considered discriminatory within the meaning
of section 401(a)(3)(B) merely because all employees whose entire annual
remuneration constitutes ''wages'' under section 3121(a)(1) (for
purposes of the Federal Insurance Contributions Act, chapter 21 of the
Code) are excluded from the plan. A reference to section 3121(a)(1) for
years after 1954 shall be deemed a reference to section 1426(a)(1) of
the Internal Revenue Code of 1939 for years before 1955. This
provision, in conjunction with section 401(a)(3)(B), is intended to
permit the qualification of plans which supplement the old-age,
survivors, and disability insurance benefits under the Social Security
Act (42 U.S.C. ch. 7). Thus, a classification which excludes all
employees whose entire remuneration constitutes ''wages'' under section
3121(a)(1), will not be considered discriminatory merely because of such
exclusion. Similarly, a plan which includes all employees will not be
considered discriminatory solely because the contributions or benefits
based on that part of their remuneration which is excluded from wages
under section 3121(a)(1) differ from the contributions or benefits based
on that part of their remuneration which is not so excluded. However,
in making his determination with respect to discrimination in
classification under section 401(a)(3)(B), the Commissioner will
consider whether the total benefits resulting to each employee under the
plan and under the Social Security Act, or under the Social Security Act
only, establish an integrated and correlated retirement system
satisfying the tests of section 401(a). If, therefore, a classification
of employees under a plan results in relatively or proportionately
greater benefits for employees earning above any specified salary amount
or rate than for those below any such salary amount or rate, it may be
found to be discriminatory within the meaning of section 401(a)(3)(B).
If, however, the relative or proportionate differences in benefits which
result from such classification are approximately offset by the old-age,
survivors, and disability insurance benefits which are provided by the
Social Security Act and which are not attributable to employee
contributions under the Federal Insurance Contributions Act, the plan
will be considered to be properly integrated with the Social Security
Act and will, therefore, not be considered discriminatory.
(2)(i) For purposes of determining whether a plan is properly
integrated with the Social Security Act, the amount of old-age,
survivors, and disability insurance benefits which may be considered as
attributable to employer contributions under the Federal Insurance
Contributions Act is computed on the basis of the following:
(a) The rate at which the maximum monthly old-age insurance benefit
is provided under the Social Security Act is considered to be the
average of (1) the rate at which the maximum benefit currently payable
under the Act (i.e., in 1971) is provided to an employee retiring at age
65, and (2) the rate at which the maximum benefit ultimately payable
under the Act (i.e., in 2010) is provided to an employee retiring at age
65. The resulting figure is 43 percent of the average monthly wage on
which such benefit is computed.
(b) The total old-age, survivors, and disability insurance benefits
with respect to an employee is considered to be 162 percent of the
employee's old-age insurance benefits. The resulting figure is 70
percent of the average monthly wage on which it is computed.
(c) In view of the fact that social security benefits are funded
through equal contributions by the employer and employee, 50 percent of
such benefits is considered attributable to employer contributions. The
resulting figure is 35 percent of the average monthly wage on which the
benefit is computed.
Under these assumptions, the maximum old-age, survivors, and
disability insurance benefits which may be attributed to employer
contributions under the Federal Insurance Contributions Act is an amount
equal to 35 percent of the earnings on which they are computed. These
computations take into account all amendments to the Society Security
Act through the Social Security Amendments of 1971 (85 Stat. 6). It is
recognized, however, that subsequent amendments to this Act may increase
the percentages described in (a) or (b) of this subdivision (i), or
both. If this occurs, the method used in this subparagraph for
determining the integration formula may result in a figure under (c) of
this subdivision (i) which is greater than 35 percent and a plan could
be amended to adopt such greater figure in its benefit formula. In
order to minimize future plan amendments of this nature, an employer may
anticipate future changes in the Social Security Act by immediately
utilizing such a higher figure, but not in excess of 37 1/2 percent, in
developing its benefit formula.
(ii) Under the rules provided in this subparagraph, a classification
of employees under a noncontributory pension or annuity plan which
limits coverage to employees whose compensation exceeds the applicable
integration level under the plan will not be considered discriminatory
within the meaning of section 401(a)(3)(B), where:
(a) The integration level applicable to an employee is his covered
compensation, or is (1) in the case of an active employee, a stated
dollar amount uniformly applicable to all active employees which is not
greater than the covered compensation of any active employee, and (2) in
the case of a retired employee an amount which is not greater than his
covered compensation. (For rules relating to determination of an
employee's covered compensation, see subdivision (iv) of this
subparagraph.)
(b) The rate at which normal annual retirement benefits are provided
for any employee with respect to his average annual compensation in
excess of the plan's integration level applicable to him does not exceed
37 1/2 percent.
(c) Average annual compensation is defined to mean the average annual
compensation over the highest 5 consecutive years.
(d) There are no benefits payable in case of death before retirement.
(e) The normal form of retirement benefits is a straight life
annuity, and if there are optional forms, the benefit payments under
each optional form are actuarially equivalent to benefit payments under
the normal form.
(f) In the case of any employee who reaches normal retirement age
before completion of 15 years of service with the employer, the rate at
which normal annual retirement benefits are provided for him with
respect to his average annual compensation in excess of the plan's
integration level applicable to him does not exceed 2 1/2 percent for
each year of service.
(g) Normal retirement age is not lower than age 65.
(h) Benefits payable in case of retirement or any other severance of
employment before normal retirement age cannot exceed the actuarial
equivalent of the maximum normal retirement benefits, which might be
provided in accordance with (a) through (g) of this subdivision (ii),
multiplied by a fraction, the numerator of which is the actual number of
years of service of the employee at retirement or severance, and the
denominator of which is the total number of years of service he would
have had if he had remained in service until normal retirement age. A
special disabled life mortality table shall not be used in determining
the actuarial equivalent in the case of severance due to disability.
(iii) (a) If a plan was properly integrated with old-age and
survivors insurance benefits on July 5, 1968 (hereinafter referred to as
an ''existing plan''), then, notwithstanding the fact that such plan
does not satisfy the requirements of subdivision (ii) of this
subparagraph, it will continue to be considered properly integrated with
such benefits until January 1, 1972. Such plan will be considered
properly integrated after December 31, 1971, so long as the benefits
provided under the plan for each employee equal the sum of --
(1) The benefits to which he would be entitled under a plan which, on
July 5, 1968, would have been considered properly integrated with
old-age and survivors insurance benefits, and under which benefits are
provided at the same (or a lesser) rate with respect to the same portion
of compensation with respect to which benefits are provided under the
existing plan, multiplied by the percentage of his total service with
the employer performed before a specified date not later than January 1,
1972; and
(2) The benefits to which he would be entitled under a plan
satisfying the requirements of subdivision (ii) of this subparagraph,
multiplied by the percentage of his total service with the employer
performed on and after such specified date.
(b) A plan which, on July 5, 1968, was properly integrated with
old-age and survivors insurance benefits will not be considered not to
be properly integrated with such benefits thereafter merely because such
plan provides a minimum benefit for each employee (other than an
employee who owns, directly or indirectly, stock possessing more than 10
percent of the total combined voting power or value of all classes of
stock of the employer corporation) equal to the benefit to which he
would be entitled under the plan as in effect on July 5, 1968, if he
continued to earn annually until retirement the same amount of
compensation as he earned in 1967.
(c) If a plan was properly integrated with old-age and survivors
insurance benefits on May 17, 1971, notwithstanding the fact that such
plan does not satisfy the requirements of subdivision (ii) of this
subparagraph, it will continue to be considered properly integrated with
such benefits until January 1, 1972.
(iv) For purposes of this subparagraph, an employee's covered
compensation is the amount of compensation with respect to which old-age
insurance benefits would be provided for him under the Social Security
Act (as in effect at any uniformly applicable date occurring before the
employee's separation from the service) if for each year until he
attains age 65 his annual compensation is at least equal to the maximum
amount of earnings subject to tax in each such year under the Federal
Insurance Contributions Act. A plan may provide that an employee's
covered compensation is the amount determined under the preceding
sentence rounded to the nearest whole multiple of a stated dollar amount
which does not exceed $600.
(v) In the case of an integrated plan providing benefits different
from those described in subdivision (ii) or (iii) (whichever is
applicable) of this subparagraph, or providing benefits related to years
of service, or providing benefits purchasable by stated employer
contributions, or under the terms of which the employees contribute, or
providing a combination of any of the foregoing variations, the plan
will be considered to be properly integrated only if, as determined by
the Commissioner, the benefits provided thereunder by employer
contributions cannot exceed in value the benefits described in
subdivision (ii) or (iii) (whichever is applicable) of this
subparagraph. Similar principles will govern in determining whether a
plan is properly integrated if participation therein is limited to
employees earning in excess of amounts other than those specified in
subdivision (iv) of this subparagraph, or if it bases benefits or
contributions on compensation in excess of such amounts, or if it
provides for an offset of benefits otherwise payable under the plan on
account of old-age, survivors, and disability insurance benefits.
Similar principles will govern in determining whether a profit-sharing
or stock bonus plan is properly integrated with the Social Security Act.
(3) A plan supplementing the Social Security Act and excluding all
employees whose entire annual remuneration constitutes ''wages'' under
section 3121(a)(1) will not, however, be deemed discriminatory merely
because, for administrative convenience, it provides a reasonable
minimum benefit not to exceed $20 a month.
(4) Similar considerations, to the extent applicable in any case,
will govern classifications under a plan supplementing the benefits
provided by other Federal or State laws. See section 401(a)(5).
(5) If a plan provides contributions or benefits for a self-employed
individual, the rules relating to the integration of such a plan with
the contributions or benefits under the Social Security Act are set
forth in paragraph (c) of 1.401-11 and paragraph (h) of 1.401-12.
(6) This paragraph (e) does not apply to plan years beginning on or
after January 1, 1989.
(f) An employer may designate several trusts or a trust or trusts and
an annuity plan or plans as constituting one plan which is intended to
qualify under section 401(a)(3), in which case all of such trusts and
plans taken as a whole may meet the requirements of such section. The
fact that such combination of trusts and plans fails to qualify as one
plan does not prevent such of the trusts and plans as qualify from
meeting the requirements of section 401(a).
(g) It is provided in section 401(a)(6) that a plan will satisfy the
requirements of section 401(a)(3), if on at least one day in each
quarter of the taxable year of the plan it satisfies such requirements.
This makes it possible for a new plan requiring contributions from
employees to qualify if by the end of the quarter-year in which the plan
is adopted it secures sufficient contributing participants to meet the
requirements of section 401(a)(3). It also affords a period of time in
which new participants may be secured to replace former participants, so
as to meet the requirements of either subparagraph (A) or (B) of section
401(a)(3).
(T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6675, 28
FR 10119, Sept. 17, 1963; T.D. 6982, 33 FR 16499, Nov. 13, 1968; T.D.
7134, 36 FR 13592, July 22, 1971; 36 FR 13990, July 29, 1971; T.D.
8359, 56 FR 47614, Sept. 19, 1991)
26 CFR 1.401-4 Discrimination as to contributions or benefits (before
1992).
(a)(1)(i) In order to qualify under section 401(a), a trust must not
only meet the coverage requirements of section 401(a)(3), but, as
provided in section 401(a)(4), it must also be part of a plan under
which there is no discrimination in contributions or benefits in favor
of officers, shareholders, employees whose principal duties consist in
supervising the work of other employees, or highly compensated employees
as against other employees whether within or without the plan.
(ii) Since, for the purpose of section 401, a profit-sharing plan is
a plan which provides for distributing the funds accumulated under the
plan after a fixed number of years, the attainment of a stated age, or
upon the prior occurrence of some event such as illness, disability,
retirement, death, layoff, or severance of employment, any amount
allocated to an employee which is withdrawn before the expiration of
such a period of time or the occurrence of such a contingency shall not
be considered in determining whether the contributions under the plan
discriminate in favor of officers, shareholders, employees whose
principal duties consist in supervising the work of other employees, or
highly compensated employees. Thus, in case a plan permits employees to
receive immediately the whole or any part of the amounts allocated to
their accounts, or to have the whole or any part of such amounts paid to
a profit-sharing plan for them, any amounts which are received
immediately shall not, for the purpose of section 401, be considered
contributed to a profit-sharing plan.
(iii) Funds in a stock bonus or profit-sharing plan arising from
forfeitures on termination of service, or other reason, must not be
allocated to the remaining participants in such a manner as will effect
the prohibited discrimination. With respect to forfeitures in a pension
plan, see 1.401-7.
(2) (i) Section 401(a)(5) sets out certain provisions which will not
in and of themselves be discriminatory within the meaning of section 401
a) (3) or (4). See 1.401-3. Thus, a plan will not be considered
discriminatory merely because the contributions or benefits bear a
uniform relationship to total compensation or to the basic or regular
rate of compensation, or merely because the contributions or benefits
based on that part of the annual compensation of employees which is
subject to the Federal Insurance Contributions Act (chapter 21 of the
Code) differ from the contributions or benefits based on any excess of
such annual compensation over such part. With regard to the application
of the rules of section 401(a)(5) in the case of a plan which benefits a
self-employed individual, see paragraph (c) of 1.401-11.
(ii) The exceptions specified in section 401(a)(5) are not an
exclusive enumeration, but are merely a recital of provisions frequently
encountered which will not of themselves constitute forbidden
discrimination in contributions or benefits.
(iii) Variations in contributions or benefits may be provided so long
as the plan, viewed as a whole for the benefit of employees in general,
with all its attendant circumstances, does not discriminate in favor of
employees within the enumerations with respect to which discrimination
is prohibited. Thus, benefits in a stock bonus or profit-sharing plan
which vary by reason of an allocation formula which takes into
consideration years of service, or other factors, are not prohibited
unless they discriminate in favor of such employees.
(b) A plan which excludes all employees whose entire remuneration
constitutes wages under section 3121(a)(1) (relating to the Federal
Insurance Contributions Act), or a plan under which the contributions or
benefits based on that part of an employee's remuneration which is
excluded from ''wages'' under such act differs from the contributions or
benefits based on that part of the employee's remuneration which is not
so excluded, or a plan under which the contributions or benefits differ
because of any retirement benefit created under State or Federal law,
will not be discriminatory because of such exclusion or difference,
provided the total benefits resulting under the plan and under such law
establish an integrated and correlated retirement system satisfying the
tests of section 401(a).
(c)(1) Although a qualified plan may provide for termination at will
by the employer or discontinuance of contributions thereunder, this will
not of itself prevent a trust from being a qualified trust. However, a
qualified pension plan must expressly incorporate provisions which
comply with the restrictions contained in subparagraph (2) of this
paragraph at the time the plan is established, unless (i) it is
reasonably certain at the inception of the plan that such restrictions
would not affect the amount of contributions which may be used for the
benefit of any employee, or (ii) the Commissioner determines that such
provisions are not necessary to prevent the prohibited discrimination
that may occur in the event of any early termination of the plan.
Although these provisions are the only provisions required to be
incorporated in the plan to prevent the discrimination that may arise
because of an early termination of the plan, the plan may in operation
result in the discrimination prohibited by section 401(a)(4), unless
other provisions are later incorporated in the plan. Any pension plan
containing a provision described in this paragraph shall not fail to
satisfy section 411(a), (d)(2) and (d)(3) merely by reason of such a
plan provision. Paragraph (c)(7) of this section sets forth special
early termination rules applicable to certain qualified defined benefit
plans for plan years affected by the Employee Retirement Income Security
Act of 1974 (''ERISA''). Paragraph (c)(7) of this section does not
contain all the rules required by the enactment of ERISA.
(2)(i) If employer contributions under a qualified pension plan may
be used for the benefit of an employee who is among the 25 highest paid
employees of the employer at the time the plan is established and whose
anticipated annual pension under the plan exceeds $1,500, such plan must
provide that upon the occurrence of the conditions described in
subdivision (ii) of this subparagraph, the employer contributions which
are used for the benefit of any such employee are restricted in
accordance with subdivision (iii) of this subparagraph.
(ii) The restrictions described in subdivision (iii) of this
subparagraph become applicable if --
(a) The plan is terminated within 10 years after its establishment,
(b) The benefits of an employee described in subdivision (i) of this
subparagraph become payable within 10 years after the establishment of
the plan, or
(c) The benefits of an employee described in subdivision (i) of this
subparagraph become payable after the plan has been in effect for 10
years, and the full current costs of the plan for the first 10 years
have not been funded.
In the case of an employee described in (b) of this subdivision, the
restrictions will remain applicable until the plan has been in effect
for 10 years, but if at that time the full current costs have been
funded the restrictions will no longer apply to the benefits payable to
such an employee. In the case of an employee described in (b) or (c) of
this subdivision, if at the end of the first 10 years the full current
costs are not met, the restrictions will continue to apply until the
full current costs are funded for the first time.
(iii) The restrictions required under subdivision (i) of this
subparagraph must provide that the employer contributions which may be
used for the benefit of an employee described in such subdivision shall
not exceed the greater of $20,000, or 20 percent of the first $50,000 of
the annual compensation of such employee multiplied by the number of
years between the date of the establishment of the plan and --
(a) The date of the termination of the plan,
(b) In the case of an employee described in subdivision (ii)(b) of
this subparagraph, the date the benefit of the employee becomes payable,
if before the date of the termination of the plan, or
(c) In the case of an employee described in subdivision (ii)(c) of
this subparagraph, the date of the failure to meet the full current
costs of the plan. However, if the full current costs of the plan have
not been met on the date described in (a) or (b) of this subdivision,
whichever is applicable, then the date of the failure to meet such full
current costs shall be substituted for the date referred to in (a) or
(b) of this subdivision. For purposes of determining the contributions
which may be used for the benefit of an employee when (b) of this
subdivision applies, the number of years taken into account may be
recomputed for each year if the full current costs of the plan are met
for such year.
(iv) For purposes of this subparagraph, the employer contributions
which, at a given time, may be used for the benefits of an employee
include any unallocated funds which would be used for his benefits if
the plan were then terminated or the employee were then to withdraw from
the plan, as well as all contributions allocated up to that time
exclusively for his benefits.
(v) The provisions of this subparagraph apply to a former or retired
employee of the employer, as well as to an employee still in the
employer's service.
(vi) The following terms are defined for purposes of this
subparagraph --
(a) The term ''benefits'' includes any periodic income, any
withdrawal values payable to a living employee, and the cost of any
death benefits which may be payable after retirement on behalf of an
employee, but does not include the cost of any death benefits with
respect to an employee before retirement nor the amount of any death
benefits actually payable after the death of an employee whether such
death occurs before or after retirement.
(b) The term full current costs means the normal cost, as defined in
1.404(a)-6, for all years since the effective date of the plan, plus
interest on any unfunded liability during such period.
(c) The term annual compensation of an employee means either such
employee's average regular annual compensation, or such average
compensation over the last five years, or such employee's last annual
compensation if such compensation is reasonably similar to his average
regular annual compensation for the five preceding years.
(3) The amount of the employer contributions which can be used for
the benefit of a restricted employee may be limited either by limiting
the annual amount of the employer contributions for the designated
employee during the period affected by the limitation, or by limiting
the amount of funds under the plan which can be used for the benefit of
such employee, regardless of the amount of employer contributions.
(4) The restrictions contained in subparagraph (2) of this paragraph
may be exceeded for the purpose of making current retirement income
benefit payments to retired employees who would otherwise be subject to
such restrictions, if --
(i) The employer contributions which may be used for any such
employee in accordance with the restrictions contained in subparagraph
(2) of this paragraph are applied either (a) to provide level amounts of
annuity in the basic form of benefit provided for under the plan for
such employee at retirement (or, if he has already retired, beginning
immediately), or (b) to provide level amounts of annuity in an optional
form of benefit provided under the plan if the level amount of annuity
under such optional form of benefit is not greater than the level amount
of annuity under the basic form of benefit provided under the plan;
(ii) The annuity thus provided is supplemented, to the extent
necessary to provide the full retirement income benefits in the basic
form called for under the plan, by current payments to such employee as
such benefits come due; and
(iii) Such supplemental payments are made at any time only if the
full current costs of the plan have then been met, or the aggregate of
such supplemental payments for all such employees does not exceed the
aggregate employer contributions already made under the plan in the year
then current.
If disability income benefits are provided under the plan, the plan
may contain like provisions with respect to the current payment of such
benefits.
(5) If a plan has been changed so as to increase substantially the
extent of possible discrimination as to contributions and as to benefits
actually payable in event of the subsequent termination of the plan or
the subsequent discontinuance of contributions thereunder, then the
provisions of this paragraph shall be applied to the plan as so changed
as if it were a new plan established on the date of such change.
However, the provision in subparagraph (2)(iii) of this paragraph that
the unrestricted amount of employer contributions on behalf of any
employee is at least $20,000 is applicable to the aggregate amount
contributed by the employer on behalf of such employee from the date of
establishment of the original plan, and, for purposes of determining if
the employee's anticipated annual pension exceeds $1,500, both the
employer contributions on the employee's behalf prior to the date of the
change in the plan and those expected to be made on his behalf
subsequent to the date of the change (based on the employee's rate of
compensation on the date of the change) are to be taken into account.
(6) This paragraph shall apply to taxable years of a qualified plan
commencing after September 30, 1963. In the case of an early
termination of a qualified pension plan during any such taxable year,
the employer contributions which may be used for the benefit of any
employee must conform to the requirements of this paragraph. However,
any pension plan which is qualified on September 30, 1963, will not be
disqualified merely because it does not expressly include the provisions
prescribed in this paragraph.
(7)(i) A qualified defined benefit plan subject to section 412
(without regard to section 412(h)(2)) shall not be required to contain
the restriction described in paragraph (c)(2)(ii)(c) of this section
applicable to an employee in a plan whose full current costs for the
first 10 years have not been funded.
(ii) A qualified defined benefit plan covered by section 4021(a) of
ERISA (''qualified Title IV plan'') shall satisfy the restrictions in
paragraph (c)(2) of this section only if the plan satisfies this
paragraph (c)(7). A plan satisfies this paragraph (c)(7) by providing
that employer contributions which may be used for the benefit of an
employee described in paragraph (c)(2) of this section who is a
substantial owner, as defined in section 4022(b)(5) of ERISA, shall not
exceed the greater of the dollar amount described in paragraph
(c)(2)(iii) of this section or a dollar amount which equals the present
value of the benefit guaranteed for such employee under section 4022 of
ERISA, or if the plan has not terminated, the present value of the
benefit that would be guaranteed if the plan terminated on the date the
benefit commences, determined in accordance with regulations of the
Pension Benefit Guaranty Corporation (''PBGC'').
(iii) A plan satisfies this paragraph (c)(7) by providing that
employer contributions which may be used for the benefit of all
employees described in paragraph (c)(2) of this section (other than an
employee who is a substantial owner as defined in section 4022(b)(5) of
ERISA) shall not exceed the greater of the dollar amount described in
paragraph (c)(2)(iii) of this section or a dollar amount which equals
the present value of the maximum benefit described in section
4022(b)(3)(B) of ERISA (determined on the date the plan terminates or on
the date benefits commence, whichever is earlier and determined in
accordance with regulations of PBGC) without regard to any other
limitations in section 4022 of ERISA.
(iv) A plan provision satisfying this paragraph (c)(7) may be adopted
by amendment or by incorporation at the time of establishment. Any
allocation of assets attributable to employer contributions to an
employee which exceeds the dollar limitation in this paragraph (c)(7)
may be reallocated to prevent prohibited discrimination.
(v) The early termination rules in the preceding subparagraphs (1)
through (6) apply to a qualified Title IV plan except where such rules
are determined by the Commissioner to be inconsistent with the rules of
this paragraph (c)(7), 1.411(d)-2, and section 4044(b)(4) of ERISA.
The early termination rules of this paragraph (c)(7) contain some of the
rules under section 401(a)(4) and (a)(7), as in effect on September 2,
1974, and section 411(d) (2) and (3). Section 1.411(d)-2 also contains
certain discrimination and vesting rules which are applicable to plan
terminations.
(vi) Paragraph (c)(7) of this section applies to plan terminations
occurring on or after March 12, 1984. For distributions not on account
of plan terminations, paragraph (c)(7) applies to distributions in plan
years beginning after December 31, 1983. However, a plan may elect to
apply that paragraph to distributions not on account of plan termination
on or after January 10, 1984.
(d) The provisions of this section do not apply to plan years
beginning on or after January 1, 1992. For rules applicable to plan
years beginning on or after January 1, 1992, see 1.401(a)(4)-1 through
1.401(a)(4)-13.
(Secs. 411 (d)(2) and (3) and 7805 of the Internal Revenue Code of
1954 (68A Stat. 917, 88 Stat. 912; 26 U.S.C. 411(d)(2) and (3) and
7805))
(T.D. 6500, 25 FR 11674, Nov. 26, 1960, as amended by T.D. 6675, 28
FR 10119, Sept. 17, 1963; T.D. 7934, 49 FR 1183, Jan. 10, 1984; 49 FR
2104, Jan. 18, 1984; T.D. 8360, 56 FR 47536, Sept. 19, 1991)
26 CFR 1.401-5 Period for which requirements of section 401(a) (3),
(4), (5), and (6) are applicable with respect to plans put into effect
before September 2, 1974.
A pension, profit-sharing, stock bonus, or annuity plan shall be
considered as satisfying the requirements of section 401(a) (3), (4),
(5), and (6) for the period beginning with the date on which it was put
into effect and ending with the 15th day of the third month following
the close of the taxable year of the employer in which the plan was put
into effect, if all the provisions of the plan which are necessary to
satisfy such requirements are in effect by the end of such period and
have been made effective for all purposes with respect to the whole of
such period. Thus, if an employer in 1954 adopts such a plan as of
January 1, 1954, and makes a return on the basis of the calendar year,
he will have until March 15, 1955, to amend his plan so as to make it
satisfy the requirements of section 401(a) (3), (4), (5), and (6) for
the calendar year 1954 provided that by March 15, 1955, all provisions
of such plan necessary to satisfy such requirements are in effect and
have been made retroactive for all purposes to January 1, 1954, the
effective date of the plan. If an employer is on a fiscal year basis,
for example, April 1 to March 31, and in 1954 adopts such a plan
effective as of April 1, 1954, he will have until June 15, 1955, to
amend his plan so as to make it satisfy the requirements of section
401(a) (3), (4), (5), and (6) for the fiscal year beginning April 1,
1954, provided that by June 15, 1955, all provisions of such plan
necessary to satisfy such requirements are in effect and have been made
retroactive for all purposes to April 1, 1954, the effective date of the
plan. It should be noted that under section 401(b) the period in which
a plan may be amended to qualify under section 401(a) ends before the
date on which taxpayers other than corporations are required to file
income tax returns. See section 6072. This section shall not apply to
any pension, profit-sharing, stock bonus, or annuity plan put into
effect after September 1, 1974, and shall not apply with respect to any
disqualifying provision to which 1.401(b)-1 applies.
(T.D. 6500, 25 FR 11674, Nov. 26, 1960; as amended by T.D. 7436, 41
FR 42653, Sept. 28, 1976)
26 CFR 1.401-6 Termination of a qualified plan.
(a) General rules. (1) In order for a pension, profit-sharing, or
stock bonus trust to satisfy the requirements of section 401, the plan
of which such trust forms a part must expressly provide that, upon the
termination of the plan or upon the complete discontinuance of
contributions under the plan, the rights of each employee to benefits
accrued to the date of such termination or discontinuance, to the extent
then funded, or the rights of each employee to the amounts credited to
his account at such time, are nonforfeitable. As to what constitutes
nonforfeitable rights of an employee, see paragraph (a)(2) of
1.402(b)-1.
(2) (i) A qualified plan must also provide for the allocation of any
previously unallocated funds to the employees covered by the plan upon
the termination of the plan or the complete discontinuance of
contributions under the plan. Such provision may be incorporated in the
plan at its inception or by an amendment made prior to the termination
of the plan or the discontinuance of contributions thereunder.
(ii) Any provision for the allocation of unallocated funds is
acceptable if it specifies the method to be used and does not conflict
with the provisions of section 401(a)(4) and the regulations thereunder.
The allocation of unallocated funds may be in cash or in the form of
other benefits provided under the plan. However, the allocation of the
funds contributed by the employer among the employees need not
necessarily benefit all the employees covered by the plan. For example,
an allocation may be satisfactory if priority is given to benefits for
employees over the age of 50 at the time of the termination of the plan,
or those who then have at least 10 years of service, if there is no
possibility of discrimination in favor of employees who are officers,
shareholders, employees whose principal duties consist in supervising
the work of other employees, or highly compensated employees.
(iii) Subdivisions (i) and (ii) of this subparagraph do not require
the allocation of amounts to the account of any employee if such amounts
are not required to be used to satisfy the liabilities with respect to
employees and their beneficiaries under the plan (see section
401(a)(2)).
(b) Termination defined. (1) Whether a plan is terminated is
generally a question to be determined with regard to all the facts and
circumstances in a particular case. For example, a plan is terminated
when, in connection with the winding up of the employer's trade or
business, the employer begins to discharge his employees. However, a
plan is not terminated, for example, merely because an employer
consolidates or replaces that plan with a comparable plan. Similarly, a
plan is not terminated merely because the employer sells or otherwise
disposes of his trade or business if the acquiring employer continues
the plan as a separate and distinct plan of its own, or consolidates or
replaces that plan with a comparable plan. See paragraph (d)(4) of
1.381(c)(11)-1 for the definition of comparable plan. In addition, the
Commissioner may determine that other plans are comparable for purposes
of this section.
(2) For purposes of this section, the term termination includes both
a partial termination and a complete termination of a plan. Whether or
not a partial termination of a qualified plan occurs when a group of
employees who have been covered by the plan are subsequently excluded
from such coverage either by reason of an amendment to the plan, or by
reason of being discharged by the employer, will be determined on the
basis of all the facts and circumstances. Similarly, whether or not a
partial termination occurs when benefits or employer contributions are
reduced, or the eligibility or vesting requirements under the plan are
made less liberal, will be determined on the basis of all the facts and
circumstances. However, if a partial termination of a qualified plan
occurs, the provisions of section 401(a)(7) and this section apply only
to the part of the plan that is terminated.
(c) Complete discontinuance defined. (1) For purposes of this
section, a complete discontinuance of contributions under the plan is
contrasted with a suspension of contributions under the plan, which is
merely a temporary cessation of contributions by the employer. A
complete discontinuance of contributions may occur although some amounts
are contributed by the employer under the plan if such amounts are not
substantial enough to reflect the intent on the part of the employer to
continue to maintain the plan. The determination of whether a complete
discontinuance of contributions under the plan has occurred will be made
with regard to all the facts and circumstances in the particular case,
and without regard to the amount of any contributions made under the
plan by employees.
(2) In the case of a pension plan, a suspension of contributions will
not constitute a discontinuance if --
(i) The benefits to be paid or made available under the plan are not
affected at any time by the suspension, and
(ii) The unfunded past service cost at any time (which includes the
unfunded prior normal cost and unfunded interest on any unfunded cost)
does not exceed the unfunded past service cost as of the date of
establishment of the plan, plus any additional past service or
supplemental costs added by amendment.
(3) In any case in which a suspension of a profit-sharing plan is
considered a discontinuance, the discontinuance becomes effective not
later than the last day of the taxable year of the employer following
the last taxable year of such employer for which a substantial
contribution was made under the profit-sharing plan.
(d) Contributions or benefits which remain forfeitable. The
provisions of this section do not apply to amounts which are reallocated
to prevent the discrimination prohibited by section 401(a)(4) (see
paragraph (c) of 1.401-4).
(e) Effective date. This section shall apply to taxable years of a
qualified plan commencing after September 30, 1963. In the case of the
termination or complete discontinuance (as defined in this section) of
any qualified plan during any such taxable year, the rights accorded to
each employee covered under the plan must conform to the requirements of
this section. However, a plan which is qualified on September 30, 1963,
will not be disqualified merely because it does not expressly include
the provisions prescribed by this section.
(T.D. 6675, 28 FR 10120, Sept. 17, 1963)
26 CFR 1.401-7 Forfeitures under a qualified pension plan.
(a) General rules. In the case of a trust forming a part of a
qualified pension plan, the plan must expressly provide that forfeitures
arising from severance of employment, death, or for any other reason,
must not be applied to increase the benefits any employee would
otherwise receive under the plan at any time prior to the termination of
the plan or the complete discontinuance of employer contributions
thereunder. The amounts so forfeited must be used as soon as possible
to reduce the employer's contributions under the plan. However, a
qualified pension plan may anticipate the effect of forfeitures in
determining the costs under the plan. Furthermore, a qualified plan
will not be disqualified merely because a determination of the amount of
forfeitures under the plan is made only once during each taxable year of
the employer.
(b) Examples. The rules of paragraph (a) of this section may be
illustrated by the following examples:
Example (1). The B Company Pension Trust forms a part of a pension
plan which is funded by individual level annual premium annuity
contracts. The plan requires ten years of service prior to obtaining a
vested right to benefits under the plan. One of the company's employees
resigns his position after two years of service. The insurance company
paid to the trustees the cash surrender value of the contract -- $750.
The B Company must reduce its next contribution to the pension trust by
this amount.
Example (2). The C Corporation's trusteed pension plan has been in
existence for 20 years. It is funded by individual contracts issued by
an insurance company, and the premiums thereunder are paid annually.
Under such plan, the annual premium accrued for the year 1966 is due and
is paid on January 2, 1966, and on July 1 of the same year the plan is
terminated due to the liquidation of the employer. Some forfeitures
were incurred and collected by the trustee with respect to those
participants whose employment terminated between January 2 and July 1.
The plan provides that the amount of such forfeitures is to be applied
to provide additional annuity benefits for the remaining employees
covered by the plan. The pension plan of the C Corporation satisfies
the provisions of section 401(a)(8). Although forfeitures are used to
increase benefits in this case, this use of forfeitures is permissible
since no further contributions will be made under the plan.
(c) Effective date. This section applies to taxable years of a
qualified plan commencing after September 30, 1963. However, a plan
which is qualified on September 30, 1963, will not be disqualified
merely because it does not expressly include the provisions prescribed
by this section.
(T.D. 6675, 28 FR 10121, Sept. 17, 1963)
26 CFR 1.401-8 Custodial accounts prior to January 1, 1974
(a) Treatment of a custodial account as a qualified trust. For
taxable years of a plan beginning after December 31, 1962, a custodial
account may be used, in lieu of a trust, under any pension,
profit-sharing, or stock bonus plan, described in section 401 if the
requirements of paragraph (b) of this section are met. A custodial
account may be used under such a plan, whether the plan covers
common-law employees, self-employed individuals who are treated as
employees by reason of section 401(c), or both. The use of a custodial
account as part of a plan does not preclude the use of a trust or
another custodial account as part of the same plan. A plan under which
a custodial account is used may be considered in connection with other
plans of the employer in determining whether the requirements of section
401 are satisfied. For regulations relating to the period after
December 31, 1973, see 1.401(f)-11.
(b) Rules applicable to custodial accounts. (1) A custodial account
shall be treated for taxable years beginning after December 31, 1962, as
a qualified trust under section 401 if such account meets the following
requirements described in subdivisions (i) through (iii) of this
subparagraph:
(i) The custodial account must satisfy all the requirements of
section 401 that are applicable to qualified trusts. See subparagraph
(2) of this paragraph.
(ii) The custodian of the custodial account must be a bank.
(iii) The custodial agreement provides that the investment of the
funds in the account is to be made --
(a) Solely in stock of one or more regulated investment companies
which is registered in the name of the custodian or its nominee and with
respect to which an employee who is covered by the plan is the
beneficial owner, or
(b) Solely in annuity, endowment, or life insurance contracts, issued
by an insurance company and held by the custodian until distributed
pursuant to the terms of the plan. For purposes of the preceding
sentence, a face-amount certificate described in section 401(g) and
1.401-9 is treated as an annuity issued by an insurance company.
See subparagraphs (3) and (4) of this paragraph.
(2) As a result of the requirement described in subparagraph (1)(i)
of this paragraph (relating to the requirements applicable to qualified
trusts), the custodial account must, for example, be created pursuant to
a written agreement which constitutes a valid contract under local law.
In addition, the terms of the contract must make it impossible, prior to
the satisfaction of all liabilities with respect to the employees and
their beneficiaries covered by the plan, for any part of the funds of
the custodial account to be used for, or diverted to, purposes other
than for the exclusive benefit of the employees or their beneficiaries
as provided for in the plan (see paragraph (a) of 1.401-2).
(3) The requirement described in subparagraph (1)(iii) of this
paragraph, relating to the investment of the funds of the plan, applies,
for example, to the employer contributions under the plan, any employee
contributions under the plan, and any earnings on such contributions.
Such requirement also applies to capital gains realized upon the sale of
stock described in (a) of such subdivision, to any capital gain
dividends received in connection with such stock, and to any refunds
described in section 852(b)(3)(D)(ii) (relating to undistributed capital
gains of a regulated investment company) which is received in connection
with such stock. However, since such requirement relates only to the
investment of the funds of the plan, the custodian may deposit funds
with a bank, in either a checking or savings account, while accumulating
sufficient funds to make additional investments or while awaiting an
appropriate time to make additional investments.
(4) The requirement in subparagraph (1)(iii)(a) of this paragraph
that an employee covered by the plan be the beneficial owner of the
stock does not mean that the employee who is the beneficial owner must
have a nonforfeitable interest in the stock. Thus, a plan may provide
for forfeitures of an employee's interest in such stock in the same
manner as plans which use a trust. In the event of a forfeiture of an
employee's beneficial ownership in the stock of a regulated investment
company, the beneficial ownership of such stock must pass to another
employee covered by the plan.
(c) Effects of qualification. (1) Any custodial account which
satisfies the requirements of section 401(f) shall be treated as a
qualified trust for all purposes of the Internal Revenue Code of 1954.
Accordingly, such a custodial account shall be treated as a separate
legal person which is exempt from the income tax by section 501(a). On
the other hand, such a custodial account is required to file the returns
described in sections 6033 and 6047 and to supply any other information
which a qualified trust is required to furnish.
(2) In determining whether the funds of a custodial account are
distributed or made available to an employee or his beneficiary, the
rules which under section 402(a) are applicable to trusts will also
apply to the custodial account as though it were a separate legal person
and not an agent of the employee.
(d) Effect of loss of qualification. If a custodial account which
has qualified under section 401 fails to qualify under such section for
any taxable year, such custodial account will not thereafter be treated
as a separate legal person, and the funds in such account shall be
treated as made available within the meaning of section 402(a)(1) to the
employees for whom they are held.
(e) Definitions. For purposes of this section --
(1) The term bank means a bank as defined in section 401(d)(1).
(2) The term regulated investment company means any domestic
corporation which issues only redeemable stock and is a regulated
investment company within the meaning of section 851(a) (but without
regard to whether such corporation meets the limitations of section
851(b)).
(Secs. 401(f)(2), 7805, Internal Revenue Code of 1954 (88 Stat. 939
and 68A Stat. 917; 26 U.S.C. 401(f)(2), 7805))
(T.D. 6675, 28 FR 10121, Sept. 17, 1963, as amended by T.D. 7565, 43
FR 41204, Sept. 15, 1978. Redesignated and amended by T.D. 7748, 46 FR
1695, Jan. 7, 1981)
26 CFR 1.401-9 Face-amount certificates -- nontransferable annuity
contracts.
(a) Face-amount certificates treated as annuity contracts. Section
401(g) provides that a face-amount certificate (as defined in section
2(a)(15) of the Investment Company Act of 1940 (15 U.S.C. sec. 80a-2))
which is not transferable within the meaning of paragraph (b)(3) of this
section shall be treated as an annuity contract for purposes of sections
401 through 404 for any taxable year of a plan subject to such sections
beginning after December 31, 1962. Accordingly, there may be
established for any such taxable year a qualified plan under which such
face-amount certificates are purchased for the participating employees
without the creation of a trust or custodial account. However, for such
a plan to qualify, the plan must satisfy all the requirements applicable
to a qualified annuity plan (see section 403(a) and the regulations
thereunder).
(b) Nontransferability of face-amount certificates and annuity
contracts. (1)(i) Section 401(g) provides that, in order for any
face-amount certificate, or any other contract issued after December 31,
1962, to be subject to any provision under sections 401 through 404
which is applicable to annuity contracts, as compared to other forms of
investment, such certificate or contract must be nontransferable at any
time when it is held by any person other than the trustee of a trust
described in section 401(a) and exempt under section 501(a). Thus, for
example, in order for a group or individual retirement income contract
to be treated as an annuity contract, if such contract is not held by
the trustee of an exempt employees' trust, it must satisfy the
requirements of this section. Furthermore, a face-amount certificate or
an annuity contract will be subject to the tax treatment under section
403(b) only if it satisfies the requirements of section 401(g) and this
section. Any certificate or contract in order to satisfy the provisions
of this section must expressly contain the provisions that are necessary
to make such certificate or contract not transferable within the meaning
of this paragraph.
(ii) In the case of any group contract purchased by an employer under
a plan to which sections 401 through 404 apply, the restriction on
transferability required by section 401(g) and this section applies to
the interest of the employee participants under such group contract but
not to the interest of the employer under such contract.
(2) If a trust described in section 401(a) which is exempt from tax
under section 501(a) distributes any annuity, endowment, retirement
income, or life insurance contract, then the rules relating to the
taxability of the distributee of any such contract are set forth in
paragraph (a)(2) of 1.402(a)-1.
(3) A face-amount certificate or an annuity contract is transferable
if the owner can transfer any portion of his interest in the certificate
or contract to any person other than the issuer thereof. Accordingly,
such a certificate or contract is transferable if the owner can sell,
assign, discount, or pledge as collateral for a loan or as security for
the performance of an obligation or for any other purpose his interest
in the certificate or contract to any person other than the issuer
thereof. On the other hand, for purposes of section 401(g), a
face-amount certificate or annuity contract is not considered to be
transferable merely because such certificate or contract, or the plan of
which it is a part, contains a provision permitting the employee to
designate a beneficiary to receive the proceeds of the certificate or
contract in the event of his death, or contains a provision permitting
the employee to elect to receive a joint and survivor annuity, or
contains other similar provisions.
(4) A material modification in the terms of an annuity contract
constitutes the issuance of a new contract regardless of the manner in
which it is made.
(c) Examples. The rules of this section may be illustrated by the
following examples:
Example (1). The P Employees' Annuity Plan is a nontrusteed plan
which is funded by individual annuity contracts issued by the Y
Insurance Company. Each annuity contract issued by such company after
December 31, 1962, provides, on its face, that it is ''not
transferable''. The terms of each such contract further provide that,
''This contract may not be sold, assigned, discounted, or pledged as
collateral for a loan or as security for the performance of an
obligation or for any other purpose, to any person other than this
company.'' The annuity contracts of the P Employees' Annuity Plan
satisfy the requirements of section 401(g) and this section.
Example (2). The R Company Pension Trust forms a part of a pension
plan which is funded by individual level premium annuity contracts.
Such contracts are purchased by the trustee of the R Company Pension
Trust from the Y Insurance Company. The trustee of the R Company
Pension Trust is the legal owner of each such contract at all times
prior to the distribution of such contract to a qualifying annuitant.
The trustee purchases such a contract on January 3, 1963, in the name of
an employee who qualifies on that date for coverage under the plan. At
the time such contract is purchased, and while the contract is held by
the trustee of the R Company Pension Trust, the contract does not
contain any restrictions with respect to its transferability. The
annuity contract purchased by the trustee of the R Company Pension Trust
satisfies the requirements of section 401(g) and this section while it
is held by the trustee.
Example (3). A is the trustee of the X Corporation's Employees'
Pension Trust. The trust forms a part of a pension plan which is funded
by individual level premium annuity contracts. The trustee is the legal
owner of such contracts, but the employees covered under the plan obtain
beneficial interests in such contracts after ten years of service with
the X Corporation. On January 15, 1980, A distributes to D an annuity
contract issued to A in D's name on June 25, 1959, and distributes to E
an annuity contract issued to A in E's name on September 30, 1963. The
contract issued to D need not be nontransferable, but the contract
issued to E must be nontransferable in order to satisfy the requirements
of section 401(g) and this section.
Example (4). The corpus of the Y Corporation's Employees' Pension
Plan consists of individual insurance contracts in the names of the
covered employees and an auxiliary fund which is used to convert such
policies to annuity contracts at the time a beneficiary of such trust
retires. F retires on June 15, 1963, and the trustee converts the
individual insurance contract on F's life to a life annuity which is
distributed to him. The life annuity issued on F's life must be
nontransferable in order to satisfy the requirements of section 401(g)
and this section.
(T.D. 6675, 28 FR 10122, Sept. 17, 1963)
26 CFR 1.401-10 Definitions relating to plans covering self-employed
individuals.
(a) In general. (1) Certain self-employed individuals may be covered
by a qualified pension, annuity, or profit- sharing plan for taxable
years beginning after December 31, 1962. This section contains
definitions relating to plans covering self-employed individuals. The
provisions of 1.401-1 through 1.401-9, relating to requirements which
are applicable to all qualified plans, are also generally applicable to
any plan covering a self-employed individual. However, in addition to
such requirements, any plan covering a self-employed individual is
subject to the rules contained in 1.401-11 through 1.401-13. Section
1.401-11 contains general rules which are applicable to any plan
covering a self-employed individual who is an employee within the
meaning of paragraph (b) of this section. Section 1.401-12 contains
special rules which are applicable to plans covering self-employed
individuals when one or more of such individuals is an owner-employee
within the meaning of paragraph (d) of this section. Section 1.401-13
contains rules relating to excess contributions by, or for, an
owner-employee. The provisions of this section and of 1.401-11
through 1.401-13 are applicable to taxable years beginning after
December 31, 1962.
(2) A self-employed individual is covered under a qualified plan
during the period beginning with the date a contribution is first made
by, or for, him under the qualified plan and ending when there are no
longer funds under the plan which can be used to provide him or his
beneficiaries with benefits.
(b) Treatment of a self-employed individual as an employee. (1) For
purposes of section 401, a self-employed individual who receives earned
income from an employer during a taxable year of such employer beginning
after December 31, 1962, shall be considered an employee of such
employer for such taxable year. Moreover, such an individual will be
considered an employee for a taxable year if he would otherwise be
treated as an employee but for the fact that the employer did not have
net profits for that taxable year. Accordingly, the employer may cover
such an individual under a qualified plan during years of the plan
beginning with or within a taxable year of the employer beginning after
December 31, 1962.
(2) If a self-employed individual is engaged in more than one trade
or business, each such trade or business shall be considered a separate
employer for purposes of applying the provisions of sections 401 through
404 to such individual. Thus, if a qualified plan is established for
one trade or business but not the others, the individual will be
considered an employee only if he received earned income with respect to
such trade or business and only the amount of such earned income derived
from that trade or business shall be taken into account for purposes of
the qualified plan.
(3)(i) The term employee, for purposes of section 401, does not
include a self-employed individual when the term ''common-law'' employee
is used or when the context otherwise requires that the term
''employee'' does not include a self-employed individual. The term
''common- law'' employee also includes an individual who is treated as
an employee for purposes of section 401 by reason of the provisions of
section 7701(a)(20), relating to the treatment of certain full-time life
insurance salesmen as employees. Furthermore, an individual who is a
common-law employee is not a self-employed individual with respect to
income attributable to such employment, even though such income
constitutes net earnings from self-employment as defined in section
1402(a). Thus, for example, a minister who is a common-law employee is
not a self-employed individual with respect to income attributable to
such employment, even though such income constitutes net earnings from
self-employment as defined in section 1402(a).
(ii) An individual may be treated as an employee within the meaning
of section 401(c)(1) of one employer even though such individual is also
a common-law employee of another employer. For example, an attorney who
is a common-law employee of a corporation and who, in the evenings
maintains an office in which he practices law as a self-employed
individual is an employee within the meaning of section 401(c)(1) with
respect to the law practice. This example would not be altered by the
fact that the corporation maintained a qualified plan under which the
attorney is benefited as a common-law employee.
(4) For the purpose of determining whether an employee within the
meaning of section 401(c)(1) satisfies the requirements for eligibility
under a qualified plan established by an employer, such an employer may
take into account past services rendered by such an employee both as a
self-employed individual and as a common-law employee if past services
rendered by other employees, including common-law employees, are
similarly taken into account. However, an employer cannot take into
account only past services rendered by employees within the meaning of
section 401(c)(1) if past services rendered to such employer by
individuals who are, or were, common-law employees are not taken into
account. Past service as described in this subparagraph may be taken
into account for the purpose of determining whether an individual who
is, or was, an employee within the meaning of section 401(c)(1)
satisfies the requirements for eligibility even if such service was
rendered prior to January 1, 1963. On the other hand, past service
cannot be taken into account for purposes of determining the
contributions which may be made on such an individual's behalf under a
qualified plan.
(c) Definition of earned income -- (1) General rule. For purposes of
section 401 and the regulations thereunder, ''earned income'' means, in
general, net earnings from self-employment (as defined in section
1402(a)) to the extent such net earnings constitute compensation for
personal services actually rendered within the meaning of section
911(b).
(2) Net earnings from self-employment. (i) The computation of the
net earnings from self-employment shall be made in accordance with the
provisions of section 1402(a) and the regulations thereunder, with the
modifications and exceptions described in subdivisions (ii) through (iv)
of this subparagraph. Thus, an individual may have net earnings from
self-employment, as defined in section 1402(a), even though such
individual does not have self-employment income, as defined in section
1402(b), and, therefore, is not subject to the tax on self-employment
income imposed by section 1401.
(ii) Items which are not included in gross income for purposes of
chapter 1 of the Code and the deductions properly attributable to such
items must be excluded from the computation of net earnings from
self-employment even though the provisions of section 1402(a)
specifically require the inclusion of such items. For example, if an
individual is a resident of Puerto Rico, so much of his net earnings
from self-employment as are excluded from gross income under section 933
must not be taken into account in computing his net earnings from
self-employment which are earned income for purposes of section 401.
(iii) In computing net earnings from self-employment for the purpose
of determining earned income, a self-employed individual may disregard
only deductions for contributions made on his own behalf under a
qualified plan. However, such computation must take into account the
deduction allowed by section 404 or 405 for contributions under a
qualified plan on behalf of the common-law employees of the trade or
business.
(iv) For purposes of determining whether an individual has net
earnings from self-employment and, thus, whether he is an employee
within the meaning of section 401(c)(1), the exceptions in section
1402(c) (4) and (5) shall not apply. Thus, certain ministers, certain
members of religious orders, doctors of medicine, and Christian Science
practitioners are treated for purposes of section 401 as being engaged
in a trade or business from which net earnings from self-employment are
derived. In addition, the exceptions in section 1402(c)(2) shall not
apply in the case of any individual who is treated as an employee under
section 3121(d)(3) (A), (C), or (D). Therefore, such individuals are
treated, for purposes of section 401, as being engaged in a trade or
business from which net earnings from self-employment may be derived.
(3) Compensation for personal services actually rendered. (i) For
purposes of section 401, the term ''earned income'' includes only that
portion of an individual's net earnings from self-employment which
constitutes earned income as defined in section 911(b) and the
regulations thereunder. Thus, such term includes only professional fees
and other amounts received as compensation for personal services
actually rendered by the individual. There is excluded from ''earned
income'' the amount of any item of income, and any deduction properly
attributable to such item, if such amount is not received as
compensation for personal services actually rendered. Therefore, an
individual who renders no personal services has no ''earned income''
even though such an individual may have net earnings from
self-employment from a trade or business.
(ii) If a self-employed individual is engaged in a trade or business
in which capital is a material income-producing factor, then, under
section 911(b), his earned income is only that portion of the net
profits from the trade or business which constitutes a reasonable
allowance as compensation for personal services actually rendered.
However, such individual's earned income cannot exceed 30 percent of the
net profits of such trade or business. The net profits of the trade or
business is not necessarily the same as the net earnings from
self-employment derived from such trade or business.
(4) Minimum earned income when both personal services and capital are
material income-producing factors. (i) If a self-employed individual
renders personal services on a full-time, or substantially full-time,
basis to only one trade or business, and if with respect to such trade
or business capital is a material income-producing factor, then the
amount of such individual's earned income from the trade or business is
considered to be not less than so much of his share in the net profits
of such trade or business as does not exceed $2,500.
(ii) If a self-employed individual renders substantial personal
services to more than one trade or business, and if with respect to all
such trades or businesses such self-employed individual actually renders
personal services on a full-time, or substantially full-time, basis,
then the earned income of the self-employed individual from trades or
businesses for which he renders substantial personal services and in
which both personal services and capital are material income-producing
factors is considered to be not less than --
(a) So much of such individual's share of the net profits from all
trades or businesses in which he renders substantial personal services
as does not exceed $2,500, reduced by.
(b) Such individual's share of the net profits of any trade or
business in which only personal services is a material income-producing
factor.
However, in no event shall the share of the net profits of any trade
or business in which capital is a material income-producing factor be
reduced below the amount which would, without regard to the provisions
of this subdivision, be treated as the earned income derived from such
trade or business under section 911(b). In making the computation
required by this subdivision, any trade or business with respect to
which the individual renders substantial personal services shall be
taken into account irrespective of whether a qualified plan has been
established by such trade or business.
(iii) If the provisions of subdivision (ii) of this subparagraph
apply in determining the earned income of a self-employed individual,
and such individual is engaged in two or more trades or businesses in
which capital and personal services are material income-producing
factors, then the total amount treated as the earned income shall be
allocated to each such trade or business for which he performs
substantial personal services in the same proportion as his share of net
profits from each such trade or business bears to his share of the total
net profits from all such trades or businesses. Thus, in such case, the
amount of earned income attributable to any such trade or business is
computed by multiplying the total earned income as determined under
subdivision (ii) of this subparagraph by the individual's net profits
from such trade or business and dividing that product by the
individual's total net profits from all such trades or businesses.
(iv) For purposes of this subparagraph, the determination of whether
an individual renders personal services on a full-time, or substantially
full-time, basis is to be made with regard to the aggregate of the
trades and businesses with respect to which the employee renders
substantial personal services as a common-law employee or as a
self-employed individual. However, for all other purposes in applying
the rules of this subparagraph, a trade or business with respect to
which an individual is a common-law employee shall be disregarded.
(d) Definition of owner-employee. For purposes of section 401 and
the regulations thereunder, the term ''owner-employee'' means a
proprietor of a proprietorship, or, in the case of a partnership, a
partner who owns either more than 10 percent of the capital interest, or
more than 10 percent of the profits interest, of the partnership. Thus,
an individual who owns only 2 percent of the profits interest but 11
percent of the capital interest of a partnership is an owner-employee.
A partner's interest in the profits and the capital of the partnership
shall be determined by the partnership agreement. In the absence of any
provision regarding the sharing of profits, the interest in profits of
the partners will be determined in the same manner as their distributive
shares of partnership taxable income. However, a guaranteed payment (as
described in section 707(c)) is not considered a distributive share of
partnership income for such purpose. See section 704(b), relating to
the determination of the distributive share by the income or loss ratio,
and the regulations thereunder. In the absence of a provision in the
partnership agreement, a partner's capital interest in a partnership
shall be determined on the basis of his interest in the assets of the
partnership which would be distributable to such partner upon his
withdrawal from the partnership, or upon liquidation of the partnership,
whichever is the greater.
(e) Definition of employer. (1) For purposes of section 401, a sole
proprietor is considered to be his own employer, and the partnership is
considered to be the employer of each of the partners. Thus, an
individual partner is not an employer who may establish a qualified plan
with respect to his services to the partnership.
(2) Regardless of the provision of local law, a partnership is
deemed, for purposes of section 401, to be continuing until such time as
it is terminated within the meaning of section 708, relating to the
continuation of a partnership.
(T.D. 6675, 28 FR 10123, Sept. 17, 1963)
26 CFR 1.401-11 General rules relating to plans covering self-employed
individuals.
(a) Introduction. This section provides certain rules which
supplement, and modify, the rules of 1.401-1 through 1.401-9 in the
case of a qualified pension, annuity, or profit-sharing plan which
covers a self-employed individual who is an employee within the meaning
of section 401(c)(1). The provisions of this section apply to taxable
years beginning after December 31, 1962. Except as otherwise provided,
paragraphs (b) through (m) of this section apply to taxable years
beginning after December 31, 1962. Paragraph (n) of this section
applies to plan years determined in accordance with paragraph (n)(1) of
this section.
(b) General rules. (1) If the amount of employer contributions for
common-law employees covered under a qualified plan is related to the
earned income (as defined in section 401(c)(2)) of a self-employed
individual, or group of self-employed individuals, such a plan is a
profit-sharing plan (as described in paragraph (b)(1)(ii) of 1.401-1)
since earned income is dependent upon the profits of the trade or
business with respect to which the plan is established. Thus, for
example, a plan, which provides that the employer will contribute 10
percent of the earned income of a self-employed individual but no more
than $2,500, and that the employer contribution on behalf of common-law
employees shall be the same percentage of their salaries as the
contribution on behalf of the self-employed individual bears to his
earned income, is a profit-sharing plan, since the amount of the
employer's contribution for common-law employees covered under the plan
is related to the earned income of a self-employed individual and
thereby to the profits of the trade or business. On the other hand, for
example, a plan which defines the compensation of any self-employed
individual as his earned income and which provides that the employer
will contribute 10 percent of the compensation of each employee covered
under the plan is a pension plan since the contribution on behalf of
common-law employees is fixed without regard to whether the
self-employed individual has earned income or the amount thereof.
(2) The Self-Employed Individuals Tax Retirement Act of 1962 (76
Stat. 809) permits self-employed individuals to be treated as employees
and therefore included in qualified plans, but it is clear that such law
requires such self-employed individuals to provide benefits for their
employees on a nondiscriminatory basis. Self-employed individuals will
not be considered as providing contributions or benefits for an employee
to the extent that the wages or salary of the employee covered under the
plan are reduced at or about the time the plan is adopted.
(3) In addition to permitting self-employed individuals to
participate in qualified plans, the Self-Employed Individuals Tax
Retirement Act of 1962 extends to such individuals some of the tax
benefits allowed common-law employee-participants in such plans.
However, the tax benefits allowed a self-employed individual are
restricted by the limits which are placed on the deductions allowed for
contributions on such an individual's behalf. In view of these
restrictions on the tax benefits extended to any self-employed
individual, a self-employed individual participating in a qualified plan
may not participate in any forfeitures. Therefore, in the case of a
qualified plan which covers any self-employed individual, a separate
account must be established for each self-employed individual to which
no forfeitures can be allocated.
(c) Requirements as to coverage. (1) In general, section 401(a)(3)
and the regulations thereunder prescribe the coverage requirements which
a qualified plan must satisfy. However, if such a plan covers
self-employed individuals who are not owner-employees, it must, in
addition to satisfying such requirements, satisfy the requirements of
this paragraph. If any owner-employee is covered under a qualified
plan, the provisions of this paragraph do not apply, but the provisions
of section 401(d), including section 401(d)(3), do apply (see
1.401-12).
(2) (i) Section 401(a)(3)(B) provides that a plan may satisfy the
coverage requirements for qualification if it covers such employees as
qualify under a classification which is found not to discriminate in
favor of employees who are officers, shareholders, persons whose
principal duties consist in supervising the work of other employees, or
highly compensated employees. Section 401(a)(5) sets forth certain
classifications that will not in themselves be considered
discriminatory. Under such section, a classification which excludes all
employees whose entire remuneration constitutes ''wages'' under section
3121(a)(1), will not be considered discriminatory merely because of such
exclusion. Similarly, a plan which includes all employees will not be
considered discriminatory solely because the contributions or benefits
based on that part of their remuneration which is excluded from
''wages'' under section 3121(a)(1) differ from the contributions or
benefits based on that part of their remuneration which is not so
excluded. However, in determining if a classification is discriminatory
under section 401(a)(3)(B), consideration will be given to whether the
total benefits resulting to each employee under the plan and under the
Social Security Act, or under the Social Security Act only, establish an
integrated and correlated retirement system satisfying the tests of
section 401(a). A plan which covers self-employed individuals, none of
whom is an owner-employee, may also be integrated with the contributions
or benefits under the Social Security Act. In such a case, the portion
of the earned income (as defined in section 401(c)(2)) of such an
individual which does not exceed the maximum amount which may be treated
as self-employment income under section 1402(b)(1), and which is derived
from the trade or business with respect to which the plan is
established, shall be treated as ''wages'' under section 3121(a)(1)
subject to the tax imposed by section 3111 (relating to the tax on
employers) for purposes of applying the rules of paragraph (e)(2) of
1.401-3, relating to the determination of whether a plan is properly
integrated. However, if the plan covers an owner-employee, the rules
relating to the integration of the plan with the contributions or
benefits under the Social Security Act contained in paragraph (b) of
1.401-12 apply.
(ii) Certain of the classifications enumerated in section 401(a)(5)
do not apply to plans which provide contributions or benefits for any
self-employed individual. Since self-employed individuals are not
salaried or clerical employees, the provision in section 401(a)(5)
permitting a plan, in certain cases to cover only this type of employee
is inapplicable to plans which cover any self-employed individual.
(iii) The classifications enumerated in section 401(a)(5) are not
exclusive, and it is not necessary that a qualified plan cover all
employees or all full-time employees. Plans may qualify even though
coverage is limited in accordance with a particular classification
incorporated in the plan, provided the effect of covering only such
employees as satisfy such eligibility requirement does not result in the
prohibited discrimination.
(d) Discrimination as to contributions or benefits -- (1) In general.
In order for a plan to be qualified, there must be no discrimination in
contributions or benefits in favor of employees who are officers,
shareholders, supervisors, or highly compensated, as against other
employees whether within or without the plan. A self-employed
individual, by reason of the contingent nature of his compensation, is
considered to be a highly-compensated employee, and thus is a member of
the group in whose favor discrimination is prohibited. In determining
whether the prohibited discrimination exists, the total employer
contribution on behalf of a self-employed individual shall be taken into
account regardless of the fact that only a portion of such contribution
is allowed as a deduction. For additional rules relating to
discrimination as to contributions or benefits with regard to plans
covering any owner-employee, see 1.401-12.
(2) Base for computing contributions or benefits. (i) A plan which
is otherwise qualified is not considered discriminatory merely because
the contributions or benefits provided under the plan bear a uniform
relationship to the total compensation, basic compensation, or regular
rate of compensation of the employees, including self-employed
individuals, covered under the plan.
(ii) In the case of a self-employed individual who is covered under a
qualified plan, the total compensation of such individual is the earned
income (as defined in section 401(c)(2)) which such individual derives
from the employer's trade or business, or trades or businesses, with
respect to which the qualified plan is established. Thus, for example,
in the case of a partner, his total compensation includes both his
distributive share of partnership income, whether or not distributed,
and guaranteed payments described in section 707(c) made to him by the
partnership establishing the plan, to the extent that such income
constitutes earned income as defined in section 401(c)(2).
(iii) (a) The basic or regular rate of compensation of any
self-employed individual is that portion of his earned income which
bears the same ratio to his total earned income derived from the trade
or business, or trades or businesses, with respect to which the
qualified plan is established as the aggregate basic or regular
compensation of all common-law employees covered under the plan bears to
the aggregate total compensation of such employees derived from such
trade or business, or trades or businesses.
(b) If an employer establishes two or more plans which satisfy the
requirements of section 401(a) separately, and only one such plan covers
a self-employed individual, the determination of the basic or regular
rate of compensation of such self-employed individual is made with
regard to the compensation of common-law employees covered under the
plan which provides contributions or benefits for such self-employed
individual. On the other hand, if two or more plans must be considered
together in order to satisfy the requirements of section 401(a), the
computation of the basic or regular rate of compensation of a
self-employed individual must be made with regard to the compensation of
the common-law employees covered by so many of such plans as are
required to be taken together in order to satisfy the qualification
requirements of section 401(a).
(3) Discriminatory contributions. If a discriminatory contribution
is made by, or for, a self-employed individual who is an employee within
the meaning of section 401(c)(1) because of an erroneous assumption as
to the earned income of such individual, the plan will not be considered
discriminatory if adequate adjustment is made to remove such
discrimination. In the case of any self-employed individual who is an
owner-employee, the amount of any excess contribution to be returned and
the manner in which it is to be repaid are determined by the provisions
of section 401(d)(8) and (e). However, if any self-employed individual,
including any owner-employee, has not made the full contribution
permitted to be made on his behalf as an employee, then, if the plan
expressly provides, so much of any excess contribution by such
self-employed individual's employer as may, under the provisions of the
plan, be treated as a contribution made by such individual as an
employee can be so treated.
(e) Distribution of entire interest. (1) If a trust forms part of a
plan which covers a self-employed individual, such trust shall
constitute a qualified trust under section 401 only if the plan of which
such trust is a part expressly provides that the entire interest of each
employee, including any common-law employee, will be distributed in
accordance with the provisions of subparagraph (2) or (3) of this
paragraph.
(2) Unless the provisions of subparagraph (3) of this paragraph
apply, the entire interest of each employee (including contributions he
has made on his own behalf, contributions made on his behalf by his
employer, and interest thereon) must be actually distributed to such
employee --
(i) In the case of an employee, other than an individual who is, or
has been, an owner-employee under the plan, not later than the last day
of the taxable year of such employee in which he attains the age of 70
1/2, or not later than the last day of the taxable year in which such
employee retires, whichever is later, and
(ii) In the case of an employee who is, or has been, an
owner-employee under the plan, not later than the last day of the
taxable year in which he attains the age of 70 1/2.
(3) In lieu of distributing an employee's entire interest in a
qualified plan as provided in subparagraph (2) of this paragraph, such
interest may be distributed commencing no later than the last taxable
year described in such subparagraph (2). In such case, the plan must
expressly provide that the entire interest of such an employee shall be
distributed to him and his beneficiaries, in a manner which satisfies
the requirements of subparagraph (5) of this paragraph, over any of the
following periods (or any combination thereof) --
(i) The life of the employee, or
(ii) The lives of the employee and his spouse, or
(iii) A period certain not longer than the life expectancy of the
employee, or
(iv) A period certain not longer than the joint life and last
survivor expectancy of the employee and his spouse.
(4) For purposes of subparagraphs (3) and (5) of this paragraph, the
determination of the life expectancy of the employee or the joint life
and last survivor expectancy of the employee and his spouse is to be
made either (i) only once, at the time the employee receives the first
distribution of his entire interest under the plan, or (ii)
periodically, in a consistent manner. Such life expectancy or joint
life and last survivor expectancy cannot exceed the period computed by
the use of the expected return multiples in 1.72-9, or, in the case of
payments under a contract issued by an insurance company, the period
computed by use of the life expectancy tables of such company.
(5) If an employee's entire interest is to be distributed over a
period described in subparagraph (3) of this paragraph, then the amount
to be distributed each year must be at least an amount equal to the
quotient obtained by dividing the entire interest of the employee under
the plan at the time the distribution is made (expressed in either
dollars or units) by the life expectancy of the employee, or joint life
and last survivor expectancy of the employee and his spouse (whichever
is applicable), determined in accordance with the provisions of
subparagraph (4) of this paragraph. However, no distribution need be
made in any year, or a lesser amount may be distributed, if the
aggregate amounts distributed by the end of that year are at least equal
to the aggregate of the minimum amounts required by this subparagraph to
have been distributed by the end of such year.
(6) If an employee's entire interest is distributed in the form of an
annuity contract, then the requirements of section 401(a)(9) are
satisfied if the distribution of such contract takes place before the
end of the latest taxable year described in subparagraph (2) of this
paragraph, and if the employee's interest will be paid over a period
described in subparagraph (3) of this paragraph and at a rate which
satisfies the requirements of subparagraph (5) of this paragraph.
(7) The requirements of section 401(a)(9) do not preclude
contributions from being made on behalf of an owner-employee under a
qualified plan subsequent to the taxable year in which the distribution
of his entire interest is required to commence. Thus, if all other
requirements for qualification are satisfied, a qualified plan may
provide contributions for an owner-employee who has already attained age
70 1/2. However, a distribution of benefits attributable to
contributions made on behalf of an owner-employee in a taxable year
beginning after the taxable year in which he attains the age of 70 1/2
must satisfy the requirements of subparagraph (3) of this paragraph.
Thus, if an owner-employee has already attained the age of 70 1/2 at the
time the first contribution is made on his behalf, the distribution of
his entire interest must commence in the year in which such contribution
is first made on his behalf.
(8) This paragraph shall not apply and an otherwise qualified trust
will not be disqualified if the method of distribution under the plan is
one which was designated by a common-law employee prior to October 10,
1962, and such method of distribution is not in accordance with the
provisions of section 401(a)(9). Such exception applies regardless of
whether the actual distribution of the entire interest of an employee
making such a designation, or any portion of such interest, has
commenced prior to October 10, 1962.
(T.D. 6675, 28 FR 10124, Sept. 17, 1963, as amended by T.D. 6982, 33
FR 16500, Nov. 13, 1968)
26 CFR 1.401-12 Requirements for qualification of trusts and plans
benefiting owner-employees.
(a) Introduction. This section prescribes the additional
requirements which must be met for qualification of a trust forming part
of a pension or profit-sharing plan, or of an annuity plan, which covers
any self-employed individual who is an owner-employee as defined in
section 401(c)(3). However, to the extent that the provisions of
1.401-11 are not modified by the provisions of this section, such
provisions are also applicable to a plan which covers an owner-employee.
The provisions of this section apply to taxable years beginning after
December 31, 1962. Except as otherwise provided, paragraphs (b) through
(m) of this section apply to taxable years beginning after December 31,
1962. Paragraph (n) of this section applies to plan years determined in
accordance with paragraph (n)(1) of the section.
(b) General rules. (1) The qualified plan and trust of an
unincorporated trade or business does not have to satisfy the additional
requirements for qualification merely because an owner-employee derives
earned income (as defined in section 401(c)(2)) from the trade or
business with respect to which the plan is established. Such additional
requirements need be satisfied only if an owner-employee is actually
covered under the plan of the employer. An owner-employee may only be
covered under a plan of an employer if such owner-employee has so
consented. However, the consent of the owner-employee may be either
expressed or implied. Thus, for example, if contributions are, in fact,
made on behalf of an owner-employee, such owner-employee is considered
to have impliedly consented to being covered under the plan.
(2) A qualified plan covering an owner-employee must be a definite
written program and arrangement setting forth all provisions essential
for qualification at the time such plan is established. Therefore, for
example, even though the owner-employee is the only employee covered
under the plan at the time the plan is established, the plan must
incorporate all the provisions relating to the eligibility and benefits
of future employees.
(c) Bank trustee. (1)(i) If a trust created after October 9, 1962,
is to form a part of a qualified pension or profit-sharing plan covering
an owner-employee, or if a trust created before October 10, 1962, but
not exempt from tax on October 9, 1962, is to form part of such a plan,
the trustee of such trust must be a bank as defined in paragraph (c)(2)
of this section, unless an exception contained in paragraph (c)(4) of
this section applies, or paragraph (n) of this section applies.
(ii) The provisions of this paragraph do not apply to an employees'
trust created prior to October 10, 1962, if such trust was exempt from
tax on October 9, 1962, even though the plan of which such trust forms a
part is amended after December 31, 1962, to cover any owner-employee.
Although the trustee of a trust described in the preceding sentence need
not be a bank, all other requirements for the qualification of such a
trust must be satisfied at the time an owner-employee is first covered
under such plan.
(2) The term bank as used in this paragraph means --
(i) A bank as defined in section 581;
(ii) A corporation which, under the laws of the State of its
incorporation or under the laws of the District of Columbia, is subject
to both the supervision of, and examination by, the authority in such
jurisdiction in charge of the administration of the banking laws;
(iii) In the case of a trust created or organized outside of the
United States, that is, outside the States and the District of Columbia,
a bank or trust company, wherever incorporated, exercising fiduciary
powers and subject to both supervision and examination by governmental
authority;
(iv) Beginning on January 1, 1974, an insured credit union (within
the meaning of section 101 (6) of the Federal Credit Union Act, 12
U.S.C. 1752 (6)).
(3) Although a bank is required to be the trustee of a qualified
trust, another person, including the employer, may be granted the power
in the trust instrument to control the investment of the trust funds
either by directing investments, including reinvestments, disposals, and
exchanges, or by disapproving proposed investments, including
reinvestments, disposals, or exchanges.
(4)(i) This paragraph does not apply to a trust created or organized
outside the States and the District of Columbia before October 10, 1962,
if, on October 9, 1962, such trust is described in section 402(c) as an
organization treated as if it was a trust exempt from tax under section
501(a).
(ii) In addition, the requirement that the trustee must be a bank
does not apply to a qualified trust forming a part of a pension or
profit-sharing plan if --
(a) The investments of all the funds in such trust are in annuity,
endowment, or life insurance contracts, issued by a company which is a
life insurance company as defined in section 801(a) during the taxable
year immediately preceding the year that such contracts are originally
purchased;
(b) All the proceeds which are, or may become, payable under the
contract are payable directly to the employee or his beneficiary;
(c) The plan contains a provision to the effect that the employer is
to substitute a bank as a trustee or custodian of the contracts if the
employer is notified by the district director that such substitution is
required because the trustee is not keeping such records, or making such
returns, or rendering such statements, as are required by forms or
regulations.
However, a qualified trust may only purchase insurance protection to
the extent permitted under a qualified plan (see paragraph (b)(1) (i)
and (ii) of 1.401-1).
(5) An employer may designate several trusts (or custodial accounts)
or a trust or trusts and an annuity plan or plans as constituting parts
of a single plan which is intended to satisfy the requirements for
qualification. However, each trust (or custodial account) so designated
which is part of a plan covering an owner-employee must satisfy the
requirements of this paragraph. Thus, for example, if all other
requirements for qualification are satisfied by the plan, a qualified
profit-sharing plan may provide that a portion of the contributions
under the plan will be paid to a custodial account, the custodian of
which is a bank, for investment in stock of a regulated investment
company, and the remainder of such contributions will be paid to a
trust, the trustee of which is not a bank, for investment in annuity
contracts.
(d) Profit-sharing plan. (1) A profit-sharing plan, as defined in
paragraph (b)(1)(ii) of 1.401-1, which covers any owner-employee must
contain a definite formula for determining the contributions to be made
by the employer on behalf of employees, other than owner-employees. A
formula to be definite must specify the portion of profits to be
contributed to the trust and must also define profits for plan purposes.
A definite formula may contain a variable factor, if the value of such
factor may not vary at the discretion of the employer. For example, the
percentage of profits to be contributed each year may differ depending
on the amount of profits. On the other hand, a formula which, for
example, specifies that profits for plan purposes are not to exceed the
cash on hand at the time the employer contribution is made is not a
definite formula. The requirement that the plan formula be definite is
satisfied if such formula limits the amount to be contributed on behalf
of all employees covered under the plan to the amount which permits
self-employed individuals to obtain the maximum deduction under section
404(a). However, even though the plan formula is definite, the plan
must satisfy all the other requirements for qualification, including the
requirement that the contributions under the plan not discriminate in
favor of any self-employed individual, and the requirement that the plan
be for the exclusive benefit of the employees in general.
(2) A definite contribution formula constitutes an integral part of a
qualified profit-sharing plan and may not be amended except for a valid
business reason.
(3) The requirement that a profit-sharing plan contain a definite
formula for determining the amount of contributions to be made on behalf
of employees does not apply to contributions which are made on behalf of
owner-employees. However, such contributions are subject to the
requirement that they be nondiscriminatory with respect to other
employees and must not exceed the limitations on allowable and
deductible contributions which may be made by owner-employees.
(e) Requirements as to coverage -- (1) Coverage of all employees.
The coverage requirements contained in section 401(a)(3) do not apply to
a plan which covers any owner-employee. However, such a plan must
satisfy the coverage requirements of section 401(d), including section
401(d)(3). Accordingly, a plan which covers an owner-employee must
benefit each employee of the trade or business (other than any
owner-employee who does not consent to be covered under the plan) whose
customary period of employment has been for more than 20 hours a week
for more than five months during each of three consecutive periods of
twelve calendar months. Therefore, a plan may not provide, for example,
that an employee, other than an owner-employee, is ineligible to
participate because he does not consent to be a participant or because
he does not consent to make reasonable contributions under the plan.
(2) Period of service. (i) In determining whether an employee
renders service to the same employer, and, therefore, must be covered
under the plan of such employer, a partnership is considered to be one
employer during the entire period prior to the time it is terminated
within the meaning of section 708 (see paragraph (e)(2) of 1.401-10).
(ii) In the case of a common-law employee who becomes an employee
within the meaning of section 401(c)(1) with respect to the same trade
or business, his period of employment is the aggregate of his service as
a common-law employee and an employee within the meaning of section
401(c)(1).
(iii) In determining whether any employee, including any
owner-employee, has three years of service, past service of any such
employee may be taken into account as provided in paragraph (b) of
1.401-10. Thus, if an employer takes into account past service for any
owner-employee, he must take into account the past service of all his
other employees to the same extent. However, a plan may provide for
coverage after a period of service which is shorter than three years,
but in no case may the plan require a waiting period for employees which
is longer than that required for the owner-employees.
(f) Discrimination in contributions or benefits. (1) Variations in
contributions or benefits may be provided under the plan so long as the
plan does not discriminate, either as to contributions or benefits, in
favor of officers, employees whose principal duties consist in
supervising the work of other employees, or highly compensated
employees, as against other employees (see 1.401-4). For the purpose of
determining whether the provisions of a plan which provide contributions
or benefits for an owner-employee result in the prohibited
discrimination, an owner-employee, like other self-employed individuals,
is considered a highly compensated employee (see paragraph (d) of
1.401-11). Whether or not a plan is discriminatory is determined by the
actual operation of the plan as well as by its formal provisions.
(2) The provisions of section 401(a)(5), relating to certain plan
provisions which will not in and of themselves be considered
discriminatory, are not applicable to any plan which covers any
owner-employee. Such a plan must, instead, satisfy the requirements of
section 401(a)(10) and section 401(d)(6). Accordingly, a plan is not
discriminatory within the meaning of section 401(a)(4) merely because
the contributions or benefits provided for the employees covered under
the plan bear a uniform relationship to the total compensation, or to
the basic or regular rate of compensation, of such employees. The total
compensation or the basic or regular rate of compensation of an
owner-employee is computed in accordance with the provisions of
paragraph (d)(2) of 1.401-11.
(3) Even though the contributions under the plan do not bear a
uniform relationship to the total compensation, or the basic or regular
rate of compensation, of the employees covered thereunder and the plan
would otherwise be considered discriminatory within the meaning of
section 401(a)(4), the plan shall not be considered discriminatory if
such variation is due to employer contributions on behalf of any
owner-employee which are required, under the plan, to be applied to pay
premiums or other consideration on one or more level premium contracts
described in section 401(e)(3)(A). In a taxable year to which the
foregoing exception applies and, therefore, one in which the
contributions under the plan would otherwise be discriminatory, the
employer contributions to pay such premiums or other consideration must
be the only employer contributions made for the owner-employee, and the
contributions for such taxable year under such plan must not be in
excess of the amount permitted to be paid toward the purchase of such a
contract under the provisions of section 401(e)(3). Furthermore, the
exception described in this subparagraph only applies to contributions
made under a plan which otherwise satisfies the requirements of section
401(a)(4) and the regulations thereunder. Thus, if a plan provides for
the purchase, in accordance with section 401(e)(3), of a level premium
contract for an owner-employee, then such plan must provide either that
the benefits for all employees are nondiscriminatory or, in the case of
a money-purchase type of plan, that the contributions for all employees
are based on compensation determined in a non-discriminatory manner.
For example, since the contributions on behalf of the owner-employee are
based on his earned income during the period preceding the purchase of
the contract, the contributions for other employees must be based on
their compensation during the same period if this will result in larger
contributions on their behalf.
(4) In the case of a plan which covers any owner-employee, the
contributions or benefits provided under the plan cannot vary with
respect to years of service except as provided in subparagraph (5) of
this paragraph.
(5) The provisions of section 401(d)(3) do not preclude the coverage
of employees with less than three years of service if such coverage is
provided on a nondiscriminatory basis. However, a plan will not be
disqualified merely because the contributions or benefits for employees
who have less than three years of service are not as favorable as the
contributions or benefits for employees having more than three years of
service.
(g) Nonforfeitable rights. (1)(i) Except as provided in subparagraph
(2) of this paragraph, if an owner-employee is covered under the plan of
his employer, each employee's rights to the contributions, or to the
benefits derived from the contributions, of such employer must be
nonforfeitable at the time such contributions are paid to, or under, the
plan. The employees who must obtain such nonforfeitable rights include
the self-employed individuals who are covered under the plan. As to
what constitutes nonforfeitable rights of an employee, see paragraph
(a)(2) of 1.402(b)-1.
(ii) Under section 401(d)(2), it is necessary that each employee
obtain nonforfeitable rights to the employer contributions under the
plan on his behalf from the time such contributions are paid. Thus,
each employee must have a nonforfeitable interest to the portion of the
funds under the plan which is allocable to the employer contributions
made under the plan on his behalf.
(2) The provisions of subparagraph (1) of this paragraph do not apply
to the extent that employer contributions on behalf of any employee must
remain forfeitable in order to satisfy the requirements of paragraph (c)
of 1.401-4. However, employer contributions on behalf of employees
whose rights are required to remain forfeitable to satisfy such
requirements must be nonforfeitable except for such contingency.
(h) Integration with social security. (1) If a qualified plan covers
any owner-employee, then the rules relating to the integration of such
plan with the contributions or benefits under the Social Security Act
are provided in this paragraph. Accordingly, the provisions of
paragraph (e) of 1.401-3 and paragraph (c) of 1.401-11 do not apply to
such a plan. In the case of a plan which provides contributions or
benefits for any owner-employee, integration of the plan with the Social
Security Act for any taxable year of the employer can take place only if
not more than one-third of the employer contributions under the plan
which are deductible under section 404 for that year are made on behalf
of the owner-employees. If such requirement is satisfied, then the plan
may be integrated with the contributions or benefits under the Social
Security Act in accordance with the rules of subparagraph (3) of this
paragraph.
(2)(i) For purposes of subparagraph (1) of this paragraph, in
determining the total amount of employer contributions which are
deductible under section 404, the provisions of section 404(a),
including the provisions of section 404(a)(9) (relating to plans
benefiting self-employed individuals), and section 404(e) (relating to
the special limitations for self-employed individuals) are taken into
account, but the provisions of section 404(a)(10) (relating to the
special limitation on the amount allowed as a deduction for
self-employed individuals) are not taken into account.
(ii) The amount of deductible employer contributions which are made
on behalf of all owner-employees for the year is compared with the
amount of deductible employer contributions for the year made on behalf
of all employees covered under the plan (including self-employed
individuals who are not owner-employees and owner-employees) for the
purpose of determining whether the deductible contributions by the
employer on behalf of owner-employees are not more than one-third of the
total deductible contributions.
(3) If a plan covering an owner-employee satisfies the requirement of
subparagraph (1) of this paragraph, and if the employer wishes to
integrate such plan with the contributions or benefits under the Social
Security Act, then --
(i) The employer contributions under the plan on behalf of any
owner-employee shall be reduced by an amount determined by multiplying
the earned income of such owner-employee which is derived from the trade
or business with respect to which the plan is established and which does
not exceed the maximum amount which may be treated as self-employment
income under section 1402(b)(1), by the rate of tax imposed under
section 1401(a); and
(ii) The employer contributions under the plan on behalf of any
employee other than an owner-employee may be reduced by an amount not in
excess of the amount determined by multiplying the employee's wages
under section 3121(a)(1) by the rate of tax imposed under section
3111(a). For purposes of this subdivision, the earned income of a
self-employed individual which is derived from the trade or business
with respect to which the plan is established and which is treated as
self-employment income under section 1402(b)(1), shall be treated as
''wages'' under section 3121(a)(1).
(4) A money purchase pension plan or a profit-sharing plan may
provide that such plan will be integrated with the Social Security Act
only for such taxable years of the employer in which the requirements
for integration are satisfied. However, a qualified plan cannot provide
that employer contributions are only to be made for taxable years in
which the integration requirements are satisfied.
(i) Limit on contributions on behalf of an owner-employee. (1)
Section 401(d)(5) requires that a plan which covers any owner-employee
must contain provisions which restrict the employer contributions that
may be made on behalf of any owner-employee for each taxable year to an
amount no greater than that which is deductible under section 404. In
computing the amount deductible under section 404 for purposes of
section 401(d)(5) and this paragraph, the limitations contained in
section 404(a)(9) and (e), relating to special limitations for
self-employed individuals, are taken into account, but such amount is
determined without regard to section 404(a)(10), relating to the special
limitation on the amount allowed as a deduction for self-employed
individuals. Accordingly, a qualified plan which covers any
owner-employee cannot permit employer contributions to be made on behalf
of such owner-employee in excess of 10 percent of the earned income
which is derived by such owner-employee from the trade or business with
respect to which the plan is established, or permit the employer to
contribute more than $2,500 on behalf of any such owner-employee for any
taxable year.
(2)(i) In determining whether the plan permits contributions to be
made in excess of the limitations of subparagraph (1) of this paragraph,
employer contributions under the plan which are allocable to the
purchase of life, accident, health, or other insurance are not to be
taken into account. To determine the amount of employer contributions
under the plan which are allocable to the purchase of life, accident,
health, or other insurance, see paragraph (f) of 1.404(e)-1 and
paragraph (b) of 1.72-16. However, contributions for such insurance can
be made only to the extent otherwise permitted under sections 401
through 404 and the regulations thereunder.
(ii) A further exception to the limit on the amount of contributions
which an employer may make under the plan on behalf of an owner-employee
is made in the case of contributions which are required, under the plan,
to be applied to pay premiums or other consideration for one or more
annuity, endowment, or life insurance contracts described in section
401(e)(3) (see section 401(e)(3) and the regulations thereunder).
(j) Excess contributions. The provisions of section 401(e) define
the term ''excess contribution'' and indicate the consequences of making
such a contribution (see 1.401-13). However, section 401(d)(8) provides
that a qualified plan which provides contributions or benefits for any
owner-employee must contain certain provisions which complement the
rules contained in section 401(e). Under section 401(d)(8), a qualified
plan must provide that --
(1) The net amount of any excess contribution (determined in
accordance with the provisions of 1.401-13) must be returned to the
owner-employee on whose behalf it is made, together with the net income
earned on such excess contribution;
(2) For each taxable year for which the trust is considered to be a
nonqualified trust with respect to an owner-employee under section
401(e)(2) because the net amount of an excess contribution and the
earnings thereon have not been returned to such owner-employee, the
income of the trust for that taxable year attributable to the interest
of such owner-employee is to be paid to him.
(3) If an excess contribution is determined to be willfully made
(within the meaning of section 401(e)(2)(E)), the entire interest of the
owner-employee on whose behalf such contribution was made is required to
be distributed to such owner-employee. Furthermore, the plan must
require the distribution of an owner-employee's entire interest under
the plan if a willful excess contribution is determined to have been
made under any other plan in which the owner-employee is covered as an
owner-employee.
(k) Contributions of property under a qualified plan. (1) The
contribution of property, other than money, prior to January 1, 1975, by
the person who is the employer (within the meaning of section 401(c)(4))
to a qualified trust forming a part of a plan which covers employees
some or all of whom are owner-employees who control (within the meaning
of section 401(d)(9)(B) and the regulations thereunder) the trade or
business with respect to which the plan is established is a prohibited
transaction between such trust and the employer-grantor of such trust
(see section 503(g) prior to its repeal by sec. 2003(b)(5) of the
Employee Retirement Income Security Act of 1974 (88 Stat. 978)).
(2) A contribution of property, other than money, prior to January 1,
1975, to a qualified trust by an owner-employee who controls, or a
member of a group of owner-employees who together control, the trade or
business with respect to which the plan is established, or a
contribution of property, other than money, to a qualified trust by a
member of such an owner-employee's family (as defined in section
267(c)(4)), is a prohibited transaction. (See section 503(g) prior to
its repeal by section 2003(b)(5) of the Employee Retirement Income
Security Act of 1974 (88 Stat. 978)).
(3) See section 4975 and the regulations thereunder with respect to
rules relating to the contribution of property, other than money, made
after December 31, 1974.
(l) Controlled trades or businesses -- (1) Plans covering an
owner-employee who controls another trade or business. (i) A plan must
not cover any owner-employee, or group of two or more owner-employees,
if such owner-employee, or group of owner-employees, control (within the
meaning of subparagraph (3) of this paragraph) any other trade or
business, unless the employees of such other trade or business
controlled by such owner-employee, or such group of owner-employees, are
included in a plan which satisfies the requirements of section 401(a),
including the qualification requirements of section 401(d). The
employees who must be covered under the plan of the trade or business
which is controlled include the self-employed individuals who are not
owner-employees and the owner-employees who consent to be covered by
such plan. Accordingly, the employer must determine whether any
owner-employee, or group of owner-employees, who may participate in the
plan which is established by such employer controls any other trade or
business, and whether the requirements of this subparagraph are
satisfied with respect to the plan established in such other trade or
business. The plan of an employer may exclude an owner-employee who
controls another trade or business from coverage under the plan even
though such owner-employee consents to be covered, if a plan which
satisfies the requirements of subdivision (ii) of this subparagraph has
not been established in the trade or business which such owner-employee
controls.
(ii) The qualified plan which the owner-employee, or owner-employees,
are required to provide for the employees of the trade or business which
they control must provide contributions and benefits which are not less
favorable than the contributions and benefits provided for the
owner-employee, or owner-employees, under the plan of any trade or
business which they do not control. Thus, for example, if the
contributions or benefits for the owner-employee under the plan of the
trade or business which he does not control are computed on the basis of
his total (as compared to basic or regular rate) of compensation, then
the contributions or benefits for employees covered under the plan of
the trade or business which the owner controls must be computed on the
basis of their total compensation. However, the requirements of this
subdivision cannot be satisfied if the benefits and contributions
provided under the plan for the employees of the trade or business which
is controlled are not comparable to those provided under the plan
covering the owner-employee, or group of owner-employees, in the trade
or business which they do not control. Thus, for example, if the
owner-employee is covered by a pension plan in the trade or business
which he does not control, he may not satisfy the requirements of this
subdivision by establishing a profit-sharing plan in the trade or
business which he does control.
(iii) If an individual is covered as an owner-employee under the
plans of two or more trades or businesses which he does not control and
such individual controls a trade or business, then the contributions or
benefits of the employees under the plan of the trade or business which
he does control must be as favorable as those provided for him under the
most favorable plan of the trade or business which he does not control.
(2) Owner-employees who control more than one trade or business. If
the plan provides contributions or benefits for an owner-employee who
controls, or group of owner-employees who together control, the trade or
business with respect to which the plan is established, and such
owner-employee, or group of owner-employees, also control as
owner-employees one or more other trades or businesses, plans must be
established with respect to such controlled trades or businesses so that
when taken together they form a single plan which satisfies the
requirements of section 401 (a) and (d) with respect to the employees of
all the controlled trades or businesses.
(3) Control defined. (i) For purposes of this paragraph, an
owner-employee, or a group of two or more owner-employees, shall be
considered to control a trade or business if such owner-employee, or
such group of two or more owner-employees together --
(a) Own the entire interest in an unincorporated trade or business,
or
(b) In the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in such partnership.
In determining whether an owner-employee, or group of
owner-employees, control a trade or business within the meaning of the
preceding sentence, it is immaterial whether or not such individuals
could be covered under a plan established with respect to the trade or
business. For example, if an individual who is an owner-employee has a
60-percent capital interest in another trade or business, such
individual controls such trade or business and the provisions of this
paragraph apply even though the individual derives no earned income, as
defined in section 401(c)(2), from the controlled trade or business.
For purposes of determining the ownership interest of an owner-employee,
or group of owner-employees, an owner-employee, or group of
owner-employees, is treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership controlled by
such owner-employee, or group of owner-employees.
(ii) The provisions of subparagraphs (1) and (2) of this paragraph
apply only if the owner-employee who controls, or the group of
owner-employees who control, a trade or business, or trades or
businesses, within the meaning of subdivision (i) of this subparagraph
is the same owner-employee, or group of owner-employees, covered under
the plan intended to satisfy the requirements for qualification. Thus,
for example, if A is a 50-percent partner in both the AB and AC
partnership, and if the AB partnership wishes to establish a plan
covering A and B, the provisions of subparagraphs (1) and (2) of this
paragraph do not apply, since A does not control either partnership, and
since B has no interest in the AC partnership.
(m) Distribution of benefits. (1)(i) Section 401(d)(4)(B) requires
that a qualified plan which provides contributions or benefits for any
owner-employee must not provide for the payment of benefits to such
owner-employee at any time before he has attained age 59 1/2. An
exception to the foregoing rule permits a qualified plan to provide for
the distribution of benefits to an owner-employee prior to the time he
attains age 59 1/2 if he is disabled. For taxable years beginning after
December 31, 1966, see section 72(m)(7) and paragraph (f) of 1.72-17
for the meaning of disabled. For taxable years beginning before January
1, 1967, see section 213(g)(3) for the meaning of disabled. In general,
both sections 72(m)(7) and 213(g)(3) provide that an individual is
considered disabled if he is unable to engage in any substantial gainful
activity because of a medically determinable physical or mental
impairment which can be expected to result in death or to be of
long-continued and indefinite duration. In addition, section
401(d)(4)(B) does not preclude the distribution of benefits to the
estate or other beneficiary of a deceased owner-employee prior to the
time the owner-employee would have attained age 59 1/2 if he had lived.
(ii) A qualified plan must provide that if, despite the restrictions
in the plan to the contrary, an amount is prematurely distributed, or
made available, to a participant in such plan who is, or has been, an
owner-employee, then no contribution shall be made under the plan by, or
for, such individual during any of the 5 taxable years of the plan
beginning after the distribution is made.
(2)(i) The provisions of subparagraph (1) of this paragraph preclude
an owner-employee who is a participant in a qualified pension or
profit-sharing plan of his employer from withdrawing any part of the
funds accumulated on his behalf except as provided in such subparagraph
(1). However, the distribution of an owner-employee's interest, or any
portion of such interest, after he attains age 59 1/2 is determined by
the provisions of the plan. Thus, for example, if a qualified pension
plan provides that the normal retirement age under the plan is age 65,
an owner-employee would not be entitled to a distribution of an amount
under the plan merely because he attained age 59 1/2.
(ii) The provisions of subparagraph (1) of this paragraph do not
preclude the establishment of a profit-sharing plan which provides for
the distribution of all, or part, of participants' accounts after a
fixed number of years. However, such a plan must not permit a
distribution of any amount to any owner-employee prior to the time the
owner-employee has attained age 59 1/2 or becomes disabled within the
meaning of section 72(m)(7) or section 213(g)(3), whichever is
applicable. On the other hand, if a distribution would have been made
under the plan to an owner-employee but for the fact that he had not
attained age 59 1/2, then the amount of such distribution (including any
increment earned on such amount) must be distributed to such
owner-employee at such time as he attains age 59 1/2.
(3) A qualified pension, annuity, or profit-sharing plan which covers
an owner-employee must provide that the distribution of an
owner-employee's entire interest under the plan must begin prior to the
end of the taxable year in which he attains the age of 70 1/2, and such
distribution must satisfy the requirements of section 401(a)(9) and
paragraph (e) of 1.401-11. Furthermore, section 401(d)(7) provides
that, if an owner-employee dies prior to the time his entire interest
has been distributed to him, such owner-employee's entire remaining
interest under the plan must, in general, either be distributed to his
beneficiary, or beneficiaries, within 5 years, or be used within that
period to purchase an immediate annuity for his beneficiary, or
beneficiaries. However, a distribution within 5 years of the death of
the owner-employee is not required if the distribution of his interest
has commenced and such distribution is for a term certain over a period
not extending beyond the joint life and survivor expectancy of the
owner-employee and his spouse. Thus, for example, an annuity for the
joint life and survivor expectancy of an owner-employee and his spouse
which guarantees payments for 10 years is a distribution which is
payable over a period which does not exceed the joint life and survivor
expectancy of the owner-employee and his spouse if such expectancy is at
least 10 years at the time the distribution first commences.
(n) Nonbank trustee -- (1) Effective dates -- (i) General rule. For
a plan not in existence on January 1, 1974, this paragraph shall apply
to the first plan year commencing after September 2, 1974, and all
subsequent plan years.
(ii) Existing plans. For a plan in existence on January 1, 1974,
this paragraph shall apply to the first plan year commencing after
December 31, 1975, and all subsequent plan years.
(2) In general. For plan years to which this paragraph applies, the
trustee of a trust described in paragraph (c)(1)(i) of this section may
be a person other than a bank if the person demonstrates to the
satisfaction of the Commissioner that the manner in which the person
will administer trusts will be consistent with the requirements of
section 401. The person must demonstrate by written application that
the requirements of paragraph (n)(3) to (7) of this section will be met.
The written application must be sent to the Commissioner of Internal
Revenue, Attention: E:EP, Internal Revenue Service, Washington, D.C.
20224. For procedural and administrative rules, see paragraph (n)(8) of
this section.
(3) Fiduciary ability. The applicant must demonstrate in detail its
ability to act within the accepted rules of fiduciary conduct. Such
demonstration must include the following elements of proof:
(i) Continuity. (A) The applicant must assure the uninterrupted
performance of its fiduciary duties nonwithstanding the death or change
of its owners. Thus, for example, there must be sufficient diversity in
the ownership of the applicant to ensure that the death or change of its
owners will not interrupt the conduct of its business. Therefore, the
applicant cannot be an individual.
(B) Sufficient diversity in the ownership of an incorporated
applicant is demonstrated in the following circumstances:
(1) Individuals each of whom owns more than 20 percent of the voting
stock in the applicant own, in the aggregate, no more than 50 percent of
such stock;
(2) The applicant has issued securities registered under section 12
(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or
required to be registered under section 12(g) (1) of that Act (15 U.S.C.
78l (g)(1)); or
(3) The applicant has a parent corporation within the meaning of
section 1563 (a) (1) that has issued securities registered under section
12 (b) of the Securities Exchange Act of 1934 (15 U.S.C. 78l (b)) or
required to be registered under Section 12 (g) (1) of that Act (15
U.S.C. 78l (g)(1)).
(C) Sufficient diversity in the ownership of an applicant that is a
partnership means that --
(1) Individuals each of whom owns more than 20 percent of the profits
interest in the partnership own, in the aggregate, no more than 50
percent of such profits interest, and
(2) Individuals each of whom owns more than 20 percent of the capital
interest in the partnership own, in the aggregate, no more than 50
percent of such capital interest.
(D) For purposes of this subdivision, the ownership of stock and of
capital and profits interests shall be determined in accordance with the
rules for constructive ownership of stock provided in section 1563 (e)
and (f) (2). For this purpose, the rules for constructive ownership of
stock provided in section 1563(e) and (f) (2) shall apply to a capital
or profits interest in a partnership as if it were a stock interest.
(ii) Established location. The applicant must have an established
place of business in the United States where it is accessible during
every business day.
(iii) Fiduciary experience. The applicant must have fiduciary
experience or expertise sufficient to ensure that it will be able to
perform its fiduciary duties. Evidence of fiduciary experience must
include proof that a significant part of the business of the applicant
consists of exercising fiduciary powers similar to those it will
exercise if its application is approved. Evidence of fiduciary
expertise must include proof that the applicant employs personnel
experienced in the administration of fiduciary powers similar to those
the applicant will exercise if its application is approved.
(iv) Fiduciary responsibility. The applicant must assure compliance
with the rules of fiduciary conduct set out in paragraph (n)(6) of this
section.
(v) Financial responsibility. The applicant must exhibit a high
degree of solvency commensurate with the obligations imposed by this
paragraph. Among the factors to be taken into account are the
applicant's net worth, its liquidity, and its ability to pay its debts
as they come due.
(4) Capacity to account. The applicant must demonstrate in detail
its experience and competence with respect to accounting for the
interests of a large number of individuals (including calculating and
allocating income earned and paying out distributions to payees).
Examples of accounting for the interests of a large number of
individuals include accounting for the interests of a large number of
shareholders in a regulated investment company and accounting for the
interests of a large number of variable annuity contract holders.
(5) Fitness to handle funds -- (i) In general. The applicant must
demonstrate in detail its experience and competence with respect to
other activities normally associated with the handling of retirement
funds.
(ii) Examples. Examples of activities normally associated with the
handling of retirement funds include:
(A) To Receive, issue receipts for, and safely keep securities;
(B) To collect income;
(C) To execute such ownership certificates, to keep such records,
make such returns, and render such statements as are required for
Federal tax purposes;
(D) To give proper notification regarding all collections;
(E) To collect matured or called principal and properly report all
such collections;
(F) To exchange temporary for definitive securities;
(G) To give proper notification of calls, subscription rights,
defaults in principal or interest, and the formation of protective
committees;
(H) To buy, sell, receive, or deliver securities on specific
directions.
(6) Rules of fiduciary conduct. The applicant must demonstrate that
under applicable regulatory requirements, corporate or other governing
instruments, or its established operating procedures:
(i) Administration of fiduciary powers. (A)(1) The owners or
directors of the applicant will be responsible for the proper exercise
of fiduciary powers by the applicant. Thus, all matters pertinent
thereto, including the determination of policies, the investment and
disposition of property held in a fiduciary capacity, and the direction
and review of the actions of all employees utilized by the applicant in
the exercise of its fiduciary powers, will be the responsibility of the
owners or directors. In discharging this responsibility, the owners or
directors may assign to designated employees, by action duly recorded,
the administration of such of the applicant's fiduciary powers as may be
proper to assign.
(2) A written record will be made of the acceptance and of the
relinquishment or closing out of all fiduciary accounts, and of the
assets held for each account.
(3) If the applicant has the authority or the responsibility to
render any investment advice with regard to the assets held in or for
each fiduciary account, the advisability of retaining or disposing of
the assets will be determined at least once during each period of 12
months.
(B) All employees taking part in the performance of the applicant's
fiduciary duties will be adequately bonded. Nothing in this subdivision
(i)(B) shall require any person to be bonded in contravention of section
412(d) of the Employee Retirement Income Security Act of 1974 (29 U.S.C.
1112(d)).
(C) The applicant will employ or retain legal counsel who will be
readily available to pass upon fiduciary matters and to advise the
applicant.
(D) In order to segregate the performance of its fiduciary duties
from other business activities, the applicant will maintain a separate
trust division under the immediate supervision of an individual
designated for that purpose. The trust division may utilize the
personnel and facilities of other divisions of the applicant, and other
divisions of the applicant may utilize the personnel and facilities of
the trust division, as long as the separate identity of the trust
division is preserved.
(ii) Adequacy of net worth. (A) The applicant will determine the
value of the assets held by it in trust at least once in each calendar
year and no more than 18 months after the preceding valuation. The
assets will be valued at their fair market value, except that the assets
of an employee pension benefit plan to which section 103(b)(3)(A) of the
Employee Retirement Income Security Act of 1974 (29 U.S.C.
1023(b)(3)(A)) applies will be considered to have the value stated in
the most recent annual report of the plan.
(B) No fiduciary account will be accepted by the applicant unless the
applicant's net worth (determined as of the end of the most recent
taxable year) exceeds the greater of --
(1) $100,000, or
(2) Four percent (or, in the case of a passive trustee described in
paragraph (n)(7)(i)(A) of this section, two percent) of the value of all
of the assets held by the applicant in fiduciary accounts (determined as
of the most recent valuation date).
(C) The applicant will take whatever lawful steps are necessary
(including the relinquishment of fiduciary accounts) to ensure that its
net worth (determined as of the close of each taxable year) exceeds the
greater of --
(1) $50,000, or
(2) Two percent (or, in the case of a passive trustee described in
paragraph (n)(7)(i)(A) of this section, one percent) of the value of all
of the assets held by the applicant in fiduciary accounts (determined as
of the most recent valuation date).
(iii) Audits. (A) At least once during each period of 12 months, the
applicant will cause detailed audits of the fiduciary books and records
to be made by a qualified public accountant. At that time, the
applicant will ascertain whether the fiduciary accounts have been
administered in accordance with law, this paragraph, and sound fiduciary
principles. The audits shall be conducted in accordance with generally
accepted auditing standards, and shall involve whatever tests of the
fiduciary books and records of the applicant are considered necessary by
the qualified public accountant.
(B) In the case of an applicant which is regulated, supervised, and
subject to periodic examination by a State or Federal agency, such
applicant may adopt an adequate continuous audit system in lieu of the
periodic audits required by paragraph (n)(6)(iii)(A) of this section.
(C) A report of the audits and examinations required under this
subdivision, together with the action taken thereon, will be noted in
the fiduciary records of the applicant.
(iv) Funds awaiting investment or distribution. Funds held in a
fiduciary capacity by the applicant awaiting investment or distribution
will not be held uninvested or undistributed any longer than is
reasonable for the proper management of the account.
(v) Custody of investments. (A) Except for investments pooled in a
common investment fund in accordance with the provisions of paragraph
(n)(6)(vi) of this section, the investments of each account will not be
commingled with any other property.
(B) Assets of accounts requiring safekeeping will be deposited in an
adequate vault. A permanent record will be kept of assets deposited in
or withdrawn from the vault.
(vi) Common investment funds. The assets of an account may be pooled
in a common investment fund (as defined in paragraph (n)(6)(viii)(C) of
this section) if the applicant is authorized under applicable law to
administer a common investment fund and if pooling the assets in a
common investment fund is not in contravention of the plan documents or
applicable law. The common investment fund must be administered as
follows:
(A) Each common investment fund must be established and maintained in
accordance with a written agreement, containing appropriate provisions
as to the manner in which the fund is to be operated, including
provisions relating to the investment powers and a general statement of
the investment policy of the applicant with respect to the fund; the
allocation of income, profits and losses; the terms and conditions
governing the admission or withdrawal of participations in the funds;
the auditing of accounts of the applicant with respect to the fund; the
basis and method of valuing assets held by the fund, setting forth
specific criteria for each type of asset; the minimum frequency for
valuation of assets of the fund; the period following each such
valuation date during which the valuation may be made (which period in
usual circumstances may not exceed 10 business days); the basis upon
which the fund may be terminated; and such other matters as may be
necessary to define clearly the rights of participants in the fund. A
copy of the agreement must be available at the principal office of the
applicant for inspection during all business hours, and upon request a
copy of the agreement must be furnished to the employer, the plan
administrator, any participant or beneficiary of an account, or the
individual for whose benefit the account is established or that
individual's beneficiary.
(B) All participations in the common investment fund must be on the
basis of a proportionate interest in all of the investments.
(C) Not less frequently than once during each period of 3 months the
applicant must determine the value of the assets in the fund as of the
date set for the valuation of assets. No participation may be admitted
to or withdrawn from the fund except (1) on the basis of such valuation
and (2) as of such valuation date. No participation may be admitted to
or withdrawn from the fund unless a written request for or notice of
intention of taking such action has been entered on or before the
valuation date in the fiduciary records of the applicant. No request or
notice may be canceled or countermanded after the valuation date.
(D)(1) The applicant must at least once during each period of 12
months cause an adequate audit to be made of the common investment fund
by a qualified public accountant.
(2) The applicant must at least once during each period of 12 months
prepare a financial report of the fund which, based upon the above
audit, must contain a list of investments in the fund showing the cost
and current value of each investment; a statement for the period since
the previous report showing purchases, with cost; sales, with profit or
loss; any other investment changes; income and disbursements; and an
appropriate notation as to any investments in default.
(3) The applicant must transmit and certify the accuracy of the
financial report to the administrator of each plan participating in the
common investment fund within 120 days after the end of the plan year.
(E) When participations are withdrawn from a common investment fund,
distributions may be made in cash or ratably in kind, or partly in cash
and partly in kind: Provided, That all distributions as of any one
valuation date must be made on the same basis.
(F) If for any reason an investment is withdrawn in kind from a
common investment fund for the benefit of all participants in the fund
at the time of such withdrawal and such investment is not distributed
ratably in kind, it must be segregated and administered or realized upon
for the benefit ratably of all participants in the common investment
fund at the time of withdrawal.
(vii) Books and records. (A) The applicant must keep its fiduciary
records separate and distinct from other records. All fiduciary records
must be so kept and retained for as long as the contents thereof may
become material in the administration of any internal revenue law. The
fiduciary records must contain full information relative to each
account.
(B) The applicant must keep an adequate record of all pending
litigation to which it is a party in connection with the exercise of
fiduciary powers.
(viii) Definitions. For purposes of this subparagraph, subdivision
(n)(3)(v), and subparagraph (n)(8) of this section --
(A) The term ''account'' or ''fiduciary account'' means a trust
described in section 401(a) (including a custodial account described in
section 401(f)), a custodial account described in section 403(b)(7), or
an individual retirement account described in section 408(a) (including
a custodial account described in section 408(h)).
(B) The term ''plan administrator'' means an administrator as defined
in 1.414(g)-1.
(C) The term ''common investment fund'' means a trust that satisfies
the following requirements:
(1) The trust consists of all or part of the assets of several
accounts that have been established with the applicant, and
(2) The trust is described in section 401(a) and is exempt from tax
under section 501(a), or is a trust that is created for the purpose of
providing a satisfactory diversification of investments or a reduction
of administrative expenses for the participating accounts and that
satisfies the requirements of section 408(c).
(D) The term ''fiduciary records'' means all matters which are
written, transcribed, recorded, received or otherwise come into the
possession of the applicant and are necessary to preserve information
concerning the acts and events relevant to the fiduciary activities of
the applicant.
(E) The term ''qualified public accountant'' means a qualified public
accountant, as defined in section 103(a)(3)(D) of the Employee
Retirement Income Security Act of 1974, 29 U.S.C. 1023(a)(3)(D), who is
independent of the applicant.
(F) The term ''net worth'' means the amount of the applicant's assets
less the amount of its liabilities, as determined in accordance with
generally accepted accounting principles.
(7) Special rules -- (i) Passive trustee. (A) An applicant that
undertakes to act only as a passive trustee may be relieved of one or
more of the requirements of this paragraph upon clear and convincing
proof that such requirements are not germane, under all the facts and
circumstances, to the manner in which the applicant will administer any
trust. A trustee is a passive trustee only if under the written trust
instrument the trustee has no discretion to direct the investment of the
trust funds or any other aspect of the business administration of the
trust, but is merely authorized to acquire and hold particular
investments specified by the trust instrument. Thus, for example, in
the case of an applicant that undertakes merely to acquire and hold the
stock of regulated investment companies, the requirements of paragraph
(n)(6) (i)(A)(3), (i)(D), and (vi) of this section shall not apply and
no negative inference shall be drawn from the applicant's failure to
demonstrate its experience of competence with respect to the activities
described in paragraph (n)(5)(ii) (E) to (H) of this section.
(B) The notice of approval issued to an applicant that is approved by
reason of this subdivision shall state that the applicant is authorized
to act only as a passive trustee.
(ii) Federal or State regulation. Evidence that an applicant is
subject to Federal or State regulation with respect to one or more
relevant factors shall be given weight in proportion to the extent that
such regulatory standards are consonant with the requirements of section
401. Such evidence may be submitted in addition to, or in lieu of, the
specific proofs required by this paragraph.
(iii) Savings account. (A) An applicant will be approved to act as
trustee under this subdivision if the following requirements are
satisfied:
(1) The applicant is a credit union, industrial loan company, or
other financial institution designated by the Commissioner;
(2) The investment of the trust assets will be solely in deposits in
the applicant;
(3) Deposits in the applicant are insured (up to the dollar limit
prescribed by applicable law) by an agency or instrumentality of the
United States, or by an organization established under a special statute
the business of which is limited to insuring deposits in financial
institutions and providing related services.
(B) Any applicant that satisfies the requirements of this subdivision
is hereby approved, and (notwithstanding subparagraph (2) of this
paragraph) is not required to submit a written application. This
approval takes effect on the first day after December 22, 1976, on which
the applicant satisfies the requirements of this subdivision, and
continues in effect for so long as the applicant continues to satisfy
those requirements.
(C) If deposits are insured, but not in the manner provided in
paragraph (n)(7)(iii)(A)(3) of this section, the applicant must submit
an application. The application, notwithstanding subparagraph (2) of
this paragraph, will be limited to a complete description of the
insurance of applicant's deposits. The applicant will be approved if
the Commissioner approves of the applicant's insurance.
(iv) Notification of Commissioner. The applicant must notify the
Commissioner in writing of any change that affects the continuing
accuracy of any representation made in the application required by this
paragraph, whether the change occurs before or after the applicant
receives a notice of approval. The notification must be addressed to
the Commissioner of Internal Revenue, Attention: E:EP, Internal Revenue
Service, Washington, D.C. 20224.
(v) Substitution of trustee. No applicant will be approved unless
the applicant undertakes to act as trustee only under trust instruments
which contain a provision to the effect that the grantor is to
substitute another trustee upon notification by the Commissioner that
such substitution is required because the applicant has failed to comply
with the requirements of this paragraph or is not keeping such records,
or making such returns, or rendering such statements as are required by
forms or regulations.
(8) Procedure and administration -- (i) Notice of approval. If the
applicant is approved, a written notice of approval will be issued to
the applicant. The notice of approval will state the day on which it
becomes effective, and (except as otherwise provided therein) will
remain effective until revoked. This paragraph does not authorize the
applicant to accept any fiduciary account before such notice of approval
becomes effective.
(ii) Notice of disapproval. If the applicant is not approved, a
written notice will be furnished to the applicant containing a statement
of the reasons why the applicant has not been approved.
(iii) Copy to be furnished. The applicant must not accept a
fiduciary account until after the plan administrator or the person for
whose benefit the account is to be established is furnished with a copy
of the written notice of approval issued to the applicant. This
provision is effective six months after April 20, 1979 for new accounts
accepted thereafter. For accounts accepted before that date, the
administrator must be notified before the later of the effective date of
this provision or six months after acceptance of the account.
(iv) Grounds for revocation. The notice of approval issued to an
applicant will be revoked if the Commissioner determines that the
applicant is unwilling or unable to administer fiduciary accounts in a
manner consistent with the requirements of this paragraph. Generally,
the notice will not be revoked unless the Commissioner determines that
the applicant has knowingly, willfully, or repeatedly failed to
administer fiduciary accounts in a manner consistent with the
requirements of this paragraph, or has administered a fiduciary account
in a grossly negligent manner.
(v) Procedures for revocation. The notice of approval issued to an
applicant may be revoked in accordance with the following procedures:
(A) If the Commissioner proposes to revoke the notice of approval
issued to an applicant, the Commissioner will advise the applicant in
writing of the proposed revocation and of the reasons therefor.
(B) Within 60 days after the receipt of such written advice, the
applicant may protest the proposed revocation by submitting a written
statement of facts, law, and arguments opposing such revocation to
Commissioner of Internal Revenue, Attention: E:EP, Internal Revenue
Service, Washington, D.C. 20224. In addition, the applicant may request
a conference in the National Office.
(C) If the applicant consents to the proposed revocation, either
before or after a National Office conference, or if the applicant fails
to file a timely protest, the Commissioner will revoke the notice of
approval that was issued to the applicant.
(D) If, after considering the applicant's protest and any information
developed in conference, the Commissioner determines that the applicant
is unwilling or unable to administer fiduciary accounts in a manner
consistent with the requirements of this paragraph, the Commissioner
will revoke the notice of approval that was issued to the applicant and
will furnish the applicant with a written statement of findings on which
the revocation is based.
(E) If at any time the Commissioner determines that immediate action
is necessary to protect the interest of the Internal Revenue Service or
of any fiduciary account, the notice of approval issued to the applicant
will be suspended at once, pending a final decision to be based on the
applicant's protest and any information developed in conference.
(9) Supersession. This paragraph supersedes 11.401(d)(1) -- 1 of
the Temporary Income Tax Regulations Under the Employee Retirement
Income Security Act of 1974.
(Secs. 401(d)(1), 7805, Internal Revenue Code of 1954 (88 Stat. 939
and 68A Stat. 917); (26 U.S.C. 401(d)(1) and 7805))
(T.D. 6675, 28 FR 10126, Sept. 17, 1963, as amended by T.D. 6982, 33
FR 16500, Nov. 13, 1968; T.D. 6985, 33 FR 19815, Dec. 27, 1968; T.D.
7428, 41 FR 34619, Aug. 16, 1976; T.D. 7611, 44 FR 23520, Apr. 20,
1979)
26 CFR 1.401-13 Excess contributions on behalf of owner-employees.
(a) Introduction. (1) The provisions of this section prescribe the
rules relating to the treatment of excess contributions made under a
qualified pension, annuity, or profit-sharing plan on behalf of a
self-employed individual who is an owner-employee (as defined in
paragraph (d) of 1.401-10). Paragraph (b) of this section defines the
term ''excess contribution''. Paragraph (c) of this section describes
an exception to the definition of an excess contribution in the case of
contributions which are applied to pay premiums on certain annuity,
endowment, or life insurance contracts. Paragraph (d) of this section
describes the effect of making an excess contribution which is not
determined to have been willfully made, and paragraph (e) of this
section describes the effect of making an excess contribution which is
determined to have been willfully made.
(2) Under section 401(c)(1), certain self-employed individuals are
treated as employees for purposes of section 401. In addition, under
section 401(c)(4), a proprietor is treated as his own employer, and the
partnership is treated as the employer of the partners. Under section
404, certain contributions on behalf of a self-employed individual are
treated as deductible and taken into consideration in determining the
amount allowed as a deduction under section 404(a). Such contributions
are treated under section 401 and the regulations thereunder as employer
contributions on behalf of the self-employed individual. However, in
some cases, additional contributions may be made on behalf of a
self-employed individual. Such contributions are not taken into
consideration in determining the amount deductible under section 404 and
are not taken into consideration in computing the amount allowed as a
deduction under section 404(a). For purposes of section 401 and the
regulations thereunder, such contributions are treated as employee
contributions by the self-employed individual. If a self-employed
individual is an owner-employee within the meaning of section 401(c)(3)
and paragraph (d) of 1.401-10, then this section prescribes the rules
applicable if contributions are made in excess of those permitted to be
made under section 401.
(b) Excess contributions defined. (1)(i) Except as provided in
paragraph (c) relating to contributions which are applied to pay
premiums on certain annuity, endowment, or life insurance contracts, an
excess contribution is any amount described in subparagraphs (2) through
(4) of this paragraph.
(ii) For purposes of determining if the amount of any contribution
made under the plan on behalf of an owner-employee is an excess
contribution, the amount of any contribution made under the plan which
is allocable to the purchase of life, accident, health, or other
insurance is not taken into account. The amount of any contribution
which is allocable to the cost of insurance protection is determined in
accordance with the provisions of paragraph (f) of 1.404 (e)-1 and
paragraph (b) of 1.72-16.
(2)(i) In the case of a taxable year of the plan for which employer
contributions are made on behalf of only owner-employees, an excess
contribution is the amount of any contribution for such taxable year on
behalf of such owner-employee which is not deductible under section 404
(determined without regard to section 404(a)(10)). This rule applies
irrespective of whether the plan provides for contributions on behalf of
common-law employees, or self-employed individuals who are not
owner-employees, when such employees or individuals become eligible for
coverage under the plan, and irrespective of whether contributions are
in fact made for such employees or such individuals for other taxable
years of the plan.
(ii) In the case of a taxable year of the plan for which employer
contributions are made on behalf of both owner-employees and either
common-law employees or self-employed individuals who are not
owner-employees, an excess contribution is the amount of any employer
contribution on behalf of any owner-employee for such taxable year which
exceeds the amount deductible under section 404 (determined without
regard to section 404(a)(10)) unless such amount may be treated as an
employee contribution under the plan in accordance with the rules of
paragraph (d)(3) of 1.401-11 and is a permissible employee contribution
under subparagraph (3) of this paragraph.
(3)(i) In the case of a taxable year of the plan for which employer
contributions are made on behalf of both an owner-employee and either
common-law employees or self-employed individuals who are not
owner-employees, employee contributions on behalf of an owner-employee
may be made for such taxable year of the plan. How-ever, the amount of
such contributions, if any, which is described in subdivisions (ii),
(iii), or (iv) of this subparagraph is an excess contribution.
(ii) An excess contribution is the amount of any employee
contribution made on behalf of any owner-employee during a taxable year
of the plan at a rate in excess of the rate of contributions which may
be made as employee contributions by common-law employees, or by
self-employed individuals who are not owner-employees, during such
taxable year of the plan.
(iii) An excess contribution is the amount of any employee
contribution made on behalf of an owner-employee which exceeds the
lesser of $2,500 or 10 percent of the earned income (as defined in
paragraph (c) of 1.401-10) of such owner-employee for his taxable year
in which such contributions are made.
(iv) In the case of a taxable year of an owner-employee in which
contributions are made on behalf of such owner-employee under more than
one plan, an excess contribution is the amount of any employee
contribution made on behalf of such owner-employee under all such plans
during such taxable year which exceeds $2,500. If such an excess
contribution is made, the amount of the excess contribution made on
behalf of the owner-employee with respect to any one of such plans is
the amount by which the employee contribution on his behalf under such
plan for the year exceeds an amount which bears the same ratio to $2,500
as the earned income of the owner-employee derived from the trade or
business with respect to which the plan is established bears to his
earned income derived from the trades or businesses with respect to
which all such plans are established.
(4) An excess contribution is the amount of any contribution on
behalf of an owner-employee for any taxable year of the plan with
respect to which the plan is treated, under section 401(e)(2), as not
meeting the requirements of section 401(d) with respect to such
owner-employee.
(c) Contributions for premiums on certain annuity, endowment, or life
insurance contracts. (1) The term ''excess contribution'' does not
include the amount of any employer contributions on behalf of an
owner-employee which, under the provisions of the plan, is expressly
required to be applied (either directly or through a trustee) to pay the
premiums or other consideration for one or more annuity, endowment, or
life insurance contracts, if --
(i) The employer contributions so applied meet the requirements of
subparagraphs (2) through (4) of this paragraph, and
(ii) The total employer contributions required to be applied annually
to pay premiums on behalf of any owner-employee for contracts described
in this paragraph do not exceed $2,500. For purposes of computing such
$2,500 limit, the total employer contributions includes amounts which
are allocable to the purchase of life, accident, health, or other
insurance.
(2)(i) The employer contributions must be paid under a plan which
satisfies all the requirements for qualification. Accordingly, for
example, contributions can be paid under the plan for life insurance
protection only to the extent otherwise permitted under sections 401
through 404 and the regulations thereunder. However, certain of the
requirements for qualification are modified with respect to a plan
described in this paragraph (see section 401(a)(10)(A)(ii) and (d)(5)).
(ii) A plan described in this paragraph is not disqualified merely
because a contribution is made on behalf of an owner-employee by his
employer during a taxable year of the employer for which the
owner-employee has no earned income. On the other hand, a plan will
fail to qualify if a contribution is made on behalf of an owner-employee
which results in the discrimination prohibited by section 401(a)(4) as
modified by section 401(a)(10)(A)(ii) (see paragraph (f)(3) of
1.401-12).
(3) The employer contributions must be applied to pay premiums or
other consideration for a contract issued on the life of the
owner-employee. For purposes of this subparagraph, a contract is not
issued on the life of an owner-employee unless all the proceeds which
are, or may become, payable under the contract are payable directly, or
through a trustee of a trust described in section 401(a) and exempt from
tax under section 501(a), to the owner-employee or to the beneficiary
named in the contract or under the plan. Accordingly, for example, a
nontransferable face-amount certificate (as defined in section 401(g)
and the regulations thereunder) is considered an annuity on the life of
the owner-employee if the proceeds of such contract are payable only to
the owner-employee or his beneficiary.
(4)(i) For any taxable year of the employer, the amount of
contributions by the employer on behalf of the owner-employee which is
applied to pay premiums under the contracts described in this paragraph
must not exceed the average of the amounts deductible under section 404
(determined without regard to section 404(a)(10)) by such employer on
behalf of such owner-employee for the most recent three taxable years of
the employer (ending prior to the date the latest contract was entered
into or modified to provide additional benefits), in which the
owner-employee derived earned income from the trade or business with
respect to which the plan is established. However, if such
owner-employee has not derived earned income for at least three taxable
years preceding such date, then, in determining the ''average of the
amounts deductible'', only so many of such taxable years as such
owner-employee was engaged in such trade or business and derived earned
income therefrom are taken into account.
(ii) For the purpose of making the computation described in
subdivision (i) of this subparagraph, the taxable years taken into
account include those years in which the individual derived earned
income from the trade or business but was not an owner-employee with
respect to such trade or business. Furthermore, taxable years of the
employer preceding the taxable year in which a qualified plan is
established are taken into account. If such taxable years began prior
to January 1, 1963, the amount deductible is determined as if section
404 included section 404(a) (8), (9), (10), and (e).
(5) The amount of any employer contribution which is not deductible
but which is not treated as an excess contribution because of the
provisions of this paragraph shall be taken into account as an employee
contribution made on behalf of the owner-employee during the
owner-employee's taxable year with, or within which, the taxable year of
the person treated as his employer under section 401(c)(4) ends.
However, such contribution is only treated as an employee contribution
made on behalf of the owner-employee for the purpose of determining
whether any other employee contribution made on behalf of the
owner-employee during such period is an excess contribution described in
paragraph (b)(3) of this section.
(d) Effect of an excess contribution which is not willfully made.
(1) If an excess contribution (as defined in paragraph (b) of this
section) is made on behalf of an owner-employee, and if such
contribution is not willfully made, then the provisions of this
paragraph describe the effect of such an excess contribution. However,
if the excess contribution made on behalf of an owner-employee is
determined to have been willfully made, then the provisions of paragraph
(e) of this section are applicable to such contribution.
(2)(i) This paragraph does not apply to an excess contribution if the
net amount of such excess contribution (as defined in subparagraph (4)
of this paragraph) and the net income attributable to such amount are
repaid to the owner-employee on whose behalf the excess contribution was
made at any time before the end of six months beginning on the day on
which the district director sends notice (by certified or registered
mail) of the amount of the excess contribution to the trust, insurance
company, or other person to whom such excess contribution was paid. The
net income attributable to the net amount of the excess contribution is
the aggregate of the amounts of net income attributable to the net
amount of the excess contribution for each year of the plan beginning
with the taxable year of the plan within which the excess contribution
is made and ending with the close of the taxable year of the plan
immediately preceding the taxable year of the plan in which the net
amount of the excess contribution is repaid. The amount of net income
attributable to the net amount of the excess contribution for each year
is the amount of net income earned under the plan during the year which
is allocated in a reasonable manner to the net amount of the excess
contribution. For example, the amount of net income earned under the
plan for the year which is attributable to the net amount of an excess
contribution can be computed as the amount which bears the same ratio to
the amount of the ''net income attributable to the interest of the
owner-employee under the plan'' for such taxable year (determined in
accordance with the provisions of subparagraph (5)(ii) of this
paragraph) as the net amount of the excess contribution bears to the
aggregate amount standing to the account of the owner-employee at the
end of that year (including the net amount of any excess contribution).
(ii) The notice described in subdivision (i) of this subparagraph
shall not be mailed prior to the time that the amount of the tax under
chapter 1 of the Code of the owner-employee to whom the excess
contribution is to be repaid has been finally determined for his taxable
year in which such excess contribution was made. For purposes of this
subdivision, a final determination of the amount of tax liability of the
owner-employee includes --
(a) A decision by the Tax Court of the United States, or a judgment,
decree, or other order by any court of competent jurisdiction, which has
become final;
(b) A closing agreement authorized by section 7121; or
(c) The expiration of the period of limitation on suits by the
taxpayer for refund, unless suit is instituted prior to the expiration
of such period.
(iii) For purposes of this subparagraph, an amount is treated as
repaid to an owner-employee if an adequate adjustment is made to the
account of the owner-employee. An adequate adjustment is made to the
account of an owner-employee, for example, if the amount of the excess
contribution (without any reduction for any loading or other
administrative charge) and the net income attributable to such amount is
taken into account as a contribution under the plan for the current
year. In such a case, the gross income of the owner-employee for his
taxable year in which such adjustment is made includes the amount of the
net income attributable to the excess contribution.
(iv) If the net amount of the excess contribution and the net income
attributable thereto is repaid, within the period described in
subdivision (i) of this subparagraph, to the owner-employee on whose
behalf such contribution was made, then the net income attributable to
the excess contribution is, pursuant to section 61(a), includible in the
gross income of the owner-employee for his taxable year in which such
amount is distributed, or made available, to him. However, such amount
is not a distribution to which section 402 or 403 and section 72 apply
(see subparagraph (6) of this paragraph).
(3)(i) If the net amount of any excess contribution (as defined in
subparagraph (4) of this paragraph) and the net income attributable to
that excess contribution are not repaid to the owner-employee on whose
behalf the excess contribution was made before the end of the six-month
period described in subparagraph (2)(i) of this paragraph, the plan
under which the excess contribution has been made is considered, for
purposes of section 404, as not satisfying the requirements for
qualification with respect to such owner-employee for all taxable years
of the plan described in subdivision (ii) of this subparagraph.
However, such disqualification only applies to the interest of the
owner-employee on whose behalf an excess contribution has been made and
does not disqualify the plan with respect to the other participants
thereunder.
(ii) The taxable years referred to in subdivision (i) of this
subparagraph include the taxable year of the plan within which the
excess contribution is made and each succeeding taxable year of the plan
until the beginning of the taxable year of the plan in which the trust,
insurance company, or other person to whom such excess contribution was
paid repays to such owner-employee --
(a) The net amount of the excess contribution, and
(b) The amount of income attributable to his interest under the plan
which is includible in his gross income for any taxable year by reason
of the provisions of subparagraph (5) of this paragraph.
(4) For purposes of this paragraph, the net amount of an excess
contribution is the amount of such excess contribution, as defined in
paragraph (b) of this section, reduced by the amount of any loading
charge or other administrative charge ratably allocable to such excess
contribution.
(5)(i) If a plan is considered as not meeting the requirements for
qualification with respect to an owner-employee by reason of the
provisions of subparagraph (3) of this paragraph for any taxable year of
the plan, such owner-employee's gross income for any of his taxable
years with or within which such taxable year of the plan ends shall, for
purposes of chapter 1 of the Code, include the portion of the net income
earned under the plan for such taxable year of the plan which is
attributable to the interest of the owner-employee under the plan.
(ii) For purposes of this subparagraph, the term ''net income'' means
the net income earned under the plan determined in accordance with
generally accepted accounting principles consistently applied, and the
''net income attributable to the interest of the owner-employee under
the plan'' is the amount which bears the same ratio to the aggregate
amount of net income earned under the plan for the taxable year of the
plan as the amount standing to the account of the owner-employee at the
end of that year (including the amount of any excess contribution which
is credited to his account) bears to the aggregate amount of all funds
under the plan for all employees at the end of that year (including the
aggregate amount of excess contributions credited to the accounts of all
owner-employees for that year).
(iii) The provisions of this subparagraph may be illustrated by the
following example:
Example. A is an owner-employee covered under the X Employees'
Pension Trust who files his return on the basis of a calendar year. An
excess contribution was made on behalf of A during the plan year
beginning on January 1, 1966. The net amount of the excess contribution
and the net income attributable thereto was not repaid to A before the
end of the six-month period described in subparagraph (2)(i) of this
paragraph. Accordingly, the net income earned under the plan during
1966 which is attributable to A's interest is to be included in his
gross income for 1966. Assume that the trust which forms a part of the
pension plan of the X Company also files its returns on a calendar year
basis, and that during 1966 the trust had a gross income of $4,000
(including a long-term capital gain of $2,500) and expenses of $500.
Assume, further, that the amount standing to A's account on December 31,
1966 (including the amount of the excess contribution), was $20,000, and
that on that date the amount funded under the plan for all employees
(including A) is $140,000. Then the net income of the trust for 1966 is
$3,500 ($4,000^$500). The net income attributable to the interest of A
under the plan is $500 (the amount which bears the same ratio to $3,500
as $20,000 bears to $140,000). Accordingly, $500 is included in A's
gross income in accordance with the provisions of section 401(e)(2)(B)
as the ''net income attributable to the interest of the owner-employee
under the plan''.
(6) The provisions of section 402 or 403 and section 72 do not apply
to any amount distributed, or made available, to an owner-employee which
is described in this paragraph. Accordingly, for example, the
provisions of section 72(m)(5)(A)(i), relating to amounts subject to the
penalty tax imposed by section 72(m), do not apply to the amount of the
net income attributable to the interest of an owner-employee (as defined
in subparagraph (5)(ii) of this paragraph) which is includible in his
gross income. Furthermore, in such a case, the provisions of section
401(d)(5)(C) do not apply to such amount.
(7) Certain adjustments will be required with respect to the interest
of an owner-employee after any amount previously allocated to his
account has been returned to him pursuant to the provisions of this
paragraph. For example, if the determination of whether life insurance
benefits provided under the plan are incidental is made, in part, with
regard to the contributions allocated to the accounts of the
participants covered under the plan, an adjustment may have to be made
with respect to the life insurance purchased under the plan for any
owner-employee after any amount previously allocated to his account has
been repaid to him. Furthermore, if, for example, an owner-employee has
received annuity payments which were taxable under the exclusion ratio
rule of section 72, and if such exclusion ratio took into account any
amount credited to the account of the owner-employee which is
subsequently repaid to him, then such exclusion ratio must be recomputed
after the adjustment in such owner-employee's account has taken place.
(8) Notwithstanding any other provision of law, in any case in which
the plan is treated as not satisfying the requirements for qualification
with respect to any owner-employee by reason of the provisions of
section 401(e), the period for assessing, with respect to such
owner-employee, any deficiency arising by reason of --
(i) The disallowance of any deduction under section 404 by reason of
the provisions of subparagraph (3) of this paragraph, or
(ii) The inclusion of amounts in the gross income of the
owner-employee by reason of the provisions of subparagraph (5) of this
paragraph,
shall not expire prior to 18 months after the day the district
director mails the notice with respect to the excess contribution
(described in subparagraph (2)(i) of this paragraph) which gives rise to
such disallowance or inclusion. Thus, for example, notwithstanding the
provisions of section 6212(c) (relating to the restriction on the
determination of additional deficiencies), if, after a final
determination by the Tax Court of the income tax liability of an
owner-employee for a taxable year in which an excess contribution was
made, the amount of such excess contribution and the net income
attributable thereto is not paid to the owner-employee before the end of
the six-month period described in subparagraph (2)(i) of this paragraph,
an additional deficiency assessment may be made for such taxable year
with respect to such excess contribution.
(e) Effect of an excess contribution which is determined to have been
willfully made. If an excess contribution (as defined in paragraph (b)
of this section) on behalf of an owner-employee is determined to have
been willful ly made, then --
(1) Only the provisions of this paragraph apply to such contribution;
(2) There shall be distributed to the owner-employee on whose behalf
such contribution was willfully made his entire interest in all plans in
which he is a participant as an owner-employee;
(3) The amount distributed under each such plan is an amount to which
section 72 does apply (see section 72(m)(5)(A)(iii)); and
(4) For purposes of section 404, no plan in which such individual is
covered as an owner-employee shall be considered as meeting the
requirements for qualification with respect to such owner-employee for
any taxable year of the plan beginning with or within the calendar year
in which it is determined that the excess contribution has been
willfully made and with or within the five calendar years following such
year.
(f) Years to which this section applies. This section applies to
contributions made in taxable years of employers beginning before
January 1, 1976. Thus, for example, in the case of willful
contributions made in taxable years of employers beginning before
January 1, 1976, paragraphs (e) (1), (2), and (3) of this section apply
to such taxable years beginning on or after such date. However, in such
a case, because the application of paragraph (e)(4) of this section
affects contributions made in taxable years of employers beginning on or
after January 1, 1976, paragraph (e)(4) of this section does not apply
to such taxable years; see paragraph (c) of 1.401(e)-4 (relating to
transitional rules for excess contributions).
(T.D. 6676, 28 FR 10139, Sept. 17, 1963; as amended by T.D. 7636, 44
FR 47053, Aug. 10, 1979)
26 CFR 1.401-14 Inclusion of medical benefits for retired employees in
qualified pension or annuity plans.
(a) Introduction. Under section 401(h) a qualified pension or
annuity plan may make provision for the payment of sickness, accident,
hospitalization, and medical expenses for retired employees, their
spouses, and their dependents. The term ''medical benefits described in
section 401(h)'' is used in this section to describe such payments.
(b) In general -- (1) Coverage. Under section 401(h), a qualified
pension or annuity plan may provide for the payment of medical benefits
described in section 401(h) only for retired employees, their spouses,
or their dependents. To be ''retired'' for purposes of eligibility to
receive medical benefits described in section 401(h), an employee must
be eligible to receive retirement benefits provided under the pension
plan, or else be retired by an employer providing such medical benefits
by reason of permanent disability. For purposes of the preceding
sentence, an employee is not considered to be eligible to receive
retirement benefits provided under the plan if he is still employed by
the employer and a separation from employment is a condition to
receiving the retirement benefits.
(2) Discrimination. A plan which provides medical benefits described
in section 401(h) must not discriminate in favor of officers,
shareholders, supervisory employees, or highly compensated employees
with respect to coverage and with respect to the contributions or
benefits under the plan. The determination of whether such a plan so
discriminates is made with reference to the retirement portion of the
plan as well as the portion providing the medical benefits described in
section 401(h). Thus, for example, a plan will not be qualified under
section 401 if it discriminates in favor of employees who are officers
or shareholders with respect to either portion of the plan.
(3) Funding medical benefits. Contributions to provide the medical
benefits described in section 401(h) may be made either on a
contributory or noncontributory basis, without regard to whether the
contributions to fund the retirement benefits are made on a similar
basis. Thus, for example, the contributions to fund the medical
benefits described in section 401(h) may be provided for entirely out of
employer contributions even though the retirement benefits under the
plan are determined on the basis of both employer and employee
contributions.
(4) Definitions. For purposes of section 401(h) and this section:
(i) The term dependent shall have the same meaning as that assigned
to it by section 152, and
(ii) The term medical expense means expenses for medical care as
defined in section 213(e)(1).
(c) Requirements. The requirements which must be met for a qualified
pension or annuity plan to provide medical benefits described in section
401(h) are set forth in subparagraphs (1) through (5) of this paragraph.
(1) Benefits. (i) The plan must specify the medical benefits
described in section 401(h) which will be available and must contain
provisions for determining the amount which will be paid. Such
benefits, when added to any life insurance protection provided for under
the plan, must be subordinate to the retirement benefits provided by
such plan. For purposes of this section, life insurance protection
includes any benefit paid under the plan on behalf of an
employee-participant as a result of the employee-participant's death to
the extent such payment exceeds the amount of the reserve to provide the
retirement benefits for the employee-participant existing at his death.
The medical benefits described in section 401(h) are considered
subordinate to the retirement benefits if at all times the aggregate of
contributions (made after the date on which the plan first includes such
medical benefits) to provide such medical benefits and any life
insurance protection does not exceed 25 percent of the aggregate
contributions (made after such date) other than contributions to fund
past service credits.
(ii) The meaning of the term subordinate may be illustrated by the
following example:
Example. The X Corporation amends its qualified pension plan to
provide medical benefits described in section 401(h) effective for the
taxable year 1964. The total contributions under the plan (excluding
those for past service credits) for the taxable year 1964 are $125,000,
allocated as follows: $100,000 for retirement benefits, $10,000 for
life insurance protection, and $15,000 for medical benefits described in
section 401(h). The medical benefits described in section 401(h) are
considered subordinate to the retirement benefits since the portion of
the contributions allocated to the medical benefits described in section
401(h) ($15,000) and to life insurance protection after such medical
benefits were included in the plan ($10,000), or $25,000, does not
exceed 25 percent of $125,000. For the taxable year 1965, the X
Corporation contributes $140,000 (exclusive of contributions for past
service credits) allocated as follows: $100,000 for retirement
benefits, $10,000 for life insurance protection, and $30,000 for medical
benefits described in section 401(h). The medical benefits described in
section 401(h) are considered subordinate to the retirement benefits
since the aggregate contributions allocated to the medical benefits
described in section 401(h) ($45,000) and to life insurance protection
after such medical benefits were included in the plan ($20,000) or
$65,000 does not exceed 25 percent of $265,000, the aggregate of the
contributions made in 1964 and 1965.
(2) Separate accounts. Where medical benefits described in section
401(h) are provided for under a qualified pension or annuity plan, a
separate account must be maintained with respect to contributions to
fund such benefits. The separation required by this section is for
recordkeeping purposes only. Consequently, the funds in the medical
benefits account need not be separately invested. They may be invested
with funds set aside for retirement purposes without identification of
which investment properties are allocable to each account. However,
where the investment properties are not allocated to each account, the
earnings on such properties must be allocated to each account in a
reasonable manner.
(3) Reasonable and ascertainable. Section 401(h) further requires
that amounts contributed to fund medical benefits therein described must
be reasonable and ascertainable. For the rules relating to the
deduction of such contributions, see paragraph (f) of 1.404(a)-3. The
employer must, at the time he makes a contribution, designate that
portion of such contribution allocable to the funding of medical
benefits.
(4) Impossibility of diversion prior to satisfaction of all
liabilities. Section 401(h) further requires that it must be
impossible, at any time prior to the satisfaction of all liabilities
under the plan to provide for the payment of medical benefits described
in section 401(h), for any part of the corpus or income of the medical
benefits account to be (within the taxable year or thereafter) used for,
or diverted to, any purpose other than the providing of such benefits.
Consequently, a plan which, for example, under its terms, permits funds
in the medical benefits account to be used for any retirement benefit
provided under the plan does not satisfy the requirements of section
401(h) and will not qualify under section 401(a). However, the payment
of any necessary or appropriate expenses attributable to the
administration of the medical benefits account does not affect the
qualification of the plan.
(5) Reversion upon satisfaction of all liabilities. The plan must
provide that any amounts which are contributed to fund medical benefits
described in section 401(h) and which remain in the medical benefits
account upon the satisfaction of all liabilities arising out of the
operation of the medical benefits portion of the plan are to be returned
to the employer.
(6) Forfeitures. The plan must expressly provide that in the event
an individual's interest in the medical benefits account is forfeited
prior to termination of the plan an amount equal to the amount of the
forfeiture must be applied as soon as possible to reduce employer
contributions to fund the medical benefits described in section 401(h).
(d) Effective date. This section applies to taxable years of a
qualified pension or annuity plan beginning after October 23, 1962.
(T.D. 6722, 29 FR 5072, Apr. 14, 1964)
26 CFR 1.401(a)-1 Post-ERISA qualified plans and qualified trusts; In
general.
(a) Introduction -- (1) In general. This section and the following
regulation sections under section 401 reflect the provisions of section
401 after amendment by the Employee Retirement Income Security Act of
1974 (Pub. L. 93-406) (''ERISA'').
(b) Requirements for pension plans -- (1) Definitely determinable
benefits. (i) In order for a pension plan to be a qualified plan under
section 401(a), the plan must be established and maintained by an
employer primarily to provide systematically for the payment of
definitely determinable benefits to its employees over a period of
years, usually for life, after retirement.
(ii) Section 1.401-1(b)(1)(i), a pre-ERISA regulation, provides rules
applicable to this requirement, and that regulation is applicable except
as otherwise provided.
(iii) The use of the type of plan provision described in
1.415-1(d)(1) which automatically freezes or reduces the rate of benefit
accrual or the annual addition to insure that the limitations of section
415 will not be exceeded, will not be considered to violate the
requirements of this subparagraph provided that the operation of such
provision precludes discretion by the employer.
(T.D. 7748, 46 FR 1695, Jan. 7, 1981)
26 CFR 1.401(a)-2 Impossibility of diversion under qualified plan or
trust.
(a) General rule. Section 401(a)(2) requires that in order for a
trust to be qualified, it must be impossible under the trust instrument
(in the taxable year and at any time thereafter before the satisfaction
of all liabilities to employees or their beneficiaries covered by the
trust) for any part of the trust corpus or income to be used for, or
diverted to, purposes other than for the exclusive benefit of those
employees or their beneficiaries. Section 1.401-2, a pre-ERISA
regulation, provides rules under section 401(a)(2) and that regulation
is applicable except as otherwise provided.
(b) Section 415 suspense account. Paragraph (a) of this section does
not apply to amounts properly allocated to a suspense account pursuant
to 1.415-6(b)(6). The plan, or the trust forming part of the plan, may
provide for the reversion to the employer, upon termination of the plan,
of amounts held in the suspense account.
(T.D. 7748, 46 FR 1696, Jan. 7, 1981)
26 CFR 1.401(a)-4 Optional forms of benefit (before 1992).
Q-1: How does section 401(a)(4) apply to optional forms of benefits?
A-1: (a) In general. -- (1) Scope. The nondiscrimination
requirements of section 401(a)(4) apply to the amount of contributions
or benefits, optional forms of benefit, and other benefits, rights and
features (e.g., actuarial assumptions, methods of benefit calculation,
loans, social security supplements, and disability benefits) under a
plan. This section addresses the application of section 401(a)(4) only
to optional forms of benefit under a plan. Generally, the determination
of whether an optional form is nondiscriminatory under section 401(a)(4)
is made by reference to the availability of such optional form, and not
by reference to the utilization or actual receipt of such optional form.
See Q&A-2 of this section. Even though an optional form of benefit
under a plan may be nondiscriminatory under section 401(a)(4) and this
1.401(a)-4 because the availability of such optional form does not
impermissibly favor employees in the highly compensated group, such plan
may fail to satisfy section 401(a)(4) with respect to the amount of
contributions or benefits or with respect to other benefits, rights and
features if, for example, the method of calculation or the amount or
value of benefits payable under such optional form impermissibly favors
the highly compensated group. See 1.411(d)-4, Q&A-1 for the definition
of ''optional form of benefit.''
(2) Nondiscrimination requirements. Each optional form of benefit
provided under a plan is subject to the nondiscrimination requirement of
section 401(a)(4) and thus the availability of each optional form of
benefit must not discriminate in favor of the employees described in
section 401(a)(4) in whose favor discrimination is prohibited (the
''highly compensated group''). See paragraph (b) of this Q&A-1 for a
description of the employees included in such group. This is true
without regard to whether a particular optional form of benefit is the
actuarial equivalent of any other optional form of benefit under the
plan. Thus, for example, a plan may not condition, or otherwise limit,
the availability of a single sum distribution of an employee's benefit
in a manner that impermissibly favors the highly compensated group.
(b) Highly compensated group. For plan years commencing prior to the
applicable effective date for the amendment made to section 401(a)(4) by
section 1114 of the Tax Reform Act of 1986 (TRA '86), the highly
compensated group consists of those employees who are officers,
shareholders, or highly compensated. For plan years beginning on or
after the applicable effective date of the amendments to section
401(a)(4) made by TRA '86, the highly compensated group consists of
those employees who are highly compensated within the meaning of section
414(q). The amendment to section 401(a)(4) made by section 1114 of TRA
'86 is generally effective for plan years commencing after December 31,
1988. See section 1114(a) of TRA '86.
Q-2: How is it determined whether an optional form of benefit
satisfies the nondiscrimination requirements of section 401(a)(4)?
A-2: (a) Nondiscrimination requirement. -- (1) In general. An
optional form of benefit under a plan is nondiscriminatory under section
401(a)(4) only if the requirements of paragraphs (a)(2) and (a)(3) of
this Q&A-2 are satisfied with respect to such optional form. The
determination of whether an optional form of benefit satisfies these
requirements is made by reference to the availability of the optional
form, and not by reference to the utilization or actual receipt of such
optional form. Thus, an optional form of benefit that satisfies the
requirements of paragraphs (a)(2) and (a)(3) of this Q&A-2 is
nondiscriminatory under section 401(a)(2) even though the highly
compensated group disproportionately utilizes such optional form.
However, the composition of the group of employees who actually receive
benefits in an optional form may be relevant in determining whether such
optional form satisfies the requirement of paragraph (a)(3) of this
Q&A-2 with respect to effective availability.
(2) Current availability -- (i) Plan years prior to TRA '86 effective
date. Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for
plan years prior to the effective date of the amendments made to section
401(b) by section 1112(a) of TRA '86, the requirement of this paragraph
(a)(2) is satisfied only if the group of employees to whom the optional
form is currently available satisfies either the seventy percent test of
section 410(b)(1)(A) or the nondiscriminatory classification test of
section 410(b)(1)(B).
(ii) Plan years commencing on or after TRA '86 effective date.
Except as provided in paragraph (a)(2)(iii) of this Q&A-2, for plan
years commencing on or after the effective date on which the amendments
made to section 410(b) by section 1112(a) of TRA '86 first apply to a
plan, the requirement of this paragraph (a)(2) is satisfied only if the
group of employees to whom the optional form is currently available
satisfies either the percentage test set forth in section 410(b)(1)(A),
the ratio test set forth in section 410(b)(1)(B), or the
nondiscriminatory classification test set forth in section
410(b)(2)(A)(i). The employer need not satisfy the average benefit
percentage test in section 410(b)(2)(A)(ii) in order for the optional
form to be currently available to a nondiscriminatory group of
employees.
(B) Example. In 1990, employer X maintains a defined benefit plan
and a profit-sharing plan that is a qualified cash or deferred
arrangement under section 401(k). Both plans satisfy the percentage
test in section 410(b)(1)(A) with respect to coverage. The defined
benefit plan provides for a single sum distribution available only to
employees in the headquarters office. This group of employees fails the
percentage and ratio tests of section 410(b), but satisfies the
nondiscriminatory classification test set forth in section
410(b)(2)(A)(i). However, the employer does not satisfy the average
benefit percentage test in section 401(b)(2)(A)(ii). Therefore, the
current availability of the optional form of benefit does not satisfy
the requirement of this paragraph (a)(2).
(iii) Special rule for certain governmental or church plans. Plans
described in section 410(c) will be treated as satisfying the current
availability test of this paragraph (a)(2) if the group of employees
with respect to whom the optional form is currently available satisfies
the requirements of section 401(a)(3) as in effect on September 1, 1974.
(iv) Effective data for TRA '86 amendments to section 410(b). The
amendments to section 410(b) made by section 1112(a) of TRA '86 are
generally effective for plan years commencing after December 31, 1988.
See section 1112(e)(1) of TRA '86.
(v) Elimination of optional forms -- (A) In general. Notwithstanding
paragraphs (a)(2)(i) and (a)(2)(ii) of this Q&A-2, in the case of an
optional form of benefit that has been eliminated under a plan with
respect to specified employees for benefits accrued after the later of
the eliminating amendment's adoption date or effective date, the
determination of whether such optional form satisfies this paragraph
(a)(2) with respect to such employees is to be made immediately prior to
the elimination. Accordingly, if, as of the later of the adoption date
or effective date of an amendment eliminating an optional form with
respect to future benefit accruals, the current availability of such
optional form immediately prior to such amendment satisfies this
paragraph (a)(2), then the optional form will be treated as satisfying
this paragraph (a)(2) for all subsequent years.
(B) Example. A profit-sharing plan that provides for a single sum
distribution available to all employees on termination of employment is
amended January 1, 1990, to eliminate such single sum optional form of
benefit with respect to benefits accrued after January 1, 1991. As of
January 1, 1991, the single sum optional form of benefit is available to
a group of employees that satisfies the percentage test of section
410(b)(1)(A). As of January 1, 1995, all nonhighly compensated
employees who were entitled to the single sum optional form of benefit
have terminated from employment with the employer and taken a
distribution of their benefits. The only remaining employees who have a
right to take a portion of their benefits in the form of a single sum
distribution on termination of employment are highly compensated
employees. Because the availability of the single sum optional form of
benefit satisfied the current availability test as of January 1, 1991,
the availability of such optional form of benefit is deemed to continue
to satisfy the current availability test of this paragraph (a)(2).
(3) Effective availability -- (i) In general. The requirement of
this paragraph (a)(3) is satisfied only if, based on the facts and
circumstances, the group of employees to whom the optional form is
effectively available does not substantially favor the highly
compensated group. This is the case even if the optional form is, or
has been, currently available to a group of employees that satisfies the
applicable requirements in paragraph (a)(2) (i) or (ii) of this Q&A-2.
(ii) Examples. The provisions of paragraph (a)(3)(i) of this Q&A-2
can be illustrated by the following examples:
Example 1. Employer X maintains a defined benefit plan that covers
both of the 2 highly compensated employees of the employer and 8 of the
twelve nonhighly compensated employees of the employer. Plan X provides
for a normal retirement benefit payable as an annuity and based on a
normal retirement age of 65, and an early retirement benefit payable
upon termination in the form of an annuity to employees who terminate
from service with the employer on or after age 55 with 30 or more years
of service. Each of the 2 employees of employer X who are in the highly
compensated group currently meet the age and service requirement, or
will have 30 years of service by the time they reach age 55. All but 2
of the 8 nonhighly compensated employees of employer X who are covered
by the plan were hired on or after age 35 and thus, cannot qualify for
the early retirement benefit provision. Even though the group of
employees to whom the early retirement benefit is currently available
does not impermissibly favor the highly compensated group by reason of
disregarding age and service, these facts and circumstances indicate
that the effective availability of the early retirement benefit in plan
X substantially favors the highly compensated group.
Example 2. Assume the same facts as in Example 1 except that the
early retirement benefit is added by a plan amendment first adopted,
announced and effective December 1, 1991, and is available only to
employees who terminate from employment with the employer prior to
December 15, 1991. Further assume that all employees were hired prior
to attaining age 25, and that the group of employees who have, or will
have attained age 55 with 30 years of service, by December 15, 1991,
satisfies the ratio test of section 410(b)(1)(B). Finally, assume that
the only employees who terminate from employment with the employer
during the two week period in which the early retirement benefit is
available are employees in the highly compensated group. These facts
and circumstances indicate that the effective availability of the early
retirement benefit substantially favors the highly compensated group.
This is the case even though the limitation of the early retirement
benefit to a specified period satisfies section 411(d)(6).
Example 3. Employer Y amends plan Y on June 30, 1990, to provide for
a single sum distribution for employees who terminate from employment
with the employer after June 30, 1990, and prior to January 1, 1991.
The availability of this single sum distribution is conditioned on the
employee having a particular disability at the time of termination of
employment. The only employee of the employer who meets this disability
requirement at the time of the amendment and thereafter through December
31, 1990, is a highly compensated employee. Generally, a disability
condition with respect to the availability of a single sum distribution
may be disregarded in determining whether the current availability of
such optional form of benefit is discriminatory. However, these facts
and circumstances indicate that the effective availability of the
optional form of benefit substantially favors the highly compensated
group.
Example 4. Employer Z maintains a money purchase pension plan that
covers all employees of the employer. The plan provides for
distribution in the form of a joint and survivor annuity, a life
annuity, or equal installments over 10 years. During the 1992 calendar
year the employer winds up his business. In December of 1992, only two
employees remain in the employment of the employer, both of whom are
highly compensated. Employer Z then amends the plan to provide for a
single sum distribution to employees who terminate from employment on or
after the date of the amendment. Both highly compensated employees
terminate from employment on December 31, 1992, taking a single sum
distribution of their benefits. These facts and circumstances indicate
that the effective availability of the single sum optional form of
benefit substantially favors the highly compensated group.
(b) Application of tests -- (1) Current availability -- (i) In
general. Except as otherwise provided in this paragraph (b), in
determining whether an optional form of benefit that is subject to
specified eligibility conditions is currently available to an employee
for purposes of paragraph (a) of this Q&A-2, the determination of
current availability generally is to be based on the current facts and
circumstances with respect to the employee (e.g., the employee's current
compensation or the employee's current net worth). Thus, for example,
the fact that an employee may, in the future, satisfy an eligibility
condition generally does not cause an optional form of benefit to be
treated as currently available to such employee.
(ii) Exceptions for age, service, employment termination and certain
other conditions -- (A) Age and service conditions. For purposes of
applying paragraph (a)(2) of this Q&A-2, except as provided in paragraph
(b)(1)(ii)(B) of this Q&A-2, an age condition, a service condition, or
both are to be disregarded. For example, an employer that maintains a
plan that provides for an early retirement benefit payable as an annuity
for employees in division A, subject to a requirement that the employee
has attained his or her 55th birthday and has at least twenty years of
service with the employer, is to disregard the age and service
conditions in determining the group of employees to whom the early
retirement annuity benefit is currently available. Thus, the early
retirement annuity benefit is treated as currently available to all
employees of division A, without regard to their ages or years of
service and without regard to whether they could potentially meet the
age and service conditions prior to attaining the plan's normal
retirement age.
(B) Exception for certain age and service conditions. Age and
service conditions that must be satisfied within a specified period of
time may not be disregarded pursuant to paragraph (b)(1)(ii)(A) of this
Q&A-2. However, in determining the current availability of an optional
form of benefit subject to such an age condition, service condition, or
both, an employer may project the age and service of employees to the
last date on which the optional form of benefit subject to the age
condition or service condition (or both) is available under the plan.
An employer's ability to protect age and service to the last date on
which the optional form of benefit is available under the plan is not
cut off by a plan termination occurring prior to that date. Thus, for
example, assume that an employer maintaining a plan that permits
employees terminating from employment on or after age 55 between June 1,
1991 to May 31, 1992, to elect a single sum distribution, decides to
terminate the plan on December 31, 1991. In determining the group of
employees to whom the single sum optional form of benefit is currently
available, this employer may project employees' ages through May 31,
1992.
(C) Certain other conditions disregarded. Conditions on the
availability of optional forms of benefit requiring termination of
employment, death, satisfaction of a specified health condition (or
failure to meet such condition), disability, hardship, marital status,
default on a plan loan secured by a participant's account balance, or
execution of a covenant not to compete may be disregarded in determining
the group of employees to whom an optional form of benefit is currently
available.
(2) Employees taken into account. For purposes of applying paragraph
(a) of this Q&A-2, the tests are to be applied on the basis of the
employer's nonexcludable employees (whether or not they are participants
in the plan) in the same manner as such tests would be applied in
determining whether the plan providing the optional form of benefit
satisfies the tests under section 410(b).
(3) Definition of ''plan''. For purposes of applying paragraph (a)
of this Q&A-2, the term ''plan'' has the meaning that such term has for
purposes of determining whether the amount of contributions or benefits
and whether other benefits, rights, and features are nondiscriminatory
under section 401(a)(4).
(4) Restructuring optional forms of benefit -- (i) In general. For
purposes of applying paragraph (a) of this Q&A-2, the availability of
two or more optional forms of benefit under a plan may be tested by
restructuring such benefits into two or more restructured optional forms
of benefit and testing the availability of such restructured optional
forms of benefit. If two or more optional forms of benefit under a plan
contain both common and distinct components, such optional forms of
benefit may be restructured as a single optional form of benefit
comprising the common component, and one or more optional forms of
benefit comprising each distinct component. Components of optional
forms of benefit may be treated as common only if they are identical
with respect to all characteristics taken into account under Q&A-1(b) of
1.411(d)-4. The availability of each restructured optional form of
benefit must satisfy the applicable nondiscrimination requirements of
paragraph (a) of this Q&A-2.
(ii) Example. A profit-sharing plan covering all the employees of an
employer provides a single sum distribution option upon termination from
employment for all employees earning less than $50,000 and a single sum
distribution option upon termination from employment after the
attainment of age 55 for all employees earning $50,000 or more. These
distribution options are identical in all other respects. For purposes
of applying section 401(a)(4), such optional forms of benefit may be
restructured into two different optional forms of benefit: (A) a single
sum distribution option upon termination from employment after the
attainment of age 55 for all employees (i.e., the common component), and
(B) a single sum distribution option upon termination from employment
before the attainment of age 55 for all employees earning less than
$50,000. The availability of each of these restructured optional forms
of benefit must satisfy section 401(a)(4).
(c) Commissioner may provide additional tests. The Commissioner may
provide such additional factors, tests, and safe harbors as are
necessary or appropriate for purposes of determining whether the
availability of an optional form of benefit is discriminatory under
section 401(a)(4). In addition, the Commissioner may provide that
additional eligibility conditions not related directly or indirectly to
compensation or wealth may be disregarded under paragraph (b)(1)(ii)(C)
of this Q&A-2 in determining the current availability of an optional
form of benefit. The Commissioner may provide such additional guidance
only through the publication of revenue rulings, notices or other
documents of general applicability.
Q-3: May a plan condition the availability of an optional form of
benefit on employer discretion?
A-3: No. Even if the availability of an optional form of benefit
that is conditioned on employer discretion satisfies the
nondiscrimination requirements of section 401(a)(4), the plan providing
the optional form of benefit will fail to satisfy certain other
requirements of section 401(a), including, in applicable circumstances,
the definitely determinable requirement of section 401(a) and the
requirements of section 401(a)(25) and section 411(d)(6). See
1.411(d)-4.
Q-4: Will a plan provision violate section 401(a)(4) merely because
it requires that an employee who terminates from service with the
employer receive a single sum distribution in the event that the present
value of the employee's benefit is not more than $3,500, as permitted by
sections 411(a)(11) and 417(e)?
A-4: No. A plan will not be treated as discriminatory under section
401(a)(4) merely because the plan mandates a single sum distribution
when the present value of an employee's benefit is not more than $3,500,
as permitted by sections 411(a)(11) and 417(e). This is an exception to
the general principles of this section. (No similar provision exists
excepting such single sum distributions from the limits on employer
discretion under section 411(d)(6). See 1.411(d)-4 Q&A-4.)
Q-5: If the availability of an optional form of benefit
discriminates, or may reasonably be expected to discriminate, in favor
of the highly compensated group, what acceptable alternatives exist for
amending the plan without violating section 411(d)(6)?
A-5: (a) Transitional rules -- (1) In general. The following rules
apply for purposes of making necessary amendments to existing plans (as
defined in Q&A-6 of this section) under which the availability of an
optional form of benefit violates the nondiscrimination requirements of
section 401(a)(4) or may reasonably be expected to violate such
requirements. These transitional rules are provided under the authority
of section 411(d)(6), which allows the elimination of certain optional
forms of benefit if permitted by regulations, and section 7805(b).
(2) Nondiscrimination -- (i) In general. The determination of
whether the availability of an optional form of benefit violates section
401(a)(4) is to be made in accordance with Q&A-2 of this section. In
addition, the availability of a particular optional form of benefit may
reasonably be expected to violate the nondiscrimination requirements of
section 401(a)(4) if, under the applicable facts and circumstances,
there is a significant possibility that the current availability of such
optional form of benefit will impermissibly favor the highly compensated
group. This determination must be made on the basis of the seventy
percent test of section 410(b)(1)(A) or the nondiscriminatory
classification test of section 410(b)(1)(B) as such tests existed prior
to the effective date of the amendments made to section 410(b) by
section 1112(a) of TRA '86. Thus, a condition may not reasonably be
expected to discriminate for purposes of these rules merely because it
results in a significant possibility that discrimination will result
because of the amendments made to section 410(b) by section 1112(a) of
TRA '86. In addition, the availability of an optional form of benefit
may not reasonably be expected to discriminate merely because of an age
or service condition that may be disregarded in determining the current
availability of such optional form of benefit under paragraph
(b)(1)(ii)(A) of Q&A-2 of this section. Similarly, the availability of
an optional form of benefit may not reasonably be expected to
discriminate merely because of an age or service condition that, after
permitted projection, does not cause such optional form to fail to
satisfy the requirement of this paragraph (a)(2).
(ii) Examples. The provisions of paragraph (a)(2)(i) of this Q&A-5
can be illustrated by the following examples:
Example (1). A plan provides that a single sum distribution option
is available only to (A) employees earning $50,000 or more in the final
year of employment, (B) employees who furnish evidence that they have a
net worth above a certain specified amount, and (C) employees who
present a letter from an accountant or attorney declaring that it is in
the employee's best interest to receive a single sum distribution.
Whether the availability of such optional form of benefit discriminates
depends on whether it meets the requirements of Q&A-2 of this
1.401(a)-4. However, each of the specified conditions limiting the
availability of the optional form of benefit may reasonably be expected
to discriminate in favor of the highly compensated group in operation
because of the likelihood of a significant positive correlation between
the ability to meet any of the specified conditions and membership in
the highly compensated group.
Example (2). A plan limits the availability of a single sum
distribution option to employees employed in one particular division of
the employer's company. All the employees of the company are
participants in the plan. During the 1988 plan year, the division
employs individuals who represent a nondiscriminatory classification of
that company's employees (under section 410(b)(1)(B) prior to the
effective date of the amendments made to section 410(b) by section
1112(a) of TRA '86) and is unlikely to cease employing such a
nondiscriminatory classification in the future. The availability of a
single sum distribution under this plan does not result in
discrimination during the 1988 plan year and may not reasonably be
expected to do so.
(b) Transitional alternatives. If the availability of an optional
form of benefit under an existing plan is discriminatory under section
401(a)(4), the plan must be amended either to eliminate the optional
form of benefit or to make the availability of the optional form of
benefit nondiscriminatory. For example, the availability of an optional
form of benefit may be made nondiscriminatory by making such benefit
available to sufficient additional employees who are not in the highly
compensated group or by imposing nondiscriminatory objective criteria on
its availability such that the group of employees to whom the benefit is
available is nondiscriminatory. See Q&A-6 of 1.411(d)-4 for
requirements with respect to such objective criteria. If, under an
exisitng plan, the availability of an optional form of benefit may
reasonably be expected to discriminate, the plan may be amended in the
same manner permitted where the availability of an optional form of
benefit is discriminatory. See paragraph (d) of this Q&A-5 for rules
limiting the period during which the availability of optional forms of
benefit may be eliminated or reduced under this paragraph.
(c) Compliance and amendment date provisions -- (1) Operational
compliance requirement. On or before the applicable effective date for
the plan (see Q&A-6 of this section), the plan sponsor must select one
of the alternatives permitted under paragraph (b) of this Q&A-5 with
respect to each affected optional form of benefit and the plan must be
operated in accordance with this selection. This is an operational
requirement and does not require a plan amendment prior to the period
set forth in paragraph (c)(2) of this Q&A-5. There is no special
reporting requirement under the Code or this section with respect to
this selection.
(2) Deferred amendment date. If paragraph (c)(1) of this Q&A-5 is
satisfied, a plan amendment conforming the plan to the particular
alternative selected under paragraph (b) of this Q&A-5 must be adopted
within the time period permitted for amending plans in order to meet the
requirements of section 410(b) as amended by TRA '86. Such conforming
amendment must be consistent with the sponsor's selection as reflected
by plan practice during the period from the effective date to the date
the amendment is adopted. Thus, for example, if an existing calendar
year noncollectively bargained defined benefit plan has a single sum
distribution form subject to a discriminatory condition, that was
available as of January 30, 1986 (subject to such condition), and such
employer makes one or more single sum distributions available on or
after the first day of the first plan year commencing on or after
January 1, 1989, and before the plan amendment, then such employer may
not adopt a plan amendment eliminating the single sum distribution form.
Instead, such employer must adopt an amendment making the distribution
form available to a nondiscriminatory group of employees while retaining
the availability of such distribution form with respect to the group of
employees to whom the benefit is already available. Similarly, any
objective criteria that are adopted as part of such amendment must be
consistent with the plan practice for the applicable period prior to the
amendment. A conforming amendment under this paragraph (c)(2) must be
made with respect to each optional form of benefit for which such
amendment is required and must be retroactive to the applicable
effective date.
(d) Limitation on transitional alternatives. The transitional
alternatives permitting the elimination or reduction of optional forms
of benefit will not violate section 411(d)(6) during the period prior to
the applicable effective date for the plan (see Q&A-6 of this section).
After the applicable effective date, any amendment (other than one
described in paragraph (c)(2) of this Q&A-5) that eliminates or reduces
an optional form of benefit or imposes new objective criteria
restricting the availability of such optional form of benefit will fail
to qualify for the exception to section 411(d)(6) provided in this
Q&A-5. This is the case without regard to whether the availability of
the optional form of benefit is discriminatory or may reasonably be
expected to be discriminatory.
Q-6: For what period are the rules of this section effective?
A-6: (a) General effective date. Except as otherwise provided in
this section, the provisions of this section are effective January 30,
1986. The provisions of this section do not apply to plan years
beginning on or after January 1, 1992. For rules applicable to plan
years beginning on or after January 1, 1992, see 1.401(a)(4)-1 through
1.401(a)(4)-13.
(b) New plans -- (1) In general. Unless otherwise provided in
paragraph (b)(2) of this Q&A-6, plans that are either adopted or made
effective on or after January 30, 1986, are ''new plans''. With respect
to such new plans, this section is effective January 30, 1986. This
effective date is applicable to such plans whether or not they are
collectively bargained.
(2) Exception with respect to certain new plans. Plans that are new
plans as defined in paragraph (b)(1) of this Q&A-6, under which the
availability of an optional form of benefit is discriminatory or may
reasonably be expected to be discriminatory, and that receive a
favorable determination letter that covered such plan provisions with
respect to an application submitted prior to July 11, 1988, will be
treated as existing plans with respect to such optional form of benefit
for purposes of the transitional rules of this section. Thus, such
plans are eligible for the compliance and amendment alternatives set
forth in the transitional rule in Q&A-5 of this section.
(c) Existing plans -- (1) In general. Plans that are both adopted
and in effect prior to January 30, 1986, are ''existing plans''. In
addition, new plans described in paragraph (b)(2) of this Q&A-6 are
treated as existing plans with respect to certain forms of benefit.
Subject to the limitations in paragraph (d) of this Q&A-6, the effective
dates set forth in paragraphs (c)(2) and (c)(3) of this Q&A-6 apply to
these existing plans for purposes of this section.
(2) Existing noncollectively bargained plans. With respect to
existing noncollectively bargained plans, this section is effective for
the first day of the first plan year commencing on or after January 1,
1989.
(3) Existing collectively bargained plans. With respect to existing
collectively bargained plans, this section is effective for the later of
the first day of the first plan year commencing on or after January 1,
1989, or the first day of the first plan year that the requirements of
section 410(b) as amended by TRA '86 apply to such plan.
(d) Delayed effective dates not applicable to new optional forms of
benefit or conditions -- (1) In general. The delayed effective dates in
paragraph (c) (2) and (3) of this Q&A-6 for existing plans are
applicable with respect to an optional form of benefit only if both the
optional form of benefit and any applicable condition either causing the
availability of such optional form of benefit to be discriminatory or
making it reasonable to expect that the availability of such optional
form will be discriminatory were both adopted and in effect prior to
January 30, 1986. If the preceding sentence is not satisfied with
respect to an optional form of benefit, this section is effective with
respect to such optional form of benefit as if the plan were a new plan.
(2) Exception for certain amendments covered by a favorable
determination letter. If a condition causing the availability of an
optional form of benefit to be discriminatory, or to be reasonably
expected to discriminate, was adopted or made effective on or after
January 30, 1986, and a favorable determination letter that covered such
plan provision is or was received with respect to an application
submitted before July 11, 1988, the effective date of this section with
respect to such provision is the applicable effective date determined
under the rules with respect to existing plans, as though such provision
had been adopted and in effect prior to January 30, 1986.
(e) Transitional rule effective date. The transitional rule provided
in Q&A-5 of this section is effective January 30, 1986.
(53 FR 26054, July 11, 1988, as amended at T.D. 8360, 56 FR 47536,
Sept. 19, 1991)
26 CFR 1.401(a)-11 Qualified joint and survivor annuities.
(a) General rule -- (1) Required provisions. A trust, to which
section 411 (relating to minimum vesting standards) applies without
regard to section 411(e)(2), which is a part of a plan providing for the
payment of benefits in any form of a life annuity (as defined in
paragraph (b)(1) of this section), shall not constitute a qualified
trust under section 401(a)(11) and this section unless such plan
provides that:
(i) Unless the election provided in paragraph (c)(1) of this section
has been made, life annuity benefits will be paid in a form having the
effect of a qualified joint and survivor annuity (as defined in
paragraph (b)(2) of this section) with respect to any participant who --
(A) Begins to receive payments under such plan on or after the date
the normal retirement age is attained, or
(B) Dies (on or after the date the normal retirement age is attained)
while in active service of the employer maintaining the plan, or
(C) In the case of a plan which provides for the payment of benefits
before the normal retirement age, begins to receive payments under such
plan on or after the date the qualified early retirement age (as defined
in paragraph (b)(4) of this section) is attained, or
(D) Separates from service on or after the date the normal retirement
age (or the qualified early retirement age) is attained and after
satisfaction of eligibility requirements for the payment of benefits
under the plan (except for any plan requirement that there be filed a
claim for benefits) and thereafter dies before beginning to receive life
annuity benefits;
(ii) Any participant may elect, as provided in paragraph (c)(1) of
this section, not to receive life annuity benefits in the form of a
qualified joint and survivor annuity; and
(iii) If the plan provides for the payment of benefits before the
normal retirement age, any participant may elect, as provided in
paragraph (c)(2) of this section, that life annuity benefits be payable
as an early survivor annuity (as defined in paragraph (b)(3) of this
section) upon his death in the event that he --
(A) Attains the qualified early retirement age (as defined in
paragraph (b)(4) of this section), and
(B) Dies on or before the day normal retirement age is attained while
employed by an employer maintaining the plan.
(2) Certain cash-outs. A plan will not fail to satisfy the
requirements of section 401(a)(11) and this section merely because it
provides that if the present value of the entire nonforfeitable benefit
derived from employer contributions of a participant at the time of his
separation from service does not exceed $1,750 (or such smaller amount
as the plan may specify), such benefit will be paid to him in a lump
sum.
(3) Illustrations. The provisions of subparagraph (1) of this
paragraph may be illustrated by the following examples:
Example (1). The X Corporation Defined Contribution Plan was
established in 1960. As in effect on January 1, 1974, the plan provided
that, upon the participant's retirement, the participant may elect to
receive the balance of his account in the form of (1) a single-sum cash
payment, (2) a single-sum distribution consisting of X Corporation
stock, (3) five equal annual cash payments, (4) a life annuity, or (5) a
combination of options (1) through (4). The plan also provided that, if
a participant did not elect another form of distribution, the balance of
his account would be distributed to him in the form of a single-sum cash
payment upon his retirement. Assume that section 401(a)(11) and this
section became applicable to the plan as of its plan year beginning
January 1, 1976, with respect to persons who were active participants in
the plan as of such date (see paragraph (f) of this section). If X
Corporation Defined Contribution Plan continues to allow the life
annuity payment option after December 31, 1975, it must be amended to
provide that if a participant elects a life annuity option the life
annuity benefit will be paid in a form having the effect of a qualified
joint and survivor annuity, except to the extent that the participant
elects another form of benefit payment. However, the plan can continue
to provide that, if no election is made, the balance will be paid as a
single-sum cash payment. If the trust is not so amended, it will fail
to qualify under section 401(a).
Example (2). The Corporation Retirement Plan provides that plan
benefits are payable only in the form of a life annuity and also
provides that a participant may retire before the normal retirement age
of 65 and receive a benefit if he has completed 30 years of service.
Under this plan, an employee who begins employment at the age of 18 will
be eligible to receive retirement benefits at the age of 48 if he then
has 30 years of service. This plan must allow a participant to elect in
the time and manner prescribed in paragraph (c)(2) of this section an
early survivor annuity (defined in paragraph (b)(3) of this section) to
be payable on the death of the participant if death occurs while the
participant is in active service for the employer maintaining the plan
and on or after the date the participant reaches the qualified early
retirement age of 55 (the later of the date the participant reaches the
earliest retirement age (age 48) or 10 years before normal retirement
age (age 55)) but before the day after the day the participant reaches
normal retirement age (age 65).
Example (3). Assume the same facts as in Example (2). A, B, and C
began employment with Y Corporation when they each attained age 18. A
retires and begins to receive benefit payments at age 48 after
completing 30 years of service. The plan is not required to pay a
qualified joint and survivor annuity to A and his spouse at any time. B
does not elect an early survivor annuity at age 55, but retires at age
57 after completing 39 years of service. Unless B makes an election
under subparagraph (1)(ii) of this paragraph, the plan is required to
pay a qualified joint and survivor annuity to B and his spouse. C makes
no elections described in subparagraph (1) of this paragraph, and dies
while in active service at age 66 after completing 48 years of service.
The plan is required to pay a qualified survivor annuity to C's spouse.
(b) Definitions. As used in this section -- (1) Life annuity. (i)
The term ''life annuity'' means an annuity that provides retirement
payments and requires the survival of the participant or his spouse as
one of the conditions for any payment or possible payment under the
annuity. For example, annuities that make payments for 10 years or
until death, whichever occurs first or whichever occurs last, are life
annuities.
(ii) However, the term ''life annuity'' does not include an annuity,
or that portion of an annuity, that provides those benefits which, under
section 411(a)(9), would not be taken into account in the determination
of the normal retirement benefit or early retirement benefit. For
example, ''social security supplements'' described in the fourth
sentence of section 411(a)(9) are not considered to be life annuities
for the purposes of this section, whether or not an early retirement
benefit is provided under the plan.
(2) Qualified joint and survivor annuity. The term ''qualified joint
and survivor annuity'' means an annuity for the life of the participant
with a survivor annuity for the life of his spouse which is neither (i)
less than one-half of, nor (ii) greater than, the amount of the annuity
payable during the joint lives of the participant and his spouse. For
purposes of the preceding sentence, amounts described in
1.401(a)-11(b)(1)(ii) may be disregarded. A qualified joint and
survivor annuity must be at least the actuarial equivalent of the normal
form of life annuity or, if greater, of any optional form of life
annuity offered under the plan. Equivalence may be determined, on the
basis of consistently applied reasonable actuarial factors, for each
participant or for all participants or reasonable groupings of
participants, if such determination does not result in discrimination in
favor of employees who are officers, shareholders, or highly
compensated. An annuity is not a qualified joint and survivor annuity
if payments to the spouse of a deceased participant are terminated, or
reduced, because of such spouse's remarriage.
(3) Early survivor annuity. The term ''early survivor annuity''
means an annuity for the life of the participant's spouse the payments
under which must not be less than the payments which would have been
made to the spouse under the joint and survivor annuity if the
participant had made the election described in paragraph (c)(2) of this
section immediately prior to his retirement and if his retirement had
occurred on the day before his death and within the period during which
an election can be made under such paragraph (c)(2). For example, if a
participant would be entitled to a single life annuity of $100 per month
or a reduced amount under a qualified joint and survivor annuity of $80
per month, his spouse is entitled to a payment of at least $40 per
month. However, the payments may be reduced to reflect the number of
months of coverage under the survivor annuity pursuant to paragraph (e)
of this section.
(4) Qualified early retirement age. The term ''qualified early
retirement age'' means the latest of --
(i) The earliest date, under the plan, on which the participant could
elect (without regard to any requirement that approval of early
retirement be obtained) to receive retirement benefits (other than
disability benefits).
(ii) The first day of the 120th month beginning before the
participant reaches normal retirement age, or
(iii) The date on which the participant begins participation.
(5) Normal retirement age. The term ''normal retirement age'' has
the meaning set forth in section 411(a)(8).
(6) Annuity starting date. The term ''annuity starting date'' means
the first day of the first period with respect to which an amount is
received as a life annuity, whether by reason of retirement or by reason
of disability.
(7) Day. The term ''day'' means a calendar day.
(c) Elections -- (1) Election not to take joint and survivor annuity
form -- (i) In general. (A) A plan shall not be treated as satisfying
the requirements of this section unless it provides that each
participant may elect, during the election period described in
subdivision (ii) of this subparagraph, not to receive a qualified joint
and survivor annuity. However, if a plan provides that a qualified
joint and survivor annuity is the only form of benefit payable under the
plan with respect to a married participant, no election need be
provided.
(B) The election shall be in writing and clearly indicate that the
participant is electing to receive all or, if permitted by the plan,
part of his benefits under the plan in a form other than that of a
qualified joint and survivor annuity. A plan will not fail to meet the
requirements of this section merely because the plan requires the
participant to obtain the written approval of his spouse in order for
the participant to make this election or if the plan provides that such
approval is not required.
(ii) Election period. (A) For purposes of the election described in
paragraph (c)(1)(i) of this section, the plan shall provide an election
period which shall include a period of at least 90 days following the
furnishing of all of the applicable information required by subparagraph
(3)(i) of this paragraph and ending prior to commencement of benefits.
In no event may the election period end earlier than the 90th day before
the commencement of benefits. Thus, for example, the commencement of
benefits may be delayed until the end of such election period because
the amount of payments to be made to a participant cannot be ascertained
before the end of such period; see 1.401(a)-14(d).
If a participant makes a request for additional information as
provided in subparagraph (3)(iii) of this paragraph on or before the
last day of the election period, the election period shall be extended
to the extent necessary to include at least the 90 calendar days
immediately following the day the requested additional information is
personally delivered or mailed to the participant. Notwithstanding the
immediately preceding sentence, a plan may provide in cases in which the
participant has been furnished by mail or personal delivery all of the
applicable information required by subparagraph (3)(i) of this
paragraph, that a request for such additional information must be made
on or before a date which is not less than 60 days from the date of such
mailing or delivery; and if the plan does so provide, the election
period shall be extended to the extent necessary to include at least the
60 calendar days following the day the requested additional information
is personally delivered or mailed to the participant.
(B) In the case of a participant in a plan to which this subparagraph
applies who separated from service after section 401(a)(11) and this
section became applicable to such plan with respect to such participant,
and to whom an election required by this subparagraph has not been
previously made available (and will not become available in normal
course), the plan must provide an election to receive the balance of his
benefits (properly adjusted, if applicable, for payments received, prior
to the exercise of such election, in the form of a qualified joint and
survivor annuity) in a form other than that of a qualified joint and
survivor annuity. The provisions of paragraph (c)(1)(ii)(A) shall apply
except that in no event shall the election period end before the 90th
day after the date on which notice of the availability of such election
and the applicable information required by subparagraph (3)(i) of this
paragraph is given directly to the participant. If such notice and
information is given by mail, it shall be treated as given on the date
of mailing. If such participant has died, such election shall be made
available to such participant's personal representative.
(2) Election of early survivor annuity -- (i) In general. (A) A plan
described in subparagraph (a)(1)(iii) of this section shall not be
treated as satisfying the requirements of this section unless it
provides that each participant may elect, during the period described in
subdivision (ii) of this subparagraph, an early survivor annuity as
described in paragraph (a)(1)(iii) of this section. Breaks in service
after the participant has attained the qualified early retirement age
neither invalidate a previous election or revocation nor prevent an
election from being made or revoked during the election period.
(B) The election shall be in writing and clearly indicate that the
participant is electing the early survivor annuity form.
(C) A plan is not required to provide an election under this
subparagraph if --
(1) The plan provides that an early survivor annuity is the only form
of benefit payable under the plan with respect to a married participant
who dies while employed by an employer maintaining the plan,
(2) In the case of a defined contribution plan, the plan provides a
survivor benefit at least equal in value to the vested portion of the
participant's account balance, if the participant dies while in active
service with an employer maintaining the plan, or
(3) In the case of a defined benefit plan, the plan provides a
survivor benefit at least equal in value to the present value of the
vested portion of the participant's normal form of the accrued benefit
payable at normal retirement age (determined immediately prior to
death), if the participant dies while in active service with an employer
maintaining the plan. Any present values must be determined in
accordance with either the actuarial assumptions or factors specified in
the plan, or a variable standard independent of employer discretion for
converting optional benefits specified in the plan.
(ii) Election period. (A) For purposes of the election described in
paragraph (c)(2)(i) of this section the plan shall provide an election
period which, except as provided in the following sentence, shall begin
not later than the later of either the 90th day before a participant
attains the qualified early retirement age or the date on which his
participation begins, and shall end on the date the participant
terminates his employment. If such a plan contains a provision that any
election made under this subparagraph does not become effective or
ceases to be effective if the participant dies within a certain period
beginning on the date of such election, the election period prescribed
in this subdivision (ii) shall begin not later than the later of (1) a
date which is 90 days plus such certain period before the participant
attains the qualified early retirement age or (2) the date on which his
participation begins. For example, if a plan provides that an election
made under this subparagraph does not become effective if the
participant dies less than 2 years after the date of such election, the
period for making an election under this subparagraph must begin not
later than the later of (1) 2 years and 90 days before the participant
attains the qualified early retirement age, or (2) the date on which his
participation begins. However, the election period for an individual
who was an active participant on the date this section became effective
with regard to the plan need not begin earlier than such effective date.
(B) In the case of a participant in a plan to which this subparagraph
applies who dies after section 401(a)(11) and this section became
applicable to such plan with respect to such participant and to whom an
election required by this subparagraph has not been previously made
available, the plan must give the participant's surviving spouse or, if
dead, such spouse's personal representative the option of electing an
early survivor annuity. The plan may reduce the surviving spouse's
annuity to take into account any benefits already received. The period
for making such election shall not end before the 90th day after the
date on which written notice of the availability of such election and
applicable information required by subparagraph (3)(i) of this paragraph
is given directly to such surviving spouse or personal representative.
If such notice and information is given by mail, if shall be treated as
given on the date of mailing.
(3) Information to be provided by plan administrator. (i) A plan
which is required to provide either or both of the elections described
in paragraph (c) (1) or (2) of this section must provide to the
participants, at the time and in the manner specified in subdivision
(ii) of this subparagraph, the following information, as applicable to
the plan, in written nontechnical language:
(A) In the case of the election described in paragraph (c)(1) of this
section, a general description or explanation of the qualified joint and
survivor annuity, the circumstances in which it will be provided unless
the participant has elected not to have benefits provided in that form,
and the availability of such election;
(B) In the case of the election described in paragraph (c)(2) of this
section, a general description of the early survivor annuity, the
circumstances under which it will be paid if elected, and the
availability of such election; and
(C) A general explanation of the relative financial effect on a
participant's annuity of either or both elections, as the case may be.
Various methods may be used to explain such relative financial
effect. With regard to a qualified joint and survivor annuity, they
include: information as to the benefits the participant would receive
under the qualified joint and survivor annuity stated as an arithmetic
or percentage reduction from a single life annuity; a table showing the
difference between a straight life annuity and a qualified joint and
survivor annuity in terms of a reduction in dollar amounts; a table
showing a percentage reduction from the straight life annuity or, in the
case of a profit-sharing plan, an approximate dollar amount reduction.
The notice and explanation required by this subdivision (i) must also
inform the participants of the availability of the additional
information specified in subdivision (iii) of this subparagraph and how
they may obtain such information.
(ii) The method or methods used to provide the information described
in subdivision (i) of this subparagraph may vary. Posting which meets
the requirements of 1.7476-2(c)(1) may be used; see 1.7476-2(c)(1)
for examples of other methods which may be used. One or more methods
may be used to provide the required information provided that all of the
required information is provided by one method or a combination of
methods by or within the time period specified in this subdivision (ii).
If mail or personal delivery is used, then, whether or not the
information has been previously provided, there must be a mailing or
personal delivery of the information by such time as to reasonably
assure that it will be received on or about: (1) In the case of a plan
which does not provide for the payment of benefits before the normal
retirement age, the date which is 9 months before the participant
attains normal retirement age; (2) in the case of a plan which provides
for the payment of benefits before the normal retirement age and which
is required to provide the election described in paragraph (c)(2) of
this section (whether or not it is also required to provide the election
described in paragraph (c)(1) of this section), the date which is 90
days before the latest date prescribed by paragraph (c)(2)(ii)(A) for
the beginning of the election period for the early survivor annuity; or
(3) in the case of a plan which provides for the payment of benefits
before the normal retirement age and which is required to provide only
the election described in paragraph (c)(1) of this section, the date
which is nine months before the participant attains the qualified early
retirement age; except that in the case of a plan described in (2) or
(3), if the qualified early retirement age is the date the participant
begins participation in the plan, the information may be provided on or
about such date. If a method other than mail or personal delivery is
used to provide participants with some or all of such information, if
must be a method which is reasonably calculated to reach the attention
of a participant on or about the date prescribed in the immediately
preceding sentence and to continue to reach the attention of such
participant during the election period applicable to him for which the
information is being provide (as, for example, by permanent posting,
repeated publication, etc.).
(iii) The plan administrator must furnish to a particular
participant, upon a timely written request, a written explanation in
nontechnical language of the terms and conditions of the qualified joint
and survivor annuity and the financial effect upon the particular
participant's annuity of making any election under this paragraph. Such
financial effect shall be given in terms of dollars per annuity payment;
and in the case of a defined contribution plan, the projected annuity
for a particular participant may be based on his account balance as of
the most recent valuation date. The plan administrator need not comply
with more than one such request made by a particular participant. This
explanation must be personally delivered or mailed (first class mail,
postage prepaid) to the participant within 30 days from the date of the
participant's written request.
(4) Election is revocable. A plan to which this section applies must
provide that any election made under this paragraph may be revoked in
writing during the specified election period, and that after such
election has been revoked, another election under this paragraph may be
made during the specified election period.
(5) Election by surviving spouse. A plan will not fail to meet the
requirements of section 401(a)(11) and this section merely because it
provides that the spouse of a deceased participant may elect to have
benefits paid in a form other than a survivor annuity. If the plan
provides that such a spouse may make such an election, the plan
administrator must furnish to this spouse, within a reasonable amount of
time after a written request has been made by this spouse, a written
explanation in non-technical language of the survivor annuity and any
other form of payment which may be selected. This explanation must
state the financial effect (in terms of dollars) of each form of
payment. A plan need not respond to more than one such request.
(d) Permissible additional plan provisions -- (1) In general. A plan
will not fail to meet the requirements of section 401(a)(11) and this
section merely because it contains one or more of the provisions
described in paragraphs (d)(2) through (5) of this section.
(2) Claim for benefits. A plan may provide that as a condition
precedent to the payment of benefits, a participant must express in
writing to the plan administrator the form in which he prefers benefits
to be paid and provide all the information reasonably necessary for the
payment of such benefits. However, if a participant files a claim for
benefits with the plan administrator and provides the plan administrator
with all the information necessary for the payment of benefits but does
not indicate a preference as to the form for the payment of benefits,
benefits must be paid in the form of a qualified joint and survivor
annuity if the participant has attained the qualified early retirement
age unless such participant has made an effective election not to
receive benefits in such form. For rules relating to provisions in a
plan to the effect that a claim for benefits must be filed before the
payment of benefits will commence, see 1.401(a)-14.
(3) Marriage requirements. A plan may provide that a joint and
survivor annuity will be paid only if --
(i) The participant and his spouse have been married to each other
throughout a period (not exceeding one year) ending on the annuity
starting date.
(ii) The spouse of the participant is not entitled to receive a
survivor annuity (whether or not the election described in paragraph
(c)(2) of this section has been made) unless the participant and his
spouse have been married to each other throughout a period (not
exceeding one year) ending on the date of such participant's death.
(iii) The same spouse must satisfy the requirements of subdivisions
(i) and (ii) of this subparagraph.
(iv) The participant must notify the plan administrator (as defined
by section 414(g)) of his marital status within any reasonable time
period specified in the plan.
(4) Effect of participant's death on an election or revocation of an
election under paragraph (c). A plan may provide that any election
described in paragraph (c) of this section or any revocation of any such
election does not become effective or ceases to be effective if the
participant dies within a period, not in excess of 2 years, beginning on
the date of such election or revocation. However, a plan containing a
provision described in the preceding sentence shall not satisfy the
requirements of this section unless it also provides that any such
election or any revocation of any such election will be given effect in
any case in which --
(i) The participant dies from accidental causes,
(ii) A failure to give effect to the election or revocation would
deprive the participant's survivor of a survivor annuity, and
(iii) Such election or revocation is made before such accident
occurred.
(5) Benefit option approval by third party. (i) A plan may provide
that an optional form of benefit elected by a participant is subject to
the approval of an administrative committee or similar third party.
However, the administrative committee cannot deny a participant any of
the benefits required by section 401(a)(11). For example, if a plan
offers a life annuity option, the committee may deny the participant a
qualified joint and survivor annuity only by denying the participant
access to all life annuity options without knowledge of whether the
participant wishes to receive a qualified joint and survivor annuity.
Alternatively, if the committee knows which form of life annuity the
participant has chosen before the committee makes its decision, the
committee cannot withhold its consent for payment of a qualified joint
and survivor annuity event though it denies all other life annuity
options. This subparagraph (5) only applies before the effective date
of the amendment made to section 411(d)(6) by section 301 of the
Retirement Equity Act of 1984. See section 411(d)(6) and the
regulations thereunder for rules limiting employer discretion.
(ii) The provisions of this subparagraph may be illustrated by the
following example:
Example. In 1980 plan M provides that the automatic form of benefit
is a single sum distribution. The plan also permits, subject to
approval by the administrative committee, the election of several
optional forms of life annuity. On the election form that is reviewed
by the administrative committee the participant indicates whether any
life annuity option is preferred, without indicating the particular life
annuity chosen. Thus, the committee approves or disapproves the
election without knowledge of whether a qualified joint and survivor
annuity will be elected. The administrative committee approval
provision in Plan M does not cause the plan to fail to satisfy this
section. On the other hand, if the form indicates which form of life
annuity is preferred, committee disapproval of any election of the
qualified joint and survivor annuity would cause the plan to fail to
satisfy this section.
(e) Costs of providing qualified joint and survivor annuity form or
early survivor annuity form. A plan may take into account in any
equitable manner consistent with generally accepted actuarial principles
applied on a consistent basis any increased costs resulting from
providing qualified joint and survivor annuity and early survivor
annuity benefits. A plan may give a participant the option of paying
premiums only if it provides another option under which an out-of-pocket
expense by the participant is not required.
(f) Application and effective date. Section 401(a)(11) and this
section shall apply to a plan only with respect to plan years beginning
after December 31, 1975, and shall apply only if --
(1) The participant's annuity starting date did not fall within a
plan year beginning before January 1, 1976, and
(2) The participant was an active participant in the plan on or after
the first day of the first plan year beginning after December 31, 1975.
For purposes of this paragraph, the term ''active participant'' means
a participant for whom benefits are being accrued under the plan on his
behalf (in the case of a defined benefit plan), the employer is
obligated to contribute to or under the plan on his behalf (in the case
of a defined contribution plan other than a profit-sharing plan), or the
employer either is obligated to contribute to or under the plan on his
behalf or would have been obligated to contribute to or under the plan
on his behalf if any contribution were made to or under the plan (in the
case of a profit-sharing plan).
If benefits under a plan are provided by the distribution to the
participants of individual annuity contracts, the annuity starting date
will be considered for purposes of this paragraph to fall within a plan
year beginning before January 1, 1976, with respect to any such
individual contract that was distributed to the participant during a
plan year beginning before January 1, 1976, if no premiums are paid with
respect to such contract during a plan year beginning after December 31,
1975. In the case of individual annuity contracts that are distributed
to participants before January 1, 1978, and which contain an option to
provide a qualified joint and survivor annuity, the requirements of this
section will be considered to have been satisfied if, not later than
January 1, 1978, holders of individual annuity contracts who are
participants described in the first sentence of this paragraph are given
an opportunity to have such contracts amended, so as to provide for a
qualified joint and survivor annuity in the absence of a contrary
election, within a period of not less than one year from the date such
opportunity was offered. In no event, however, shall the preceding
sentence apply with respect to benefits attributable to premiums paid
after December 31, 1977.
(g) Effect of REA 1984 -- (1) In general. The Retirement Equity Act
of 1984 (REA 1984) significantly changed the qualified joint and
survivor annuity rules generally effective for plan years beginning
after December 31, 1984. The new survivor annuity rules are primarily
in sections 401(a)(11) and 417 as revised by REA 1984 and 1.401(a)-20
and 417(e)-1.
(2) Regulations after REA 1984. (i) REA and the regulations
thereunder to the extent inconsistent with pre-REA 1984 section
401(a)(11) and this section are controlling for years to which REA 1984
applies. See e.g., paragraphs (a)(1) and (2) of this section, relating
to required provisions and certain cash-outs, respectively and (e),
relating to costs of providing annuities, for rules that are
inconsistent with REA 1984 and, therefore, are not applicable to REA
1984 years.
(ii) To the extent that the pre-REA 1984 law either is the same as or
consistent with REA 1984 and the new regulations hereunder, the rules in
this section shall continue to apply for years to which REA 1984
applies. (See, e.g., paragraph (c) (relating to how information is
furnished participants and spouses) and paragraph (b) (defining a life
annuity) for some of the rules that apply to REA 1984 years.) The rules
in this section shall not apply for such years to the extent that they
are inconsistent with REA 1984 and the regulations thereunder.
(iii) The Commissioner may provide additional guidance as to the
continuing effect of the various rules in this section for years to
which REA 1984 applies.
(Secs. 401(a)(11), 7805 Internal Revenue Code of 1954, (88 Stat.
935, 68A Stat. 917; (26 U.S.C. 401(a)(11), 7805)))
(T.D. 7458, 42 FR 1466, Jan. 7, 1977; 42 FR 6367, Feb. 2, 1977;
T.D. 7510, 42 FR 53956, Oct. 4, 1977; T.D. 8219, 53 FR 31841, Aug. 22,
1988; 53 FR 48534, Dec. 1, 1988)
26 CFR 1.401(a)-12 Mergers and consolidations of plans and transfers of
plan assets.
A trust will not be qualified under section 401 unless the plan of
which the trust is a part provides that in the case of any merger or
consolidation with, or transfer of assets or liabilities to, another
plan after September 2, 1974, each participant in the plan would receive
a minimum benefit if the plan terminated immediately after the merger,
consolidation, or transfer. This benefit must be equal to or greater
than the benefit the participant would have been entitled to receive
immediately before the merger, consolidation, or transfer if the plan in
which he was a participant had then terminated. This section applies to
a multiemployer plan only to the extent determined by the Pension
Benefit Guaranty Corporation. For additional rules concerning mergers
or consolidations of plans and transfers of plan assets, see section
414(l) and 1.414(l)-1.
(T.D. 7638, 44 FR 48195, Aug. 17, 1979)
26 CFR 1.401(a)-13 Assignment or alienation of benefits.
(a) Scope of the regulations. This section applies only to plans to
which section 411 applies without regard to section 411(e)(2). Thus,
for example, it does not apply to a governmental plan, within the
meaning of section 414(d); a church plan, within the meaning of section
414(e), for which there has not been made the election under section
410(a) to have the participation, vesting, funding, etc. requirements
apply; or a plan which at no time after September 2, 1974, provided for
employer contributions.
(b) No assignment or alienation -- (1) General rule. Under section
401(a)(13), a trust will not be qualified unless the plan of which the
trust is a part provides that benefits provided under the plan may not
be anticipated, assigned (either at law or in equity), alienated or
subject to attachment, garnishment, levy, execution or other legal or
equitable process.
(2) Federal tax levies and judgments. A plan provision satisfying
the requirements of subparagraph (1) of this paragraph shall not
preclude the following:
(i) The enforcement of a Federal tax levy made pursuant to section
6331.
(ii) The collection by the United States on a judgment resulting from
an unpaid tax assessment.
(c) Definition of assignment and alienation -- (1) In general. For
purposes of this section, the terms ''assignment'' and ''alienation''
include --
(i) Any arrangement providing for the payment to the employer of plan
benefits which otherwise would be due the participant under the plan,
and
(ii) Any direct or indirect arrangement (whether revocable or
irrevocable) whereby a party acquires from a participant or beneficiary
a right or interest enforceable against the plan in, or to, all or any
part of a plan benefit payment which is, or may become, payable to the
participant or beneficiary.
(2) Specific arrangements not considered an assignment or alienation.
The terms ''assignment'' and ''alienation'' do not include, and
paragraph (e) of this section does not apply to, the following
arrangements:
(i) Any arrangement for the recovery of amounts described in section
4045(b) of the Employee Retirement Income Security Act of 1974, 88 Stat.
1027 (relating to the recapture of certain payments),
(ii) Any arrangement for the withholding of Federal, State or local
tax from plan benefit payments,
(iii) Any arrangement for the recovery by the plan of overpayments of
benefits previously made to a participant,
(iv) Any arrangement for the transfer of benefit rights from the plan
to another plan, or
(v) Any arrangement for the direct deposit of benefit payments to an
account in a bank, savings and loan association or credit union,
provided such arrangement is not part of an arrangement constituting an
assignment or alienation. Thus, for example, such an arrangement could
provide for the direct deposit of a participant's benefit payments to a
bank account held by the participant and the participant's spouse as
joint tenants.
(d) Exceptions to general rule prohibiting assignments or alienations
-- (1) Certain voluntary and revocable assignments or alienations. Not
withstanding paragraph (b)(1) of this section, a plan may provide that
once a participant or beneficiary begins receiving benefits under the
plan, the participant or beneficiary may assign or alienate the right to
future benefit payments provided that the provision is limited to
assignments or alienations which --
(i) Are voluntary and revocable;
(ii) Do not in the aggregate exceed 10 percent of any benefit
payment; and
(iii) Are neither for the purpose, nor have the effect, of defraying
plan administration costs.
For purposes of this subparagraph, an attachment, garnishment, levy,
execution, or other legal or equitable process is not considered a
voluntary assignment or alienation.
(2) Benefits assigned or alienated as security for loans. (i)
Notwithstanding paragraph (b)(1) of this section, a plan may provide for
loans from the plan to a participant or a beneficiary to be secured (by
whatever means) by the participant's accrued nonforfeitable benefit
provided that the following conditions are met.
(ii) The plan provision providing for the loans must be limited to
loans from the plan. A plan may not provide for the use of benefits
accrued or to be accrued under the plan as security for a loan from a
party other than the plan, regardless of whether these benefits are
nonforfeitable within the meaning of section 411 and the regulations
thereunder.
(iii) The loan, if made to a participant or beneficiary who is a
disqualified person (within the meaning of section 4975(e)(2)), must be
exempt from the tax imposed by section 4975 (relating to the tax imposed
on prohibited transactions) by reason of section 4975(d)(1). If the
loan is made to a participant or beneficiary who is not a disqualified
person, the loan must be one which would the exempt from the tax imposed
by section 4975 by reason of section 4975(d)(1) if the loan were made to
a disqualified person.
(e) Special rule for certain arrangements -- (1) In general. For
purposes of this section and notwithstanding paragraph (c)(1) of this
section, an arrangement whereby a participant or beneficiary directs the
plan to pay all, or any portion, of a plan benefit payment to a third
party (which includes the participant's employer) will not constitute an
''assignment or alienation'' if --
(i) It is revocable at any time by the participant or beneficiary;
and
(ii) The third party files a written acknowledgement with the plan
administrator pursuant to subparagraph (2) of this paragraph.
(2) Acknowledgement requirement for third party arrangements. In
accordance with paragraph (e)(1)(ii) of this section, the third party is
required to file a written acknowledgement with the plan administrator.
This acknowledgement must state that the third party has no enforceable
right in, or to, any plan benefit payment or portion thereof (except to
the extent of payments actually received pursuant to the terms of the
arrangement). A blanket written acknowledgement for all participants
and beneficiaries who are covered under the arrangement with the third
party is sufficient. The written acknowledgement must be filed with the
plan administrator no later than the later of --
(i) August 18, 1978; or
(ii) 90 days after the arrangement is entered into.
(f) Effective date. Section 401(a)(13) is applicable as of January
1, 1976, and the plan provision required by this section must be
effective as of that date. However, regardless of when the provision is
adopted, it will not affect --
(1) Attachments, garnishments, levies, or other legal or equitable
process permitted under the plan that are made before January 1, 1976;
(2) Assignments permitted under the plan that are irrevocable on
December 31, 1975, including assignments made before January 1, 1976, as
security for loans to a participant or beneficiary from a party other
than the plan; and
(3) Renewals or extensions of loans described in subparagraph (2) of
this paragraph, if --
(i) The principal amount of the obligation outstanding on December
31, 1975 (or, if less, the principal amount outstanding on the date of
renewal or extension), is not increased;
(ii) The loan, as renewed or extended, does not bear a rate of
interest in excess of the rate prevailing for similar loans at the time
of the renewal or extensions; and
(iii) With respect to loans that are renewed or extended to bear a
variable interest rate, the formula for determining the applicable rate
is consistent with the formula for formulae prevailing for similar loans
at the time of the renewal or extension.
For purposes of subparagraphs (2) and (3) of this paragraph, a loan
from a party other than the plan made after December 31, 1975, will be
treated as a new loan. This is so even if the lender's security
interest for the loan arises from an assignment of the participant's
accrued nonforfeitable benefit made before that date.
(g) Special rules for qualified domestic relations orders -- (1)
Definition. The term ''qualified domestic relations order'' (QDRO) has
the meaning set forth in section 414(p). For purposes of the Internal
Revenue Code, a QDRO also includes any domestic relations order
described in section 303(d) of the Retirement Equity Act of 1984.
(2) Plan amendments. A plan will not fail to satisfy the
qualification requirements of section 401(a) or 403(a) merely because it
does not include provisions with regard to a QDRO.
(3) Waiver of distribution requirements. A plan shall not be treated
as failing to satisfy the requirements of sections 401 (a) and (k) and
409(d) solely because of a payment to an alternate payee pursuant to a
QDRO. This is the case even if the plan provides for payments pursuant
to a QDRO to an alternate payee prior to the time it may make payments
to a participant. Thus, for example, a pension plan may pay an
alternate payee even though the participant may not receive a
distribution because he continues to be employed by the employer.
(4) Coordination with section 417 -- (i) Former spouse. (A) In
general. Under section 414(p)(5), a QDRO may provide that a former
spouse shall be treated as the current spouse of a participant for all
or some purposes under sections 401(a)(11) and 417.
(B) Consent. (1) To the extent a former spouse is treated as the
current spouse of the participant by reason of a QDRO, any current
spouse shall not be treated as the current spouse. For example, assume
H is divorced from W, but a QDRO provides that H shall be treated as W's
current spouse with respect to all of W's benefits under a plan. H will
be treated as the surviving spouse under the QPSA and QJSA unless W
obtains H's consent to waive the QPSA or QJSA or both. The fact that W
married S after W's divorce from H is disregarded. If, however, the
QDRO had provided that H shall be treated as W's current spouse only
with respect to benefits that accrued prior to the divorce, then H's
consent would be needed by W to waive the QPSA or QJSA with respect to
benefits accrued before the divorce. S's consent would be required with
respect to the remainder of the benefits.
(2) In the preceding examples, if the QDRO ordered that a portion of
W's benefit (either through separate accounts or a percentage of the
benefit) must be distributed to H rather than ordering that H be treated
as W's spouse, the survivor annuity requirements of sections 401(a)(11)
and 417 would not apply to the part of W's benefit awarded H. Instead,
the terms of the QDRO would determine how H's portion of W's accrued
benefit is paid. W is required to obtain S's consent if W elects to
waive either the QJSA or QPSA with respect to the remaining portion of
W's benefit.
(C) Amount of the QPSA or QJSA. (1) Where, because of a QDRO, more
than one individual is to be treated as the surviving spouse, a plan may
provide that the total amount to be paid in the form of a QPSA or
survivor portion of a QJSA may not exceed the amount that would be paid
if there were only one surviving spouse. The QPSA or survivor portion
of the QJSA, as the case may be, payable to each surviving spouse must
be paid as an annuity based on the life of each such spouse.
(2) Where the QDRO splits the participant's accrued benefit between
the participant and a former spouse (either through separate accounts or
percentage of the benefit), the surviving spouse of the participant is
entitled to a QPSA or QJSA based on the participant's accrued benefit as
of the date of death or the annuity starting date, less the separate
account or percentage that is payable to the former spouse. The
calculation is made as if the separate account or percentage had been
distributed to the participant prior to the relevant date.
(ii) Current spouse. Under section 414(p)(5), even if the applicable
election periods (i.e., the first day of the year in which the
participant attains age 35 and 90 days before the annuity starting date)
have not begun, a QDRO may provide that a current spouse shall not be
treated as the current spouse of the participant for all or some
purposes under sections 401(a)(11) and 417. A QDRO may provide that the
current spouse waives all future rights to a QPSA or QJSA.
(iii) Effects on benefits. (A) A plan is not required to provide
additional vesting or benefits because of a QDRO.
(B) If an alternate payee is treated pursuant to a QDRO as having an
interest in the plan benefit, including a separate account or percentage
of the participant's account, then the QDRO cannot provide the alternate
payee with a greater right to designate a beneficiary for the alternate
payee's benefit amount than the participant's right. The QJSA or QPSA
provisions of section 417 do not apply to the spouse of an alternate
payee.
(C) If the former spouse who is treated as a current spouse dies
prior to the participant's annuity starting date, then any actual
current spouse of the participant is treated as the current spouse,
except as otherwise provided in a QDRO.
(iv) Section 415 requirements. Even though a participant's benefits
are awarded to an alternate payee pursuant to a QDRO, the benefits are
benefits of the participant for purposes of applying the limitations of
section 415 to the participant's benefits.
(T.D. 7534, 43 FR 6943, Feb. 17, 1978, as amended by T.D. 8219, 53 FR
31850, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988)
26 CFR 1.401(a)-14 Commencement of benefits under qualified trusts.
(a) In general. Under section 401(a)(14), a trust to which section
411 applies (without regard to section 411(e)(2) is not qualified under
section 401 unless the plan of which such trust is a part provides that
the payment of benefits under the plan to the participant will begin not
later than the 60th day after the close of the plan year in which the
latest of the following events occurs --
(1) The attainment by the participant of age 65, or, if earlier, the
normal retirement age specified under the plan,
(2) The 10th anniversary of the date on which the participant
commenced participation in the plan,
(3) The termination of the participant's service with the employer,
or
(4) The date specified in an election made pursuant to paragraph (b)
of this section.
Notwithstanding the preceding sentence, a plan may require that a
participant file a claim for benefits before payment of benefits will
commence.
(b) Election of later date -- (1) General rule. A plan may permit a
participant to elect that the payment to him of any benefit under a plan
will commence at a date later than the dates specified under paragraphs
(a)(1), (2), and (3) of this section.
(2) Manner of election. A plan permitting an election under this
paragraph shall require that such election must be made by submitting to
the plan administrator a written statement, signed by the participant,
which describes the benefit and the date on which the payment of such
benefit shall commence.
(3) Restriction. An election may not be made pursuant to a plan
provision permitted by this paragraph if the exercise of such election
will cause benefits payable under the plan with respect to the
participant in the event of his death to be more than ''incidental''
within the meaning of paragraph (b)(1)(i) of 1.401-1.
(c) Special early retirement rule -- (1) Separation prior to early
retirement age. A trust forming part of a plan which provides for the
payment of an early retirement benefit is not qualified under section
401 unless, upon satisfaction of the age requirement for such early
retirement benefit, a participant who --
(i) Satisfied the service requirements for such early retirement
benefit, but
(ii) Separated from service (with any nonforfeitable right to an
accrued benefit) before satisfying such age requirement,
is entitled to receive not less than the reduced normal retirement
benefit described in paragraph (c)(2) of this section. A plan may
establish reasonable conditions for payments of early retirement
benefits (including for example, a requirement that a claim for benefits
be made) if the conditions are equally applicable to participants who
separate from service when eligible for an early retirement benefit and
participants who separate from service earlier.
(2) Reduced normal retirement benefit. For purposes of this section,
the reduced normal retirement benefit is the benefit to which the
participant would have been entitled under the plan at normal retirement
age, reduced in accordance with reasonable actuarial assumptions.
(3) Separation prior to effective date of this section. The
provisions of this paragraph shall not apply in the case of a plan
participant who separates from service before attainment of early
retirement age and prior to the effective date of this section set forth
in paragraph (e) of this section.
(4) Illustration. The provisions of this paragraph may be
illustrated by the following example:
Example. The X Corporation Defined Benefit Plan provides that a
normal retirement benefit will be payable to a participant upon
attainment of age 65. The plan also provides that an actuarially
reduced retirement benefit will be payable, upon application, to any
participant who has completed 10 years of service with the X Corporation
and attained age 60. When he is 55 years of age and has completed 10
years of service with X Corporation, A, a participant in the plan,
leaves the service of X Corporation and does not return. The plan will
not be qualified under section 401 unless, upon attainment of age 60 and
application for benefits, A is entitled to receive a reduced normal
retirement benefit described in subparagraph (2) of this paragraph.
(d) Retroactive payment rule. If the amount of the payment required
to commence on the date determined under this section cannot be
ascertained by such date, or if it is not possible to make such payment
on such date because the plan administrator has been unable to locate
the participant after making reasonable efforts to do so, a payment
retroactive to such date may be made no later than 60 days after the
earliest date on which the amount of such payment can be ascertained
under the plan or the date on which the participant is located
(whichever is applicable).
(e) Effective date. This section shall apply to a plan for those
plan years to which section 411 of the Code applies without regard to
section 411(e)(2).
(Secs. 401(a)(14), 7805, Internal Revenue Code of 1954 (88 Stat.
937, 68A Stat. 917; 26 U.S.C. 401(a)(14), 7805))
(T.D. 7436, 41 FR 42651, Sept. 28, 1976; 41 FR 44690, Oct. 12, 1976)
26 CFR 1.401(a)-15 Requirement that plan benefits are not decreased on
account of certain Social Security increases.
(a) In general. Under section 401(a)(15), a trust which is part of a
plan to which section 411 applies (without regard to section 411(e)(2))
is not qualified under section 401 unless, under the plan of which such
trust is a part:
(1) Benefit being received by participant or beneficiary. A benefit
(including a death or disability benefit) being received under the plan
by a participant or beneficiary (other than a participant to whom
subparagraph (2)(ii) of this paragraph applies, or a beneficiary of such
a participant) is not decreased by reason of any post-separation social
security benefit increase effective after the later of --
(i) September 2, 1974, or
(ii) The date of first receipt of any retirement benefit, death
benefit, or disability benefit under the plan by the participant or by a
beneficiary of the participant (whichever receipt occurs first).
(2) Benefit to which participant separated from service has
nonforfeitable right. In the case of a benefit to which a participant
has a nonforfeitable right under such plan --
(i) If such participant is separated from service and does not
subsequently return to service and resume participation in the plan,
such benefit is not decreased by reason of any post-separation social
security benefit increase effective after the later of September 2,
1974, or separation from service, or
(ii) If such participant is separated from service and subsequently
returns to service and resumes participation in the plan, such benefit
is not decreased by reason of any post-separation social security
benefit increase effective after September 2, 1974, which occurs during
separation from service and which would decrease such benefit to a level
below the level of benefits to which he would have been entitled had he
not returned to service after his separation.
(b) Post-separation social security benefit increase. For purposes
of this section, the term ''post-separation social security benefit
increase'' means, with respect to a participant or a beneficiary of the
participant, an increase in a benefit level or wage base under title II
of the Social Security Act (whether such increase is a result of an
amendment of such title II or is a result of the application of the
provisions of such title II) occurring after the earlier of such
participant's separation from service or commencement of benefits under
the plan.
(c) Illustrations. The provisions of paragraphs (a) and (b) of this
section may be illustrated by the following examples:
Example (1). A plan to which section 401(a)(15) applies provides an
annual benefit at the normal retirement age, 65, in the form of a stated
benefit formula amount less a specified percentage of the primary
insurance amount payable under title II of the Social Security Act. The
plan provides no early retirement benefits. In the case of a
participant who separates from service before age 65 with a
nonforfeitable right to a benefit under the plan, the plan defines the
primary insurance amount as the amount which the participant is entitled
to receive under title II of the Social Security Act at age 65,
multiplied by the ratio of the number of years of service with the
employer to the number of years of service the participant would have
had if he had worked for the employer until age 65. The plan does not
satisfy the requirements of section 401(a)(15), because social security
increases that occur after a participant's separation from service will
reduce the benefit the participant will receive under the plan.
Example (2). A plan to which section 401(a)(15) applies provides an
annual benefit at the normal retirement age, 65, in the form of a stated
benefit formula amount less a specified percentage of the primary
insurance amount payable under title II of the Social Security Act. The
plan provides no early retirement benefits. In the case of a
participant who separates from service before age 65 with a
nonforfeitable right to a benefit under the plan, the plan defines the
primary insurance amount as the amount which the participant is entitled
to receive under title II of the Social Security Act at age 65 based
upon the assumption that he will continue to receive until reaching age
65 compensation which would be treated as wages for purposes of the
Social Security Act at the same rate as he received such compensation at
the time he separated from service, but determined without regard to any
post-separation social security benefit increase, multiplied by the
ratio of the number of years of service with the employer to the number
of years of service the participant would have had if he had worked for
the employer until age 65. The plan satisfies the requirements of
section 401(a)(15), because social security increases that occur after a
participant's separation from service will not reduce the benefit the
participant will receive under the plan.
(d) Other Federal or State laws. To the extent applicable, the rules
discussed in this section will govern classifications under a plan
supplementing the benefits provided by other Federal or State laws, such
as the Railroad Retirement Act of 1937. See section 206(b) of the
Employee Retirement Income Security Act of 1974 (Public Law 93-406, 88
Stat. 864).
(e) Effect on prior law. Nothing in this section shall be construed
as amending or modifying the rules applicable to post-separation social
security increases prior to September 2, 1974. See paragraph (e) of
1.401-3.
(f) Effective date. Section 401(a)(15) and this section shall apply
to a plan only with respect to plan years to which section 411 (relating
to minimum vesting standards) is applicable to the plan without regard
to section 411(e)(2).
(T.D. 7434, 41 FR 42650, Sept. 28, 1976)
26 CFR 1.401(a)-16 Limitations on benefits and contributions under
qualified plans.
A trust will not be a qualified trust and a plan will not be a
qualified plan if the plan provides for benefits or contributions which
exceed the limitations of section 415. Section 415 and the regulations
thereunder provide rules concerning these limitations on benefits and
contributions.
(T.D. 7748, 46 FR 1696, Jan. 7, 1981)
26 CFR 1.401(a)-19 Nonforfeitability in case of certain withdrawals.
(a) Application of section. Section 401(a)(19) and this section
apply to a plan to which section 411(a) applies. (See section 411(e)
and 1.411(a)-2 for applicability of section 411).
(b) Prohibited forfeitures -- (1) General rule. A plan to which this
section applies is not a qualified plan (and a trust forming a part of
such plan is not a qualified trust) if, under such plan, any part of a
participant's accrued benefit derived from employer contributions is
forfeitable solely because a benefit derived from the participant's
contributions under the plan is voluntarily withdrawn by him after he
has become a 50 percent vested participant.
(2) 50 percent vested participant. For purposes of subparagraph (1)
of this paragraph, a participant is a 50 percent vested participant when
he has a nonforfeitable right (within the meaning of section 411 and the
regulations thereunder) to at least 50 percent of his accrued benefit
derived from employer contributions. Whether or not a participant is 50
percent vested shall be determined by the ratio of the participant's
total nonforfeitable employer-derived accrued benefit under the plan to
his total employer-derived accrued benefit under the plan.
(3) Certain forfeitures. Paragraph (b)(1) of this section does not
apply in the case of a forfeiture permitted by section 411(a)(3)(D)(iii)
and 1.411(a)-7(d)(3) (relating to forfeitures of certain benefits
accrued before September 2, 1974).
(c) Supersession. Section 11.401(a)-(19) of the Temporary Income Tax
Regulations under the Employee Retirement Income Security Act of 1974 is
superseded by this section.
(Sec. 411 Internal Revenue Code of 1954 (88 Stat. 901; 26 U.S.C.
411))
(T.D. 7501, 42 FR 42320, Aug. 23, 1977)
26 CFR 1.401(a)-20 Requirements of qualified joint and survivor annuity
and qualified preretirement survivor annuity.
Q-1: What are the survivor annuity requirements added to the Code by
the Retirement Equity Act of 1984 (REA 1984)?
A-1: REA 1984 replaced section 401(a)(11) with a new section
401(a)(11) and added section 417. Plans to which new section 401(a)(11)
applies must comply with the requirements of sections 401(a)(11) and 417
in order to remain qualified under sections 401(a) or 403(a). In
general, these plans must provide both a qualified joint and survivor
annuity (QJSA) and a qualified preretirement survivor annuity (QPSA) to
remain qualified. These survivor annuity requirements are applicable to
any benefit payable under a plan, including a benefit payable to a
participant under a contract purchased by the plan and paid by a third
party.
Q-2: Must annuity contracts purchased and distributed to a
participant or spouse by a plan subject to the survivor annuity
requirements of sections 401(a)(11) and 417 satisfy the requirements of
those sections?
A-2: Yes. Rights and benefits under section 401(a)(11) or 417 may
not be eliminated or reduced because the plan uses annuity contracts to
provide benefits merely because (a) such a contract is held by a
participant or spouse instead of a plan trustee, or (b) such contracts
are distributed upon plan termination. Thus, the requirements of
sections 401(a)(11) and 417 apply to payments under the annuity
contracts, not to the distributions of the contracts.
Q-3: What plans are subject to the survivor annuity requirements of
section 401(a)(11)?
A-3: (a) Section 401(a)(11) applies to any defined benefit plan and
to any defined contribution plan that is subject to the minimum funding
standards of section 412. This section also applies to any participant
under any other defined contribution plan unless all of the following
conditions are satisfied --
(1) The plan provides that the participant's nonforfeitable accrued
benefit is payable in full, upon the participant's death, to the
participant's surviving spouse (unless the participant elects, with
spousal consent that satisfies the requirements of section 417(a)(2),
that such benefit be provided instead to a designated beneficiary);
(2) The participant does not elect the payment of benefits in the
form of a life annuity; and
(3) With respect to the participant, the plan is not a transferee or
an offset plan. (See Q&A 5 of this section.)
(b) A defined contribution plan not subject to the minimum funding
standards of section 412 will not be treated as satisfying the
requirement of paragraph (a)(1) unless both of the following conditions
are satisfied --
(1) The benefit is available to the surviving spouse within a
reasonable time after the participant's death. For this purpose,
availability within the 90-day period following the date of death is
deemed to be reasonable and the reasonableness of longer periods shall
be determined based on the particular facts and circumstances. A time
period longer than 90 days, however, is deemed unreasonable if it is
less favorable to the surviving spouse than any time period under the
plan that is applicable to other distributions. Thus, for example, the
availability of a benefit to the surviving spouse would be unreasonable
if the distribution was required to be made by the close of the plan
year including the participant's death while distributions to employees
who separate from service were required to be made within 90 days of
separation.
(2) The benefit payable to the surviving spouse is adjusted for gains
or losses occurring after the participant's death in accordance with
plan rules governing the adjustment of account balances for other plan
distributions. Thus, for example, the plan may not provide for
distributions of an account balance to a surviving spouse determined as
of the last day of the quarter in which the participant's death occurred
with no adjustments of an account balance for gains or losses after
death if the plan provides for such adjustments for a participant who
separates from service within a quarter.
(c) For purposes of determining the extent to which section
401(a)(11) applies to benefits under an employee stock ownership plan
(as defined in section 4975(e)(7)), the portion of a participant's
accrued benefit that is subject to section 409(h) is to be treated as
though such benefit were provided under a defined contribution plan not
subject to section 412.
(d) The requirements set forth in section 401(a)(11) apply to other
employee benefit plans that are covered by applicable provisions under
Title I of the Employee Retirement Income Security Act of 1974. For
purposes of applying the regulations under sections 401(a)(11) and 417,
plans subject to ERISA section 205 are treated as if they were described
in section 401(a). For example, to the extent that section 205 covers
section 403(b) contracts and custodial accounts they are treated as
section 401(a) plans. Individual retirement plans (IRAs), including
IRAs to which contributions are made under simplified employee pensions
described in section 408(k) and IRAs that are treated as plans subject
to Title I, are not subject to these requirements.
Q-4: What rules apply to a participant who elects a life annuity
option under a defined contribution plan not subject to section 412?
A-4: If a participant elects at any time (irrespective of the
applicable election period defined in section 417(a)(6)) a life annuity
option under a defined contribution plan not subject to section 412, the
survivor annuity requirements of sections 401(a)(11) and 417 will always
thereafter apply to all of the participant's benefits under such plan
unless there is a separate accounting of the account balance subject to
the election. A plan may allow a participant to elect an annuity option
prior to the applicable election period described in section 417(a)(6).
If a participant elects an annuity option, the plan must satisfy the
applicable written explanation, consent, election, and withdrawal rules
of section 417, including waiver of the QJSA within 90 days of the
annuity starting date. If a participant selecting such an option dies,
the surviving spouse must be able to receive the QPSA benefit described
in section 417(c)(2) which is a life annuity, the actuarial equivalent
of which is not less than 50 percent of the nonforfeitable account
balance (adjusted for loans as described in Q&A 24(d) of this section).
The remaining account balance may be paid to a designated nonspouse
beneficiary.
Q-5: How do sections 401(a)(11) and 417 apply to transferee plans
which are defined contribution plans not subject to section 412?
A-5: (a) Transferee plans. Although the survivor annuity
requirements of sections 401(a)(11) and 417 generally do not apply to
defined contribution plans not subject to section 412, such plans are
subject to the survivor annuity requirements to the extent that they are
transferee plans with respect to any participant. A defined
contribution plan is a transferee plan with respect to any participant
if the plan is a direct or indirect transferee of such participant's
benefits held on or after January 1, 1985, by:
(1) A defined benefit plan,
(2) A defined contribution plan subject to section 412 or
(3) A defined contribution plan that is subject to the survivor
annuity requirements of sections 401(a)(11) and 417 with respect to that
participant.
If through a merger, spinoff, or other transaction having the effect
of a transfer, benefits subject to the survivor annuity requirements of
sections 401(a)(11) and 417 are held under a plan that is not otherwise
subject to such requirements, such benefits will be subject to the
survivor annuity requirements even though they are held under such plan.
Even if a plan satisfies the survivor annuity requirements, other rules
apply to these transactions. See, e.g., section 411(d)(6) and the
regulations thereunder. A transfer made before January 1, 1985, and any
rollover contribution made at any time, are not transactions that
subject the transferee plan to the survivor annuity requirements with
respect to a participant. If a plan is a transferee plan with respect
to a participant, the survivor annuity requirements do not apply with
respect to other plan participants solely because of the transfer. Any
plan that would not otherwise be subject to the survivor annuity
requirements of sections 401(a)(11) and 417 whose benefits are used to
offset benefits in a plan subject to such requirements is subject to the
survivor annuity requirements with respect to those participants whose
benefits are offset. Thus, if a stock bonus or profit-sharing plan
offsets benefits under a defined benefit plan, such a plan is subject to
the survivor annuity requirements.
(b) Benefits covered. The survivor annuity requirements apply to all
accrued benefits held for a participant with respect to whom the plan is
a transferee plan unless there is an acceptable separate accounting
between the transferred benefits and all other benefits under the plan.
A separate accounting is not acceptable unless gains, losses,
withdrawals, contributions, forfeitures, and other credits or charges
are allocated on a reasonable and consistent basis between the accrued
benefits subject to the survivor annuity requirements and other
benefits. If there is an acceptable separate accounting between
transferred benefits and any other benefits under the plan, only the
transferred benefits are subject to the survivor annuity requirements.
Q-6: Is a frozen or terminated plan required to satisfy the survivor
annuity requirements of sections 401(a)(11) and 417?
A-6: In general, benefits provided under a plan that is subject to
the survivor annuity requirements of sections 401(a)(11) and 417 must be
provided in accordance with those requirements even if the plan is
frozen or terminated. However, any plan that has a termination date
prior to September 17, 1985, and that distributed all remaining assets
as soon as administratively feasible after the termination date, is not
subject to the survivor annuity requirements. The date of termination
is determined under section 411(d)(3) and 1.411(d)-2(c).
Q-7: If the Pension Benefit Guaranty Corporation (PBGC) is
administering a plan, are benefits payable in the form of a QPSA or
QJSA-
A-7: Yes, the PBGC will pay benefits in such forms.
Q-8: How do the survivor annuity requirements of sections 401(a)(11)
and 417 apply to participants?
A-8: (a) If a participant dies before the annuity starting date with
vested benefits attributable to employer or employee contributions (or
both), benefits must be paid to the surviving spouse in the form of a
QPSA. If a participant survives until the annuity starting date with
vested benefits attributable to employer or employee contributions (or
both), benefits must be provided to the participant in the form of a
QJSA.
(b) A participant may waive the QPSA or the QJSA (or both) if the
applicable notice, election, and spousal consent requirements of section
417 are satisfied.
(c) Benefits are not required to be paid in the form of a QPSA or
QJSA if at the time of death or distribution the participant was vested
only in employee contributions and such death occurred, or distribution
commenced, before October 22, 1986.
(d) Certain mandatory distributions. A distribution may occur
without satisfying the spousal consent requirements of section 417 (a)
and (e) if the present value of the nonforfeitable benefit does not
exceed $3,500. See 1.417(e)-1.
Q-9: May separate portions of a participant's accrued benefit be
subject to QPSA and QJSA requirements at any particular point in time?
A-9: (a) Dual QPSA and QJSA rights. One portion of a participant's
benefit may be subject to the QPSA and another portion to the QJSA
requirements at the same time. For example, in order for a money
purchase pension plan to distribute any portion of a married
participant's benefit to the participant, the plan must distribute such
portion in the form of a QJSA (unless the plan satisfies the applicable
consent requirements of section 417 (a) and (e) with respect to such
portion of the participant's benefit). This rule applies even if the
distribution is merely an in-service distribution attributable to
voluntary employee contributions and regardless of whether the
participant has attained the normal retirement age under the plan. The
QJSA requirements apply to such a distribution because the annuity
starting date has occurred with respect to this portion of the
participant's benefit. In the event of a participant's death following
the commencement of a distribution in the form of a QJSA, the remaining
payments must be made to the surviving spouse under the QJSA. In
addition, the plan must satisfy the QPSA requirements with respect to
any portion of the participant's benefits for which the annuity starting
date had not yet occurred.
(b) Example. Assume that participant A has a $100,000 account
balance in a money purchase pension plan. A makes an in-service
withdrawal of $20,000 attributable to voluntary employee contributions.
The QJSA requirements apply to A's withdrawal of the $20,000.
Accordingly, unless the QJSA form is properly waived such amount must be
distributed in the form of a QJSA. A's remaining account balance
($80,000) remains subject to the QPSA requirements because the annuity
starting date has not occurred with respect to the $80,000. (If A
survives until the annuity starting date, the $80,000 would be subject
to the QJSA requirements.) If A died on the day following the annuity
starting date for the withdrawal, A's spouse would be entitled to a QPSA
with a value equal to at least $40,000 with respect to the $80,000
account balance, in addition to any survivor benefit without respect to
the $20,000. If the $20,000 payment to A had been the first payment of
an annuity purchased with the entire $100,000 account balance rather
than an in-service distribution, then the QJSA requirements would apply
to the entire account balance at the time of the annuity starting date.
In such event, the plan would have no obligation to provide A's spouse
with a QPSA benefit upon A's death. Of course, A's spouse would receive
the QJSA benefit (if the QJSA had not been waived) based on the full
$100,000.
Q-10: What is the relevance of the annuity starting date with
respect to the survivor benefit requirements?
A-10: (a) Relevance. The annuity starting date is relevant to
whether benefits are payable as either a QJSA or QPSA, or other selected
optional form of benefit. If a participant is alive on the annuity
starting date, the benefits must be payable as a QJSA. If the
participant is not alive on the annuity starting date, the surviving
spouse must receive a QPSA. The annuity starting date is also used to
determine when a spouse may consent to and a participant may waive a
QJSA. A waiver is only effective if it is made 90 days before the
annuity starting date. Thus, a deferred annuity cannot be selected and
a QJSA waived until 90 days before payments commence under the deferred
annuity. In some cases, the annuity starting date will have occurred
with respect to a portion of the participant's accrued benefit and will
not have occurred with respect to the remaining portion. (See Q&A-9.)
(b) Annuity starting date -- (1) General rule. For purposes of
sections 401(a)(11), 411(a)(11) and 417, the annuity starting date is
the first day of the first period for which an amount is paid as an
annuity or any other form.
(2) Annuity payments. The annuity starting date is the first date
for which an amount is paid, not the actual date of payment. Thus, if
participant A is to receive annuity payments as of the first day of the
first month after retirement but does not receive any payments until
three months later, the annuity starting date is the first day of the
first month. For example, if an annuity is to commence on January 1,
January 1 is the annuity starting date even though the payment for
January is not actually made until a later date. In the case of a
deferred annuity, the annuity starting date is the date for which the
annuity payments are to commence, not the date that the deferred annuity
is elected or the date the deferred annuity contract is distributed.
(3) Administrative delay. A payment shall not be considered to occur
after the annuity starting date merely because actual payment is
reasonably delayed for calculation of the benefit amount if all payments
are actually made.
(4) Forfeitures on death. Prior to the annuity starting date,
section 411(a)(3)(A) allows a plan to provide for a forfeiture of a
participant's benefit, except in the case of a QPSA or a spousal benefit
described in section 401(a)(11)(B)(iii)(I). Once the annuity starting
date has occurred, even if actual payment has not yet been made, a plan
must pay the benefit in the distribution form elected.
(5) Surviving spouses, alternate payees, etc. The definition of
''annuity starting date'' for surviving spouses, other beneficiaries and
alternate payees under section 414(p) is the same as it is for
participants.
(c) Disability auxiliary benefit -- (1) General rule. The annuity
starting date for a disability benefit is the first day of the first
period for which the benefit becomes payable unless the disability
benefit is an auxiliary benefit. The payment of any auxiliary
disability benefits is disregarded in determining the annuity starting
date. A disability benefit is an auxiliary benefit if upon attainment
of early or normal retirement age, a participant receives a benefit that
satisfies the accrual and vesting rules of section 411 without taking
into account the disability benefit payments up to that date.
(2) Example. (i) Assume that participant A at age 45 is entitled to
a vested accrued benefit of $100 per month commencing at age 65 in the
form of a joint and survivor annuity under Plan X. If prior to age 65 A
receives a disability benefit under Plan X and the payment of such
benefit does not reduce the amount of A's retirement benefit of $100 per
month commencing at age 65, any disability benefit payments made to A
between ages 45 and 65 are auxiliary benefits. Thus, A's annuity
starting date does not occur until A attains age 65. A's surviving
spouse B would be entitled to receive a QPSA if A died before age 65. B
would be entitled to receive the survivor portion of a QJSA (unless
waived) if A died after age 65. The QPSA payable to B upon A's death
prior to age 65 would be computed by reference to the QJSA that would
have been payable to A and B had A survived to age 65.
(ii) If in the above example A's benefit payable at age 65 is reduced
to $99 per month because a disability benefit is provided to A prior to
age 65, the disability benefit would not be an auxiliary benefit. The
benefit of $99 per month payable to A at age 65 would not, without
taking into account the disability benefit payments to A prior to age
65, satisfy the minimum vesting and accrual rules of section 411.
Accordingly, the first day of the first period for which the disability
payments are to be made to A would constitute A's annuity starting date,
and any benefit paid to A would be required to be paid in the form of a
QJSA (unless waived by A with the consent of B).
(d) Other rules -- (1) Suspension of benefits. If benefit payments
are suspended after the annuity starting date pursuant to a suspension
of benefits described in section 411(a)(3)(B) after an employee
separates from service, the recommencement of benefit payments after the
suspension is not treated as a new annuity starting date unless the plan
provides otherwise. In such case, the plan administrator is not
required to provide new notices nor to obtain new waivers for the
recommenced distributions if the form of distribution is the same as the
form that was appropriately selected prior to the suspension. If
benefits are suspended for an employee who continues in service without
a separation and who never receives payments, the commencement of
payments after the period of suspension is treated as the annuity
starting date unless the plan provides otherwise.
(2) Additional accruals. In the case of an annuity starting date
that occurs on or after normal retirement age, such date applies to any
additional accruals after the annuity starting date, unless the plan
provides otherwise. For example, if a participant who continues to
accrue benefits elects to have benefits paid in an optional form at
normal retirement age, the additional accruals must be paid in the
optional form selected unless the plan provides otherwise. In the case
of an annuity starting date that occurs prior to normal retirement age,
such date does not apply to any additional accruals after such date.
Q-11: Do the survivor annuity requirements apply to benefits derived
from both employer and employee contributions?
A-11: Yes. The survivor annuity benefit requirements apply to
benefits derived from both employer and employee contributions.
Benefits are not required to be paid in the form of a QPSA or a QJSA if
the participant was vested only in employee contributions at the time of
death or distribution and such death or distribution occurred before
October 22, 1986. All benefits provided under a plan, including
benefits attributable to rollover contributions, are subject to the
survivor annuity requirements.
Q-12: To what benefits do the survivor annuity requirements of
sections 401(a)(11) and 417 apply?
A-12: (a) Defined benefit plans. Under a defined benefit plan,
sections 401(a)(11) and 417 apply only to benefits in which a
participant was vested immediately prior to death. They do not apply to
benefits to which a participant's beneficiary becomes entitled by reason
of death or to the proceeds of a life insurance contract to the extent
such proceeds exceed the present value of the participant's
nonforfeitable benefits that existed immediately prior to death.
(b) Defined contribution plans. Sections 401(a)(11) and 417 apply to
all nonforfeitable benefits which are payable under a defined
contribution plan, whether nonforfeitable before or upon death,
including the proceeds of insurance contracts.
Q-13: Does the rule of section 411(a)(3)(A) which permits
forfeitures on account of death apply to a QPSA or the spousal benefit
described in section 401(a)(11)(B)(iii)?
A-13: No. Section 411(a)(3)(A) permits forfeiture on account of
death prior to the time all the events fixing payment occur. However,
this provision does not operate to deprive a surviving spouse of a QPSA
or the spousal benefit described in section 401(a)(11)(B)(iii).
Therefore, sections 401(a)(11) and 417 apply to benefits that were
nonforfeitable immediately prior to death (determined without regard to
section 411(a)(3)(A)). Thus, in the case of the death of a married
participant in a defined contribution plan not subject to section 412
which provides that, upon a participant's death, the entire
nonforfeitable accrued benefit is payable to the participant's spouse,
the nonforfeitable benefit is determined without regard to the
provisions of section 411(a)(3)(A).
Q-14: Do sections 411(a)(11), 401(a)(11) and 417 apply to
accumulated deductible employee contributions, as defined in section
72(o)(5)(B) (Accumulated DECs)?
A-14: (a) Employee consent, section 411. The requirements of
section 411(a)(11) apply to Accumulated DECs. Thus, Accumulated DECs
may not be distributed without participant consent unless the applicable
exemptions apply.
(b) Survior requirements. Accumulated DECs are treated as though
held under a separate defined contribution plan that is not subject to
section 412. Thus, section 401(a)(11) applies to Accumulated DECs only
as provided in section 401(a)(11)(B)(iii). All Accumulated DECs are
treated in this manner, including Accumulated DECs that are the only
benefit held under a plan and Accumulated DECs that are part of a
defined benefit or a defined contribution plan.
(c) Effective date. Sections 401(a)(11) and 411(a)(11) shall not
apply to distributions of accumulated DECs until the first plan year
beginning after December 31, 1988.
Q-15: How do the survivor annuity requirements of sections
401(a)(11) and 417 apply to a defined benefit plan that includes an
accrued benefit based upon a contribution to a separate account or
mandatory employee contributions?
A-15: (a) 414(k) plans. In the case of a section 414(k) plan that
includes both a defined benefit plan and a separate account, the rules
of sections 401(a)(11) and 417 apply separately to the defined benefit
portion and the separate account portion of the plan. The separate
account portion is subject to the survivor annuity requirements of
sections 401(a)(11) and 417 and the special QPSA rules in section
417(c)(2).
(b) Employee contributions -- (1) Voluntary. In the case of
voluntary employee contributions to a defined benefit plan, the plan
must maintain a separate account with respect to the voluntary employee
contributions. This separate account is subject to the survivor annuity
requirements of sections 401(a)(11) and 417 and the special QPSA rules
in section 417(c)(2).
(2) Mandatory. In the case of a defined benefit plan providing for
mandatory employee contributions, the entire accrued benefit is subject
to the survivor annuity requirements of sections 401(a)(11) and 417 as a
defined benefit plan.
(c) Accumulated DECs. See Q&A 14 of this section for the rule
applicable to accumulated deductible employee contributions.
Q-16: Can a plan provide a benefit form more valuable than the QJSA
and if a plan offers more than one annuity option satisfying the
requirements of a QJSA, is spousal consent required when the participant
chooses among the various forms?
A-16: In the case of an unmarried participant, the QJSA may be less
valuable than other optional forms of benefit payable under the plan.
In the case of a married participant, the QJSA must be at least as
valuable as any other optional form of benefit payable under the plan at
the same time. Thus, if a plan has two joint and survivor annuities
that would satisfy the requirements for a QJSA, but one has a greater
actuarial value than the other, the more valuable joint and survivor
annuity is the QJSA. If there are two or more actuarially equivalent
joint and survivor annuities that satisfy the requirements for a QJSA,
the plan must designate which one is the QJSA and, therefore, the
automatic form of benefit payment. A plan, however, may allow a
participant to elect out of such a QJSA, without spousal consent, in
favor of another actuarially equivalent joint and survivor annuity that
satisfies the QJSA conditions. Such an election is not subject to the
requirement that it be made within the 90-day period before the annuity
starting date. For example, if a plan designates a joint and 100%
survivor annuity as the QJSA and also offers an actuarially equivalent
joint and 50% survivor annuity that would satisfy the requirements of a
QJSA, the participant may elect the joint and 50% survivor annuity
without spousal consent. The participant, however, does need spousal
consent to elect a joint and survivor annuity that was not actuarially
equivalent to the automatic QJSA.
Q-17: When must distributions to a participant under a QJSA
commence?
A-17: (a) QJSA benefits upon earliest retirement. A plan must
permit a participant to receive a distribution in the form of a QJSA
when the participant attains the earliest retirement age under the plan.
Written consent of the participant is required. However, the consent
of the participant's spouse is not required. Any payment not in the
form of a QJSA is subject to spousal consent. For example, if the
participant separates from service under a plan that allows for
distributions on separation from service or if a plan allows for
in-service distributions, the participant may receive a QJSA without
spousal consent in such events. Payments in any other form, including a
single sum, would require waiver of the QJSA by the participant's
spouse.
(b) Earliest retirement age. (1) This paragraph (b) defines the term
''earliest retirement age'' for purposes of sections 401(a)(11),
411(a)(11) and 417.
(2) In the case of a plan that provides for voluntary distributions
that commence upon the participant's separation from service, earliest
retirement age is the earliest age at which a participant could separate
from service and receive a distribution. Death of a participant is
treated as a separation from service.
(3) In the case of a plan that provides for in-service distributions,
earliest retirement age is the earliest age at which such distributions
may be made.
(4) In the case of a plan not described in subparagraph (2) or (3) of
this paragraph, the rule below applies. Earliest retirement age is the
early retirement age determined under the plan, or if no early
retirement age, the normal retirement age determined under the plan. If
the participant dies or separates from service before such age, then
only the participant's actual years of service at the time of the
participant's separation from service or death are taken into account.
Thus, in the case of a plan under which benefits are not payable until
the attainment of age 65, or upon attainment of age 55 and completion of
10 years of service, the earliest retirement age of a participant who
died or separated from service with 8 years of service is when the
participant would have attained age 65 (if the participant had
survived). On the other hand, if a participant died or separated from
service after 10 years of service, the earliest retirement age is when
the participant would have attained age 55 (if the participant had
survived).
Q-18: What is a qualified preretirement survivor annuity (QPSA) in a
defined benefit plan?
A-18: A QPSA is an immediate annuity for the life of the surviving
spouse of a participant. Each payment under a QPSA under a defined
benefit plan is not to be less than the payment that would have been
made to the survivor under the QJSA payable under the plan if (a) in the
case of a participant who dies after attaining the earliest retirement
age under the plan, the participant had retired with a QJSA on the day
before the participant's death, and (b) in the case of a participant who
dies on or before the participant's earliest retirement age under the
plan, the participant had separated from service at the earlier of the
actual time of separation or death, survived until the earliest
retirement age, retired at that time with a QJSA, and died on the day
thereafter. If the participant elects before the annuity starting date
a form of joint and survivor annuity that satisfies the requirements for
a QJSA and dies before the annuity starting date, the elected form is
treated as the QJSA and the QPSA must be based on such form.
Q-19: What rules apply in determining the amount and forfeitability
of a QPSA?
A-19: The QPSA is calculated as of the earliest retirement age if
the participant dies before such time, or at death if the participant
dies after the earliest retirement age. The plan must make reasonable
actuarial adjustments to reflect a payment earlier or later than the
earliest retirement age. A defined benefit plan may provide that the
QPSA is forfeited if the spouse does not survive until the date
prescribed under the plan for commencement of the QPSA (i.e., the
earliest retirement age). Similarly, if the spouse survives past the
participant's earliest retirement age (or other earlier QPSA
distribution date under the plan) and elects after the death of the
participant to defer the commencement of the QPSA to a later date, a
defined benefit plan may provide for a forfeiture of the QPSA benefit if
the spouse does not survive until the deferred commencement date. The
account balance in a defined contribution plan may not be forfeited even
though the spouse does not survive until the time the account balance is
used to purchase the QPSA. See Q&A-17 of this section for the meaning
of earliest retirement age.
Q-20: What preretirement survivor annuity benefits must a defined
contibution plan subject to the survivor annuity requirements of
sections 401(a)(11) and 417 provide?
A-20: A defined contribution plan that is subject to the survivor
annuity requirements of sections 401(a)(11) and 417 must provide a
preretirement survivor annuity with a value which is not less than 50
percent of the nonforfeitable account balance of the participant as of
the date of the participant's death. If a contributory defined
contribution plan has a forfeiture provision permitted by section
411(a)(3)(A), not more than a proportional percent of the account
balance attributable to contributions that may not be forfeited at death
(for example, employee and section 401(k) contributions) may be used to
satisfy the QPSA benefit. Thus, for example, if the QPSA benefit is to
be provided from 50 percent of the account balance, not more than 50
percent of the nonforfeitable contributions may be used for the QPSA.
Q-21: May a defined benefit plan charge the participant for the cost
of the QPSA benefit?
A-21: Prior to the later of the time the plan allows the participant
to waive the QPSA or provides notice of the ability to waive the QPSA, a
defined benefit plan may not charge the participant for the cost of the
QPSA by reducing the participant's plan benefits or by any other method.
The preceding sentence does not apply to any charges prior to the first
plan year beginning after December 31, 1988. Once the participant is
given the opportunity to waive the QPSA or the notice of the QPSA is
later, the plan may charge the participant for the cost of the QPSA. A
charge for the QPSA that reasonably reflects the cost of providing the
QPSA will not fail to satisfy section 411 even if it reduces the accrued
benefit.
Q-22: When must distributions to a surviving spouse under a QPSA
commence?
A-22: (a) In the case of a defined benefit plan, the plan must
permit the surviving spouse to direct the commencement of payments under
QPSA no later than the month in which the participant would have
attained the earliest retirement age. However, a plan may permit the
commencement of payments at an earlier date.
(b) In the case of a defined contribution plan, the plan must permit
the surviving spouse to direct the commencement of payments under the
QPSA within a reasonable time after the participant's death.
Q-23: Must a defined benefit plan obtain the consent of a
participant and the participant's spouse to commence payments in the
form of a QJSA in order to avoid violating section 415 or 411(b)?
A-23: No. A defined benefit plan may commence distributions in the
form of a QJSA without the consent of the participant and spouse, even
if consent would otherwise be required (see 1.417(e)-1(b)), to the
extent necessary to avoid a violation of section 415 or 411(b). For
example, assume a plan has a normal retirement age of 55. A is a
married participant, age 55, and has accrued a $75,000 joint and 100
percent survivor annuity that satisfies section 415. If an actuarial
increase would be required under section 411 because of deferred
commencement and the increase would cause the benefit to exceed the
applicable limit under section 415, the plan may commence payment of a
QJSA at age 55 without the participant's election or consent and without
the spouse's concent.
Q-24: What are the rules under sections 401(a)(11) and 417
applicable to plan loans?
A-24: (a) Consent rules. (1) A plan does not satisfy the survivor
annuity requirements of sections 401(a)(11) and 417 unless the plan
provides that, at the time the participant's accrued benefit is used as
security for a loan, spousal consent to such use is obtained. Consent
is required even if the accrued benefit is not the primary security for
the loan. No spousal consent is necessary if, at the time the loan is
secured, no consent would be required for a distribution under section
417(a)(2)(B). Spousal consent is not required if the plan or the
participant is not subject to section 401(a)(11) at the time the accrued
benefit is used as security, or if the total accrued benefit subject to
the security is not in excess of $3,500. The spousal consent must be
obtained no earlier than the beginning of the 90-day period that ends on
the date on which the loan is to be so secured. The consent is subject
to the requirements of section 417(a)(2). Therefore, the consent must
be in writing, must acknowledge the effect of the loan and must be
witnessed by a plan representative or a notary public.
(2) Participant consent is deemed obtained at the time the
participant agrees to use his accrued benefit as security for a loan for
purposes of satisfying the requirements for participant consent under
sections 401(a)(11), 411(a)(11) and 417.
(b) Change in status. If spousal consent is obtained or is not
required under paragraph (a) of this Q&A 24 at the time the benefits are
used as security, spousal consent is not required at the time of any
setoff of the loan against the accrued benefit resulting from a default,
even if the participant is married to a different spouse at the time of
the setoff. Similarly, in the case of a participant who secured a loan
while unmarried, no consent is required at the time of a setoff of the
loan against the accrued benefit even if the participant is married at
the time of the setoff.
(c) Renegotiation. For purposes of obtaining any required spousal
consent, any renegotiation, extension, renewal, or other revision of a
loan shall be treated as a new loan made on the date of the
renegotiation, extension, renewal, or other revision.
(d) Effect on benefits. For purposes of determining the amount of a
QPSA or QJSA, the accrued benefit of a participant shall be reduced by
any security interest held by the plan by reason of a loan outstanding
to the participant at the time of death or payment, if the security
interest is treated as payment in satisfaction of the loan under the
plan. A plan may offset any loan outstanding at the participant's death
which is secured by the participant's account balance against the
spousal benefit required to be paid under section 401(a)(11)(B)(iii).
(e) Effective date. Loans made prior to August 19, 1985, are deemed
to satisfy the consent requirements of paragraph (a) of this Q&A 24.
Q-25: How do the survivor annuity requirements of sections
401(a)(11) and 417 apply with respect to participants who are not
married or to surviving spouses and participants who have a change in
marital status?
A-25: (a) Unmarried participant rule. Plans subject to the survivor
annuity requirements of sections 401(a)(11) and 417 must satisfy those
requirements applicable to QJSAs with respect to participants who are
not married. A QJSA for a participant who is not married is an annuity
for the life of the participant. Thus, an unmarried participant must be
provided the written explanation described in section 417(a)(3)(A) and a
single life annuity unless another form of benefit is elected by the
participant. An unmarried participant is deemed to have waived the QPSA
requirements. This deemed waiver is null and void if the participant
later marries.
(b) Marital status change. -- (1) Remarriage. If a participant is
married on the date of death, payments to a surviving spouse under a
QPSA or QJSA must continue even if the surviving spouse remarries.
(2) One-year rule. (i) A plan is not required to treat a participant
as married unless the participant and the participant's spouse have been
married throughout the one-year period ending on the earlier of (A) the
participant's annuity starting date or (B) the date of the participant's
death. Nevertheless, for purposes of the preceding sentence, a
participant and the participant's spouse must be treated as married
throughout the one-year period ending on the participant's annuity
starting date even though they are married to each other for less than
one year before the annuity starting date if they remain married to each
other for at least one year. See section 417(d)(2). If a plan adopts
the one-year rule provided in section 417(d), the plan must treat the
participant and spouse who are married on the annuity starting date as
married and must provide benefits which are to commence on the annuity
starting date in the form of a QJSA unless the participant (with spousal
consent) elects another form of benefit. The plan is not required to
provide the participant with a new or retroactive election or the spouse
with a new consent when the one-year period is satisfied. If the
participant and the spouse do not remain married for at least one year,
the plan may treat the participant as having not been married on the
annuity starting date. In such event, the plan may provide that the
spouse loses any survivor benefit right; further, no retroactive
correction of the amount paid the participant is required.
(ii) Example. Plan X provides that participants who are married on
the annuity starting date for less than one year are treated as
unmarried participants. Plan X provides benefits in the form of a QJSA
or an optional single sum distribution. Participant A was married 6
months prior to the annuity starting date. Plan X must treat A as
married and must commence payments to A in the form of a QJSA unless
another form of benefit is elected by A with spousal consent. If a QJSA
is paid and A is divorced from his spouse S, within the first year of
the marriage, S will no longer have any survivor rights under the
annuity (unless a QDRO provides otherwise). If A continues to be
married to S, and A dies within the one-year period, Plan X may treat A
as unmarried and forfeit the OJSA benefit payable to S.
(3) Divorce. If a participant divorces his spouse prior to the
annuity starting date, any elections made while the participant was
married to his former spouse remain valid, unless otherwise provided in
a QDRO, or unless the participant changes them or is remarried. If a
participant dies after the annuity starting date, the spouse to whom the
participant was married on the annuity starting date is entitled to the
QJSA protection under the plan. The spouse is entitled to this
protection (unless waived and consented to by such spouse) even if the
participant and spouse are not married on the date of the participant's
death, except as provided in a QDRO.
Q-26: In the case of a defined contribution plan not subject to
section 412, does the requirement that a participant's nonforfeitable
accrued benefit be payable in full to a surviving spouse apply to a
spouse who has been married to the participant for less than one year?
A-26: A plan may provide that a spouse who has not been married to a
participant throughout the one-year period ending on the earlier of (a)
the participant's annuity starting date or (b) the date of the
participant's death is not treated as a surviving spouse and is not
required to receive the participant's account balance. The special
exception described in section 417(d)(2) and Q&A 25 of this section does
not apply.
Q-27: Are there circumstances when spousal consent to a
participant's election to waive the QJSA or the QPSA is not required?
A-27: Yes. If it is established to the satisfaction of a plan
representative that there is no spouse or that the spouse cannot be
located, spousal consent to waive the QJSA or the QPSA is not required.
If the spouse is legally incompetnent to give consent, the spouse's
legal guardian, even if the guardian is the participant, may give
consent. Also, if the participant is legally separated or the
participant has been abandoned (within the meaning of local law) and the
participant has a court order to such effect, spousal consent is not
required unless a QDRO provides otherwise. Similar rules apply to a
plan subject to the requirements of section 401(a)(11)(B)(iii)(I).
Q-28: Does consent contained in an antenuptial agreement or similar
contract entered into prior to marriage satisfy the consent requirements
of sections 401(a)(11) and 417?
A-28: No. An agreement entered into prior to marriage does not
satisfy the applicable consent requirements, even if the agreement is
executed within the applicable election period.
Q-29: If a participant's spouse consents under section 417(a)(2)(A)
to the participant's waiver of a survivor annuity form of benefit, is a
subsequent spouse of the same participant bound by the consent?
A-29: No. A consent under section 417(a)(2)(A) by one spouse is
binding only with respect to the consenting spouse. See Q&A-24 of this
section for an exception in the case of plan benefits securing plan
loans.
Q-30: Does the spousal consent requirement of section 417(a)(2)(A)
require that a spouse's consent be revocable?
A-30: No. A plan may preclude a spouse from revoking consent once it
has been given. Alternatively, a plan may also permit a spouse to
revoke a consent after it has been given, and thereby to render
ineffective the participant's prior election not to receive a QPSA or
QJSA. A participant must always be allowed to change his election
during the applicable election period. Spousal consent is required in
such cases to the extent provided in Q&A 31, except that spousal consent
is never required for a QJSA or QPSA.
Q-31: What rules govern a participant's waiver of a QPSA or QJSA
under section 417(a)(2)?
A-31: (a) Specific beneficiary. Both the participant's waivers of a
QPSA and QJSA and the spouse's consents thereto must state the specific
nonspouse beneficiary (including any class of beneficiaries or any
contingent beneficiaries) who will receive the benefit. Thus, for
example, if spouse B consents to participant A's election to waive a
QPSA, and to have any benefits payable upon A's death before the annuity
starting date paid to A's children, A may not subsequently change
beneficiaries without the consent of B (except if the change is back to
a QPSA). If the designated beneficiary is a trust, A's spouse need only
consent to the designation of the trust and need not consent to the
designation of trust beneficiaries or any changes of trust
beneficiaries.
(b) Optional form of benefit -- (1) QJSA. Both the participant's
waiver of a QJSA (and any required spouse's consent thereto) must
specify the particular optional form of benefit. The participant who
has waived a QJSA with the spouse's consent in favor of another form of
benefit may not subsequently change the optional form of benefit without
obtaining the spouse's consent (except back to a QJSA). Of course, the
participant may change the form of benefit if the plan so provides after
the spouse's death or a divorce (other than as provided in a QDRO). A
participant's waiver of a QJSA (and any required spouse's consent
thereto) made prior to the first plan year beginning after December 31,
1986, is not required to specify the optional form of benefit.
(2) QPSA. A participant's waiver of a QPSA and the spouse's consent
thereto are not required to specify the optional form of any
preretirement benefit. Thus, a participant who waives the QPSA with
spousal consent may subsequently change the form of the preretirement
benefit, but not the nonspouse beneficiary, without obtaining the
spouse's consent.
(3) Change in form. After the participant's death, a beneficiary may
change the optional form of survivor benefit as permitted by the plan.
(c) General consent. In lieu of satisfying paragraphs (a) and (b) of
this Q&A 31, a plan may permit a spouse to execute a general consent
that satisfies the requirements of this paragraph (c). A general
consent permits the participant to waive a QPSA or QJSA, and change the
designated beneficary or the optional form of benefit payment without
any requirement of further consent by such spouse. No general consent
is valid unless the general consent acknowledges that the spouse has the
right to limit consent to a specific beneficiary and a specific optional
form of benefit, where applicable, and that the spouse voluntarily
elects to relinquish both of such rights. Notwithstanding the previous
sentence, a spouse may execute a general consent that is limited to
certain beneficiaries or forms of benefit payment. In such case,
paragraphs (a) and (b) of this Q&A 31 shall apply to the extent that the
limited general consent is not applicable and this paragraph (c) shall
apply to the extent that the limited general consent is applicable. A
general consent, including a limited general consent, is not effective
unless it is made during the applicable election period. A general
consent executed prior to October 22, 1986 does not have to satisfy the
specificity requirements of this Q&A 31.
Q-32: What rules govern a participant's waiver of the spousal
benefit under section 401(a)(11)(B)?
A-32: (a) Application. In the case of a defined contribution plan
that is not subject to the survivor annuity requirements of sections
401(a)(11) and 417, a participant may waive the spousal benefit of
section 401(a)(11)(B)(iii) if the conditions of paragraph (b) are
satisfied. In general, a spousal benefit is the nonforfeitable account
balance on the participant's date of death.
(b) Conditions. In general, the same conditions, other than the age
35 requirement, that apply to the participant's waiver of a QPSA and the
spouse's consent thereto apply to the participant's waiver of the
spousal benefit and the spouse's consent thereto. See Q&A-31. Thus,
the participant's waiver of the spousal benefit must state the specific
nonspouse beneficiary who will receive such benefit. The waiver is not
required to specify the optional form of benefit. The participant may
change the optional form of benefit, but not the nonspouse beneficiary,
without obtaining the spouse's consent.
Q-33: When and in what manner, may a participant waive a spousal
benefit or a QPSA?
A-33: (a) Plans not subject to section 401(a)(11). A participant in
a plan that is not subject to the survivor annuity requirements of
section 401(a)(11) (because of subparagraph (B)(iii) thereof) may waive
the spousal benefit at any time, provided that no such waiver shall be
effective unless the spouse has consented to the waiver. The spouse may
consent to a waiver of the spousal benefit at any time, even prior to
the participant's attaining age 35. No spousal consent is required for
a payment to the participant or the use of the accrued benefit as
security for a plan loan to the participant.
(b) Plans subject to section 401(a)(11). A participant in a plan
subject to the survivor annuity requirements of section 401(a)(11)
generally may waive the QPSA benefit (with spousal consent) only on or
after the first day of the plan year in which the participant attains
age 35. However, a plan may provide for an earlier waiver (with spousal
consent), provided that a written explanation of the QPSA is given to
the participant and such waiver becomes invalid upon the beginning of
the plan year in which the participant's 35th birthday occurs. If there
is no new waiver after such date, the participant's spouse must receive
the QPSA benefit upon the participant's death.
Q-34: Must the written explanations required by section 417(a)(3) be
provided to nonvested participants?
A-34: Such written explantions must be provided to nonvested
participants who are employed by an employer maintaining the plan.
Thus, they are not required to be provided to those nonvested
participants who are no longer employed by such an employer.
Q-35: When must a plan provide the written explanation, required by
section 417(a)(3)(B), of the QPSA to a participant?
A-35: (a) General rule. A plan must provide the written explanation
of the QPSA to a participant within the applicable period. Except as
provided in paragraph (b), the applicable period means, with respect to
a participant, whichever of the following periods ends last:
(1) The period beginning with the first day of the plan year in which
the participant attains age 32 and ending with the close of the plan
year preceding the plan year in which the participant attains age 35.
(2) A reasonable period ending after the individual becomes a
participant.
(3) A reasonable period ending after the QPSA is no longer fully
subsidized.
(4) A reasonable period ending after section 401(a)(11) first applies
to the participant. Section 401(a)(11) would first apply when a benefit
is transferred from a plan not subject to the survivor annuity
requirements of section 401(a)(11) to a plan subject to such section or
at the time of an election of an annuity under a defined contribution
plan described in section 401(a)(11)(B)(iii).
(b) Pre-35 separations. In the case of a participant who separates
from service before attaining age 35, the applicable period means the
period beginning one year before the separation from service and ending
one year after such separation. If such a participant returns to
service, the plan must also comply with pragraph (a).
(c) Reasonable period. For purposes of applying paragraph (a), a
reasonable period ending after the enumerated events described in
paragraphs (a) (2), (3) and (4) is the end of the one-year period
beginning with the date the applicable event occurs. The applicable
period for such events begins one year prior to the occurrence of the
enumerated events.
(d) Transition rule. In the case of an individual who was a
participant in the plan on August 23, 1984, and, as of that date had
attained age 34, the plan will satisfy the requriement of section
417(a)(3)(B) if it provided the explanation not later than December 31,
1985.
Q-36: How do plans satisfy the requirements of providing
participants explanations of QPSAs and QJSAs?
A-36: Section 417(a)(3) sets forth the requirements for providing
plan participants written explanations of QPSAs and QJSAs. The
requirement that the terms and conditions of the QJSA or QPSA, as the
case may be, be furnished to participants is not satisfied unless the
written explanation complies with the requirements set forth in
1.401(a)-11(c)(3). Also, for plan years beginning after December 31,
1988, participants must be furnished a general description of the
eligibility conditions and other material features of the optional forms
of benefit and sufficient additional information to explain the relative
values of the optional forms of benefit available under the plan (e.g.,
the extent to which optional forms are subsidized relative to the normal
form of benefit or the interest rates used to calculate the optional
forms).
Q-37: What are the consequences of fully subsidizing the cost of
either a QJSA or a QPSA in accordance with section 417(a)(5)?
A-37: If a plan fully subsidizes a QJSA or QPSA in accordance with
section 417(a)(5) and does not allow a participant to waive such QJSA or
QPSA or to select a nonspouse beneficiary, the plan is not required to
provide the written explanation required by section 417(a)(3). However,
if the plan offers an election to waive the benefit or designate a
beneficiary, it must satisfy the election, consent, and notice
requirements of section 417(a) (1), (2), and (3), with respect to such
subsidized QJSA or QPSA, in accordance with section 417(a)(5).
Q-38: What is a fully subsidized benefit?
A-38: (a) QJSA -- (1) General rule. A fully subsidized QJSA is one
under which no increase in cost to, or decrease in actual amounts
received by, the participant may result from the participant's failure
to elect another form of benefit.
(2) Examples.
Example (1). If a plan provides a joint and survivor annuity and a
single sum option, the plan does not fully subsidize the joint and
survivor annuity, regardless of the actuarial value of the joint and
survivor annuity because, in the event of the participant's early death,
the participant would have received less under the annuity than he would
have received under the single sum option.
Example (2). If a plan provides for a life annuity of $100 per month
and a joint and 100% survivor benefit of $99 per month, the plan does
not fully subsidize the joint and survivor benefit.
(b) QPSA. A QPSA is fully subsidized if the amount of the
participant's benefit is not reduced because of the QPSA coverage and if
no charge to the participant under the plan is made for the coverage.
Thus, a QPSA is fully subsidized in a defined contribution plan.
Q-39: When do the survivor annuity requirements of sections
401(a)(11) and 417 apply to plans?
A-39: Sections 401(a)(11) and 417 generally apply to plan years
beginning after December 31, 1984. Sections 302 and 303 of REA 1984
provide specific effective dates and transitional rules under which the
QJSA or QPSA (or pre-REA 1984 section 401(a)(11)) requirements may be
applicable to particular plans or with respect to benefits provided to
(as amended by REA 1984) particular participants. In general, the
section 401(a)(11) (as amended by REA 1984) survivor annuity
requirements do not apply with respect to a participant who does not
have at least one hour of service or one hour of paid leave under the
plan after August 22, 1984.
Q-40: Are there special effective dates for plans maintained
pursuant to collective bargaining agreements?
A-40: Yes. Section 302(b) of REA 1984 as amended by section 1898(g)
of the Tax Reform Act of 1986 provides a special deferred effective date
for such plans. Whether a plan is described in section 302(b) of REA
1984 is determined under the principles applied under section 1017(c) of
the Employee Retirement Income Security Act of 1974. See H.R. Rep. No.
1280, 93d Cong., 2d Sess. 266 (1974). In addition, a plan will not be
treated as maintained under a collective bargaining agreement unless the
employee representatives satisfy section 7701(a)(46) of the Internal
Revenue Code after March 31, 1984. See 301.7701-17T for other
requirements for a plan to be considered to be collectively bargained.
Nothing in section 302(b) of REA 1984 denies a participant or spouse the
rights set forth in sections 303(c)(2), 303(c)(3), 303(e)(1), and
303(e)(2) of REA 1984.
Q-41: What is one hour of service or paid leave under the plan for
purposes of the transition rules in section 303 of REA 1984?
A-41: One hour of service or paid leave under the plan is one hour
of service or paid leave recognized or required to be recognized under
the plan for any purpose, e.g., participation, vesting percentage, or
benefit accrual purposes. For plans that do not compute hours of
service, one hour of service or paid leave means any service or paid
leave recognized or required to be recognized under the plan for any
purpose.
Q-42: Must a plan be amended to provide for the QPSA required by
section 303(c)(2) of REA 1984, or for the survivor annuities required by
section 303(e) of REA 1984?
A-42: A plan will not fail to satisfy the qualification requirements
of section 401(a) or 403(a) merely because it is not amended to provide
the QPSA required by section 303(c)(2) or the survivor annuities
required by section 303(e). The plan must, however, satisfy those
requirements in operation.
Q-43: Is a participant's election, or a spouse's consent to an
election, with respect to a QPSA, made before August 23, 1984, valid?
A-43: No.
Q-44: Is spousal consent required for certain survivor annuity
elections made by the participant after December 31, 1984, and before
the first plan year to which new sections 401(a)(11) and 417 apply?
A-44: Yes. Section 303(c)(3) of REA 1984 provides that any election
not to take a QJSA made after December 31, 1984, and before the date
sections 401(a)(11) and 417 apply to the plan by a participant who has 1
hour of service or leave under the plan after August 23, 1984, is not
effective unless the spousal consent requirements of section 417 are met
with respect to such election. Unless the participant's annuity
starting date occurred before January 1, 1985, the spousal consent
required by section 417 (a)(2) and (e) must be obtained even though the
participant elected the benefit prior to January 1, 1985. The plan is
not required to be amended to comply with section 303(c)(3) of REA 1984,
but the plan must satisfy this requirement in operation.
Q-45: Are there special rules for certain participants who separated
from service prior to August 23, 1984?
A-45: Yes. Section 303(e) of REA 1984 provides special rules for
certain participants who separated from service before August 23, 1984.
Section 303(e)(1), which applies only to plans subject to section
401(a)(11) of the Code (as in effect on August 22, 1984), provides that
participants whose annuity starting date did not occur before August 24,
1984, and who had one hour of service on or after September 2, 1974, but
not in a plan year beginning after December 31, 1975, may elect to
receive the benefits required to be provided under section 401(a)(11) of
the Code (as in effect on August 22, 1984). Section 303(e)(2) provides
that certain participants who had one hour of service in a plan year
beginning on or after January 1, 1976, but not after August 22, 1984,
may elect QPSA coverage under new sections 401(a)(11) and 417 in plans
subject to these provisions. Section 303(e)(4)(A) requires plans or
plan administrators to notify those participants of the provisions of
section 303(e).
Q-46: When must a plan provide the notice required by section
303(e)(4)(A) of REA 1984?
A-46: The notice required by section 303(e)(4)(A) must be provided
no later than the earlier of:
(a) The date the first summary annual report provided after September
17, 1985, is distributed to participants; or
(b) September 30, 1985.
A plan will not fail to satisfy the preceding sentence if the plan
provides a fully subsidized QPSA with respect to any participant
described in section 303(e) who dies on or after July 19, 1985, and
before the notice is received. If the plan ceases to fully subsidize
the QPSA, the cessation must not be effective until the notice is given.
For this purpose, an annuity payable to a nonspouse beneficiary elected
by the participant, in lieu of a spouse, shall satisfy the QPSA
requirement, so long as the survivor benefit is fully subsidized. The
notice required by this paragraph must be in writing and sent to the
participant's last known address.
Q-47: Is there another time when plans must provide notice of the
right, described in section 303(e)(1) of REA '84, to elect a pre-REA
1984 qualified joint and survivor annuity?
A-47: Yes. Notice of this right must also be provided to a
participant at the time the participant applies for benefit payments.
(53 FR 31842, Aug. 22, 1988; 53 FR 48534, Dec. 1, 1988)
26 CFR 1.401(a)-30 Limit on elective deferrals.
(a) General Rule. A trust that is part of a plan under which
elective deferrals may be made during a calendar year is not qualified
under section 401(a) unless the plan provides that the elective
deferrals on behalf of an individual under the plan and all other plans,
contracts, or arrangements of the employer maintaining the plan may not
exceed the applicable limit for the individual's taxable year beginning
in the calendar year. A plan may incorporate the applicable limit by
reference. In the case of a plan maintained by more than one employer
to which section 413 (b) or (c) applies, section 401(a)(30) and this
section are applied as if each employer maintained a separate plan. See
1.402(g)-1(e) for rules permitting the distribution of excess deferrals
to prevent disqualification of a plan or trust for failure to comply in
operation with section 401(a)(30).
(b) Definitions. For purposes of this section:
(1) Applicable limit. The term ''applicable limit'' has the meaning
provided in 1.402(g)-1(d).
(2) Elective deferrals. The term ''elective deferrals'' has the
meaning provided in 1.402(g)-1(b).
(c) Effective date -- (1) In general. Except as otherwise provided
in this paragraph (c), this section is effective for plan years
beginning after December 31, 1987.
(2) Transition rule. For plan years beginning in l988, a plan may
rely on a reasonable interpretation of the law as in effect on December
31, 1987.
(3) Deferrals under collective bargaining agreements. In the case of
a plan maintained pursuant to one or more collective bargaining
agreements between employee representatives and one or more employers
ratified before March 1, 1986, this section does not apply to
contributions made pursuant to a collective bargaining agreement for
plan years beginning before the earlier of:
(i) The later of January 1, 1988, or the date on which the last
collective bargaining agreement terminates (determined without regard to
any extension thereof after February 28, 1986), or
(ii) January 1, 1989.
(T.D. 8357, 56 FR 40516, Aug. 15, 1991)
26 CFR 1.401(a)-50 Puerto Rican trusts; election to be treated as a
domestic trust.
(a) In general. Section 401(a) requires, among other things, that a
trust forming part of a pension, profit-sharing, or stock bonus plan
must be created or organized in the United States to be a qualified
trust. Section 1022(i)(2) of the Employee Retirement Income Security
Act of 1974 (ERISA) (88 Stat. 942) provides that trusts under certain
pension, etc., plans created or organized in Puerto Rico whose
administrators have made the election referred to in section 1022(i)(2)
are to be treated as trusts created or organized in the United States
for purposes of section 401(a). Thus, if a plan otherwise satisfies the
qualification requirements of section 401(a), any trust forming part of
the plan for which an election is made will be treated as a qualified
trust under that section.
(b) Manner and effect of election. A plan administrator may make an
election under ERISA section 1022(i)(2) by filing a statement making the
election, along with a copy of the plan, with the Director's
Representative of the Internal Revenue Service in Puerto Rico. The
statement making the election must indicate that it is being made under
ERISA section 1022(i)(2). The statement may also be filed in
conjunction with a written request for a determination letter. If the
election is made with a written request for a determination letter, the
election may be conditioned upon issuance of a favorable determination
letter and will be irrevocable upon issuance of such letter. Otherwise,
once made, an election is irrevocable. It is generally effective for
plan years beginning after the date it has been made. However, an
election made before March 3, 1983 may, at the option of the plan
administrator at the time he or she makes the election, be considered to
have been made on any date between September 2, 1974, and the actual
date of the election. The election will then be effective for plan
years beginning on or after the date chosen by the plan administrator.
(c) Annuities, custodial accounts, etc. See section 401 (f) for
rules relating to the treatment of certain annuities, custodial accounts
or other contracts, as trusts for purposes of section 401(a).
(d) Source of plan distributions to participants and beneficiaries
residing outside the United States. Except as provided under section
871(f) (relating to amounts received as an annuity by nonresident
aliens), the amount of a distribution from an electing plan that is to
be treated as income from sources within the United States is determined
as described below. The portion of the distribution considered to be a
return of employer contributions is to be treated as income from sources
within the United States in an amount equal to the portion of the
distribution considered to be a return of employer contributions
multiplied by the following fraction:
Days of performance of labor or services within the United States for
the employer.
Total days of performance of labor or services for the employer.
The days of performance of labor or services within the United States
shall not include the time period for which the employee's compensation
is deemed not to be income from sources within the United States under
subtitle A of the Code. Thus, for example, if an employee's
compensation was not deemed to be income from sources within the United
States under section 861(a)(3), then the time the emloyee was present in
the United States while such compensation was earned would not be
included in determining the days of performance of labor or services
within the United States in the numerator of the above fraction. In
addition, days of performance of labor or services for the employer in
both the numerator and denominator of the above fraction are limited to
days of plan participation by the employee and any service used for
determining an employee's accrued benefit under the plan. The remaining
portion of the distribution, that is, any amount other than the portion
of the distribution considered to be a return of employer contributions,
is not to be treated as income from sources within the United States.
For example, if a distribution consists of amounts representing employer
contributions, employee contributions, and earnings on employer and
employee contributions, no part of the portion of the distribution
attributable to employee contributions, or earnings on employer and
employee contributions, will be treated as income from sources within
the United States.
(T.D. 7859, 47 FR 54297, Dec. 2, 1982)
26 CFR 1.401(a)(4)-0 Table of contents.
This section contains a listing of the headings 1.401(a)(4)-1
through 1.401(a)(4)-13.
1.401(a)(4)-1 Nondiscrimination requirements of section 401(a)(4).
(a) In general.
(b) Requirements a plan must satisfy.
(1) In general.
(2) Nondiscrimination in amount of contributions or benefits.
(i) In general.
(ii) Defined contribution plans.
(iii) Defined benefit plans.
(iv) Permitted disparity.
(3) Nondiscriminatory availability of benefits, rights, and features.
(4) Nondiscriminatory effect of plan amendments and terminations.
(c) Application of requirements.
(1) In general.
(2) Interpretation.
(3) Former employees.
(4) Employee-provided contributions and benefits.
(5) Plans providing section 401(h) benefits.
(6) Collectively bargained plans.
(7) Employee stock ownership plans. (Reserved)
(8) Scope of plan subject to testing.
(i) Relationship with section 410(b).
(ii) Special rules for certain aggregated plans.
(iii) Restructuring.
(iv) Reference to section 410(b) includes section 410(c).
(9) Plan year basis of testing.
(i) In general.
(ii) Retroactive correction.
(10) Rollovers and transfers.
(11) Vesting.
(12) Crediting service.
(13) Governmental plans.
(14) Allocation of earnings.
(15) Definitions.
(16) Effective dates and fresh-start rules.
(d) Additional rules.
1.401(a)(4)-2 Nondiscrimination in amount of contributions under a
defined contribution plan.
(a) Introduction.
(1) General rule.
(2) Overview.
(3) Alternative methods of satisfying nondiscriminatory amount
requirement.
(4) Separate testing of employer and employee contributions.
(b) Safe harbors.
(1) In general.
(2) Uniformity requirements.
(i) In general.
(ii) Uniform normal retirement age and allocation formula.
(iii) Uniform vesting and service crediting.
(3) Safe harbor for plans with uniform allocation formula.
(4) Safe harbor for uniform points plans.
(i) In general.
(ii) Example.
(5) Use of safe harbors not precluded by certain plan provisions.
(i) In general.
(ii) Section 401(l) permitted disparity.
(iii) Entry dates.
(iv) Prior vesting schedules.
(v) Certain conditions on allocations.
(vi) Certain limits on allocations.
(vii) Dollar allocation per uniform unit of service.
(viii) Section 409(n) limits.
(ix) Section 415 limits.
(x) Multiple definitions of service.
(A) In general.
(B) Hour-of-service equivalencies.
(C) Recognition of prior employment for eligibility and vesting.
(D) Imputed Service.
(xi) Multiple formulas.
(A) In general.
(B) Sole formulas.
(C) Separate testing.
(D) Availability.
(1) General rule.
(2) Formulas for nonhighly compensated employees.
(3) Top-heavy formulas.
(E) Provisions may be applied more than once.
(F) Examples.
(c) General test for nondiscrimination in amount of contributions.
(1) In general.
(2) Determination of allocation rates.
(i) In general.
(ii) Allocations taken into account.
(iii) Allocations not taken into account.
(iv) Imputation of permitted disparity.
(v) Grouping of allocation rates.
(3) Satisfaction of section 410(b) by a rate group.
(i) In general.
(ii) Permissive aggregation not available.
(iii) Deemed satisfaction of reasonable classification requirement.
(iv) Facts-and-circumstances requirements replaced.
(v) Application of average benefit percentage test.
(4) Examples.
(d) Exclusive tests for sections 401 (k) and (m) plans.
(1) Section 401(k) plans.
(2) Section 401(m) plans.
(3) Scope of exclusive tests.
1.401(a)(4)-3 Nondiscrimination in amount of benefits under a
defined benefit plan.
(a) Introduction.
(1) General rule.
(2) Overview.
(3) Alternative methods of satisfying nondiscriminatory amount
requirement.
(4) Separate testing of employer-provided benefits and
employee-provided benefits.
(b) Safe harbors.
(1) In general.
(2) Uniformity requirements.
(i) In general.
(ii) Uniform normal retirement benefit.
(iii) Uniform post-normal retirement benefits.
(iv) Uniform subsidies.
(v) Uniform vesting and service crediting.
(vi) No employee contributions.
(vii) Examples.
(3) Safe harbor for unit credit plans.
(i) General rule.
(ii) Examples.
(4) Safe harbor for unit credit plans using fractional accrual rule.
(i) General rule.
(ii) Examples.
(5) Safe harbor for flat benefit plans.
(i) General rule.
(ii) Examples.
(6) Alternative safe harbor for flat benefit plans.
(7) Safe harbor for insurance contract plans.
(8) Use of safe harbors not precluded by certain plan provisions.
(i) In general.
(ii) Section 401(l) permitted disparity.
(iii) Entry dates.
(iv) Prior vesting schedules.
(v) Certain conditions on accruals.
(vi) Certain limits on accruals.
(vii) Dollar accrual per uniform unit of service.
(viii) Prior benefits accrued under a different formula.
(A) All employees in plan.
(B) Section 401(a)(17) employees only.
(ix) Employee contributions.
(A) Unit credit safe harbor.
(B) Other safe harbors.
(x) Modifications to average annual compensation.
(A) Certain years disregarded.
(B) Use of plan year compensation by an accumulation plan.
(xi) Multiple definitions of service.
(A) In general.
(B) Hour-of-service equivalencies.
(C) Recognition of prior employment for eligibility and vesting.
(D) Special rule for benefit formula and accrual method.
(E) Imputed service.
(xii) Offsets for benefits accrued under another defined benefit
plan.
(A) In general.
(B) Benefits frozen under prior plan.
(C) Wrap-around benefit provided in plan.
(D) Uniform application of offset.
(E) Offset employees not needed to satisfy minimum coverage.
(F) Prior plan maintained by another employer.
(xiii) Multiple formulas.
(A) In general.
(B) Sole formulas.
(C) Separate testing.
(D) Availability.
(1) General rule.
(2) Formulas for nonhighly compensated employees.
(3) Top-heavy formulas.
(E) Provisions may be applied more than once.
(F) Examples.
(c) General test for nondiscrimination in amount of benefits.
(1) Basic test.
(2) Alternative test.
(i) In general.
(ii) Plan requirements.
(iii) Certain QJSA adjustments permitted.
(A) In general.
(B) Adjustment for marital status or age of spouse.
(C) Adjustment for termination of employment before earliest
retirement age.
(iv) Minimum service condition on early retirement benefits.
(3) Satisfaction of section 410(b) by a rate group.
(i) In general.
(ii) Permissive aggregation not available.
(iii) Deemed satisfaction of reasonable classification requirement.
(iv) Facts-and-circumstances requirements replaced.
(v) Application of average benefit percentage test.
(4) Examples.
(i) In general.
(ii) Example illustrating basic test.
(iii) Examples illustrating alternative test.
(d) Determination of accrual rates.
(1) Introduction.
(i) Overview of rules.
(ii) General description of accrual rates.
(A) Normal accrual rate.
(B) Most valuable accrual rate.
(iii) General description of annual, accrued-to-date, and projected
methods.
(2) Annual method.
(i) Normal accrual rate.
(ii) Most valuable accrual rate.
(iii) Example.
(3) Accrued-to-date method.
(i) Normal accrual rate.
(ii) Most valuable accrual rate.
(iii) Section 401(a)(17) employees.
(iv) Examples.
(4) Projected method.
(i) Normal accrual rate.
(ii) Most valuable accrual rate.
(iii) Terminated employees.
(iv) Section 401(a)(17) employees.
(v) Discriminatory pattern of accruals.
(vi) Examples.
(5) Rules of general application.
(i) In general.
(ii) Uniformity required.
(iii) Determining plan benefits.
(A) In general.
(B) Accrued benefit.
(C) Benefit accrual service.
(D) Eligibility service.
(E) Plan compensation.
(F) Marital status of employee.
(G) Benefit computation factors.
(H) Benefit computation factors based on variable indices.
(I) Benefits commencing at certain ages disregarded.
(iv) Normalizing plan benefits.
(A) In general.
(B) Actuarial assumptions.
(C) Special rules for QSUPPS.
(v) Examples.
(6) Optional rules for calculating accrual rates.
(i) In general.
(ii) Imputation of permitted disparity.
(iii) Expressing accrual rates as dollar amounts.
(iv) Grouping of accrual rates.
(A) In general.
(B) Examples.
(v) Floor on most valuable accrual rate.
(A) In general.
(B) Examples.
(vi) Adjustment in most valuable accrual rate for certain disability
benefits provided under the plan.
(A) In general.
(B) Includible disability benefits.
(C) Adjustment.
(D) Example.
(vii) Fresh-start alternative for accrued-to-date method.
(A) In general.
(B) Normal accrual rate.
(C) Most valuable accrual rate.
(D) Examples.
(viii) Fresh-start alternative for projected method.
(A) In general.
(B) Normal accrual rate.
(C) Most valuable accrual rate.
(D) Terminated employees.
(E) Discriminatory pattern of accruals.
(F) Example.
(e) Compensation rules.
(1) In general.
(2) Average annual compensation.
(3) Testing compensation.
(i) In general.
(ii) Certain modifications to plan year compensation.
(iii) Certain modifications to average annual compensation.
(4) Examples.
(f) Special rules.
(1) In general.
(2) Section 415 limits.
(3) Accruals after normal retirement age.
(i) In general.
(ii) Examples.
(4) Early retirement window benefits.
(i) General rule.
(ii) Exceptions.
(iii) Early retirement window benefit defined.
(5) Unpredictable contingent event benefits.
(i) General rule.
(ii) Example.
(6) Determination of benefits on other than plan year basis.
(7) Adjustments for certain plan distributions.
(8) Adjustment for certain QPSA charges.
1.401(a)(4)-4 Nondiscriminatory availability of benefits, rights,
and features.
(a) Introduction.
(1) General rule.
(2) Overview.
(b) Current availability.
(1) General rule.
(2) Determination of current availability.
(i) General rule.
(ii) Certain age and service conditions disregarded.
(A) General rule.
(B) Time-limited age or service conditions not disregarded.
(iii) Certain other conditions disregarded.
(iv) Mandatory cash-outs.
(v) Certain conditions on plan loans.
(3) Optional forms of benefit and other rights and features that are
eliminated prospectively.
(i) Special testing rule.
(ii) Treatment of earnings.
(iii) Example.
(c) Effective availability.
(1) In general.
(2) Examples.
(d) Special rules.
(1) Mergers and acquisitions.
(i) Special testing rule.
(ii) Scope of special testing rule.
(iii) Option to extend availability to new employees.
(iv) Example.
(2) Frozen participants.
(3) Early retirement window benefits.
(4) Permissive aggregation of certain benefits, rights, or features.
(i) General rule.
(ii) Aggregation may be applied more than once.
(iii) Examples.
(5) Certain spousal benefits.
(e) Definitions.
(1) Optional form of benefit.
(i) General rule.
(ii) Exceptions.
(A) Differences in benefit formula or accrual method.
(B) Differences in allocation formula.
(C) Distributions subject to section 417(e).
(iii) Examples.
(2) Ancillary benefit.
(3) Other right or feature.
1.401(a)(4)-5 Plan amendments and plan terminations.
(a) Plan amendments.
(1) General rule.
(2) Facts-and-circumstances determination.
(3) Time at which determination made.
(4) Treatment of certain prospective plan amendments.
(5) Safe harbor for certain grants of past service.
(6) Examples.
(b) Pre-termination restrictions.
(1) Required provisions in defined benefit plans.
(2) Restriction of benefits.
(3) Restrictions on distributions.
(i) Limit on annual payments.
(ii) Employees whose benefits are restricted.
(iii) ''Benefit'' defined.
(iv) Determination of current liabilities.
(v) Determination date for assets and liabilities.
(4) Operational restrictions on certain money purchase pension plans.
1.401(a)(4)-6 Contributory defined benefit plans.
(a) Overview.
(1) Contributions not allocated to separate accounts.
(2) Contributions allocated to separate accounts.
(b) Determination of employer-provided benefit.
(1) General rule.
(2) Composition-of-work-force method.
(i) In general.
(ii) Eligibility requirements.
(A) Uniform rate of employee contributions.
(B) Demographic requirements.
(1) In general.
(2) Minimum percentage test.
(3) Ratio test.
(iii) Determination of employer-provided benefit.
(A) Application of factors to determine employee-provided benefit
rate.
(B) Employer-provided benefits under a unit credit safe harbor plan.
(C) Employer-provided benefits under the general test.
(iv) Determination of plan factor.
(v) Examples.
(3) Minimum benefit method.
(i) Application of uniform factors.
(ii) Minimum benefit requirement.
(iii) Example.
(4) Grandfather rule for plans in existence on May 14, 1990.
(5) Government plan method.
(6) Cessation of employee contributions method.
(c) Rules applicable in determining whether employee-provided
benefits are nondiscriminatory in amount.
(1) In general.
(2) Same rate of contributions.
(3) Total benefits method.
(4) Grandfather rule for plans in existence on May 14, 1990.
1.401(a)(4)-7 Imputation of permitted disparity.
(a) Introduction.
(1) In general.
(2) Overview.
(b) Adjusting allocation rates.
(1) In general.
(2) Employees whose plan year compensation does not exceed taxable
wage base.
(3) Employees whose plan year compensation exceeds taxable wage base.
(4) Definitions
(i) Allocations.
(ii) Permitted disparity rate.
(A) In general.
(B) Cumulative permitted disparity limit.
(iii) Taxable wage base.
(iv) Unadjusted allocation rate.
(5) Example.
(c) Adjusting accrual rates.
(1) In general.
(2) Employees whose testing compensation does not exceed covered
compensation.
(3) Employees whose testing compensation exceeds covered
compensation.
(4) Definitions.
(i) Covered compensation.
(ii) Employer-provided accrual.
(iii) Permitted disparity factor.
(A) In general.
(B) Annual permitted disparity factor.
(C) Annual method.
(D) Accrued-to-date method.
(1) General rule.
(2) Fresh-start alternative.
(E) Projected method.
(1) General rule.
(2) Fresh-start alternative.
(3) Projected testing service.
(F) Cumulative permitted disparity limit.
(iv) Social security retirement age.
(v) Testing compensation.
(vi) Unadjusted accrual rate.
(5) Example.
(d) Rules of general application.
(1) Eligible plans.
(2) Consistency.
(3) Overall permitted disparity.
(4) Relationship to other adjustments.
(5) Compensation -- used for amounts testing.
1.401(a)(4)-8 Cross-testing.
(a) Introduction.
(1) Overview.
(2) Separate testing of employer-provided and employee-provided
benefits.
(b) Nondiscrimination in amount of benefits provided under a defined
contribution plan.
(1) General rule.
(2) Determination of equivalent accrual rates.
(i) Annual method.
(ii) Accrued-to-date method.
(A) General rule.
(B) Fresh-start alternative
(C) Determination of adjusted account balance.
(3) Safe harbor testing method for target benefit plans.
(i) General rule.
(A) Form of plan.
(B) Stated benefit formula.
(C) Employer contributions.
(D) Employee contributions.
(E) Permitted disparity.
(ii) Fresh start rules.
(A) In general.
(B) Additional requirements for plans that did not satisfy safe
harbor in prior years.
(iii) Benefits and contributions after normal retirement age.
(iv) Method for determining required employer contributions.
(A) General rule.
(B) Theoretical reserve.
(1) Initial theoretical reserve.
(2) Theoretical reserve in subsequent plan years.
(C) Required contributions for employees under normal retirement age.
(D) Required contributions for employees over normal retirement age.
(v) Effect of section 415 and 416 requirements.
(vi) Examples.
(c) Nondiscrimination in amount of contributions under a defined
benefit plan.
(1) General rule.
(2) Determination of equivalent allocation rates.
(i) Equivalent normal allocation rate.
(ii) Equivalent most valuable allocation rate.
(iii) Use of optional calculation methods.
(3) Safe harbor testing method for cash balance plans.
(i) General rule.
(ii) Plan requirements in general.
(iii) Hypothetical allocations.
(A) In general.
(B) Uniform hypothetical allocation formula.
(C) Modified general test.
(iv) Interest adjustments to hypothetical allocations.
(A) General rule.
(B) Requirements with respect to interest rates.
(C) Variable interest rates.
(1) General rule.
(2) Permissible variable interest rates.
(3) Current value of variable interest rate.
(v) Hypothetical account.
(A) Current value of hypothetical account.
(B) Value of hypothetical account as of normal retirement age.
(vi) Determination of accrued benefit.
(A) Definition of accrued benefit.
(B) Normal form of benefit.
(C) Determination of actuarial equivalence.
(D) Effect of section 415 and 416 requirements.
(vii) Optional forms of benefit.
(A) In general.
(B) Limitations on subsidies.
(C) Distributions subject to section 417(e).
(D) Determination of actuarial present value.
(viii) Past service credit.
(ix) Employees beyond normal retirement age.
(x) Additional uniformity requirements.
(xi) Changes in benefit formula, allocation formula or interest
rates.
(d) Safe harbor testing method for defined benefit plans that are
part of a floor-offset arrangement.
(1) General rule.
(2) Application of safe harbor testing method to qualified offset
arrangements.
1.401(a)(4)-9 Plan aggregation and restructuring.
(a) Introduction.
(b) Application of nondiscrimination requirements to DB/DC plans.
(1) General rule.
(2) Special rules for demonstrating nondiscrimination in amount of
contributions or benefits.
(i) Application of general tests.
(ii) Determination of aggregate allocation rates.
(iii) Determination of aggregate accrual rates.
(A) Annual method.
(B) Accrued-to-date method.
(C) Projected method.
(iv) Treatment of permitted disparity.
(v) Consistency requirements.
(A) In general.
(B) Use of optional calculation methods.
(3) Special rules for demonstrating nondiscrimination in availability
of non-core benefits, rights, and features.
(i) In general.
(ii) Current availability.
(iii) Effective availability.
(c) Plan restructuring.
(1) General rule.
(2) Identification of component plans.
(3) Satisfaction of section 401(a)(4) by a component plan.
(i) General rule.
(ii) Certain testing rules involving averaging.
(4) Satisfaction of section 410(b) by a component plan.
(i) General rule.
(ii) Relationship to satisfaction of section 410(b) by the plan.
(5) Effect of restructuring under other sections.
(6) Examples.
1.401(a)(4)-10 Testing of former employees.
(a) Introduction.
(1) General rule.
(2) Overview.
(b) Nondiscrimination in amount of contributions or benefits.
(1) General rule.
(2) Defined contribution plans.
(3) Defined benefit plans.
(i) General rule.
(ii) Special rules for applying safe harbor tests.
(A) Compensation requirements.
(B) Option to apply safe harbors on aggregate basis.
(iii) Special rules for applying general tests.
(A) In general.
(B) Compensation for former employees.
(C) Testing service for former employees.
(iv) Special section 410(b) test for former employees.
(v) Permitted disparity.
(4) Safe harbor for ad hoc cost-of-living adjustments.
(i) In general.
(ii) Uniformity requirements.
(iii) Banding options.
(iv) Examples.
(c) Nondiscrimination in availability of benefits, rights, or
features.
(1) General rule.
(2) No change in availability.
(3) Changes in availability.
(4) Plan loans.
(5) Employees terminated before a specified date.
1.401(a)(4)-11 Additional rules.
(a) Introduction.
(b) Rollovers and transfers.
(1) Rollovers and elective transfers.
(2) Other transfers. (Reserved)
(c) Vesting.
(1) In general.
(2) Deemed equivalence of statutory vesting schedules.
(d) Crediting service.
(1) In general.
(2) Absence from service.
(i) General rule.
(ii) Requirements for crediting service during absence from service.
(A) Definition of absence from service.
(B) Uniformity.
(C) Effective availability.
(D) Period of credited service.
(E) Amount of imputed service.
(iii) Elapsed time.
(e) Family aggregation rules. (Reserved)
(f) Governmental plans. (Reserved)
(g) Retroactive correction.
(1) In general.
(2) Scope of retroactive amendments.
(i) Minimum coverage and nondiscrimination in amount of contributions
or benefits.
(ii) Nondiscriminatory availability of benefits, rights and features.
(iii) Nondiscriminatory effect of plan amendments and terminations.
(iv) Special rules for section 401(k) and 401(m) plans.
(3) Conditions for retroactive correction.
(i) In general.
(ii) Allocations or accruals only increased.
(iii) Amendment effective for all purposes.
(iv) Time when amendment must be adopted and put into effect.
(A) In general.
(B) Determination letter requested by employer or plan administrator.
(v) Retroactive amendment must separately satisfy sections 401(a)(4)
and 410(b).
(A) In general.
(B) Retroactive amendment to conform to safe harbor.
(4) Retroactive amendments affecting terminated nonvested employees.
(5) Effect under other statutory requirements.
(6) Examples.
1.401(a)(4)-12 Definitions.
Accrual method.
Accumulation plan.
Actuarial equivalent.
Actuarial present value.
Ancillary benefit.
Average annual compensation.
Benefit formula.
Benefits, rights, and features.
Contributory DBplan.
Defined benefit excess plan.
Defined benefit plan.
Defined contribution plan.
Employee.
Employer.
ESOP.
Excess benefit percentage.
Former employee.
Fresh-start date.
Frozen.
Gross benefit percentage.
Highly compensated employee.
Highly compensated former employee.
Nonexcludable employee.
Nonhighly compensated employee.
Nonhighly compensated former employee.
Normalize.
Offset plan.
Optional form of benefit.
Plan.
Plan year.
Plan year compensation.
Present value.
QJSA.
QSUPP.
Qualified plan.
Ratio percentage.
Section 401(a)(17) employee.
Section 401(k) plan.
Section 401(l) plan.
Section 401(m) plan.
Section 414(s) compensation.
Social security supplement.
Standard interest rate.
Standard mortality table.
Straight life annuity.
Straight life annuity factor.
Testing age.
Testing compensation.
Testing service.
Uniform normal retirement age.
Year of service.
1.401(a)(4)-13 Effective dates and fresh-start rules.
(a) In general.
(b) Effective date for governmental plans.
(c) Fresh-start rules for defined benefit plans.
(1) Introduction.
(i) In general.
(ii) Consistency.
(iii) Multiple fresh starts.
(2) Formula without wear-away.
(3) Formula with wear-away.
(4) Formula with extended wear-away.
(5) Permitted adjustments.
(i) Increases in section 415 limits.
(ii) Former employees.
(iii) Adjusted accrued benefit.
(iv) Compensation adjustments to top-heavy minimum benefits.
(6) Benefits, rights, and features.
(i) Eligibility and vesting.
(ii) Changes in optional forms.
(7) Examples.
(d) Plans using pre-effective-date fresh-start dates.
(1) In general.
(2) Average pay requirement.
(3) Meaningful coverage as of fresh-start date.
(4) Meaningful current benefit accruals.
(5) Minimum benefit adjustment.
(i) In general.
(ii) Excess or offset plans.
(iii) Other plans.
(6) Adjusted accrued benefit.
(i) General rule.
(A) Old compensation fraction.
(B) New compensation fraction.
(C) Reconstructed compensation fraction.
(ii) Reconstructed average annual compensation.
(iii) Permissible compensation definitions.
(iv) Option to make less than the full permitted adjustment.
(7) Examples.
(e) Special fresh-start rules for target benefit plans.
(1) Plans qualified under prior law.
(2) Determination of initial theoretical reserve.
(3) Example.
(f) Special fresh-start rules for cash balance plans.
(1) In general.
(2) Alternative formula.
(i) In general.
(ii) Addition of opening hypothetical account.
(iii) Determination of opening hypothetical account.
(A) General rule.
(B) Alternative opening hypothetical account.
(3) Limitations on formulas.
(i) Past service restriction.
(ii) Change in interest rate.
(iii) Meaningful benefit requirement.
(T.D. 8360, 56 FR 47537, Sept. 19, 1991; 57 FR 4719, Feb. 7, 1992;
57 FR 10952, Mar. 31, 1992)
26 CFR 1.401(a)(4)-1 Nondiscrimination requirements of section
401(a)(4).
(a) In general. Section 401(a)(4) provides that a plan is a
qualified plan only if the contributions or the benefits provided under
the plan do not discriminate in favor of highly compensated employees.
Whether a plan satisfies this requirement depends on the form of the
plan and on its effect in operation. In making this determination,
intent is irrelevant. This section sets forth the exclusive rules for
determining whether a plan satisfies section 401(a)(4). A plan that
complies in form and operation with the rules in this section therefore
satisfies section 401(a)(4).
(b) Requirements a plan must satisfy -- (1) In general. In order to
satisfy section 401(a)(4), a plan must satisfy the requirements of
paragraphs (b)(2) through (b)(4) of this section.
(2) Nondiscrimination in amount of contributions or benefits -- (i)
In general. Either the contributions or the benefits provided under the
plan must be nondiscriminatory in amount. It need not be shown that
both the contributions and the benefits provided are nondiscriminatory
in amount, but only that either the contributions alone or the benefits
alone are nondiscriminatory in amount.
(ii) Defined contribution plans. A defined contribution plan
generally satisfies this paragraph (b)(2) if the contributions allocated
under the plan (including forfeitures) are nondiscriminatory in amount
under 1.401(a)(4)-2. Alternatively, a defined contribution plan (other
than an ESOP, a section 401(k) plan, or a section 401(m) plan) satisfies
this paragraph (b)(2) if the equivalent benefits provided under the plan
are nondiscriminatory in amount under 1.401(a)(4)-8(b). These latter
rules include a safe harbor testing method for contributions provided
under a target benefit plan.
(iii) Defined benefit plans. A defined benefit plan generally
satisfies this paragraph (b)(2) if the benefits provided under the plan
are nondiscriminatory in amount under 1.401(a)(4)-3. Alternatively, a
defined benefit plan satisfies this paragraph (b)(2) if the equivalent
allocations provided under the plan are nondiscriminatory in amount
under 1.401(a)(4)-8(c). These latter rules include a safe harbor
testing method for benefits provided under a cash balance plan. In
addition, 1.401(a)(4)-8(d) provides a safe harbor testing method for
benefits provided under a defined benefit plan that is part of a
floor-offset arrangement.
(iv) Permitted disparity. In determining whether the contributions
or benefits provided under a plan are nondiscriminatory in amount, the
disparity permitted under section 401(l) may be taken into account, both
by plans that satisfy section 401(l) in form and by those that do not.
A plan that satisfies section 401(l) in form may be able to satisfy
certain design-based safe harbors under 1.401(a)(4)-2, 1.401(a)(4)-3,
and 1.401(a)(4)-8. Alternatively, a plan may be able to satisfy the
general tests in 1.401(a)(4)-2, 1.401(a)(4)-3, and 1.401(a)(4)-8 by
imputing the disparity permitted under section 401(l) on an
employee-by-employee basis, even in the case of a plan that does not
satisfy section 401(l) in form. Rules for taking into account the
disparity permitted under section 401(l) are set forth in
1.401(a)(4)-2, 1.401(a)(4)-3, 1.401(a)(4)-7, 1.401(a)(4)-8, and
1.401(a)(4)-9. In no event may these rules be used by a plan to which
sections 401(a)(5)(C) and 401(l) are not available.
(3) Nondiscriminatory availability of benefits, rights, and features.
The benefits, rights, and features provided under the plan must be made
available to employees in the plan in a nondiscriminatory manner. The
benefits, rights, and features subject to this requirement are all
optional forms of benefit, ancillary benefits, and other rights and
features available to any employee under the plan. Rules for
determining whether the requirement of this paragraph (b)(3) is met are
set forth in 1.401(a)(4)-4 and 1.401(a)(4)-9.
(4) Nondiscriminatory effect of plan amendments and terminations.
The effect of plan amendments (including plan amendments granting past
service credit) and plan terminations must be nondiscriminatory. Rules
for determining whether the requirement of this paragraph (b)(4) is met
are set forth in 1.401(a)(4)-5.
(c) Application of requirements -- (1) In general. The requirements
of paragraph (b) of this section must be applied in accordance with the
rules set forth in this paragraph (c).
(2) Interpretation. The provisions of 1.401(a)(4)-1 through
1.401(a)(4)-13 must be interpreted in a reasonable manner consistent
with the purpose of preventing discrimination in favor of highly
compensated employees.
(3) Former employees. In applying the nondiscriminatory amount and
availability requirements of paragraphs (b)(2) and (b)(3) of this
section, former employees are tested separately from active employees
unless otherwise provided. Rules for applying the requirements of
paragraphs (b)(2) and (b)(3) of this section to former employees are set
forth in 1.401(a)(4)-10.
(4) Employee-provided contributions and benefits. In applying the
nondiscriminatory amount requirement of paragraph (b)(2) of this
section, employee-provided contributions and benefits are tested
separately from employer-provided contributions and benefits, unless
otherwise provided. Rules for applying the requirements of paragraph
(b)(2) of this section to employee contributions allocated to separate
accounts are set forth in 1.401(a)(4)-2(d)(2). Rules for determining
the amount of employer-provided benefits under a defined benefit plan
that includes employee contributions not allocated to separate accounts
are set forth in 1.401(a)(4)-6(b), and rules for applying the
requirements of paragraph (b)(2) of this section to employee
contributions under such a plan are set forth in 1.401(a)(4)-6(c).
(5) Plans providing section 401(h) benefits. In applying the
requirements of paragraph (b) of this section, the portion of a plan
providing benefits described in section 401(h) is tested separately from
the portion of the same plan providing retirement benefits. Rules
applicable to plans providing section 401(h) benefits are set forth in
1.401-14(b)(2).
(6) Collectively bargained plans. The requirements of paragraph (b)
of this section are treated as satisfied by a collectively bargained
plan that automatically satisfies section 410(b) under
1.410(b)-2(b)(7). This rule applies even if the collectively bargained
plan is also a governmental plan within the meaning of section 414(d)
that is subject to section 410(c). See 1.410(b)-2(e).
(7) Employee stock ownership plans. (Reserved)
(8) Scope of plan subject to testing -- (i) Relationship with section
410(b). To be a qualified plan, a plan must satisfy both sections
410(b) and 401(a)(4). Section 410(b) requires that a plan benefit a
nondiscriminatory group of employees, and section 401(a)(4) requires
that the contributions or benefits provided to employees benefiting
under the plan not discriminate in favor of those employees who are
highly compensated. Consistent with this requirement, the definition of
a plan subject to testing under section 401(a)(4) is the same as the
definition of a plan subject to testing under section 410(b), i.e., the
plan determined after applying the mandatory disaggregation rules of
1.410(b)-7(c) and the permissive aggregation rules of 1.410(b)-7(d). In
addition, whichever testing option is used for the plan year under
1.410(b)-8(a) must also be used for purposes of applying section
401(a)(4) to the plan for the plan year.
(ii) Special rules for certain aggregated plans. Special rules are
set forth in 1.401(a)(4)-9(b) for testing a plan that includes one or
more defined benefit plans and one or more defined contribution plans
that have been permissively aggregated under 1.410(b)-7(d). By
contrast, an aggregated plan that includes only defined benefit plans or
only defined contribution plans is tested exclusively under the rules
applicable to a single plan without regard to the special rules in
1.401(a)(4)-9(b).
(iii) Restructuring. In certain circumstances, a plan may be
restructured on the basis of employee groups and treated as comprising
two or more plans, each of which is treated as a separate plan that must
independently satisfy sections 401(a)(4) and 410(b). In effect,
restructuring permits a plan that might otherwise fail to satisfy
section 401(a)(4) as a single plan to demonstrate compliance with
section 401(a)(4) based on the components of the plan, if those
components separately satisfy section 410(b). Rules relating to
restructuring plans for purposes of applying the requirements of
paragraph (b) of this section are set forth in 1.401(a)(4)-9(c).
(iv) Reference to section 410(b) includes section 410(c). In the
case of a plan described in section 410(c)(1), a reference to section
410(c)(2) may be substituted for any reference to section 410(b) in
1.401(a)(4)-1 through 1.401(a)(4)-13. The preceding sentence does not
apply to a plan that has made the election provided in section 410(d) or
that is subject to section 403(b)(12)(A)(i).
(9) Plan year basis of testing -- (i) In general. The requirements
of paragraph (b) of this section are generally applied on the basis of
the plan year. Thus, unless otherwise provided, the compensation,
contributions, benefit accruals, and other items used to apply these
requirements must be determined with respect to the plan year being
tested.
(ii) Retroactive correction. In accordance with paragraph (c)(9)(i)
of this section, the requirements of paragraph (b) of this section are
generally applied on the basis of the terms of the plan in effect during
the plan year. However, 1.401(a)(4)-11(g) provides rules allowing a
plan to be retroactively amended after the close of the plan year to
satisfy certain requirements under paragraph (b) of this section.
(10) Rollovers and transfers. In applying the requirements of
paragraph (b) of this section, rollover contributions described in
section 402(a)(5), 403(a)(4), or 408(d)(3), elective transfers described
in Q&A-3(b) of 1.411(d)-4, and transfers of assets and liabilities
described in section 414(l) are treated in accordance with the rules set
forth in 1.401(a)(4)-11(b).
(11) Vesting. Notwithstanding any other provision in the
regulations, a plan does not satisfy the nondiscriminatory amount
requirement of paragraph (b)(2) of this section if the manner in which
employees vest in their accrued benefits under the plan discriminates in
favor of highly compensated employees. Rules for making this
determination are set forth in 1.401(a)(4)-11(c).
(12) Crediting service. Notwithstanding any other provision in the
regulations, a plan does not satisfy the nondiscriminatory amount
requirement of paragraph (b)(2) of this section if the manner in which
employees' service is credited under the plan discriminates in favor of
highly compensated employees. Rules for making this determination are
set forth in 1.401(a)(4)-11(d).
(13) Governmental plans. The rules of this section apply to a
governmental plan within the meaning of section 414(d), except as
provided in 1.401(a)(4)-11(f) and 1.401(a)(4)-13(b).
(14) Allocation of earnings. Notwithstanding any other provision in
the regulations, a defined contribution plan does not satisfy the
nondiscriminatory amount requirement of paragraph (b)(2) of this section
if the manner in which income, expenses, gains, or losses are allocated
to employee accounts under the plan discriminates in favor of highly
compensated employees.
(15) Definitions. In applying the requirements of this section, the
definitions set forth in 1.401(a)(4)-12 govern, unless otherwise
provided.
(16) Effective dates and fresh-start rules. In applying the
requirements of this section, the effective dates set forth in
1.401(a)(4)-13 govern. Section 1.401(a)(4)-13 also provides certain
transition and fresh-start rules that apply for purposes of this
section.
(d) Additional rules. The Commissioner may, in revenue rulings,
notices, and other guidance of general applicability, provide any
additional rules that may be necessary or appropriate in applying the
nondiscrimination requirements of section 401(a)(4).
(T.D. 8360, 56 FR 47541, Sept. 19, 1991)
26 CFR 1.401(a)(4)-2 Nondiscrimination in amount of contributions under
a defined contribution plan.
(a) Introduction -- (1) General rule. The amount of contributions
under a defined contribution plan for a plan year does not discriminate
in favor of highly compensated employees if the plan satisfies the
requirements of this section for the plan year.
(2) Overview. This section sets forth rules for determining whether
the contributions under a defined contribution plan are
nondiscriminatory in amount. Certain defined contribution plans that
provide uniform allocations are permitted to satisfy the requirements of
this section by meeting one of the safe harbor tests in paragraph (b) of
this section. Plans that do not satisfy one of these safe harbors
generally may comply with the requirements of this section by satisfying
the general test in paragraph (c) of this section. Paragraph (d) of
this section sets forth the exclusive tests under which section 401(k)
plans and section 401(m) plans must satisfy the requirements of this
section.
(3) Alternative methods of satisfying nondiscriminatory amount
requirement. A plan (other than a section 401(k) plan or a section
401(m) plan) is permitted to satisfy either of the tests in paragraph
(b)(3) or (c) of this section on a restructured basis pursuant to
1.401(a)(4)-9(c). Alternatively, a plan (other than an ESOP, a section
401(k) plan, or a section 401(m) plan) is permitted to satisfy the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) on the
basis of equivalent benefits pursuant to 1.401(a)(4)-8(b). These latter
rules include a safe harbor testing method for contributions provided
under a target benefit plan.
(4) Separate testing of employer and employee contributions. In
applying the requirements of this section, employer contributions are
tested separately from employee contributions, except as specifically
provided for section 401(m) plans in 1.401(m)-1 and 1.401(m)-2. To
satisfy the requirements of this section, employer contributions must
meet one of the tests set forth in paragraph (b), (c), or (d) of this
section. Employee contributions under a section 401(m) plan must
satisfy the requirements in paragraph (d)(2) of this section.
(b) Safe harbors -- (1) In general. A defined contribution plan
satisfies the requirements of this section for a plan year if the plan
satisfies the uniformity requirements of paragraph (b)(2) of this
section and either of the safe harbors in paragraphs (b)(3) and (b)(4)
of this section. Paragraph (b)(5) of this section provides exceptions
for certain plan provisions that do not cause a plan to fail the
requirements of this paragraph (b).
(2) Uniformity requirements -- (i) In general. A plan satisfies the
uniformity requirements of this paragraph (b)(2) only if it satisfies
each of the requirements in paragraphs (b)(2)(ii) and (b)(2)(iii) of
this section.
(ii) Uniform normal retirement age and allocation formula. The same
uniform normal retirement age and the same allocation formula must apply
to all employees in the plan.
(iii) Uniform vesting and service crediting. All employees in the
plan must be subject to the same vesting schedule and the same
definition of years of service. For purposes of crediting service, only
service with the employer (or a predecessor employer within the meaning
of section 414(a)) may be taken into account.
(3) Safe harbor for plans with uniform allocation formula. A plan
satisfies the safe harbor in this paragraph (b)(3) for a plan year if
the plan allocates all amounts taken into account under paragraph
(c)(2)(ii) of this section for the plan year under a formula that
allocates the same percentage of plan year compensation or the same
dollar amount to every employee in the plan.
(4) Safe harbor for uniform points plans -- (i) In general. A plan
satisfies the safe harbor in this paragraph (b)(4) for a plan year if it
satisfies each of the following requirements --
(A) The plan is a uniform points plan. A uniform points plan is a
plan (other than an ESOP) under which each employee's allocation for the
plan year equals the product determined by multiplying all amounts
allocated or treated as allocated to all employees in the plan for the
plan year (to the extent such amounts are taken into account under
paragraph (c)(2)(ii) of this section) by a fraction, the numerator of
which is the employee's points for the plan year, and the denominator of
which is the sum of the points of all employees in the plan for the plan
year. For this purpose, an employee's points for the plan year equal
the sum of the employee's points for age, service, and units of plan
year compensation for the plan year. Under a uniform points plan, each
employee in the plan must receive the same number of points for each
year of age, the same number of points for each year of service, and the
same number of points for each unit of plan year compensation. The unit
of plan year compensation used in the allocation formula must be the
same for all employees in the plan and must be a single dollar amount
that does not exceed $200. A uniform points plan need not grant points
for both age and service, but it must grant points for at least one of
them. If the plan grants points for years of service, the plan is
permitted to limit the number of years of service taken into account to
a single maximum number of years of service. In all cases, a uniform
points plan must grant points for plan year compensation.
(B) For the plan year, the average of the allocation rates for the
highly compensated employees in the plan does not exceed the average of
the allocation rates for the nonhighly compensated employees in the
plan. For this purpose, allocation rates are determined in accordance
with paragraph (c) of this section, without imputing permitted disparity
under paragraph (c)(2)(iv) of this section and 1.401(a)(4)-7, and
without grouping allocation rates under paragraphs (c)(2)(v) of this
section.
(ii) Example. The following example illustrates the safe harbor in
this paragraph (b)(4).
Example. (a) Plan A has a single allocation formula that applies to
all employees in the plan, and under which each employee's allocation
for the plan year equals the product determined by multiplying all
amounts taken into account for all employees in the plan for the plan
year under paragraph (c)(2)(ii) of this section by a fraction, the
numerator of which is the employee's points for the plan year, and the
denominator of which is the sum of the points of all employees in the
plan for the plan year. Plan A grants each employee 10 points for each
year of service and 1 point for each $100 of plan year compensation.
For the 1994 plan year, the total allocations are $81,200, and the total
points for all employees in the plan are 8,120. Each employee's
allocation for the 1994 plan year is set forth in the table below.
(b) Under these facts, for the 1994 plan year Plan A is a uniform
points plan within the meaning of paragraph (b)(4)(i)(A) of this
section.
(c) For the 1994 plan year, the average allocation rate for the
highly compensated employees in the plan (H1 through H4) is 11.2
percent, and the average allocation rate for nonhighly compensated
employees in the plan (N1 through N4) is 11.3 percent. Because the
average of the allocation rates for the highly compensated employees in
the plan does not exceed the average of the allocation rates for the
nonhighly compensated employees in the plan, Plan A satisfies paragraph
(b)(4)(i)(B) of this section and, thus, the safe harbor in this
paragraph (b)(4) for the 1994 plan year.
(5) Use of safe harbors not precluded by certain plan provisions --
(i) In general. A plan does not fail to satisfy the requirements of
this paragraph (b) merely because the plan contains one or more of the
provisions described in this paragraph (b)(5). Unless otherwise
provided, the provision must apply uniformly to all employees in the
plan.
(ii) Section 401(l) permitted disparity. The plan takes permitted
disparity into account in a manner that satisfies section 401(l) in
form. Thus, differences in employees' allocations under the plan
attributable to uniform disparities permitted under 1.401(l)-2
(including differences in disparities that are deemed uniform under
1.401(l)-2(c)(2)) do not cause a plan to fail to satisfy the
requirements of this paragraph (b). This paragraph (b)(5)(ii) applies
solely for purposes of the uniform allocation safe harbor in paragraph
(b)(3) of this section.
(iii) Entry dates. The plan provides one or more entry dates during
the plan year as permitted by section 410(a)(4).
(iv) Prior vesting schedules. The plan provides different vesting
schedules solely to the extent necessary to comply with section
411(a)(10) (relating to changes in vesting schedules).
(v) Certain conditions on allocations. The plan provides that an
employee's allocation for the plan year is conditioned on the employee's
employment on the last day of the plan year or on the employee's
completion of a minimum number of hours of service during the plan year
(not to exceed 1,000). Such a provision may include an exception for
all employees who terminate employment during the plan year or only for
those employees who terminate employment during the plan year on account
of one or more of the following circumstances: retirement, disability,
death, or military service.
(vi) Certain limits on allocations. The plan limits allocations
otherwise provided under the allocation formula to a maximum dollar
amount or a maximum percentage of plan year compensation, or limits the
dollar amount of plan year compensation taken into account in
determining the amount of allocations. The plan may apply these limits
solely to all highly compensated employees in the plan.
(vii) Dollar allocation per uniform unit of service. The plan
determines allocations based on the same dollar amount for each uniform
unit of service (not to exceed 1 week) performed by each employee in the
plan during the plan year. This paragraph (b)(5)(vii) applies solely
for purposes of the uniform allocation safe harbor in paragraph (b)(3)
of this section.
(viii) Section 409(n) limits. The plan limits allocations to
employees in accordance with section 409(n) (or section 1042(b)(3) of
the Internal Revenue Code of 1954 as in effect immediately prior to the
Tax Reform Act of 1986).
(ix) Section 415 limits. The plan limits allocations to employees in
accordance with section 415.
(x) Multiple definitions of service -- (A) In general. The plan
provides different definitions of years of service for different
purposes under the plan, provided that, for each purpose, the same
definition of years of service applies to all employees in the plan.
Thus, for example, the plan may define years of service for purposes of
vesting as all years of service in which the employee has completed at
least 500 hours of service, and for purposes of eligibility for plan
participation as all years of service in which the employee has
completed at least 1,000 hours of service.
(B) Hour-of-service equivalencies. The plan credits service for a
specific purpose for some employees (e.g., hourly employees) based on
hours of service as provided for in 29 CFR 2530.200b-2, but credits
service for the same purpose for other employees (e.g., salaried
employees) based on one of the equivalencies set forth in 29 CFR
2530.200b-3.
(C) Recognition of prior employment for eligibility and vesting. The
plan credits service for purposes of eligibility or vesting, or both,
for service with a prior employer. This rule applies solely to
employees who become employees of the employer pursuant to a transaction
between the employer and the prior employer that is a stock or asset
acquisition, a merger, or other similar transaction involving a change
in the employer of the employees of a trade or business.
(D) Imputed service. The plan credits imputed service as permitted
under 1.401(a)(4)-11(d)(2).
(xi) Multiple formulas -- (A) In general. The plan provides that an
employee's allocation under the plan is the greater of the allocations
determined under two or more formulas. Alternatively, the plan provides
that an employee's allocation under the plan is the sum of the
allocations determined under two or more formulas. This paragraph
(b)(5)(xi) does not apply to a plan unless each of the formulas under
the plan satisfies the requirements of paragraphs (b)(5)(xi) (B) through
(D) of this section. See 1.401(l)-5(b)(8)(ii) for rules regarding the
overall permitted disparity limitations.
(B) Sole formulas. The formulas are the only formulas under the
plan.
(C) Separate testing. Each of the formulas separately satisfies the
uniformity requirements of paragraph (b)(2) of this section and also
separately satisfies either of the safe harbors in paragraphs (b)(3) and
(b)(4) of this section. For this purpose, the formulas need not satisfy
the same safe harbor. In addition, a formula that is available solely
to some or all nonhighly compensated employees in the plan is deemed to
satisfy this paragraph (b)(5)(xi)(C).
(D) Availability -- (1) General rule. All of the formulas are
available on the same terms to all employees in the plan.
(2) Formulas for nonhighly compensated employees. A formula does not
fail to be available on the same terms to all employees in the plan,
merely because the formula is available solely to some or all nonhighly
compensated employees in the plan on the same terms as all the other
formulas in the plan.
(3) Top-heavy formulas. In the case of a plan that provides the
greater of the allocations under two or more formulas, one of which is a
top-heavy formula, the top-heavy formula does not fail to be available
on the same terms to all employees in the plan, merely because the
formula is available solely to all non-key employees in the plan on the
same terms as all the other formulas under the plan. Furthermore, the
top-heavy formula does not fail to be available on the same terms as the
other formulas under the plan, merely because the top-heavy formula is
conditioned on the plan's being top-heavy within the meaning of section
416(g). Finally, the top-heavy formula does not fail to be available on
the same terms as the other formulas under the plan, merely because the
top-heavy formula is available to all employees described in 1.416-1,
Q&A M-10 (i.e., all non-key employees who have not separated from
service as of the last day of the plan year). The preceding sentence
does not apply, however, unless the plan would satisfy section 410(b) if
all employees whose only allocation under the plan is provided under the
top-heavy formula were treated as not currently benefiting under the
plan. For purposes of this paragraph (b)(5)(xi)(D)(3), a top-heavy
formula is a formula that provides the minimum benefit described in
section 416(c)(2) (taking into account, if applicable, the modification
in section 416(h)(2)(A)(ii)(II)).
(E) Provisions may be applied more than once. The provisions of this
paragraph (b)(5)(xi) may be applied more than once. For example, a plan
satisfies the requirements of this paragraph (b) if an employee's
allocation under the plan is the greater of the allocations under two or
more formulas, and one or more of those formulas is the sum of the
allocations under two or more other formulas, provided that each of the
formulas under the plan satisfies the requirements of paragraphs
(b)(5)(xi) (B) through (D) of this section.
(F) Examples. The following examples illustrate the rules regarding
multiple formulas in this paragraph (b)(5)(xi).
Example 1. Under Plan A, each employee's allocation equals the sum
of the allocations determined under two formulas. The first formula
provides an allocation of 5 percent of plan year compensation. The
second formula provides an allocation of $100. Plan A is eligible to
apply the rules in this paragraph (b)(5)(xi).
Example 2. Under Plan B, each employee's allocation equals the
greater of the allocations determined under two formulas. The first
formula provides an allocation of 7 percent of plan year compensation
and is available to all employees in the plan who complete at least
1,000 hours of service during the plan year and who have not separated
from service as of the last day of the plan year. The second formula is
a top-heavy formula that provides an allocation of 3 percent of plan
year compensation (determined using section 414(s) compensation as
defined in 1.414(s)-1(c)(2)), and that is available to all employees
described in 1.416-1, Q&A M-10. Plan B does not satisfy the general
rule in paragraph (b)(5)(xi)(D)(1) of this section because the two
formulas are not available on the same terms to all employees in the
plan (i.e., an employee is required to complete 1,000 hours of service
during the plan year to receive an allocation under the first formula,
but not under the second formula). Nonetheless, because the second
formula is a top-heavy formula, the special availability rules for
top-heavy formulas in paragraph (b)(5)(xi)(D)(3) of this section apply.
Thus, the second formula does not fail to be available on the same terms
as the first formula, merely because the second formula is available to
all employees described in 1.416-1, Q&A M-10, as long as the plan would
satisfy section 410(b) if all employees whose only allocation under the
plan is provided under the second formula were treated as not currently
benefiting under the plan. This is true, even if the plan conditions
the availability of the second formula on the plan's being top-heavy for
the plan year.
Example 3. The facts are the same as in Example 2, except that the
first formula is available to all employees who have not separated from
service as of the last day of the plan year, regardless of whether they
complete at least 1,000 hours of service during the plan year. Plan B
still does not satisfy the general rule in paragraph (b)(5)(xi)(D)(1) of
this section because the two formulas are not available on the same
terms to all employees in the plan (i.e., the second formula is only
available to all non-key employees in the plan). Nonetheless, because
the second formula is a top-heavy formula, the special availability
rules for top-heavy formulas in paragraph (b)(5)(xi)(D)(3) of this
section apply. Thus, the second formula does not fail to be available
on the same terms as the first formula, merely because the second
formula is available solely to all non-key employees in the plan.
(c) General test for nondiscrimination in amount of contributions --
(1) In general. A plan satisfies the requirements of this section for a
plan year if each rate group under the plan satisfies section 410(b).
For purposes of this paragraph (c), a rate group exists under a plan for
each highly compensated employee in the plan and consists of the highly
compensated employee and all other employees in the plan (both highly
and nonhighly compensated) who have an allocation rate greater than or
equal to the highly compensated employee's allocation rate. Thus, an
employee is in the rate group for each highly compensated employee in
the plan who has an allocation rate less than or equal to the employee's
allocation rate.
(2) Determination of allocation rates -- (i) In general. The
allocation rate for an employee for a plan year equals the sum of the
allocations to the employee's account for the plan year, expressed
either as a percentage of plan year compensation or as a dollar amount.
(ii) Allocations taken into account. The amounts taken into account
in determining allocation rates for a plan year include all employer
contributions and forfeitures that are allocated or treated as allocated
to the account of an employee under the plan for the plan year, other
than amounts described in paragraph (c)(2)(iii) of this section. For
this purpose, employer contributions include annual additions described
in 1.415-6(b)(2)(i) (regarding amounts arising from certain
transactions between the plan and the employer). In the case of a
defined contribution plan subject to section 412, the amount of employer
contributions taken into account is the amount of employer contributions
required to be allocated under the plan to the employee's account for
the plan year, even if all or part of the required contribution is not
actually made. For purposes of this paragraph (c)(2)(ii), amounts that
would be allocated to the account of an employee for the plan year but
for the limits of section 415 are not treated as allocated to the
account of the employee. However, amounts that would be allocated to
the account of an employee for the plan year but for the limits of
section 409(n) (or section 1042(b)(3) of the Internal Revenue Code of
1954 as in effect immediately prior to the Tax Reform Act of 1986) are
treated as allocated to the account of the employee.
(iii) Allocations not taken into account. Allocations of earnings,
expenses, gains, and losses attributable to the balance in an employee's
account are not taken into account in determining allocation rates.
(iv) Imputation of permitted disparity. The disparity permitted
under section 401(l) may be imputed in accordance with the rules of
1.401(a)(4)-7.
(v) Grouping of allocation rates. An employer may treat all
employees who have allocation rates within a range of no more than 5
percent (not 5 percentage points) above and below a midpoint rate chosen
by the employer as having an allocation rate equal to that midpoint
rate. If allocation rates are determined as a percentage of plan year
compensation (rather than a dollar amount), an employer may, as an
alternative, treat all employees who have allocation rates within a
range of no more than one-quarter of a percentage point above and below
a midpoint rate chosen by the employer as having an allocation rate
equal to that midpoint rate. Allocation rates within a given range may
be grouped under this paragraph (c)(2)(v) only if the allocation rates
of highly and nonhighly compensated employees are dispersed throughout
the range in a reasonably comparable manner and the range does not
overlap with any other range chosen by the employer. An employer may
choose to group the allocation rates of some employees into ranges and
not to group the allocation rates of other employees into ranges,
provided that the allocation rates of all employees within each range
chosen by the employer are grouped within that range. If allocation
rates are determined as a percentage of plan year compensation (rather
than as a dollar amount), an employer may apply either grouping method
described in this paragraph (c)(2)(v) and, in addition, may apply one
method to one group of employees and the other method to another group
of employees, provided that only one method is applied to any given
employee or group of employees.
(3) Satisfaction of section 410(b) by a rate group -- (i) In general.
For purposes of determining whether a rate group satisfies section
401(b), the rate group is treated as if it were a separate plan that
benefits only the employees included in the rate group for the plan
year. Except as provided in paragraphs (c)(3)(ii) through (v) of this
section, the rules that apply in determining whether a rate group
satisfies section 410(b) are the same as apply in determining whether a
plan satisfies section 410(b). Thus, for example, if the rate group
does not satisfy the ratio percentage test of 1.410(b)-2(b)(2), the
rate group must satisfy the average benefit test of 1.410(b)-2(b)(3)
(including the nondiscriminatory classification test of 1.410(b)-4 and
the average benefit percentage test of 1.410(b)-5).
(ii) Permissive aggregation not available. The permissive
aggregation rules of 1.410(b)-7(d) are not available to a rate group in
determining whether it satisfies section 410(b).
(iii) Deemed satisfication of reasonable classification requirement.
In determining whether a rate group satisfies the nondiscriminatory
classification test of 1.410(b)-4, the rate group is deemed to satisfy
the reasonable classification requirement of 1.410(b)-4(b).
(iv) Facts-and-circumstances requirements replaced. In determining
whether a rate group satisfies the nondiscriminatory classification test
of 1.410(b)-4, the facts-and-circumstances requirements of
1.410(b)-4(c)(3) do not apply. Instead, the rate group is deemed to
satisfy the facts-and-circumstances requirements of 1.410(b)-4(c)(3),
but only if the ratio percentage of the rate group is greater than or
equal to the lesser of --
(A) The ratio percentage of the plan, or
(B) The midpoint between the safe and the unsafe harbor percentages
applicable to the plan.
(v) Application of average benefit percentage test. A rate group
satisfies the average benefit percentage test of 1.410(b)-5 if the plan
of which it is a part satisfies 1.410(b)-5 (applied without regard to
1.410(b)-5(f)). In the case of a plan that relies on 1.410(b)-5(f) to
satisfy the average benefit percentage test, each rate group under the
plan satisfies the average benefit percentage test (if applicable) only
if the rate group separately satisfies 1.410(b)-5(f).
(4) Examples. The following examples illustrate the general test in
this paragraph (c).
Example 1. Employer X maintains 2 defined contribution plans, Plan A
and Plan B, that are aggregated and treated as a single plan for
purposes of sections 410(b) and 401(a)(4) pursuant to 1.410(b)-7(d).
For the 1994 plan year, Employee M has plan year compensation of $10,000
and receives an allocation of $200 under Plan A and an allocation of
$800 under Plan B. Employee M's allocation rate under the aggregated
plan for the 1994 plan year is 10 percent (i.e., $1,000 divided by
$10,000).
Example 2. The employees in Plan C have the following allocation
rates (expressed as percentage of plan year compensation): 9.6 percent,
9.7 percent, 9.8 percent, and 10.5 percent. Because all employees have
allocation rates within a range of no more than 5 percent above and
below 10.0 percent (a midpoint rate chosen by the employer), the
employer may treat all employees as having an allocation rate of 10.0
percent (provided, of course, that the allocation rates of highly
compensated employees and nonhighly compensated employees are dispersed
throughout the range in a reasonably comparable manner).
Example 3. The employees in Plan D have the following allocation
rates (expressed as a percentage of plan year compensation): 2.75
percent, 2.80 percent, 2.85 percent, 3.25 percent, 6.65 percent, 7.33
percent, 7.34 percent, and 7.35 percent. Because the first four rates
are within a range of no more than one-quarter of a percentage point
above and below 3.0 percent (a midpoint rate chosen by the employer),
the employer may treat the employees who have those rates as having an
allocation rate of 3.0 percent (provided that the allocation rates of
highly compensated employees and nonhighly compensated employees are
dispersed throughout the range in a reasonably comparable manner).
Because the last four rates are within a range of no more than 5 percent
above and below 7.0 percent (a midpoint rate chosen by the employer),
the employer may treat the employees who have those rates as having an
allocation rate of 7.0 percent (provided that the allocation rates of
highly compensated employees and nonhighly compensated employees are
dispersed throughout the range in a reasonably comparable manner).
Example 4. (a) Employer Y has only 6 nonexcludable employees, all of
whom benefit under Plan E. The highly compensated employees in the plan
are H1 and H2, and the nonhighly compensated employees in the plan are
N1 through N4. For the 1994 plan year, H1 and N1 through N4 have an
allocation rate of 5.0 percent of plan year compensation. For the same
plan year, H2 has an allocation rate of 7.5 percent of plan year
compensation.
(b) There are two rate groups under Plan E. Rate group 1 consists of
H1 and all those employees in the plan who have an allocation rate
greater than or equal to H1's allocation rate (5.0 percent). Thus, rate
group 1 consists of H1, H2, and N1 through N4. Rate group 2 consists
only of H2 because no other employee in the plan has an allocation rate
greater than or equal to H2's allocation rate (7.5 percent).
(c) Rate group 2 does not satisfy the ratio percentage test under
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 0
percent -- i.e., 0 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 50 percent
(the percentage of all highly compensated nonexcludable employees who
are in the rate group).
(d) Rate group 2 also does not satisfy the nondiscriminatory
classification test of 1.410(b)-4 because the ratio percentage of the
rate group (0 percent) is less than the unsafe harbor percentage
applicable to the plan under 1.410(b)-4(c)(4) (35.5 percent).
(e) Rate group 2 therefore does not satisfy 410(b) and, as a result,
Plan E does not satisfy the requirements of paragraph (c) of this
section. This is true even though rate group 1 satisfies the ratio
percentage test of 1.410(b)-2(b)(2).
Example 5. (a) The facts are the same as in Example 4, except that
N4 has an allocation rate of 8.0 percent.
(b) There are 2 rate groups in Plan E. Rate group 1 consists of H1
and all those employees who have an allocation rate greater than or
equal to H1's allocation rate (5.0 percent). Thus, rate group 1 consists
of H1, H2 and N1 through N4. Rate group 2 consists of H2, and all those
employees who have an allocation rate greater than or equal to H2's
allocation rate (7.5 percent). Thus, rate group 2 consists of H2 and N4.
(c) Rate group 1 satisfies the ratio percentage test under
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 100
percent -- i.e., 100 percent (the percentage of all nonhighly
compensated nonexcludable employees who are in the rate group) divided
by 100 percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(d) Rate group 2 does not satisfy the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 50
percent -- i.e., 25 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 50 percent
(the percentage of all highly compensated nonexcludable employees who
are in the rate group).
(e) However, rate group 2 does satisfy the nondiscriminatory
classification test of 1.410(b)-4 because the rate group is deemed to
satisfy the reasonable classification requirement of 1.410(b)-4(b) and
the ratio percentage of the rate group (50 percent) is greater than the
safe harbor percentage applicable to the plan under 1.410(b)-4(c)(4)
(45.5 percent).
(f) If rate group 2 satisfies the average benefit percentage test of
1.410(b)-5, then rate group 2 satisfies section 410(b). In that case,
Plan E satisfies the requirements of paragraph (c) of this section
because each rate group under the plan satisfies section 410(b).
Example 6. (a) Plan F satisfies section 410(b) by satisfying the
nondiscriminatory classification test of 1.410(b)-4 and the average
benefit percentage test of 1.410(b)-5 (without regard to
1.410(b)-5(f)). See 1.410(b)-2(b)(3). Plan F utilizes the
facts-and-circumstances requirements of 1.410(b)-4(c)(3) to satisfy the
nondiscriminatory classification test of 1.410(b)-4. The safe and
unsafe harbor percentages applicable to the plan under 1.410(b)-4(c)(4)
are 29 and 20 percent, respectively. Plan F has a ratio percentage of
22 percent.
(b) Rate group 1 under Plan F has a ratio percentage of 23 percent.
Under paragraph (c)(3)(iii) of this section, the rate group is deemed to
satisfy the reasonable classification requirement of 1.410(b)-4(b).
Even though the ratio percentage of the rate group (23 percent) falls
below the safe harbor percentage applicable to the plan (29 percent),
under paragraph (c)(3)(iv) of this section the rate group is deemed to
satisfy the facts-and-circumstances requirements of 1.410(b)-4(c)(3),
because the ratio percentage for the rate group (23 percent) is greater
than the lesser of --
(1) the ratio percentage for the plan as a whole (22 percent), and
(2) the midpoint between the safe and unsafe harbor percentages (24.5
percent).
Under these facts, the rate group satisfies the nondiscriminatory
classification test of 1.410(b)-4. In addition, under paragraph
(c)(3)(v) of this section, the rate group satisfies section 410(b)
because the plan satisfies the average benefit percentage test of
1.410(b)-5.
(d) Exclusive tests for section 401(k) and (m) plans -- (1) Section
401(k) plans. A section 401(k) plan is deemed to satisfy the
requirements of this section.
(2) Section 401(m) plans. A section 401(m) plan satisfies the
requirements of this section only if the plan satisfies
1.401(m)-1(b)(1), 1.401(m)-1(b)(3), and 1.401(m)-2.
(3) Scope of exclusive tests. This paragraph (d) does not apply to
contributions under a nonqualified cash or deferred arrangement,
qualified nonelective contributions treated as elective or matching
contributions under 1.401(k)-1(b)(5) and 1.401(m)-1(b)(5) (except to
the extent provided in those sections), or elective contributions
described in 1.401(k)-1(b)(4)(iv) that fail to satisfy the allocation
and compensation requirements of 1.401(k)-1(b)(4)(i). Contributions
described in the preceding sentence must satisfy the nondiscriminatory
amount requirement of 1.401(a)(4)-1(b)(2) without regard to the rules
in paragraphs (d)(1) and (d)(2) of this section.
(T.D. 8360, 56 FR 47542, Sept. 19, 1991; 57 FR 4719, Feb. 7, 1992;
57 FR 10952, Mar. 31, 1992)
26 CFR 1.401(a)(4)-3 Nondiscrimination in amount of benefits under a
defined benefit plan.
(a) Introduction -- (1) General rule. The amount of
employer-provided benefits under a defined benefit plan does not
discriminate in favor of highly compensated employees for a plan year if
the plan satisfies the requirements of this section for the plan year.
(2) Overview. This section sets forth rules for determining whether
the employer-provided benefits under a defined benefit plan are
nondiscriminatory in amount. Certain defined benefit plans that provide
uniform benefits are permitted to satisfy the requirements of this
section by meeting one of the five safe harbor tests in paragraph (b) of
this section. Four of these safe harbors are design-based and do not
require the determination and comparison of actual benefits under the
plan. Plans that do not provide uniform benefits in accordance with any
of the safe harbors in paragraph (b) of this section may comply with the
requirements of this section only by satisfying the general test in
paragraph (c) of this section. The general test requires the
determination of individual benefit accrual rates. Paragraph (d) of
this section provides rules for determining these accrual rates.
Paragraph (e) of this section provides rules for determining
compensation for purposes of applying the tests in this section.
Paragraph (f) of this section provides additional rules and exceptions
that apply generally under this section, for purposes of both the safe
harbor tests in paragraph (b) of this section and the general test in
paragraph (c) of this section.
(3) Alternative methods of satisfying nondiscriminatory amount
requirement. A defined benefit plan is permitted to satisfy any of the
tests in paragraph (b) or (c) of this section on a restructured basis
pursuant to 1.401(a)(4)-9(c). In addition, a defined benefit plan that
is part of a floor-offset arrangement is permitted to satisfy the
requirements of this section pursuant to 1.401(a)(4)-8(d).
Alternatively, a defined benefit plan is permitted to satisfy the
nondiscriminatory amount requirement of 1.401(a)(4)-1(b)(2) on the
basis of equivalent allocations pursuant to 1.401(a)(4)-8(c). These
latter rules include a safe harbor testing method for benefits provided
under a cash balance plan.
(4) Separate testing of employer-provided benefits and
employee-provided benefits. This section applies for purposes of
determining whether the amount of employer-provided benefits under a
defined plan satisfies the nondiscriminatory amount requirement of
1.401(a)(4)-1(b)(2). In the case of a contributory DBplan (i.e., one
that includes employee contributions not allocated to separate
accounts), 1.401(a)(4)-6(b) provides rules for determining the amount
of employer-provided benefits under the plan, and 1.401(a)(4)-6(c)
provides rules for determining whether the employee-provided benefits
under the plan satisfy the nondiscriminatory amount requirement of
1.401(a)(4)-1(b)(2).
(b) Safe harbors -- (1) In general. A defined benefit plan satisfies
the requirements of this section for a plan year if the plan satisfies
the uniformity requirements of paragraph (b)(2) of this section and any
one of the safe harbors in paragraphs (b)(3) (unit credit plans), (b)(4)
(unit credit fractional accrual plans), (b)(5) (flat benefit plans),
(b)(6) (alternative safe harbor for flat benefit plans), and (b)(7)
(insurance contract plans) of this section. Paragraph (b)(8) of this
section provides exceptions for certain plan provisions that do not
cause a plan to fail the requirements of this paragraph (b).
(2) Uniformity requirements -- (i) In general. A plan satisfies the
uniformity requirements of this paragraph (b)(2) only if it satisfies
each of the requirements in paragraphs (b)(2)(ii) through (b)(2)(vi) of
this section.
(ii) Uniform normal retirement benefit. The same benefit formula
must apply to all employees in the plan. The benefit formula must
provide all employees in the plan with an annual benefit payable in the
same form commencing at the same uniform normal retirement age. The
annual benefit must be the same percentage of average annual
compensation or the same dollar amount for all employees in the plan who
will have the same number of years of service at normal retirement age.
The annual benefit must equal the employee's accrued benefit at normal
retirement age (within the meaning of section 411(a)(7)(A)(i)) and must
be the normal retirement benefit under the plan (within the meaning of
section 411(a)(9)).
(iii) Uniform post-normal retirement benefits. With respect to an
employee with a given number of years of service at any age after normal
retirement age, the annual benefit commencing at the employee's age must
be the same percentage of average annual compensation or the same dollar
amount that would be payable commencing at normal retirement age to an
employee who had that same number of years of service at normal
retirement age.
(iv) Uniform subsidies. Each subsidized optional form of benefit
under the plan must be available to substantially all employees in the
plan. In determining whether a subsidized optional form of benefit is
available to an employee, the same criteria apply as in determining
whether an optional foirm of benefit is currently available to an
em,.loyee in the plan under 1.401(a)(4)-4(b). An optional form of
benefit is considered subsidized if the normalized optional form of
benefit is larger than the normalized normal retirement benefit under
the plan.
(v) Uniform vesting and service crediting. All employees in the plan
must be subject to the same vesting schedule and the same definition of
years of service for all purposes under the plan. For purposes of
crediting service, only service with the employer (or a predecessor
employer within the meaning of section 414(a)) may be taken into
account.
(vi) No employee contributions. The plan is not a contributory
DBplan.
(vii) Examples. The following examples illustrate the uniformity
requirements in this paragraph (b)(2).
Example 1. Plan A provides a normal retirement benefit equal to 2
percent of average annual compensation times each year of service
commencing at age 65 for all employees in the plan. Plan A provides
that employees of Division A receive their benefit in the form of a
straight life annuity and that employees of Division B receive their
benefit in the form of a life annuity with an automatic cost-of-living
increase. Plan A does not provide a uniform normal retirement benefit
within the meaning of paragraph (b)(2)(ii) of this section because the
annual benefit is not payable in the same form to all employees in the
plan.
Example 2. Plan B provides a normal retirement benefit equal to 1.5
percent of average annual compensation times each year of service at
normal retirement age for all employees in the plan. The normal
retirement age under the plan is the earlier of age 65 or the age at
which the employee completes 10 years of service, but in no event
earlier than age 62. Plan B does not provide a uniform normal
retirement benefit within the meaning of paragraph (b)(2)(ii) of this
section because the same uniform normal retirement age does not apply to
all employees in the plan.
Example 3. Plan C is an accumulation plan under which the benefit
for each year of service equals 1 percent of plan year compensation
payable in the same form to all employees in the plan commencing at the
same uniform normal retirement age. Under paragraph (b)(8)(x)(B) of
this section, an accumulation plan does not fail to satisfy the
requirements of this paragraph (b) merely because it substitutes plan
year compensation for average annual compensation. Plan C provides a
uniform normal retirement benefit within the meaning of paragraph
(b)(2)(ii) of this section, because all employees in the plan with the
same number of years of service at normal retirement age will receive an
annual benefit that is treated as the same percentage of average annual
compensation.
Example 4. The facts are the same as in Example 3, except that the
benefit for each year of service equals 1 percent of plan year
compensation increased by reference to the increase in the cost of
living from the year of service to normal retirement age. Plan C does
not provide a uniform normal retirement benefit, because the annual
benefit defined by the benefit formula can vary for employees with the
same number of years of service at normal retirement age, depending on
the age at which those years of service were credited to the employee
under the plan.
Example 5. Plan D provides a normal retirement benefit of 50 percent
of average annual compensation at normal retirement age (age 65) for
employees with 30 years of service at normal retirement age. Plan D
provides that in the case of an employee with less than 30 years of
service at normal retirement age, the normal retirement benefit is
reduced on a pro rata basis for each year of service less than 30.
However, if an employee with less than 30 years of service at normal
retirement age continues to work past normal retirement age, Plan D
provides that the additional years of service worked past normal
retirement age are taken into account for purposes of the 30 years of
service requirement. Thus, an employee who has 26 years of service at
age 65 but who does not retire until age 69 with 30 years of service
will receive a benefit of 50 percent of average annual compensation.
Plan D provides uniform post-normal retirement benefits within the
meaning of paragraph (b)(2)(iii) of this section.
Example 6. Plan E provides a normal retirement benefit payable in
the form of a straight life annuity equal to 1 percent of average annual
compensation per year of service. The normal retirement age under the
plan is 65. Plan E also provides an optional form of benefit for
employees who have at least 10 years of service and who have attained at
least age 55. The optional form of benefit provides that for employees
retiring before age 65, the normal retirement benefit is reduced by 5
percent for each year that commencement of benefits precedes age 65.
Thus, the early retirement benefit at age 55, for example, is 50 percent
of the normal retirement benefit. When normalized, this benefit is 131
percent of the normalized normal retirement benefit under the plan. The
reduction factor of 5 percent therefore creates a subsidized early
retirement benefit for purposes of paragraph (b)(2)(iv) of this section
because the normalized early retirement benefit is larger than the
normalized normal retirement benefit under the plan. In order to
satisfy the uniform subsidies requirement of paragraph (b)(2)(iv) of
this section, the early retirement benefit must be available to
substantially all employees in the plan.
Example 7. Plan F is amended on February 14, 1994, to provide an
early retirement window benefit that is a subsidized optional form of
benefit under paragraph (b)(2)(iv) of this section. The early
retirement window benefit is available only to employees who retire
between June 1, 1994, and December 31, 1994. Paragraph (b)(2)(iv) of
this section provides that, in determining whether a subsidized optional
form of benefit is available to substantially all employees in the plan,
the same criteria apply as in determining whether an optional form of
benefit is currently available to a group of employees under
1.401(a)(4)-4(b). Section 1.401(a)(4)-4(b) provides that age and service
requirements are not disregarded in determining the current availability
of an optional form of benefit if those requirements must be satisfied
within a specified period of time. Thus, unless substantially all
employees in the plan will satisfy the eligibility requirements for the
early retirement window benefit by the close of the early retirement
window benefit period, Plan F fails to satisfy the requirements of
paragraph (b)(2)(iv) of this section. However, see
1.401(a)(4)-9(c)(6), Example 3, for an example of how a plan with an
early retirement window benefit may be restructured into two component
plans, each of which satisfies the safe harbors of this paragraph (b).
(3) Safe harbor for unit credit plans -- (i) General rule. A plan
satisfies the safe harbor in this paragraph (b)(3) for a plan year if it
satisfies each of the following requirements --
(A) The plan satisfies the 133 1/3 percent accrual rule of section
411(b)(1)(B).
(B) An employee's accrued benefit under the plan as of any plan year
is determined by applying the plan's benefit formula to the employee's
years of service and (if applicable) average annual compensation, both
determined as of that plan year. Thus, all employees in the plan who
have the same number of years of service as of any plan year will have
an accrued benefit that is the same percentage of average annual
compensation or the same dollar amount.
(ii) Examples. The following examples illustrate the unit credit
safe harbor in this paragraph (b)(3). In each example, it is assumed
that the plan has never permitted employee contributions.
Example 1. Plan A provides that the accrued benefit of each employee
in the plan as of any plan year equals 1.5 percent of the employee's
average annual compensation times the employee's years of service
determined as of that plan year. Plan A satisfies this paragraph
(b)(3).
Example 2. Plan B provides that the accrued benefit of each employee
in the plan as of any plan year equals the employee's average annual
compensation times a percentage that depends on the employee's years of
service determined as of that plan year. The percentage is 1.5 percent
for each of the first 5 years of service, plus 1.75 percent for each of
the next 5 years of service, plus 2 percent for all additional years of
service. Plan B satisfies this paragraph (b)(3).
Example 3. Plan C provides that the accrued benefit of each employee
in the plan as of any plan year equals the employee's average annual
compensation times a percentage that depends on the employee's years of
service determined as of that plan year. The percentage is 2 percent
for each of the first 5 years of service, plus 1 percent for all
additional years of service. Plan C satisfies this paragraph (b)(3).
(4) Safe harbor for unit credit plans using fractional accrual rule
-- (i) General rule. A plan satisfies the safe harbor in this paragraph
(b)(4) for a plan year if it satisfies each of the following
requirements --
(A) The plan satisfies the fractional accrual rule of section
411(b)(1)(C).
(B) An employee's accrued benefit under the plan as of any plan year
before the employee reaches normal retirement age is determined by
multiplying the employee's fractional rule benefit (within the meaning
of 1.411(b)-1(b)(3)(ii)(A)) by a fraction, the numerator of which is
the employee's years of service determined as of the plan year, and the
denominator of which is the employee's projected years of service as of
normal retirement age. Thus, all employees in the plan who have the
same entry age and the same number of years of service as of any plan
year will have an accrued benefit at normal retirement age that is the
same percentage of average annual compensation or the same dollar
amount.
(C) Under the plan, it is impossible for any employee in the plan to
accrue in a plan year a portion of the normal retirement or post-normal
retirement benefit described in paragraph (b)(2) (ii) or (iii) of this
section that is more than 1/3 larger than the portion of the same
benefit accrued in that or any other plan year by any other employee in
the plan, when each portion of the benefit is expressed as a percentage
of each employee's average annual compensation or as a dollar amount.
Solely for this purpose, employees with projected service at normal
retirement age in excess of 33 years may be disregarded. In addition,
in the case of a section 401(l) plan, an employee is treated as accruing
benefits at a rate equal to the excess benefit percentage in the case of
a defined benefit excess plan, or at a rate equal to the gross benefit
percentage in the case of an offset plan.
(ii) Examples. The following examples illustrate the unit credit
fractional accrual safe harbor in this paragraph (b)(4). In each
example, it is assumed that the plan has never permitted employee
contributions.
Example 1. Plan A provides a normal retirement benefit equal to 1.6
percent of average annual compensation times each year of service up to
25. Plan A further provides that an employee's accrued benefit as of
any plan year equals the employee's fractional rule benefit multiplied
by a fraction, the numerator of which is the employee's years of service
as of the plan year, and the denominator of which is the employee's
projected years of service as of normal retirement age. The greatest
benefit that an employee could accrue in any plan year is 1.6 percent of
average annual compensation (this is the case for an employee in the
plan with 25 or fewer years of projected service at normal retirement
age). Among employees with 33 or fewer years of projected service at
normal retirement age, the lowest benefit that an employee could accrue
in any plan year is 1.212 percent of average annual compensation (this
is the case for an employee in the plan with 33 years of projected
service at normal retirement age). Plan A satisfies paragraph
(b)(4)(i)(C) of this section because 1.6 percent is not more than 1/3
larger than 1.212 percent.
Example 2. Plan B is a section 401(l) plan that provides a normal
retirement benefit equal to 1.0 percent of average annual compensation
up to the integration level, and 1.6 percent of average annual
compensation above the integration level, times each year of service up
to 35. Plan B further provides that an employee's accrued benefit as of
any plan year equals the employee's fractional rule benefit multiplied
by a fraction, the numerator of which is the employee's years of service
as of the plan year, and the denominator of which is the employee's
projected years of service as of normal retirement age. For purposes of
satisfying the 1/3 larger rule in paragraph (b)(4)(i)(C) of this
section, all employees in the plan are assumed to accrue benefits at the
rate of 1.6 percent of average annual compensation (the excess benefit
percentage under the plan). Plan B satisfies the requirements of
paragraph (b)(4)(i)(C) of this section because all employees with 33 or
fewer years of projected service at normal retirement age accrue in each
plan year a benefit of 1.6 percent of average annual compensation.
Example 3. Plan C provides a normal retirement benefit equal to 4
percent of average annual compensation times each year of service up to
10 and 1 percent of average annual compensation times each year of
service in excess of 10 and not in excess of 30. Plan C further
provides that an employee's accrued benefit as of any plan year equals
the employee's fractional rule benefit multiplied by a fraction, the
numerator of which is the employee's years of service as of the plan
year, and the denominator of which is the employee's projected years of
service as of normal retirement age. The greatest benefit that an
employee could accrue in any plan year is 4 percent of average annual
compensation (this is the case for an employee with 10 or fewer years of
projected service at normal retirement age). Among employees with 33 or
fewer years of projected service at normal retirement age, the lowest
benefit that an employee could accrue in a plan year is 1.82 percent of
average annual compensation (this is the case of an employee with 33
years of projected service at normal retirement age). Plan C fails to
satisfy this paragraph (b)(4) because 4 percent is more than 1/3 larger
than 1.82 percent.
Example 4. Plan D provides a normal retirement benefit equal to 2.0
percent of average annual compensation, plus 0.65 percent of average
annual compensation above covered compensation, for each year of service
up to 25. Plan D further provides that an employee's accrued benefit as
of any plan year equals the sum of --
(a) The employee's fractional rule benefit (determined as if the
normal retirement benefit under the plan equaled 2.0 percent of average
annual compensation for each year of service up to 25) multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service as of normal retirement age, plus
(b) 0.65 percent of the employee's average annual compensation above
covered compensation multiplied by the employee's years of service (up
to 25) as of the current plan year.
Although Plan D satisfies the fractional accrual rule of section
411(b)(1)(C), the plan fails to satisfy this paragraph (b)(4) because
the plan does not determine employees' accrued benefits in accordance
with paragraph (b)(4)(i)(B) of this section.
(5) Safe harbor for flat benefit plans -- (i) General rule. A plan
satisfies the safe harbor in this paragraph (b)(5) for a plan year if it
satisfies each of the following requirements --
(A) The plan satisfies the fractional accrual rule of section
411(b)(1)(C).
(B) An employee's accrued benefit under the plan as of any plan year
before the employee reaches normal retirement age is determined by
multiplying the employee's fractional rule benefit (within the meaning
of 1.411(b)-1(b)(3)(ii)(A)) by a fraction, the numerator of which is
the employee's years of service determined as the plan year, and the
denominator of which the employee's projected years of service as of
normal retirement age. Thus, all employees in the plan who have the
same entry age and the same number of years of service as of any plan
year will have an accrued benefit that is the same percentage of average
annual compensation or the same dollar amount.
(C) The normal retirement benefit under the plan is a flat benefit.
For this purpose, a flat benefit is a benefit that is the same
percentage of average annual compensation or the same dollar amount for
all employees in the plan who have a minimum number of years of service
at normal retirement age (e.g., 50 percent of average annual
compensation), with a pro rata reduction in the flat benefit for
employees who have less than the minimum number of years of service at
normal retirement age.
(D) The plan requires a minimum of 25 years of service at normal
retirement age or an employee to receive the unreduced flat benefit,
determined without regard to section 415. Thus, an employee is
permitted to accrue the maximum benefit permitted under section 415 over
a period of less than 25 years, provided that the flat benefit under the
plan, determined without regard to section 415, can accrue over no less
than 25 years.
(ii) Examples. The following examples illustrate the flat benefit
safe harbor in this paragraph (b)(5). In each example, it is assumed
that the plan has never permitted employee contributions.
Example 1. Plan A provides a normal retirement benefit of 100
percent of average annual compensation, reduced by 4 percentage points
for each year of service below 25 the employee has at normal retirement
age. Plan A further provides that an employee's accrued benefit as of
any plan year is equal to the employee's fractional rule benefit
multiplied by a fraction, the numerator of which is the employee's years
of service as of the plan year, and the denominator of which is the
employee's projected years of service at normal retirement age. In the
case of an employee who has 5 years of service as of the current plan
year, and who is projected to have 10 years of service at normal
retirement age, the employee's fractional rule benefit would be 40
percent of average annual compensation, and the employee's accrued
benefit as of the current plan year would be 20 percent of average
annual compensation (the fractional rule benefit multiplied by a
fraction of 5 years over 10 years). Plan A satisfies the requirements
of this paragraph (b)(5).
Example 2. The facts are the same as in Example 1, except that the
normal retirement benefit is 125 percent of average annual compensation,
reduced by 5 percentage points for each year of service below 25 that
the employee has at normal retirement age. Plan A satisfies the
requirements of this paragraph (b)(5), even though an employee may
accrue the maximum benefit allowed under section 415 (i.e., 100 percent
of the participant's average compensation for the high 3 years of
service) in less than 25 years.
Example 3. The facts are the same as in Example 1, except that the
plan determines each employee's accrued benefit by multiplying the
employee's projected normal retirement benefit by the fraction described
in Example 1. In determining an employee's projected normal retirement
benefit, the plan defines each employee's average annual compensation as
the average annual compensation the employee would have at normal
retirement age if the employee's annual section 414(s) compensation in
future plan years equaled the employee's plan year compensation for the
prior plan year. Under these facts, Plan A does not satisfy paragraph
(b)(5)(i)(B) of this section because the projected normal retirement
benefit used to determine an employee's accrued benefit is not the
employee's fractional rule benefit determined in accordance with
1.411(b)-1(b)(3)(ii)(A).
Example 4. Plan B provides a normal retirement benefit of 50 percent
of average annual compensation, with a pro rata reduction for employees
with less than 30 years of service at normal retirement age. Plan B
further provides that an employee's accrued benefit as of any plan year
is equal to the employee's fractional rule benefit multiplied by a
fraction, the numerator of which is the employee's years of service as
of the plan year, and the denominator of which is the employee's
projected years of service at normal retirement age. For purposes of
determining this fraction, the plan limits the years of service taken
into account for an employee to the number of years the employee has
participated in the plan. However, all years of service (including
years of service before the employee commenced participation in the
plan) are taken into account in determining an employee's normal
retirement benefit under the plan's benefit formula. Plan B fails to
satisfy the requirements of this paragraph (b)(5) because the definition
of years of service for determining the normal retirement benefit
differs from the definition of years of service for determining the
accrued benefit. See paragraphs (b)(2)(v) and (b)(8)(xi)(D) of this
section.
(6) Alternative safe harbor for flat benefit plan. A plan satisfies
the safe harbor in this paragraph (b)(6) for a plan year if it satisfies
each of the following requirements --
(i) The plan satisfies the requirements of paragraph (b)(5) of this
section, other than the requirement of paragraph (b)(5)(i)(D) of this
section that the minimum number of years of service for receiving the
unreduced flat benefit is at least 25 years.
(ii) For the plan year, the average of the normal accrual rates for
all nonhighly compensated nonexcludable employees is at least 70 percent
of the average of the normal accrual rates for all highly compensated
nonexcludable employees. Thus, the averages in the preceding sentence
are determined taking into account all nonexcludable employees
(regardless of whether they benefit under the plan). In addition,
contributions and benefits under other plans of the employer are
disregarded. For purposes of this paragraph (b)(6), normal accrual
rates are determined under paragraph (d) of this section, without regard
to the grouping rules of paragraph (d)(6)(iv) of this section. Thus,
for example, accrual rates may be determined taking into account the
imputed disparity rules of 1.401(a)(4)-7.
(7) Safe harbor for insurance contract plans. A plan satisfies the
safe harbor in this paragraph (b)(7) if it satisfies each of the
following requirements --
(i) The plan satisfies the accrual rule of section 411(b)(1)(F).
(ii) The plan is an insurance contract plan within the meaning of
section 412(i).
(iii) The benefit formula under the plan would satisfy the
requirements of paragraph (b)(4) or (b)(5) of this section if the stated
normal retirement benefit under the formula accrued ratably over each
employee's period of plan participation through normal retirement age in
accordance with paragraph (b)(4)(i)(B) or (b)(5)(i)(B) of this section.
Thus, the benefit formula may not recognize years of service before an
employee commences participation in the plan because, otherwise, the
definition of years of service for determining the normal retirement
benefit would differ from the definition of years of service for
determining the accrued benefit under paragraph (b)(4)(i)(B) or
(b)(5)(i)(B) of this section. See paragraph (b)(5)(ii), Example 4, of
this section. Notwithstanding the foregoing, a plan adopted and in
effect on September 19, 1991, may continue to recognize years of service
prior to an employee's participation in the plan to the extent provided
in the plan on such date. The preceding sentence does not apply in the
case of an employee who first becomes a participant in the plan after
that date.
(iv) The scheduled premium payments under an individual or group
insurance contract used to fund an employee's normal retirement benefit
are level annual payments to normal retirement age. Thus, payments may
not be scheduled to cease before normal retirement age.
(v) The premium payments for an employee who continues benefiting
after normal retirement age are equal to the amount necessary to fund
additional benefits that accrue under the plan's benefit formula for the
plan year.
(vi) Experience gains, dividends, forfeitures, and similar items are
used solely to reduce future premiums.
(vii) All benefits are funded through contracts of the same series.
Among other requirements, contracts of the same series must have cash
values based on the same terms (including interest and mortality
assumptions), and the same conversion rights. A plan does not fail to
satisfy this requirement, however, if any change in the contract series
or insurer applies on the same terms to all employees in the plan. But
see 1.401(a)(4)-5(a)(6), Example 12 (change in insurer considered a
plan amendment subject to 1.401(a)(4)-5(a)).
(viii) If permitted disparity is taken into account, the normal
retirement benefit stated under the plan's benefit formula satisfies the
requirements of 1.401(l)-3. For this purpose, the 0.75-percent factor
in the maximum excess or offset allowance in 1.401(l)-3(b)(2)(i) or
(b)(3)(i), respectively, adjusted in accordance with 1.401(l)-3(d)(9)
and (e), is reduced by multiplying the factor by 0.80.
(8) Use of safe harbors not precluded by certain plain provisions --
(i) In general. A plan does not fail to satisfy the requirements of
this paragraph (b) merely because the plan contains one or more of the
provisions described in this paragraph (b)(8). Unless otherwise
provided, the provision must apply uniformly to all employees in the
plan. Paragraph (f) of this section provides additional rules on plan
provisions that may be relevant in determining whether a plan satisfies
this paragraph (b).
(ii) Section 401(l) permitted disparity. The plan takes permitted
disparity into account in a manner that satisfies section 401(l) in
form. Thus, differences in employees' benefits under the plan
attributable to uniform disparities permitted under 1.401(l)-3
(including differences in disparities that are deemed uniform under
1.401(l)-3(c)(2)) do not cause a plan to fail to satisfy the
requirements of this paragraph (b).
(iii) Entry dates. The plan provides one or more entry dates during
the plan year as permitted by section 410(a)(4).
(iv) Prior vesting schedules. The plan provides different vesting
schedules solely to the extent necessary to comply with section
411(a)(10) (relating to changes in vesting schedules).
(v) Certain conditions on accruals. The plan provides that an
employee's accrual for the plan year is less than a full accrual
(including a zero accrual) because of a plan provision permitted by the
year-of-participation rules of section 411(b)(4).
(vi) Certain limits on accruals. The plan limits benefits otherwise
provided under the benefit formula or accrual method to a maximum dollar
amount or to a maximum percentage of average annual compensation or in
accordance with section 401(a)(5)(D), or limits the dollar amount of
annual section 414(s) compensation or average annual compensation taken
into account in determining benefits. The plan may apply these limits
solely to all highly compensated employees in the plan. If the plan
does so, rules similar to those provided in paragraph (b)(8)(xiii)(D)(2)
of this section must be applied in the case of a nonhighly compensated
employee who becomes a highly compensated employee and thus subject to a
limit.
(vii) Dollar accrual per uniform unit of service. The plan
determines accruals based on the same dollar amount for each uniform
unit of service (not to exceed 1 week) performed by each employee with
the same number of years of service under the plan during the plan year.
The preceding sentence applies solely for purposes of the unit credit
safe harbor in paragraph (b)(3) of this section.
(viii) Prior benefits accrued under a different formula -- (A) All
employees in plan. The plan provides benefits that were accrued in plan
years beginning before a fresh-start date under a benefit formula or
accrual method that differs from the benefit formula and accrual method
used to determine benefit accruals in plan years beginning after the
fresh-start date. This paragraph (b)(8)(viii) applies solely to plans
that meet the requirements of 1.401(a)(4)-13(c) with regard to benefits
accrued after the fresh-start date.
(B) Section 401(a)(17) employees only. The plan provides benefits
that were accrued before the effective date applicable to the plan under
1.401(a)(17)-1(d)(1) and determines the accrued benefits of section
401(a)(17) employees under a fresh-start formula that applies solely to
such employees, as permitted under 1.401(a)(17)-1(e)(3)(ii).
(ix) Employee contributions -- (A) Unit credit safe harbor. The plan
is a contributory DBplan that otherwise satisfies the requirements of
the unit credit safe harbor in paragraph (b)(3) of this section. This
paragraph (b)(8)(ix)(A) applies only if the plan satisfies one of the
methods in 1.401(a)(4)-6(b)(2) through (b)(6) (the
composition-of-workforce method, the minimum benefit method, the
grandfather rule for plans in existence on May 14, 1990, the government
plan method, and the cessation-of-employee-contributions method,
respectively). Thus, for example, if a plan complies with the minimum
benefit method under 1.401(a)(4)-6(b)(3), the plan does not fail to
satisfy the safe harbor in paragraph (b)(3) of this section merely
because the plan includes employee contributions that are not allocated
to separate accounts, or merely because the benefits under the plan are
nonuniform solely as a result of the minimum benefit added to the plan
to satisfy 1.401(a)(4)-6(b)(3).
(B) Other safe harbors. The plan is a contributory DBplan that
otherwise satisfies the requirements of one of the safe harbors in
paragraphs (b)(4) through (b)(7) of this section. This paragraph
(b)(8)(ix)(B) applies only if the plan satisfies one of the methods in
1.401(a)(4)-6(b)(4) through (b)(6) (the grandfather rule for plans in
existence on May 14, 1990, the government plan method, and the
cessation-of-employee-contributions method, respectively).
(x) Modifications to average annual compensation -- (A) Certain years
disregarded. In determining average annual compensation, the plan
completely disregards either or both of the following types of 12-month
periods in an employee's compensation history --
(1) The 12-month period in which the employee terminates employment,
or
(2) All 12-month periods in which the employee has less than 1,000
hours of service or, in the case of a plan that credits service using
the elapsed time method, all 12-month periods in which the employee
performs services during less than six months.
(B) Use of plan year compensation by accumulation plan. In the case
of an accumulation plan, the plan substitutes plan year compensation for
average annual compensation, as required under the definition of
accumulation plan in 1.401(a)(4)-12.
(xi) Multiple definitions of service -- (A) In general. The plan
provides different definitions of years of service for different
purposes under the plan, provided that for each purpose, the same
definition of years of service applies to all employees in the plan.
Thus, for example, the plan may define years of service for purposes of
vesting as all years of service in which the employee has completed at
least 1,000 hours of service, and for purposes of benefit accrual as all
years of participation in which the employee has completed at least
2,000 hours of service (with a pro rata reduction for employees with
less than 2,000 hours of service).
(B) Hour-of-service equivalencies. The plan credits service for a
specific purpose for some employees (e.g., hourly employees) based on
hours of service as provided for in 29 CFR 2530.200b-2, but credits
service for the same purpose for other employees (e.g., salaried
employees) based on one of the equivalencies set forth in 29 CFR
2530.200b-3.
(C) Recognition of prior employment for eligibility and vesting. The
plan credits service for purposes of eligibility or vesting (or both)
for service with a prior employer. This rule applies solely to
employees who become employees of the employer pursuant to a transaction
between the employer and the prior employer that is a stock or asset
acquisition, a merger, or other similar transaction involving a change
in the employer of the employees of a trade or business.
(D) Special rule for benefit formula and accrual method.
Notwithstanding paragraph (b)(8)(xi)(A) of this section, the plan must
use the same definition of years of service for purposes of applying the
benefit formula and accrual method under the plan, including the years
over which the benefit accrues. Thus, for example, for purposes of the
safe harbors in paragraphs (b)(4), (b)(5), and (b)(6) of this section,
the plan must use the same definition of years of service to determine
both the normal retirement benefit under the plan's benefit formula and
the fraction by which an employee's fractional rule benefit is
multiplied to derive the employee's accrued benefit as of any plan year.
A plan does not fail to satisfy the requirement in this paragraph
(b)(8)(xi)(D) merely because the benefit formula limits the years of
service used to determine the normal retirement benefit to a fixed
number of years of service (e.g., 25).
(E) Imputed service. The plan credits imputed service as permitted
under 1.401(a)(4)-11(d)(2).
(xii) Offsets for benefits accrued under another defined benefit plan
-- (A) In general. The plan provides that an employee's benefits
otherwise determined under the plan are reduced by reference to the
employee's benefits under another defined benefit plan maintained by the
same or another employer (the ''prior plan''). For this purpose,
benefits under a defined benefit plan include benefits provided under
annuities distributed upon the termination of a defined benefit plan.
This paragraph (b)(8)(xii)(A) applies only if the requirements of
paragraphs (b)(8)(xii)(B) through (F) of this section are satisfied.
(B) Benefits frozen under prior plan. The employee must cease to
accrue benefits under the prior plan before commencing participation in
the plan, and the employee's benefits under the prior plan must be
frozen as of the date the employee ceases accruing benefits in the prior
plan. Thus, for example, the employee's benefits under the prior plan
may not be increased due to subsequent increases in the employee's
compensation. Notwithstanding the foregoing, adjustments in the
employee's frozen accrued benefit that would be permitted under
1.401(a)(4)-13(c)(5)(i), (c)(5)(ii), (c)(5)(iv), (c)(6)(i), and
(c)(6)(ii) (regarding increases permitted under section 415(d),
increases for former employees, increases in top-heavy minimum benefits,
subsequent eligibility and vesting service, and new optional forms of
benefit, respectively) may be made under the prior plan.
(C) Wrap-around benefit provided in plan. The plan must provide that
the employee's vested accrued benefit under the plan is equal to the
employee's vested accrued benefit otherwise determined under the plan's
benefit formula and accrual method, as applied to the employee's total
number of years of service under the plan and the prior plan (determined
without double-counting any year of service), minus the offset. For
this purpose, the offset must equal the actuarial equivalent of the
vested portion of the employee's frozen accrued benefit under the prior
plan (adjusted as provided in paragraph (b)(8)(xii)(B) of this section).
(D) Uniform application of offset. The offset provision in the plan
must apply uniformly to all employees in the plan who have, or have had,
accrued benefits under the prior plan. For this purpose, the prior plan
includes any other plan that is or has been aggregated with the prior
plan for purposes of sections 401(a)(4) and 410(b). If the prior plan
is or has been aggregated with a defined contribution plan, the
requirement of this paragraph (b)(8)(xii)(D) cannot be satisfied,
because the offset provision cannot be applied uniformly to all
employees in the plan who have, or have had, accrued benefits under the
prior plan.
(E) Offset employees not needed to satisfy minimum coverage. The
plan would satisfy section 410(b) if 1.410(b)-3(a)(2)(iv) (regarding
benefit offset arrangements) did not apply. Thus, the plan must still
satisfy section 410(b) if each employee whose benefits are offset is not
treated as benefiting under the plan until such time as the employee's
accrued benefit under the plan (determined without regard to the offset)
is greater than the offset. Notwithstanding the foregoing,
1.410(b)-(3)(a)(2)(iv) is still applied for this purpose to an employee
whose benefits under the prior plan were provided pursuant to a
collective bargaining agreement and were accrued in plan years in which
the employee was an excludable employee under 1.410(b)-6(d) (regarding
employees covered by a collective bargaining agreement).
(F) Prior plan maintained by another employer. If the prior plan is
maintained by another employer, the employees whose benefits are subject
to the offset must have become employees of the employer maintaining the
plan pursuant to a transaction between the employer and the other
employer that is a stock or asset acquisition, a merger, or other
similar transaction involving a change in the employer of the employees
of a trade or business.
(xiii) Multiple formulas -- (A) In general. The plan provides that
an employee's benefit under the plan is the greater of the benefits
determined under two or more formulas. Alternatively, the plan provides
that an employee's benefit under the plan is the sum of the benefits
determined under two or more formulas. This paragraph (b)(8)(xiii) does
not apply to a plan unless each of the formulas under the plan satisfies
the requirements of paragraphs (b)(8)(xiii)(B) through (D) of this
section. See 1.401(l)-5(b)(8)(ii) for rules regarding the overall
permitted disparity limitations.
(B) Sole formulas. The formulas are the only formulas under the
plan.
(C) Separate testing. Each of the formulas separately satisfies the
uniformity requirements of paragraph (b)(2) of this section and also
separately satisfies one of the safe harbors in paragraphs (b)(3)
through (b)(7) of this section. For this purpose, the formulas need not
satisfy the same safe harbor. In addition, a formula that is available
solely to some or all nonhighly compensated employees in the plan is
deemed to satisfy this paragraph (b)(8)(xiii)(C).
(D) Availability -- (1) General rule. All of the formulas are
available on the same terms to all employees in the plan.
(2) Formulas for nonhighly compensated employees. A formula does not
fail to be available on the same terms to all employees in the plan
merely because the formula is available solely to some or all nonhighly
compensated employees in the plan on the same terms as all the other
formulas in the plan. If an employee was previously subject to a
formula that was available solely to some or all nonhighly compensated
employees in the plan and the employee subsequently becomes a highly
compensated employee, the employee's accrued benefit under the plan in
plan years beginning after the last plan year in which the employee was
a nonhighly compensated employee must be determined in accordance with
one of the formulas in 1.401(a)(4)-13 (c)(2) through (c)(4). For
purposes of applying the formulas in 1.401(a)(4)-13 (c)(2) through
(c)(4), the fresh-start date is the last day of the last plan year in
which the employee was a nonhighly compensated employee, and the formula
applicable to benefit accruals in the current plan year is the formula
(or formulas) under the plan applicable to the highly compensated
employee in plan years beginning after the fresh-start date.
(3) Top-heavy formulas. In the case of a plan that provides the
greater of the benefits under two or more formulas, one of which is a
top-heavy formula, the top-heavy formula does not fail to be available
on the same terms to all employees in the plan merely because the
formula is available solely to all non-key employees in the plan on the
same terms as all the other formulas under the plan. Furthermore, the
top-heavy formula does not fail to be available on the same terms as the
other formulas under the plan merely because the top-heavy formula is
conditioned on the plan's being top-heavy within the meaning of section
416(g). For purposes of this paragraph (b)(8)(xiii)(D)(3), a top-heavy
formula is a formula that provides a benefit equal to the minimum
benefit described in section 416(c)(1) (taking into account, if
applicable, the modification in section 416(h)(2)(A)(ii)(I)).
(E) Provisions may be applied more than once. The provisions of this
paragraph (b)(8)(xiii) may be applied more than once. For example, a
plan satisfies the requirements of paragraph (b) of this section if an
employee's benefit under the plan is the greater of the benefits under
two or more formulas and one or more of those formulas is the sum of the
benefits under two or more other formulas, provided that each of the
formulas under the plan satisfies the requirements of paragraph
(b)(8)(xiii) (B) through (D) of this section.
(F) Examples. The following examples illustrate the rules regarding
multiple formulas in this paragraph (b)(8)(xiii).
Example 1. Under Plan A, each employee's benefit equals the sum of
the benefits determined under two formulas. The first formula provides
1 percent of average annual compensation per year of service. The
second formula provides $10 per year of service. Plan A is eligible to
apply the rules in this paragraph (b)(8)(xiii).
Example 2. Under Plan B, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula
provides $15 per year of service and is available to all employees who
complete at least 500 hours of service during the plan year. The second
formula provides 1.5 percent of average annual compensation per year of
service and is available to all employees who complete at least 1,000
hours of service during the plan year. Plan B does not satisfy this
paragraph (b)(8)(xiii) because the two formulas are not available on the
same terms to all employees in the plan.
Example 3. Under Plan C, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula
provides $15 per year of service and is available to all employees who
complete at least 1,000 hours of service during the plan year. The
second formula provides the minimum benefit described in section
416(c)(1) and is available to all non-key employees who complete at
least 1,000 hours of service during the plan year. Plan C does not
satisfy the general rule in paragraph (b)(8)(xiii)(D)(1) of this section
because the two formulas are not available on the same terms to all
employees in the plan (i.e., the second formula is only available to all
non-key employees in the plan). Nonetheless, because the second formula
is a top-heavy formula, the special availability rules for top-heavy
formulas in paragraph (b)(8)(xiii)(D)(3) of this section apply. Thus,
the second formula does not fail to be available on the same terms as
the first formula merely because the second formula is available solely
to all non-key employees in the plan on the same terms. This is true
even if the plan conditions the availability of the second formula on
the plan's being top-heavy for the plan year.
Example 4. Under Plan D, each employee's benefit equals the greater
of the benefits determined under two formulas. The first formula is
available to all employees in the plan and provides a benefit equal to 2
percent of average annual compensation per year of service, minus the
maximum offset allowance permitted under section 401(l). The second
formula is only available to nonhighly compensated employees in the plan
and provides a benefit equal to 2 percent of average annual compensation
per year of service, minus 2 percent of the primary insurance amount per
year of service. Under paragraph (b)(8)(xiii)(D)(2) of this section,
both formulas are treated as available to all employees in the plan on
the same terms. Furthermore, even though the second formula does not
satisfy any of the safe harbors in this paragraph (b), the formula is
deemed to satisfy the separate testing requirement under paragraph
(b)(8)(xiii)(C) of this section, because the formula is available solely
to some or all nonhighly compensated employees in the plan.
Example 5. Plan E provides a benefit of 1 percent of average annual
compensation per year of service to all employees in the plan. In 1994,
the plan is amended to provide a benefit of 2 percent of average annual
compensation per year of service after 1993, while retaining the
1-percent formula for all years of service before 1994. This new
formula provides a benefit equal to the sum of the benefits determined
under two formulas: 1 percent of average annual compensation per year
of service, plus 1 percent of average annual compensation per year of
service after 1993. Plan E is eligible to apply the rules in this
paragraph (b)(8)(xiii).
Example 6. The facts are the same as in Example 5, except that the
plan amendment in 1994 decreases the benefit to 0.5 percent of average
annual compensation per year of service after 1993, while retaining the
1-percent formula for all years of service before 1994. This new
formula provides a benefit equal to the sum of the benefits determined
under two formulas: 0.5 percent of average annual compensation per year
of service, plus 0.5 percent of average annual compensation per year of
service before 1994. Under these facts, the second formula does not
separately satisfy any of the safe harbors in this paragraph (b) because
the definition of years of service for purposes of applying the benefit
formula (years of service before 1994) differs from the definition of
years of service over which the resulting benefit accrues (all years of
service). See paragraphs (b)(2)(v) and (b)(8)(xi)(D) of this section.
Example 7. Plan F provides a benefit to all employees of 1 percent
of average annual compensation per year of service. Employee P was
hired as the president of the employer in December 1994 and was not a
highly compensated employee under section 414(q) during the 1994
calendar plan year. In 1994, Plan F is amended to provide a benefit
that is the greater of the benefit determined under the pre-existing
formula in the plan and a new formula that is available solely to all
nonhighly compensated employees in the plan. The new formula does not
satisfy any of the safe harbors in this paragraph (b), because the
formula provides a greater benefit for Employee P than for other
nonhighly compensated employees in the plan. In 1995, when Employee P
first becomes a highly compensated employee, the second formula no
longer applies to Employee P. It would be inconsistent with the purpose
of preventing discrimination in favor of highly compensated employees
for Plan F to use the special rule for a formula that is available
solely to some or all nonhighly compensated employees to satisfy the
separate testing requirement of paragraph (b)(8)(xiii)(C) of this
section for the 1994 calendar plan year. See 1.401(a)(4)-1(c)(2).
(c) General test for nondiscrimination in amount of benefits -- (1)
Basic test. A plan satisfies the requirements of this section for a
plan year if each rate group under the plan satisfies section 410(b).
For purposes of this paragraph (c)(1), a rate group exists under a plan
for each highly compensated employee in the plan and consists of the
highly compensated employee and all other employees (both highly and
nonhighly compensated) in the plan who have a normal accrual rate
greater than or equal to the highly compensated employee's normal
accrual rate, and who also have a most valuable accrual rate greater
than or equal to the highly compensated employee's most valuable accrual
rate. Thus, an employee is in the rate group for each highly
compensated employee in the plan who has a normal accrual rate less than
or equal to the employee's normal accrual rate, and who also has a most
valuable accrual rate less than or equal to the employee's most valuable
accrual rate.
(2) Alternative test -- (i) In general. In the case of a plan that
determines the QJSA at each age as a uniform percentage of each
employee's normal retirement benefit, the plan satisfies the
requirements of this section if each rate group under the plan satisfies
section 410(b). For purposes of this paragraph (c)(2), a rate group
exists under a plan for each highly compensated employee in the plan and
consists of the highly compensated employee and all other employees
(both highly and nonhighly compensated) in the plan who have a most
valuable accrual rate greater than or equal to the highly compensated
employee's most valuable accrual rate. Thus, an employee is in the rate
group for each highly compensated employee in the plan who has a most
valuable accrual rate less than or equal to the employee's most valuable
accrual rate.
(ii) Plan requirements. A plan determines the QJSA at each age as a
uniform percentage of each employee's normal retirement benefit only if
the plan satisfies each of the following requirements --
(A) The plan does not provide a QSUPP;
(B) The plan does not adjust most valuable accrual rates to reflect
the value of certain disability benefits under paragraph (d)(6)(vi) of
this section;
(C) The same uniform normal retirement age applies to all employees
in the plan; and
(D) The QJSA at each age under the plan is determined by multiplying
an employee's accrued benefit by a factor for that age that is the same
for all employees in the plan.
(iii) Certain QJSA adjustments permitted -- (A) In general. A plan
does not fail to meet the requirement in paragraph (c)(2)(ii)(D) of this
section merely because the plan makes one or more of the adjustments
described in this paragraph (c)(2)(iii) in the factor used to determine
the QJSA at each age under the plan. In each case, the adjustment must
apply on the same terms to all employees in the plan.
(B) Adjustment for marital status or age of spouse. The plan adjusts
the factor for determining the QJSA at each age under the plan to take
into account the marital status of the employee or the age of the
employee's spouse.
(C) Adjustment for termination of employment before earliest
retirement age. The factor used to determine the QJSA at each age
before normal retirement age under the plan is lower for employees who
terminate employment before the earliest retirement age for which they
are eligible to commence benefits under the plan than for employees who
terminate employment at or after the earliest retirement age for which
they are eligible to commence benefits under the plan.
(iv) Minimum service condition on early retirement benefits. A plan
also does not fail to meet the requirement in paragraph (c)(2)(ii)(D) of
this section merely because the plan provides that early retirement
benefits (and thus the QJSA at any age before normal retirement age) are
available only to employees who terminate employment after completing a
minimum number of years of service.
(3) Satisfaction of section 410(b) by a rate group -- (i) In general.
For purposes of determining whether a rate group satisfies section
410(b), the rate group is treated as if it were a separate plan that
benefits only the employees included in the rate group. Except as
provided in paragraphs (c)(3)(ii) through (v) of this section, the rules
that apply in determining whether a rate group satisfies section 410(b)
are the same as apply in determining whether a plan satisfies section
410(b). Thus, for example, if the rate group does not satisfy the ratio
percentage test of 1.410(b)-2(b)(2), the rate group must satisfy the
average benefit test of 1.410(b)-2(b)(3) (including the
nondiscriminatory classification test of 1.410(b)-4 and the average
benefit percentage test of 1.410(b)-5).
(ii) Permissive aggregation not available. The permissive
aggregation rules of 1.410(b)-7(d) are not available to a rate group in
determining whether it satisfies section 410(b).
(iii) Deemed satisfaction of reasonable classification requirement.
In determining whether a rate group satisfies the nondiscriminatory
classification test of 1.410(b)-4, the rate group is deemed to satisfy
the reasonable classification requirement of 1.410(b)-4(b).
(iv) Facts-and-circumstances requirements replaced. In determining
whether a rate group satisfies the nondiscriminatory classification test
of 1.410(b)-4, the facts-and-circumstances requirements of
1.410(b)-4(c)(3) do not apply. Instead, the rate group is deemed to
satisfy the facts-and-circumstances requirements of 1.410(b)-4(c)(3),
but only if the ratio percentage of the rate group is greater than or
equal to the lesser of --
(A) The ratio percentage of the plan, or
(B) The midpoint between the safe and the unsafe harbor percentages
applicable to the plan.
(v) Application of average benefit percentage test. A rate group
satisfies the average benefit percentage test of 1.410(b)-5 if the plan
of which it is a part satisfies 1.410(b)-5 (applied without regard to
1.410(b)-5(f)). In the case of a plan that relies on 1.410(b)-5(f) to
satisfy the average benefit percentage test, each rate group under the
plan satisfies the average benefit percentage test (if applicable) only
if the rate group separately satisfies 1.410(b)-5(f)).
(4) Examples -- (i) In general. Paragraphs (c)(4) (ii) and (iii) of
this section provide examples that illustrate this paragraph (c).
(ii) Example illustrating basic test. The following example
illustrates the basic test in paragraph (c)(1) of this section.
Example. (a) Employer X has 110 nonexcludable employees, N1 through
N100, who are nonhighly compensated employees, and H1 through H10, who
are highly compensated employees. Employer X maintains Plan Y, a
defined benefit plan that benefits all of these nonexcludable employees.
Assume that Plan Y is not eligible to use the alternative test in
paragraph (c)(2) of this section. The normal and most valuable accrual
rates (determined as a percentage of testing compensation) for the
employees in Plan Y for the 1994 plan year are listed in the following
table.
(b) There are 10 rate groups in Plan Y because there are 10 highly
compensated employees in Plan Y.
(c) Rate group 1 consists of H1 and all those employees who have a
normal accrual rate greater than or equal to H1's normal accrual rate
(1.5 percent) and who also have a most valuable accrual rate greater
than or equal to H1's most valuable accrual rate (2.0 percent). Thus,
rate group 1 consists of H1 through H10 and N11 through N100.
(d) Rate group 1 satisfies the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 90
percent, i.e., 90 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 100
percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(e) Because H1 through H5 have the same normal accrual rates and the
same most valuable accrual rates, the rate group with respect to each of
them is identical. Thus, because rate group 1 satisfies section 410(b),
rate groups 2 through 5 also satisfy section 410(b).
(f) Rate group 6 consists of H6 and all those employees who have a
normal accrual rate greater than or equal to H6's normal accrual rate
(2.0 percent) and who also have a most valuable accrual rate greater
than or equal to H6's most valuable accrual rate (2.65 percent). Thus,
rate group 6 consists of H6 through H10 and N51 through N100. (Even
though N11 through N50 have a most valuable accrual rate (3.0 percent)
greater than H6's most valuable accrual rate (2.65 percent), they are
not included in this rate group because their normal accrual rate (1.5
percent) is less than H6's normal accrual rate (2.0 percent).)
(g) Rate group 6 satisfies the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 100
percent, i.e., 50 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 50 percent
(the percentage of all highly compensated nonexcludable employees who
are in the rate group).
(h) Because H6 through H10 have the same normal accrual rates and the
same most valuable accrual rates, the rate group with respect to each of
them is identical. Thus, because rate group 6 satisfies section 410(b),
rate groups 7 through 10 also satisfy section 410(b).
(i) Plan Y satisfies the requirements of paragraph (c)(1) of this
section because each rate group under the plan satisfies section 410(b).
(iii) Examples illustrating alternative test. The following examples
illustrate the alternative test in paragraph (c)(2) of this section. In
each example, unless otherwise provided, it is assumed that the plan
satisfies paragraphs (c)(2)(ii) (A) through (C) of this section.
Example 1. Plan A provides salaried employees with a benefit equal
to 1 percent of average compensation times each year of service less 1
percent of the projected primary insurance amount times each year of
service. Plan A provides hourly employees with a monthly annuity of $25
times each year of service. Normal retirement age under the plan is age
65. Plan A also provides that employees who retire after age 55 but
before normal retirement age and who have at least 10 years of service
will receive an immediate QJSA that is reduced by 4 percent per year for
each year prior to normal retirement age. In addition, employees who
terminate with 10 years of service but before age 55 will receive a QJSA
that is the actuarial equivalent under the terms of the plan of the
normal retirement benefit.
Under paragraphs (c)(2)(iii)(C) and (c)(2)(iv) of this section, Plan
A does not fail to determine the QJSA at each age under the plan as a
uniform percentage of each employee's normal retirement benefit merely
because of these early retirement provisions.
Example 2. The facts are the same as in Example 1, except that the
plan also provides that an employee may retire at any age after
completing 30 years of service and receive an unreduced benefit. For
purposes of paragraph (c)(2) of this section, Plan B does not determine
the QJSA at each age under the plan as a uniform percentage of each
employee's normal retirement benefit because the plan's factors for
determining the QJSA at each age for employees who terminate employment
after attaining the earliest retirement age under the plan vary
depending on the employee's service.
Example 3. Plan B provides a benefit equal to 1 percent of average
compensation times each year of service, less 1 percent of the projected
primary insurance amount times each year of service. In determining an
employee's early retirement benefit, one early retirement factor is
applied to the gross benefit under the formula, and a different early
retirement factor is applied to the offset under the formula. For
purposes of paragraph (c)(2) of this section, Plan C does not determine
the QJSA at each age under the plan as a uniform percentage of each
employee's normal retirement benefit because the plan's factors for
determining the OJSA at each age vary among employees depending on the
relative sizes of their gross benefit and the offset applied to it.
Example 4. (a) Employer X has only 6 nonexcludable employees, all of
whom benefit under Plan C. The nonhighly compensated employees in the
plan are N1 through N4, and the highly compensated employees in the plan
are H1 and H2. Assume that Plan C is eligible to use the alternative
test of paragraph (c)(2) of this section. For the 1994 plan year, N1
through N4 and H1 have a most valuable accrual rate of 1.75 percent of
testing compensation. For the same plan year, H2 has a most valuable
accrual rate of 2.5 percent of testing compensation.
(b) There are two rate groups under Plan C. Rate group 1 consists of
H1 and all those employees in the plan who have a most valuable accrual
rate greater than or equal to H1's most valuable accrual rate (1.75
percent). Thus, rate group 1 consists of H1, H2, and N1 through N4.
Rate group 2 consists only of H2 because no other employee in the plan
has a most valuable accrual rate greater than or equal to H2's most
valuable accrual rate.
(c) Rate group 2 does not satisfy the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 0
percent, i.e., 0 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 50 percent
(the percentage of all highly compensated nonexcludable employees who
are in the rate group).
(d) Rate group 2 also does not satisfy the nondiscriminatory
classification test of 1.410(b)-4 because the ratio percentage of the
rate group (0 percent) is less than the unsafe harbor percentage
applicable to the plan under 1.410(b)-4(c)(4) (35.5 percent).
(e) Rate group 2 therefore does not satisfy section 410(b) and, as a
result, Plan C does not satisfy the requirements of paragraph (c)(2) of
this section. This is true even though rate group 1 satisfies the ratio
percentage test of 1.410(b)-2(b)(2).
Example 5. (a) The facts are the same as in Example 4, except that
N4 has a most valuable accrual rate of 2.5 percent.
(b) There are 2 rate groups in Plan C. Rate group 1 consists of H1
and all those employees who have a most valuable accrual rate greater
than or equal to H1's most valuable accrual rate (1.75 percent). Thus,
rate group 1 consists of H1, H2, and N1 through N4. Rate group 2
consists of H2 and all those employees who have a most valuable accrual
rate greater than or equal to H2's most valuable accrual rate (2.5
percent). Thus, rate group 2 consists of H2 and N4.
(c) Rate group 1 satisfies the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 100
percent, i.e., 100 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 100
percent (the percentage of all highly compensated nonexcludable
employees who are in the rate group).
(d) Rate group 2 does not satisfy the ratio percentage test of
1.410(b)-2(b)(2) because the ratio percentage of the rate group is 50
percent, i.e., 25 percent (the percentage of all nonhighly compensated
nonexcludable employees who are in the rate group) divided by 50 percent
(the percentage of all highly compensated nonexcludable employees who
are in the rate group).
(e) However, rate group 2 does satisfy the nondiscriminatory
classification test of 1.410(b)-4 because the rate group is deemed to
satisfy the reasonable classification requirement of 1.410(b)-4(b) and
the ratio percentage of the rate group (50 percent) is greater than the
safe harbor percentage applicable to the plan under 1.410(b)-4(c)(4)
(45.5 percent).
(f) If rate group 2 satisfies the average benefit percentage test of
1.410(b)-5, then rate group 2 satisfies section 410(b). In that case,
Plan C satisfies the requirements of paragraph (c)(2) of this section
because each rate group under the plan satisfies section 410(b). See
paragraph (c)(3)(v) of this section for rules governing the application
of the average benefit percentage test to a rate group.
Example 6. Plan D provides a normal retirement benefit of 2 percent
of average annual compensation per year of service to all highly
compensated employees in the plan, and a normal retirement benefit of
1.5 percent of average annual compensation per year of service to all
nonhighly compensated employees in the plan. Plan D also provides for
an unreduced early retirement benefit to all employees who retire after
25 years of service. None of the highly compensated employees in the
plan are projected to be eligible for the unreduced early retirement
benefit before age 62. A substantial portion of the nonhighly
compensated employees in the plan are projected to be eligible for the
unreduced early retirement benefit before age 60. Under these facts, it
would be inconsistent with the purpose of preventing discrimination in
favor of highly compensated employees to apply the alternative in
paragraph (c)(2) of this section to Plan D. See 1.401(a)(4)-1(c)(2).
(d) Determination of accrual rates -- (1) Introduction -- (i)
Overview of rules. This paragraph (d) provides the rules for
determining the normal and most valuable accrual rates for the employees
in a plan for a plan year. Paragraphs (d)(2) through (d)(4) of this
section set forth the three basic methods for determining accrual rates
-- the annual method, the accrued-to-date method, and the projected
method, respectively. Paragraph (d)(5) of this section sets forth rules
of general application that must be followed in determining accrual
rates under any method in this paragraph (d). Paragraph (d)(6) of this
section provides certain optional rules that may be applied in
determining accrual rates under this paragraph (d). Additional rules
that may affect the determination of accrual rates under this paragraph
(d) are set forth in paragraph (f) of this section.
(ii) General description of accrual rates -- (A) Normal accrual rate.
The normal accrual rate for an employee for a plan year generally can
be described as the yearly rate at which the employee's normal
retirement benefit under the plan accrues. This rate is determined for
the plan year under one of the methods in this paragraph (d) after
normalizing the employee's normal retirement benefit to the employee's
testing age.
(B) Most valuable accrual rate. The most valuable accrual rate for
an employee for a plan year generally can be described as the yearly
rate at which the employee's most valuable optional form of benefit
under the plan accrues. This rate is determined for the plan year under
one of the methods in this paragraph (d) after normalizing the QJSA at
each age under the plan to the employee's testing age and then comparing
the normalized QJSA for each of these ages to determine which is the
most valuable. The most valuable accrual rate is determined by
reference to the QJSA because the QJSA must be at least as valuable as
any other optional form of benefit commencing at (or deferred from) each
age under the plan. See 1.401(a)-20, Q&A-16. If the plan provides a
QSUPP, the most valuable accrual rate also takes into account the QSUPP
payable in conjunction with the QJSA at each age under the plan, because
the value of the QSUPP is not reflected in the QJSA itself, and because
the QSUPP payable in conjunction with the QJSA must be at least as
valuable as any other QSUPP commencing at that age. See paragraph (5)
of the definition of QSUPP in 1.401(a)(4)-12. Thus, the most valuable
accrual rate is designed to reflect the value of all benefits accrued or
treated as accrued under section 411(d)(6) that are payable in any form
and at any time under the plan, including early retirement benefits,
retirement-type subsidies, early retirement window benefits, and QSUPPs.
(iii) General description of annual, accrued-to-date, and projected
methods. Under the annual method, the yearly rate at which benefits
accrue is determined by reference to the amount of benefits the employee
has accrued during the current plan year. Under the accrued-to-date
method, this determination generally is made by reference to the average
amount of benefits the employee has accrued each year over all years of
service under the plan, up to and including the current plan year.
Under the projected method, this determination generally is made by
reference to the average amount of benefits the employee will have
accrued each year over the employee's entire projected years of service
under the plan, up to and including the plan year in which payment of
each QJSA under the plan could commence to the employee. Paragraphs
(d)(6) (vii) and (viii) of this section provide optional rules under
which the accrued-to-date and projected methods may be applied solely
with respect to benefits accrued and years of service in plan years
beginning after a fresh-start date selected by the employer.
(2) Annual method -- (i) Normal accrual rate. Under the annual
method, the normal accrual rate for an employee in the plan for a plan
year is the percentage amount determined under the following steps --
(A) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the last day of the plan
year.
(B) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the last day of the prior
plan year.
(C) Normalize the accrued benefit determined in paragraph
(d)(2)(i)(A) of this section.
(D) Normalize the accrued benefit determined in paragraph
(d)(2)(i)(B) of this section.
(E) Subtract the normalized accrued benefit determined in paragraph
(d)(2)(i)(D) of this section from the normalized accrued benefit
determined in paragraph (d)(2)(i)(C) of this section.
(F) Divide the difference determined in paragraph (d)(2)(i)(E) of
this section by the employee's testing compensation. This rate is the
employee's normal accrual rate under the plan for the plan year.
(ii) Most valuable accrual rate. Under the annual method, the most
valuable accrual rate for an employee in the plan for a plan year is the
percentage amount determined under the following steps --
(A) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the last day of the plan year.
(B) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the last day of the prior plan year.
(C) Normalize each QJSA and each QSUPP determined in paragraph
(d)(2)(ii)(A) of this section.
(D) Normalize each QJSA and each QSUPP determined in paragraph
(d)(2)(ii)(B) of this section.
(E) Subtract the normalized QJSA determined for each age in paragraph
(d)(2)(ii)(D) of this section from the normalized QJSA determined for
the same age in paragraph (d)(2)(ii)(C) of this section.
(F) Subtract the normalized QSUPP determined for each age in
paragraph (d)(2)(ii)(D) of this section from the normalized QSUPP
determined for the same age in paragraph (d)(2)(ii)(C) of this section.
(G) Add the increase in the normalized QJSA determined for each age
in paragraph (d)(2)(ii)(E) of this section to the increase in the
normalized QSUPP determined for the same age in paragraph (d)(2)(ii)(F)
of this section.
(H) Divide the amount determined for each age in paragraph
(d)(2)(ii)(G) of this section by the employee's testing compensation.
(I) Select the largest rate determined in paragraph (d)(2)(ii)(H) of
this section. This rate is the employee's most valuable accrual rate
under the plan for the plan year.
(iii) Example. The following example illustrates the annual method
in this paragraph (d)(2).
Example. The following table illustrates the determination of the
most valuable accrual rate for Employee M in Plan A for the 1994 plan
year under the annual method. Employee M has a testing age under Plan A
of 65 and testing compensation for the 1994 plan year of $50,000. Plan
A does not provide a QSUPP. Step A lists the QJSA payable to Employee M
at each age under the plan, determined under paragraph (d)(5)(iii) of
this section as if Employee M's benefits under the plan had been frozen
as of the last day of the 1994 plan year. Assume that as determined
under paragraph (d)(5)(iii) of this section, Employee M is first
eligible for a QJSA at age 55. Step B lists the QJSA payable to
Employee M at each age under the plan, determined under paragraph
(d)(5)(iii) of this section as if Employee M's benefits under the plan
had been frozen as of the last day of the 1993 plan year. Steps C and D
list the normalized value (as determined under paragraph (d)(5)(iv) of
this section) of each QJSA in steps A and B, respectively. For this
purpose, an 8-percent interest rate and the UP-84 mortality table have
been applied to normalize each QJSA. Step E lists the difference
between steps C and D at each age. (The table skips steps F and G
because Plan A does not provide a QSUPP.) Step H lists the result of
dividing the difference determined in step E by Employee M's $50,000
testing compensation. Employee M's most valuable accrual rate under
Plan A for the 1994 plan year is 2.05 percent, the largest rate listed
in step H.
(3) Accrued-to-date method -- (i) Normal accrual rate. Under the
accrued-to-date method, the normal accrual rate for an employee in the
plan for a plan year is the percentage amount determined under the
following steps --
(A) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the last day of the plan
year.
(B) Normalize the accrued benefit determined in paragraph
(d)(3)(i)(A) of this section.
(C) Divide the normalized accrued benefit determined in paragraph
(d)(3)(i)(B) of this section by the employee's testing service.
(D) Divide the amount determined in paragraph (d)(3)(i)(C) of this
section by the employee's testing compensation. This rate is the
employee's normal accrual rate under the plan for the plan year.
(ii) Most valuable accrual rate. Under the accrued-to-date method,
the most valuable accrual rate for an employee in the plan for a plan
year is the percentage amount determined under the following steps --
(A) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the last day of the plan year.
(B) Normalize each QJSA and each QSUPP determined in paragraph
(d)(3)(ii)(A) of this section.
(C) Add the normalized QJSA determined for each age under paragraph
(d)(3)(ii)(B) of this section to the normalized QSUPP determined for the
same age under paragraph (d)(3)(ii)(B) of this section.
(D) Divide the amount determined for each age in paragraph
(d)(3)(ii)(C) of this section by the employee's testing service.
(E) Divide the amount determined for each age in paragraph
(d)(3)(ii)(D) of this section by the employee's testing compensation.
(F) Select the largest rate determined in paragraph (d)(3)(ii)(E) of
this section. This rate is the employee's most valuable accrual rate
under the plan for the plan year.
(iii) Section 401(a)(17) employees. The normal and most valuable
accrual rates under the accrued-to-date method of all section 401(a)(17)
employees in the plan may be determined under the fresh-start
alternative for the accrued-to-date method in paragraph (d)(6)(vii) of
this section. The preceding sentence applies only if the plan
determines the accrued benefits of section 401(a)(17) employees under a
fresh-start formula that applies solely to such employees, as permitted
under 1.401(a)(17)-1(e)(3)(ii).
(iv) Examples. The following examples illustrate the accrued-to-date
method in this paragraph (d)(3).
Example 1. The following table illustrates the determination of the
most valuable accrual rate for Employee M in Plan A for the 1994 plan
year under the accrued-to-date method. Employee M has a testing age
under Plan A of 65, testing compensation for the 1994 plan year of
$50,000, and 10 years of testing service under Plan A. Plan A does not
provide a QSUPP. Step A lists the QJSA payable to Employee M at each
age under the plan, determined under paragraph (d)(5)(iii) of this
section as if Employee M's benefits under the plan had been frozen as of
the last day of the 1994 plan year. Assume that as determined under
paragraph (d)(5)(iii) of this section, Employee M is first eligible for
a QJSA at age 55. Step B lists the normalized value (as determined
under paragraph (d)(5)(iv) of this section) of each QJSA in step A. For
this purpose, an 8-percent interest rate and the UP-84 mortality table
have been applied to normalize each QJSA. (The table skips step C
because Plan A does not provide a QSUPP.) Step D divides the normalized
QJSA in step B by Employee M's 10 years of testing service. Step E
divides the quotient determined in step D by Employee M's testing
compensation of $50,000. Employee M's most valuable accrual rate under
Plan A for the 1994 plan year is 2.40 percent, the largest rate listed
in step E.
Example 2. The facts are the same as in Example 1, except that the
plan also provides a QSUPP payable for each year until the employee is
62. Employee M's accrued QSUPP is shown in the second column under step
A. Employee M's most valuable accrual rate is 3.23 percent, the largest
percentage in step E.
(4) Projected method -- (i) Normal accrual rate. Under the projected
method, the normal accrual rate for an employee in the plan for a plan
year is the percentage amount determined under the following steps --
(A) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the employee's testing
age.
(B) Normalize the accrued benefit determined in paragraph
(d)(4)(i)(A) of this section.
(C) Divide the normalized accrued benefit determined in paragraph
(d)(4)(i)(B) of this section by the testing service the employee would
have as of the employee's testing age.
(D) Divide the amount determined in paragraph (d)(4)(i)(C) of this
section by the employee's testing compensation as of the employee's
testing age. This rate is the employee's normal accrual rate under the
plan for the plan year.
(ii) Most valuable accrual rate. Under the projected method, the
most valuable accrual rate for an employee in the plan for a plan year
is the percentage amount determined under the following steps --
(A) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the age payment of the QJSA and the QSUPP (if any) to
the employee would commence under the plan.
(B) Normalize each QJSA and each QSUPP determined in paragraph
(d)(4)(ii)(A) of this section.
(C) Add the normalized QJSA determined for each age under paragraph
(d)(4)(ii)(B) of this section to the normalized QSUPP determined for the
same age under paragraph (d)(4)(ii)(B) of this section.
(D) Divide the amount determined for each age in paragraph
(d)(4)(ii)(C) of this section by the testing service the employee would
have as of that age.
(E) Divide the amount determined for each age in paragraph
(d)(4)(ii)(D) of this section by the employee's testing compensation as
of that age.
(F) Select the largest rate determined in paragraph (d)(4)(ii)(E) of
this section. This rate is the employee's most valuable accrual rate
under the plan for the plan year.
(iii) Terminated employees. In the case of an employee who has
terminated employment as of the last day of the current plan year, the
employee's normal and most valuable accrual rates under the projected
method are determined under the accrued-to-date method in paragraph
(d)(3) of this section.
(iv) Section 401(a)(17) employees. The normal and most valuable
accrual rates under the projected method of all section 401(a)(17)
employees in the plan may be determined under the fresh-start
alternative for the projected method in paragraph (d)(6)(viii) of this
section. The preceding sentence applies only if the plan determines the
accrued benefits of section 401(a)(17) employees under a fresh-start
formula that applies solely to such employees, as permitted under
1.401(a)(17)-1(e)(3)(ii).
(v) Discriminatory pattern of accruals. The projected method may not
be used for a plan year if the pattern of accruals under the plan
discriminates in favor of highly compensated employees. The pattern of
accruals refers to the manner in which projected benefits actually
accrue over the period of accrual (i.e., whether projected benefits
accrue in a level manner or in a relatively frontloaded or backloaded
manner). A pattern of accruals discriminates in favor of highly
compensated employees if the pattern of accruals for the highly
compensated employees in the plan is frontloaded when compared to the
pattern of accruals for the nonhighly compensated employees in the plan.
This determination is made based on all relevant facts and
circumstances.
(vi) Examples. The following examples illustrate the projected
method in this paragraph (d)(4).
Example 1. Employer P maintains a plan under which headquarters
employees in the plan accrue a benefit of 1.25 percent of average
compensation for the first 10 years of service and 0.75 percent of
average compensation for subsequent years of service, while all other
employees in the plan accrue a benefit of 1 percent of compensation for
all years of service. Assume that the group of headquarters employees
in the plan does not satisfy section 410(b). Under these facts, the
pattern of accruals under the plan discriminates in favor of highly
compensated employees, and therefore, under paragraph (d)(4)(v) of this
section, accrual rates under the plan may not be determined under the
projected method in this paragraph (d)(4) for the plan year.
Example 2. The following table illustrates the determination of the
most valuable accrual rate for Employee M in Plan A for the 1994 plan
year under the projected method. Employee M has a testing age under
Plan A of 65. Plan A does not provide a QSUPP. Step A lists the QJSA
payable to Employee M at each age under the plan, determined under
paragraph (d)(5)(iii) of this section as if Employee M's benefits under
the plan had been frozen as of each age at which payment of a QJSA would
begin. Assume that as determined under paragraph (d)(5)(iii) of this
section, Employee M is first eligible for a QJSA at age 60. Step B
lists the normalized value (as determined under paragraph (d)(5)(iv) of
this section) of each QJSA in step A. For this purpose, an 8-percent
interest rate and the UP-84 mortality table have been applied to
normalize each QJSA. (The table skips step C because Plan A does not
provide a QSUPP.) Step D lists Employee M's projected testing service as
of each age and the results of dividing the normalized QJSA in step B by
Employee M's projected testing service as of that age. Step E lists
Employee M's projected testing compensation as of each age and the
results of dividing the quotient in step D by Employee M's projected
testing compensation as of that age. Employee M's most valuable accrual
rate under Plan A for the 1994 plan year is 1.56 percent, the largest
rate listed in step E.
(5) Rules of general application -- (i) In general. This paragraph
(d)(5) provides rules of general application that must be followed in
determining accrual rates under this paragraph (d), regardless of the
particular method used to determine those rates. The rules in this
paragraph (d)(5) are also used for purposes of determining employee
benefit percentages under 1.410(b)-5(d), equivalent allocation rates
under 1.401(a)(4)-8(c)(2), and whenever a benefit is required to be
determined or normalized.
(ii) Uniformity required. Accrual rates must be determined in the
same manner for all employees in the plan for the plan year. Thus, for
example, both the normal accrual rates and the most valuable accrual
rates for all employees in the plan for the plan year must be determined
under the same method -- that is, under either the annual method, the
accrued-to-date method, the projected method, the fresh-start
alternative for the accrued-to-date method, or the fresh-start
alternative for the projected method. See paragraphs (d)(2), (d)(3),
(d)(4), (d)(6)(vii), and (d)(6)(viii) of this section, respectively.
Similarly, the same actuarial assumptions, as well as the same optional
rules under paragraph (d)(6) of this section, must be used in
determining the normal accrual rates and the most valuable accrual rates
for all employees in the plan for the plan year. No exception to the
uniformity requirement in this paragraph (d)(5)(ii) applies unless
specifically provided for. Notwithstanding the foregoing, an employer
may determine accrual rates differently for purposes of satisfying
section 401(a)(4) in different plan years.
(iii) Determining plan benefits -- (A) In general. A benefit payable
to an employee in a particular form under a plan is determined under the
rules in this paragraph (d)(5)(iii).
(B) Accrued benefit. For purposes of determining an employee's
accrued benefit, the term ''accrued benefit'' means the employee's
accrued benefit under the plan as defined in section 411(a)(7)(A)(i).
If an employee's testing age is later than the employee's normal
retirement age under the plan, the term ''accrued benefit'' means the
benefit the employee has (or is projected to have) under the plan as of
the date on which the employee's benefits under the plan are treated as
frozen, expressed in the form of the benefit the employee would receive
under the plan commencing at the employee's testing age. Thus, for
example, if a plan with a normal retirement age of 62 has been
aggregated with a plan with a normal retirement age of 65, an employee
in the first plan who has a normal retirement age of 62 under that plan
would nonetheless have a testing age of 65 under the aggregated plan.
See paragraph (2) of the definition of testing age in 1.401(a)(4)-12.
Under the rule in this paragraph (d)(5)(iii)(B), such an employee's
accrued benefit must be determined based on the benefit the employee
would receive under the plan at age 65, including accruals (if
applicable) and actuarial increases between ages 62 and 65.
(C) Benefit accrual service. An employee's years of service for
purposes of benefit accrual under a plan are taken into account through
the date on which the employee's benefits under the plan are treated as
frozen. If an employee's benefits under the plan are treated as frozen
as of a date after the current plan year, the employee's years of
service for purposes of benefit accrual under the plan are determined by
assuming that the amount of service credited to the employee for that
purpose for the current plan year continues to be credited to the
employee in each future plan year through the date on which the
employee's benefits under the plan are treated as frozen.
(D) Eligibility service. An employee's years of service for purposes
of determining the employee's eligibility under a plan for a benefit
commencing at (or deferred from) a particular age are taken into account
through that age. If the employee would reach the age after the current
plan year, the employee's years of service for purposes of determining
eligibility for the benefit are determined by assuming that the employee
earns one year of service for purposes of eligibility in each future
plan year through the age.
(E) Plan compensation. An employee's compensation from the employer
taken into account under the plan's compensation formula is taken into
account through the date on which the employee's benefits under the plan
are treated as frozen. If an employee's benefits under the plan are
treated as frozen as of a date after the current plan year, the
employee's compensation for purposes of benefit determination under the
plan is determined by assuming that the amount of the employee's
compensation for the current plan year taken into account under the
plan's compensation formula continues to be earned by the employee in
each future plan year through the date on which the employee's benefits
under the plan are treated as frozen. Thus, for example, if after the
application of section 401(a)(17), an employee's compensation for the
current plan year taken into account under the plan's compensation
formula is $245,000, it is assumed that the employee continues to earn
$245,000 in compensation for each future plan year through the date on
which the employee's benefits under the plan are treated as frozen.
(F) Marital status of employee. An employee is assumed to be married
and to have a spouse of the same age as the employee.
(G) Benefit computation factors. Social security benefits and all
other relevant factors used to compute benefits under the plan (other
than factors described in paragraph (d)(5)(iii)(H) of this section) are
assumed to remain constant as in effect on the earlier of the last day
of the current plan year or the date on which the employee's benefits
under the plan are treated as frozen.
(H) Benefit computation factors based on variable indices. If the
dollar amount of a benefit accrued or treated as accrued under section
411(d)(6) is subject to increase by reference to a variable index, the
rate of increase determined by reference to the index in each future
plan year is assumed to equal the rate of increase determined by
reference to the index in the current plan year. Thus, for example, if
an employee's normal form of benefit provides a post-retirement
cost-of-living adjustment equal to the annual rate of increase in the
Consumer Price Index (CPI) and the CPI increased by 4 percent in the
current plan year, it is assumed that the CPI will continue to increase
by 4 percent in each future plan year. Similarly, if an employee's
benefit accrual for a plan year is a fixed percentage of plan year
compensation indexed through normal retirement age by reference to the
average yield on 30-year Treasury Constant Maturities for the week that
includes the first day of each plan year, and the yield for the current
plan year is 8 percent, it is assumed that the yield will continue to be
8 percent in each future plan year.
(I) Benefits commencing at certain ages disregarded. For purposes of
determining an employee's most valuable accrual rate, any benefit
commencing before the current plan year or after the employee's testing
age is disregarded. Thus, for example, the most valuable accrual rate
for an employee who is beyond the otherwise applicable testing age under
the plan (i.e., the testing age determined without regard to paragraph
(4) of the definition of testing age in 1.401(a)(4)-12 (current-age
rule)) is determined solely by reference to the QJSA commencing in the
current plan year.
(iv) Normalizing plan benefits -- (A) In general. A benefit payable
to an employee in a particular form under a plan is normalized to an
actuarially equivalent straight life annuity commencing at the
employee's testing age under the plan as follows --
(1) Determine the actuarial present value of all payments under the
benefit, as of the date payment of the benefit to the employee would
commence under the plan.
(2) If the employee's testing age is after the benefit commencement
date in paragraph (d)(5)(iv)(A)(1) of this section, increase the
actuarial present value determined in paragraph (d)(5)(iv)(A)(1) of this
section by interest for the period from the benefit commencement date in
paragraph (d)(5)(iv)(A)(1) of this section to the employee's testing
age. If the employee's testing age is before the benefit commencement
date in paragraph (d)(5)(iv)(A)(1) of this section, discount the
actuarial present value determined in paragraph (d)(5)(iv)(A)(1) of this
section by interest from the benefit commencement age in paragraph
(d)(5)(iv)(A)(1) of this section to the employee's testing age. The
interest rate used to make these adjustments may be different from the
single interest rate used to determine the actuarial present value in
paragraph (d)(5)(iv)(A)(1) of this section and the straight life annuity
factor in paragraph (d)(5)(iv)(A)(3) of this section.
(3) Divide the amount determined in paragraph (d)(5)(iv)(A)(2) of
this section by a straight life annuity factor for the employee's
testing age. The resulting quotient is the employee's normalized
benefit.
(B) Actuarial assumptions. The actuarial assumptions used in
normalizing a benefit must be reasonable and must be applied on a
gender-neutral basis. A standard interest rate and a standard mortality
table are deemed to be reasonable for this purpose. Except as provided
in paragraph (d)(5)(iv)(A)(2) of this section, the same interest rate
and the same mortality table must be used for all purposes under this
paragraph (d). For other assumptions (including an employee's marital
status and the value of variable indices), see paragraph (d)(5)(iii) of
this section.
(C) Special rule for QSUPPs. In normalizing a QSUPP, the survivor
portion of the QSUPP and any amounts provided under the QSUPP after the
employee's normal retirement age under the plan are disregarded.
(v) Examples. The following examples illustrate the rules in this
paragraph (d)(5).
Example 1. Plan A is a defined benefit plan that includes an early
retirement option on or after age 55 for employees who complete 10 years
of service with the employer. Employee X currently is age 51 and has
completed 5 years of service. Under paragraph (d)(5)(iii)(D) of this
section, Employee X is assumed to continue to earn one year of
retirement eligibility service in each future plan year. Under this
assumption, Employee X will first meet the eligibility requirements for
the early retirement option at age 56, when Employee X will have
completed 10 years of service. Thus, in determining Employee X's most
valuable accrual rate, the first QJSA payable to Employee X under Plan A
would commence at age 56.
Example 2. (a) Under Plan B, benefits for unmarried employees are
paid in the form of a straight life annuity commencing at a normal
retirement age of 65. Plan B further provides that a married employee
will be paid benefits in the form of an actuarially equivalent QJSA
commencing at the same age. The conversion factor used to determine the
QJSA is a function of the employee's age and the age of the employee's
spouse. For an employee with a spouse the same age as the employee, the
conversion factor is 0.92 at age 55 and decreases in a straight line to
a value of 0.90 at age 65.
(b) Plan B permits an employee who has completed 10 years of service
to retire on or after age 55 and to receive a reduced early retirement
benefit. The amount of the reduction is 6.67 percent for each of the
first 5 years that an employee's benefit commencement date precedes
normal retirement age and 3.33 percent for each of the next 5 years that
an employee's benefit commencement precedes age 60.
(c) Employee Y is a participant in Plan B. Employee Y is 50 years
old and has 10 years of service. If Employee Y's benefits under Plan B
were frozen as of the last day of the current plan year, Employee Y
would have an accrued benefit of $9,333. The QJSA payable at each
potential age that benefits could commence to Employee Y under the plan
is determined under the following table. For this purpose, Employee Y
is assumed under paragraph (d)(5)(iii)(F) of this section to be married
and to have a spouse of the same age.
Example 3. A 50-percent QJSA of $1,200, payable in monthly
installments of $100 each to Employee A commencing at age 62, is
normalized under paragraph (d)(5)(iv) of this section to an actuarially
equivalent straight life annuity commencing at Employee A's testing age
of 65 by using an 8-percent interest rate and the UP-84 mortality table,
under the following steps. Regardless of Employee A's marital status,
under paragraphs (d)(5)(iii)(F) and (d)(5)(iv)(B) of this section,
Employee A is assumed to have a spouse who is the same age as Employee
A.
(a) The actuarial present value of the QJSA at age 62 is $11,462.
(b) The actuarial present value determined in paragraph (a) of this
Example 3 as of age 62 is increased by interest for the period from age
62 to age 65, resulting in a value at age 65 of $14,439.
(c) The amount determined in paragraph (b) of this Example 3 is
divided by a straight life annuity factor of 8.1958 for age 65. The
resulting quotient (a straight life annuity of $1,762) is the employee's
normalized QJSA.
Example 4. The facts are the same as in Example 3, except that
Employee A is also entitled to a $600 annual QSUPP payable in equal
monthly payments of $50 beginning at age 55 and continuing until
Employee A's social security retirement age. The QSUPP is normalized to
an actuarially equivalent straight life annuity under the following
steps.
(a) The actuarial present value of the QSUPP at age 55 is $3,996.
This actuarial present value excludes the value of payments that may be
made under the QSUPP to Employee A's spouse if Employee A were to die
before receiving all the scheduled payments under the QSUPP and the
value of any payments that extend beyond Employee A's normal retirement
date under the plan.
(b) The actuarial present value determined in paragraph (a) of this
Example 4 as of age 55 is increased by interest for the period from age
55 to age 65, resulting in a value at age 65 of $8,627.
(c) The amount determined in paragraph (b) of this Example 4 is
divided by a straight life annuity factor of 8.1958 for age 65. The
resulting quotient (a straight life annuity of $1,053) is Employee A's
normalized QSUPP.
Example 5. The facts are the same as in Example 3, except that
Employee A's accrued benefit is payable as a life annuity of $12,000,
payable in monthly installments of $1,000 per month beginning at the
plan's normal retirement age of 65, with an automatic cost-of-living
adjustment after normal retirement date. In the current plan year, the
index that determines the automatic cost-of-living adjustment increased
by 4 percent. Employee A's life annuity is normalized to an actuarially
equivalent straight life annuity beginning at age 65 under the following
steps.
(a) The actuarial present value of the life annuity at age 65 is
$129,260. This actuarial present value reflects future annual increases
of 4 percent under the plan's automatic cost-of-living adjustment after
normal retirement date.
(b) The actuarial present value determined in paragraph (a) of this
Example 5 as of age 65 is neither increased nor discounted for interest,
because the benefit commencement date and the employee's testing age are
both age 65.
(c) The amount determined in paragraph (b) of this Example 5 is
divided by a straight life annuity factor of 8.1958 for age 65. The
resulting quotient (a straight life annuity of $15,772) is Employee A's
normalized accrued benefit.
Example 6. A life annuity of $12,000, payable in monthly
installments of $1,000 each to Employee B commencing at age 68, is
normalized under paragraph (d)(5)(iv) of this section to an actuarially
equivalent straight life annuity commencing at Employee B's testing age
of 65 by using an 8-percent interest rate and the UP-84 mortality table,
under the following steps.
(a) The actuarial present value of the annuity at age 68 is $91,211.
(b) The actuarial present value determined in paragraph (a) of this
Example 6 as of age 68 is discounted by interest for the period from age
68 to age 65, resulting in a value at age 65 of $72,406.
(c) The amount determined in paragraph (b) of this Example 6 is
divided by a straight life annuity factor of 8.1958 for age 65. The
resulting quotient (a straight life annuity of $8,835) is Employee B's
normalized QJSA.
Example 7. (a) Plan B is a defined benefit plan with a benefit
formula of 2 percent of average annual compensation less 1.5 percent of
the employee's primary social security benefit per year of service.
Plan B has a calendar plan year. Average annual compensation is defined
as the average of the annual compensation for the 3 consecutive plan
year period over an employee's career in which the average is highest.
Employee B has 5 years of testing service as of the calendar plan year
2000 and the following annual compensation: 1996 -- $15,000,
1997-$20,000, 1998 -- $24,000, 1999-$30,000, 2000-$33,000.
(b) Accrual rates for Plan B are being determined under the projected
method of paragraph (d)(4) of this section for the year 2000. For
purposes of projecting accrued benefits as of a date after the year
2000, the annual compensation for the year 2000 is assumed to continue
into the future. See paragraph (d)(5)(iii)(E) of this section. Thus,
in order to determine Employee B's QJSA as if Employee B's benefits
under the plan were frozen as of the end of the year 2000, Employee B's
average annual compensation is the average for the years 1998-2000, or
$29,000. In order to determine Employee B's QJSA as if Employee B's
benefits under the plan were frozen as of the end of the year 2001,
Employee B's average annual compensation is the average for the years
1999-2001, or $32,000 (the average of $30,000, $33,000, and $33,000).
In order to determine Employee B's QJSA as if Employee B's benefits
under the plan were frozen as of the end of the year 2002 or a later
year, Employee B's average annual compensation is $33,000.
(c) In order to determine the primary social security benefit offset
in the plan formula, the factors required to determine a primary social
security benefit are not assumed to change in the future. See paragraph
(d)(5)(iii)(G) of this section. Thus, for example, if accrual rates are
being determined in the year 2000 based on benefits determined as if
frozen at a year after the year 2000, the taxable wage base for the year
2000 is assumed to remain constant.
Example 8. Employer A maintains a defined benefit plan. An
employee's normal retirement benefit under the plan equals 1 percent of
compensation times years of service. The plan provides for five-year
cliff vesting as permitted under section 411(a)(2)(A). Because the
definition of compensation under the plan does not satisfy section
414(s), the plan must be tested under the general test of paragraph (c)
of this section. In anticipation of the plan's failure to satisfy the
general test, Employer A amends the plan to add a minimum benefit equal
to 5 percent of compensation, so that following the amendment an
employee's normal retirement benefit equals the greater of --
(A) 1 percent of compensation times years of service, or
(B) 5 percent of compensation.
Because the normal retirement benefit of a vested participant with 5
or more years of service would be at least 5 percent of compensation
even without regard to the minimum benefit, the minimum benefit does not
provide meaningful benefits to vested participants. It therefore would
be inconsistent with the purpose of preventing discrimination in favor
of highly compensated employees to take the minimum benefit into account
in determining accrual rates under this paragraph (d). See
1.401(a)(4)-1(c)(2).
(6) Optional rules for calculating accrual rates -- (i) In general.
This paragraph (d)(6) provides optional rules that may be applied in
determining accrual rates under this paragraph (d). If any optional
rule is applied to a plan for a plan year, the rule must be applied to
determine accrual rates for all employees in the plan for the plan year,
unless otherwise provided.
(ii) Imputation of permitted disparity. The disparity permitted
under section 401(l) may be imputed in accordance with the rules of
1.401(a)(4)-7.
(iii) Expressing accrual rates as dollar amounts. Accrual rates may
be expressed as a dollar amount rather than as a percentage of testing
compensation. Accrual rates that are expressed as a dollar amount are
determined without taking into account any requirement in this paragraph
(d) that calls for expressing any amount as a percentage of testing
compensation, dividing any amount by testing compensation, or
multiplying any amount by testing compensation. For example, under the
annual method, an employee's normal accrual rate would be determined by
subtracting the employee's normalized accrued benefit (determined as if
frozen as of the last day of the prior plan year) from the employee's
normalized accrued benefit (determined as if frozen as of the last day
of the plan year), without dividing the difference by the employee's
testing compensation for the plan year.
(iv) Grouping of accrual rates -- (A) In general. An employer may
treat all employees who have accrual rates within a range of no more
than 5 percent (not 5 percentage points) above and below a midpoint rate
chosen by the employer as having an accrual rate equal to that midpoint
rate. If accrual rates are determined as a percentage of testing
compensation, an employer may, as an alternative, treat all employees
who have accrual rates within a range of no more than one-twentieth of a
percentage point above and below a midpoint rate chosen by the employer
as having an accrual rate equal to that midpoint rate. Accrual rates
within a given range may be grouped under this paragraph (d)(6)(iv) only
if the accrual rates of highly and nonhighly compensated employees are
dispersed throughout the range in a reasonably comparable manner and the
range does not overlap with any other range chosen by the employer. An
employer may choose to group the accrual rates of some employees into
ranges and not to group the accrual rates of other employees into
ranges, provided that the accrual rates of all employees within each
range chosen by the employer are grouped within that range. If accrual
rates are determined as a percentage of testing compensation, an
employer may apply either grouping method described in this paragraph
(d)(6)(iv) and, in addition, may apply one method to one group of
employees and the other method to another group of employees, provided
that only one method is applied to any given employee or group of
employees. An employer may also choose to apply these grouping rules in
one manner (or not all) for normal accrual rates and in another manner
(or not at all) for most valuable accrual rates.
(B) Examples. The following examples illustrate the grouping rules
in this paragraph (d)(6)(iv).
Example 1. The employees in Plan A have the following accrual rates
(expressed as a percentage of testing compensation): 1.9 percent, 2.0
percent, and 2.1 percent. Because all employees have accrual rates
within a range of no more than 5 percent above or below 2.0 percent (a
midpoint rate chosen by the employer), the employer may treat all
employees in Plan A as having an accrual rate of 2.0 percent (provided,
of course, that the accrual rates of highly compensated employees and
nonhighly compensated employees are dispersed throughout the range in a
reasonably comparable manner).
Example 2. The employees in Plan B have the following accrual rates
(expressed as percentage of testing compensation): 0.8 percent, 0.83
percent, 0.9 percent, 1.9 percent, 2.0 percent, and 2.1 percent.
Because the first three rates are within a range of no more than
one-twentieth of a percentage point above or below 0.85 percent (a
midpoint rate chosen by the employer), the employer may treat the
employees who have those rates as having an accrual rate of 0.85 percent
(provided that the accrual rates of highly compensated employees and
nonhighly compensated employees are dispersed throughout the range in a
reasonably comparable manner). Because the last three rates are within
a range of no more than 5 percent above or below 2.0 percent (a midpoint
rate chosen by the employer), the employer may treat the employees who
have those rates as having an accrual rate of 2.0 percent (provided that
the accrual rates of highly compensated employees and nonhighly
compensated employees are dispersed throughout the range in a reasonably
comparable manner).
(v) Floor on most valuable accrual rate -- (A) In general. In
determining an employee's most valuable accrual rate under this
paragraph (d), the employer may substitute for the employee's actual
most valuable accrual rate for the current plan year, the employee's
highest most valuable accrual rate determined for any plan year in a
period of consecutive plan years. The period of consecutive plan years
must begin with any prior plan year selected by the employer that is the
same for all employees in the plan (except as otherwise provided below),
and must end with and include the current plan year. This paragraph
(d)(6)(v) is available to determine the most valuable accrual rate of an
employee only if the following requirements are satisfied --
(1) There has been no plan amendment effective during the period that
affects the determination of the most valuable accrual rate of any
employee in the plan.
(2) The employee's normal accrual rates for all plan years in the
period were determined in the same manner, and the employee's most
valuable accrual rates for all plan years in the period were determined
in the same manner. The employee's normal and most valuable accrual
rates for all prior plan years may be redetermined to meet this
requirement. Most valuable accrual rates do not fail to be determined
in the same manner merely because the option in this paragraph (d)(6)(v)
is not applied in any one or more of the prior plan years in the period.
(3) The employee's normal accrual rates for all plan years in the
period fall within a range that would be permitted to be grouped at a
single midpoint rate under the grouping rules of paragraph (d)(6)(iv) of
this section if the employee's normal accrual rates were the only rates
in the plan for a plan year. If this requirement is not satisfied for
the employee, the earliest plan year in the period must be disregarded
for purposes of applying this paragraph (d)(6)(v) to the employee. The
rule in the preceding sentence must be applied repeatedly until the
requirement in this paragraph (d)(6)(v)(A)(3) is satisfied. For
purposes of this paragraph (d)(6)(v)(A)(3), an employee's normal accrual
rates are determined in accordance with paragraph (d)(6)(v)(A)(2) of
this section and without applying the grouping rules under paragraph
(d)(6)(iv) of this section.
(B) Examples. The following examples illustrate this paragraph
(d)(6)(v).
Example 1. Under Plan A, Employee X has the following normal accrual
rates in the current plan year and the immediately preceding 5 plan
years: 1.9 percent, 1.95 percent, 2.0 percent, 2.1 percent, 2.05
percent, and 2.05 percent. For each of those years, Employee X has the
following most valuable accrual rates: 3.0 percent, 2.6 percent, 2.7
percent, 2.9 percent, 2.8 percent, and 2.8 percent. The normal and most
valuable accrual rates for all plan years in the period of consecutive
plan years have been determined in the same manner. In addition, the
plan has not been amended during the period of consecutive years in a
manner that would affect the determination of the most valuable accrual
rate of any employee in the plan. The employer applies the option in
this paragraph (d)(6)(v) for all employees. Employee X's normal accrual
rates in the current and preceding 5 plan years are no more than 5
percent above or below 2.0 percent (a midpoint rate chosen by the
employer) and thus are within a range of rates that would be permitted
to be grouped at a single midpoint rate under the grouping rules of
paragraph (d)(6)(iv) of this section if the employee's normal accrual
rates were the only rates in the plan for a plan year. Therefore, the
employer may treat Employee X's most valuable accrual rate as 3.0
percent for the current plan year.
Example 2. The facts are the same as in Example 1, except that
Employee X's normal accrual rate in the 5th preceding plan year is 2.5
percent. Due to the greater dispersion of Employee X's normal accrual
rates within the period, they may not be grouped at a single midpoint
rate chosen by the employer. Under paragraph (d)(6)(v)(A)(3) of this
section, the earliest plan year in the period must therefore be
disregarded. As a result, only Employee X's normal and most valuable
accrual rates for the current and the 4 preceding plan years are taken
into account. After applying the analysis in Example 1 to this shorter
period, the employer may treat Employee X's most valuable accrual rate
as 2.9 percent for the current plan year.
(vi) Adjustment in most valuable accrual rate for certain disability
benefits provided under the plan -- (A) In general. An employer may
adjust an employee's most valuable accrual rate to reflect the value of
certain disability benefits that are currently available to the employee
under the plan (within the meaning of 1.401(a)(4)-4(b)(2)).
(B) Includible disability benefits. A disability benefit may be
taken into account under this paragraph (d)(6)(vi) only if the following
requirements are satisfied --
(1) The disability benefit is equal to the maximum qualified
disability benefit (within the meaning of section 411(a)(9)).
(2) The employee is treated as disabled under the plan if the
employee is unable to perform the duties of the employee's usual
occupation.
(3) The actual experience of the employer or the nature of the work
being performed by employees covered by the disability benefit (i.e.,
the likelihood of employment-related disability) indicates that it is a
meaningful and significant benefit.
(C) Adjustment. The value of the disability benefit is taken into
account by multiplying the employee's most valuable accrual rate by
1.11. This factor is applied before imputing permitted disparity under
1.401(a)(4)-7, and before grouping accrual rates under paragraph
(d)(6)(iv) of this section.
(D) Example. The following example illustrates this paragraph
(d)(6)(vi).
Example. Employer A maintains Plan X. Plan X provides a disability
benefit for all employees who work in Employer A's underground coal
mines and who suffer an employment-related disability. Under these
facts, the disability benefit is a meaningful and significant benefit.
(vii) Fresh-start alternative for accrued-to-date method -- (A) In
general. The accrued-to-date method may be applied solely with respect
to benefits accrued and testing service in plan years beginning after a
fresh-start date. This alternative may be applied only if the plan
satisfies the fresh-start rules of 1.401(a)(4)-13(c) with respect to
the fresh-start date.
(B) Normal accrual rate. Under the fresh-start alternative for the
accrued-to-date method, the normal accrual rate for an employee in the
plan for a plan year is the percentage amount determined under the
following steps --
(1) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the last day of the plan
year.
(2) Determine the employee's accrued benefit frozen in accordance
with 1.401(a)(4)-13(c) as of the fresh-start date and adjusted, if
applicable, in accordance with 1.401(a)(4)-13(c)(5)(iii) (but not
1.401(a)(4)-13(c)(6)(ii)) through the last day of the current plan year.
(3) Normalize the accrued benefit determined in paragraph
(d)(6)(vii)(B)(1) of this section.
(4) Normalize the accrued benefit determined in paragraph
(d)(6)(vii)(B)(2) of this section.
(5) Subtract the normalized accrued benefit determined in paragraph
(d)(6)(vii)(B)(4) of this section from the normalized accrued benefit
determined in paragraph (d)(6)(vii)(B)(3) of this section.
(6) Divide the amount determined in paragraph (d)(6)(vii)(B)(5) of
this section by the employee's testing service since the fresh-start
date.
(7) Divide the amount determined in paragraph (d)(6)(vii)(B)(6) of
this section by the employee's testing compensation for the plan year.
This rate is the employee's normal accrual rate under the plan for the
plan year.
(C) Most valuable accrual rate. Under the fresh-start alternative
for the accrued-to-date method, the most valuable accrual rate for an
employee in the plan for a plan year is the percentage amount determined
under the following steps --
(1) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the last day of the plan year.
(2) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, the QJSA and the QSUPP
are frozen (along with the employee's other benefits under the plan) in
accordance with 1.401(a)(4)-13(c) as of the fresh-start date and
adjusted, if applicable, in accordance with 1.401(a)(4)-13(c)(5)(iii)
(but not 1.401(a)(4)-13(c)(6)(ii)) through the last day of the current
plan year.
(3) Normalize each QJSA and each QSUPP determined in paragraph
(d)(6)(vii)(C)(1) of this section.
(4) Normalize each QJSA and each QSUPP determined in paragraph
(d)(6)(vii)(C)(2) of this section.
(5) Subtract the normalized QJSA determined for each age in paragraph
(d)(6)(vii)(C)(4) of this section from the normalized QJSA determined
for the same age in paragraph (d)(6)(vii)(C)(3) of this section.
(6) Subtract the normalized QSUPP determined for each age under
paragraph (d)(6)(vii)(C)(4) of this section from the normalized QSUPP
determined for the same age under paragraph (d)(6)(vii)(C)(3) of this
section.
(7) Add the increase in the normalized QJSA determined for each age
in paragraph (d)(6)(vii)(C)(5) to the increase in the normalized QSUPP
determined for the same age in paragraph (d)(6)(vii)(C)(6) of this
section.
(8) Divide the amount determined for each age in paragraph
(d)(6)(vii)(C)(7) of this section by the employee's testing service
since the fresh-start date.
(9) Divide the amount determined in paragraph (d)(6)(vii)(C)(8) of
this section by the employee's testing compensation.
(10) Select the largest rate determined in paragraph
(d)(6)(vii)(C)(9) of this section. This rate is the employee's most
valuable accrual rate under the plan for the plan year.
(D) Examples. The following examples illustrate the fresh-start
alternative for the accrued-to-date method.
Example 1. The following table illustrates the determination of the
most valuable accrual rate for Employee M in Plan A for the 1994 plan
year under the fresh-start alternative to the accrued-to-date method.
Employee M has a testing age under Plan A of 65, testing service of 5
years since the fresh-start date, and testing compensation for the 1994
plan year of $50,000. Plan A does not provide a QSUPP. Step 1 lists
the QJSA payable to Employee M at each age under the plan, determined
under paragraph (d)(5)(iii) of this section as if Employee M's benefits
under the plan had been frozen as of the last day of the 1994 plan year.
Assume that as determined under paragraph (d)(5)(iii) of this section,
Employee M is first eligible for a QJSA at age 55. Step 2 lists the
QJSA payable to Employee M at each age under the plan, determined under
paragraph (d)(5)(iii) of this section, frozen in accordance with
1.401(a)(4)-13(c), and adjusted in accordance with
1.401(a)(4)-13(c)(5)(iii) through the last day of the current plan year.
Steps 3 and 4 list the normalized value (as determined under paragraph
(d)(5)(iv) of this section) of each QJSA in steps 1 and 2, respectively.
For this purpose, an 8-percent interest rate and the UP-84 mortality
table have been applied to normalize each QJSA. Step 5 lists the
difference between steps 3 and 4 at each age. (The table skips steps 6
and 7 because Plan A does not provide a QSUPP.) Step 8 divides the
difference in step 5 by Employee M's 5 years of testing service since
the fresh-start date. Step 9 divides the quotient determined in step 8
by Employee M's testing compensation of $50,000. Employee M's most
valuable accrual rate under Plan A for the 1994 plan year is 3.36
percent, the largest rate listed in step 9.
Example 2. The facts are the same as in Example 1, except that the
plan has been amended since the fresh-start date to improve the factor
used to calculate the QJSA as permitted under 1.401(a)(4)-13(c)(6)(ii).
The new factor applies to benefits accrued both before and after the
fresh-start date. Although this change increases the QJSA determined
with respect to benefits accrued prior to the fresh-start date, the
frozen QJSA determined as of the fresh-start date and adjusted through
the last day of the current plan year under paragraph (d)(6)(vii)(C)(2)
of this section does not include the increase in benefits attributable
to the new QJSA factor and thus must be determined using the original
factor provided in the plan.
(viii) Fresh-start alternative for projected method -- (A) In
general. The projected method may be applied solely with respect to
benefits accrued and testing service in plan years beginning after a
fresh-start date. This alternative may be applied only if the plan
satisfies the fresh-start rules of 1.401(a)(4)-13(c) with respect to
the fresh-start date.
(B) Normal accrual rate. Under the fresh-start alternative for the
projected method, the normal accrual rate for an employee in the plan
for a plan year is the percentage amount determined under the following
steps --
(1) Determine the employee's accrued benefit as if the employee's
benefits under the plan had been frozen as of the employee's testing
age.
(2) Determine the employee's accrued benefit frozen in accordance
with 1.401(a)(4)-13(c) as of the fresh-start date and adjusted, if
applicable, in accordance with 1.401(a)(4)-13(c)(5)(iii) (but not
1.401(a)(4)-13(c)(6)(ii)) through the last day of the current plan year.
(3) Normalize the accrued benefit determined in paragraph
(d)(6)(viii)(B)(1) of this section.
(4) Normalize the accrued benefit determined in paragraph
(d)(6)(viii)(B)(2) of this section.
(5) Subtract the normalized accrued benefit determined in paragraph
(d)(6)(viii)(B)(4) of this section from the normalized accrued benefit
determined in paragraph (d)(6)(viii)(B)(3) of this section.
(6) Divide the amount determined in paragraph (d)(6)(viii)(B)(5) of
this section by the testing service since the fresh-start date the
employee would have as of the employee's testing age.
(7) Divide the amount determined in paragraph (d)(6)(viii)(B)(6) of
this section by the employee's testing compensation as of the employee's
testing age. This rate is the employee's normal accrual rate under the
plan for the plan year.
(C) Most valuable accrual rate. Under the fresh-start alternative
for the projected method, the most valuable accrual rate for an employee
in the plan for a plan year is the percentage amount determined under
the following steps --
(1) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, each QJSA and each
QSUPP is determined as if the employee's benefits under the plan had
been frozen as of the age payment of the QJSA and the QSUPP (if any) to
the employee would commence under the plan.
(2) Determine the QJSA, and the QSUPP (if any) payable in conjunction
with the QJSA, at each age payment of these benefits to the employee
could commence under the plan. For this purpose, the QJSA and the QSUPP
are frozen (along with the employee's other benefits under the plan) in
accordance with 1.401(a)(4)-13(c) as of the fresh-start date and
adjusted, if applicable, in accordance with 1.401(a)(4)-13(c)(5)(iii)
(but not 1.401(a)(4)-13(c)(6)(ii)) through the last day of the current
plan year.
(3) Normalize each QJSA and each QSUPP determined in paragraph
(d)(6)(viii)(C)(1) of this section.
(4) Normalize each QJSA and each QSUPP determined in paragraph
(d)(6)(viii)(C)(2) of this section.
(5) Subtract the normalized QJSA determined for each age in paragraph
(d)(6)(viii)(C)(4) of this section from the normalized QJSA determined
for the same age in paragraph (d)(6)(viii)(C)(3) of this section.
(6) Subtract the normalized QSUPP determined for each age under
paragraph (d)(6)(viii)(C)(4) of this section from the normalized QSUPP
determined for the same age under paragraph (d)(6)(viii)(C)(3) of this
section.
(7) Add the increase in the normalized QJSA determined for each age
in paragraph (d)(6)(viii)(C)(5) of this section to the increase in the
normalized QSUPP determined for the same age in paragraph
(d)(6)(viii)(C)(6) of this section.
(8) Divide the amount determined for each age in paragraph
(d)(6)(viii)(C)(7) of this section by the testing service since the
fresh-start date the employee would have as of that age.
(9) Divide the amount determined for each age in paragraph
(d)(6)(viii)(C)(8) of this section by the employee's testing
compensation as of that age.
(10) Select the largest rate determined in paragraph
(d)(6)(viii)(C)(9) of this section. This rate is the employee's most
valuable accrual rate under the plan for the plan year.
(D) Terminated employees. Notwithstanding the foregoing, in the case
of an employee who has terminated employment as of the last day of the
current plan year, the employee's normal and most valuable accrual rates
under the fresh-start alternative for the projected method are
determined under the fresh-start alternative for the accrued-to-date
method in paragraph (d)(6)(vii) of this section.
(E) Discriminatory pattern of accruals. Paragraph (d)(4)(v) of this
section prohibits use of the projected method if the pattern of accruals
under the plan discriminates in favor of highly compensated employees.
The same prohibition applies to use of the fresh-start alternative for
the projected method, except that only the pattern of accruals under the
plan after the fresh-start date is taken into account.
(F) Example. The rules in this paragraph (d)(6)(viii) are
illustrated in the following example.
Example. The following table illustrates the determination of the
most valuable accrual rate for Employee M in Plan A for the 1994 plan
year under the fresh-start alternative for the projected method.
Employee M has a testing age under Plan A of 65. Plan A does not
provide a QSUPP. Step 1 lists the QJSA payable to Employee M at each
age under the plan, determined under paragraph (d)(5)(iii) of this
section as if Employee M's benefits under the plan had been frozen as of
each age at which payment of the QJSA would begin. Assume that, as
determined under paragraph (d)(5)(iii) of this section, Employee M is
first eligible for a QJSA at age 60. Step 2 lists the QJSA payable to
Employee M at each age under the plan, determined under paragraph
(d)(5)(iii) of this section, frozen in accordance with
1.401(a)(4)-13(c), and adjusted in accordance with
1.401(a)(4)-13(c)(5)(iii) through the last day of the current plan year.
Steps 3 and 4 list the normalized value (as determined under paragraph
(d)(5)(iv) of this section) of each QJSA in steps 1 and 2, respectively.
For this purpose, an 8-percent interest rate and the UP-84 mortality
table have been applied to normalize each QJSA. Step 5 lists the
difference between steps 3 and 4 at each age. (The table skips steps 6
and 7 because Plan A does not provide a QSUPP.) Step 8 lists Employee
M's projected testing service since the fresh-start date as of each age
and the results of dividing the difference in step 5 by Employee M's
projected testing service since the fresh-start date as of that age.
Step 9 lists Employee M's projected testing compensation as of each age
and the results of dividing the quotient in step 8 by Employee M's
projected testing compensation as of that age. Employee M's most
valuable accrual rate under Plan A for the 1994 plan year is 1.96
percent, the largest rate listed in step 9.
(e) Compensation rules -- (1) In general. This paragraph (e)
provides rules for determining average annual compensation and testing
compensation for the employees in a plan for a plan year. Safe harbor
plans that satisfy paragraph (b) of this section must determine benefits
either as a dollar amount unrelated to employees' compensation or as a
percentage of each employees's average annual compensation. For safe
harbor plans that determine benefits as a percentage of each employee's
average annual compensation, paragraph (e)(2) of this section provides
the rules for determining the average annual compensation of each
employee in the plan. Plans that do not satisfy one of the safe harbors
in paragraph (b) of this section, and that instead satisfy this section
under the general test of paragraph (c) of this section, are not
required under this section to determine benefits under any particular
definition of compensation or in any particular manner. However, the
accrual rates used in testing these plans under the general test of
paragraph (c) of this section must be expressed either as a dollar
amount or as a percentage of each employee's testing compensation for
the plan year. Paragraph (e)(3) of this section provides the rules for
determining the testing compensation of each employee in the plan for
the plan year.
(2) Average annual compensation. ''Average annual compensation''
means the average of an employee's annual section 414(s) compensation
determined over the averaging period in the employee's compensation
history during which the average of the employee's annual section 414(s)
compensation is the highest. For this purpose, an averaging period must
consist of 3 or more consecutive 12-month periods (or, if shorter, the
employee's period of employment). In addition, each employee's
compensation history must end in the current plan year and must include
10 or more consecutive 12-month periods. However, an employee's
compensation history need not be longer than the longer of the
employee's period of testing service or the employee's averaging period.
Finally, the averaging period and the compensation history for all
employees in the plan must be determined in a consistent manner.
(3) Testing compensation -- (i) In general. ''Testing compensation''
means either average annual compensation or plan year compensation,
modified (if applicable) in accordance with paragraph (e)(3) (ii) or
(iii) of this section. The testing compensation for all employees in
the plan must be determined in a consistent manner. If accrual rates
are determined by imputing permitted disparity as allowed under
paragraph (d)(6)(ii) of this section, see 1.401(a)(4)-7(c)(4)(v) for
limitations on testing compensation.
(ii) Certain modifications to plan year compensation. If accrual
rates are being determined under any method other than the annual method
in paragraph (d)(2) of this section, the following modifications to the
plan year compensation must be made --
(A) Plan year compensation must be determined during the period
specified in paragraph (3) of the definition of plan year compensation
in 1.401(a)(4)-12 (i.e., a 12-month period ending with or within the
current plan year).
(B) In the case of employees who do not have section 414(s)
compensation during at least 11 months within the 12-month period
specified in paragraph (3) of the definition of plan year compensation
in 1.401(a)(4)-12 by reason of termination of employment or absence
from service, the 12-month period used to determine plan year
compensation must be either --
(1) The 12-month period ending on the employee's termination of
employment or absence from service, or
(2) The 12-month period immediately preceding the period used to
determine the plan year compensation of all other employees in the plan.
(iii) Certain modifications to average annual compensation. If
accrual rates are being determined under the projected method in
1.401(a)(4)-3(d)(4) or the fresh-start alternative for the projected
method in 1.401(a)(4)-3(d)(6)(viii), the following modifications in
determining average annual compensation must be made --
(A) An employee's average annual compensation must be determined as
of each date (other than the fresh-start date, if applicable) that the
employee's benefits under the plan are treated as frozen.
(B) If an employee's benefits under the plan are treated as frozen as
of a date after the current plan year, the employee's compensation
history must be projected through the future plan year in which the
employee's benefits under the plan are treated as frozen, in addition to
the period of compensation history ending in the current plan year
described in paragraph (e)(2) of this section.
(C) In determining the employee's projected compensation history as
of any date after the 12-month period ending in the current plan year,
it must be assumed that the employee continues to earn in each future
12-month period in the employee's projected compensation history the
same amount of annual section 414(s) compensation that the employee
earned in the 12-month period in the employee's compensation history
ending in the current plan year.
(4) Examples. The rules of this paragraph (e) are illustrated by the
following examples.
Example 1. Employer X maintains a defined benefit plan (Plan A). In
testing whether the benefits provided under Plan A satisfy section
401(a)(4) for the plan year ending June 30, 1993, Employer X determines
employees' accrual rates under the accrued-to-date method in paragraph
(d)(3) of this section by using the following as the testing
compensation divisor in paragraphs (d)(3)(i)(D) and (d)(3)(ii)(E) of
this section: The average of each employee's annual compensation for
the 5 consecutive 12-month periods (or the employee's period of
employment, if shorter) during which the average of the employee's
annual compensation is the highest. In determining the 5 consecutive
12-month periods during which the average of each employee's annual
compensation is the highest, the last 10 consecutive 12-month periods
ending on June 30, 1993, of each employee's compensation history are
taken into account or, if shorter, the employee's period of testing
service. In determining compensation for each 12-month period in an
employee's compensation history, Employer X defines compensation using a
definition that satisfies section 414(s). The amount of compensation
used to determine employees' accrual rates under Plan A meets the
definition of average annual compensation in paragraph (e)(2) of this
section and thus is testing compensation within the meaning of paragraph
(e)(3)(i) of this section.
Example 2. (a) The facts are the same as in Example 1, except that,
in determining the amount of each employee's compensation for the
12-month periods in each employee's compensation history ending in 1990
through 1993 that are taken into account in determining each employee's
average annual compensation, Employer X defines compensation as wages
within the meaning of section 3401(a) (wages for purposes of income tax
withholding). In determining the amount of each employee's compensation
for the 12-month periods in each employee's compensation history ending
June 30, 1988, and June 30, 1989, that are taken into account in
determining each employee's average annual compensation, Employer X
defines compensation as section 415(c)(3) compensation (as defined in
1.415-2(d) without regard to 1.415-2(d) (10) through (12)). In
determining the amount of each employee's compensation for the 12-month
periods in each employee's compensation history beginning before January
1, 1988, taken into account in determining each employee's average
annual compensation, Employer X defines compensation using a definition
that does not satisfy section 414(s) but that was nondiscriminatory for
the 1984 through 1987 plan years based on the relevant facts for those
plan years.
(b) The testing compensation divisor used to determine employees'
accrual rates for purposes of paragraph (d)(3) of this section is
average annual compensation, and thus may be used as testing
compensation, even though the underlying definition used to measure the
amount of compensation for each year in an employee's compensation
history is not the same. The underlying definition of compensation for
each 12-month period in the employee's compensation history is section
414(s) compensation, because the definition satisfies the requirements
contained in the definition of section 414(s) compensation in
1.401(a)(4)-12.
Example 3. The facts are the same as in Example 2, except the
testing compensation divisor used in determining each employee's rate of
accrual is the average of the employee's annual section 414(s)
compensation for the consecutive 12-month periods ending on June 30,
1993, during which the employee was employed by Employer X rather than
the average of 5 consecutive 12-month periods as described in Examples 1
and 2. The compensation used to determine accruals is average annual
compensation. The averaging period is determined consistently for each
employee even though a different number of years is used to determine
each employee's averaging period because the averaging period for each
employee includes all the employee's years of consecutive employment.
Thus, the amount of compensation used to determine employee's accrual
rates under Plan A for purposes of paragraph (d)(3) of this section
meets the definition of average annual compensation and may be used as
testing compensation.
Example 4. The facts are the same as Example 2, except that Employer
X determines the accrual rates for employees in Plan A who work at Plant
S using, as the testing compensation divisor, each employee's plan year
compensation as modified by paragraph (e)(3)(ii) of this section. The
accrual rates for all other employees in Plan A are determined, using as
the testing compensation divisor, each employee's average annual
compensation as described in Examples 1 and 2. Employer X is not
determining testing compensation for all employees, because the same
method is not being used (either average annual compensation or plan
year compensation) to determine the testing compensation for each
employee in the plan. Therefore, the accrual rates determined for each
employee in the plan do not satisfy paragraph (d)(3) of this section.
However, Employer X may be able to restructure Plan A into two component
plans in accordance with 1.401(a)(4)-9(c), one component plan including
all employees in Plan A who work in Plant S and the other component plan
including the employees in Plan A who do not work in Plant S.
Example 5. The facts are the same as in Example 4, except that the
testing compensation divisor used by Employer X to determine the accrual
rates for employees in Plan A who work at Plant S is the average of each
employee's compensation for the 3 consecutive 12-month periods during
which the average of each employee's annual section 414(s) compensation
is the highest, rather than the average for the 5 consecutive 12-month
periods that is used for other employees in the plan. Employer X is not
using average annual compensation and thus is not using testing
compensation to determine each employee's accrual rates because the
averaging period is not determined consistently for all employees.
Therefore the accrual rates determined for each employee in the plan do
not satisfy paragraph (d)(3) of this section.
Example 6. (a) The facts are the same as in Example 1, except that
Employer X determines each employee's accrual rates using the projected
method in paragraph (d)(4) of this section and Employer X determines
compensation for each 12-month period in the employee's compensation
history on the basis of the calendar year ending in the plan year.
Employee Q, born on May 30, 1943, began participation in Plan A on July
1, 1973, and has benefited under the plan in every plan year since that
date. Employee Q's testing age is 65. Employee Q has the following
compensation history for the calendar years 1983 through 1992: 1983 --
$10,000; 1984 -- $12,000; 1985 -- $14,000; 1986 -- $15,000; 1987 --
$17,000; 1988 -- $17,000; 1989 -- $15,000; 1990 -- $15,000; 1991 --
$13,000; 1992 -- $12,000.
(b) In order to determine Employee Q's normal accrual rate, Employee
Q's projected average annual compensation as of Employee Q's testing age
of 65 must be determined. To determine Employee Q's compensation
history to be used in determining Employee Q's projected average annual
compensation, Employer X must assume that Employee Q's annual section
414(s) compensation for calendar years 1993 through 2007 (the calendar
year ending in the plan year in which Employee Q attains the testing age
of age 65) will be $12,000 for each calendar year, the same as Employee
Q's annual section 414(s) compensation for the 1992 calendar year ending
in the 1993 plan year. However, calendar years 1983 through 1992 must
also be included in Employee Q's compensation history that is taken into
account in determining Employee Q's projected average annual
compensation. Employee Q's highest averaging period is calendar years
1986 through 1990 (the 5 consecutive 12-month periods out of calendar
years 1983 through 2007, using projected annual section 414(s)
compensation for 1993 through 2007, during which the average of Employee
Q's annual section 414(s) compensation is the highest). Therefore
Employee Q's projected average annual compensation for the 2007 plan
year is $15,800 (($15,000 plus $17,000 plus $17,000 plus $15,000 plus
$15,000) divided by 5).
Example 7. (a) Plan M is a high average pay plan established on July
1, 1998, with a plan year ending each June 30. Plan M bases benefits
for each employee on the average of the employee's annual compensation
for the 36 months (or, if shorter, the employee's period of employment)
during which the average of the employee's annual compensation is the
highest. Compensation for purposes of determining benefits under the
plan is determined using a definition that satisfies section 414(s). In
determining the 36 months for each employee during which the average of
the employee's annual compensation is the highest, the plan takes into
account the 10 consecutive 12-month periods of the employee's
compensation history ending on the June 30 preceding the date on which
the employee terminates employment.
(b) The compensation determined under Plan M is not testing
compensation, because compensation for the 12-month period ending on the
June 30 during which any employee terminates employment is not included
in the compensation history of that employee in determining the
employee's average annual compensation. Therefore the average annual
compensation determined under Plan M may not be used to determine
accrual rates for purposes of paragraph (d) of this section. However,
if plan M were a safe harbor plan under paragraph (b) of this section,
the compensation determined under Plan M would nevertheless be treated
as average annual compensation. See paragraph (b)(8)(x)(B) of this
section.
(f) Special rules -- (1) In general. The special rules in this
paragraph (f) apply for purposes of applying the provisions of this
section to a defined benefit plan.
(2) Section 415 limits. Plan provisions that implement the limits of
section 415 are disregarded. Furthermore, any plan provision that
provides for increases in an employee's accrued benefit (that would have
been greater but for the application of section 415) due solely to
adjustments under section 415(d)(1) is also disregarded, but only if
such provision applies uniformly to all employees in the plan. Thus,
for example, a plan does not fail to satisfy the safe harbors in
paragraph (b) of this section merely because the plan limits benefits in
accordance with section 415. Similarly, for purposes of determining
accrual rates under paragraph (d) of this section, plan benefits are
determined without regard to plan provisions that implement the limits
of section 415.
(3) Accruals after normal retirement age -- (i) In general. An
employee's accruals for any plan year after the plan year in which the
employee attains normal retirement age are taken into account for
purposes of this section. However, any plan provision may be
disregarded that provides for increases in an employee's accrued benefit
solely because the employee has delayed commencing benefits beyond the
normal retirement age applicable to the employee under the plan, but
only if --
(A) The plan provision applies on the same terms to all employees in
the plan;
(B) The same uniform normal retirement age applies to all employees
in the plan; and
(C) The percentage factor used to increase the employee's accrued
benefit is no greater than the largest percentage factor that could be
applied to actuarially increase the employee's accrued benefit using any
standard mortality table and any standard interest rate.
(ii) Examples. The following examples illustrate the rules of this
paragraph (f)(3). In each example, it is assumed that the plan
satisfies the requirements of paragraph (f)(3)(i) (A) through (C) of
this section.
Example 1. Plan A provides a benefit of 2 percent of average annual
compensation per year of service for all employees. In addition, Plan A
provides an actuarial increase in an employee's accrued benefit of 6
percent for each year that an employee defers commencement of benefits
beyond normal retirement age. For employees who continue in service
beyond normal retirement age, the employee's 2-percent accrual for the
current plan year is offset by the 6-percent actuarial increase, as
permitted under section 411(b)(1)(H)(iii)(II). The employer may
disregard the actuarial increase (and hence the offset) and thus may
treat all employees as if they were accruing at the rate of 2 percent of
average annual compensation per year.
Example 2. The facts are the same as in Example 1, except that the
employee's 2-percent accrual for the current plan year is not offset by
the 6-percent actuarial increase. The employer may disregard the
actuarial increase and thus may treat all employees as if they were
accruing at the rate of 2 percent of average annual compensation per
year.
(4) Early retirement window benefits -- (i) General rule. In
applying the uniform subsidies requirement of paragraph (b)(2)(iv) of
this section or in determining an employee's most valuable accrual rate
under paragraph (d) of this section, all early retirement benefits,
retirement-type subsidies, and QSUPPs for which the employee is (or is
projected to be) eligible are taken into account, regardless of whether
they are permanent features under the plan or are offered only to
employees who retire within a limited period of time.
(ii) Exceptions. Notwithstanding paragraph (f)(4)(i) of this
section, an early retirement window benefit (as defined in paragraph
(f)(4)(iii) of this section) is taken into account in accordance with
the following rules --
(A) In the case of an early retirement window benefit that is
available for a period that begins in one plan year and ends in the
immediately succeeding plan year, the early retirement window benefit is
disregarded for purposes of applying this section to the plan for the
second plan year. The preceding sentence applies solely in the case of
employees to whom the early retirement window benefit was treated as
currently available for purposes of applying 1.401(a)(4)-4(b) to the
plan for the first plan year.
(B) An early retirement window benefit is disregarded for purposes of
applying this section to a plan for any plan year after the last plan
year in which the early retirement window benefit is available. Thus,
for example, in applying the option of the floor on the most valuable
accrual rate in paragraph (d)(6)(v) of this section, the most valuable
accrual rate in any plan year other than the current plan year is
determined without regard to any early retirement window benefit offered
in an earlier plan year. Similarly, in determining the most valuable
accrual rate under the fresh-start alternative for the accrued-to-date
method in paragraph (d)(6)(vii) of this section, the normalized amount
of a QJSA frozen as of the fresh-start date is determined without regard
to any early retirement window benefit offered in the plan year that
ends on the fresh-start date.
(iii) Early retirement window benefit defined. An early retirement
window benefit is an early retirement benefit, retirement-type subsidy,
or QSUPP payable under a plan only to employees who retire within a
limited period of time (not to exceed 1 year). For this purpose, an
amendment to an early retirement window benefit that merely extends the
early retirement window benefit period is not treated as a separate
early retirement window benefit, provided that the period as extended
does not exceed 1 year. However, any other amendment to an early
retirement window benefit creates a separate early retirement window
benefit.
(5) Unpredictable contingent event benefits -- (i) General rule. In
applying the uniform subsidies requirement of paragraph (b)(2)(iv) of
this section or in determining an employee's normal or most valuable
accrual rate under paragraph (d) of this section, an unpredictable
contingent event benefit is not taken into account until the occurrence
of the contingent event. Upon the occurrence of the contingent event,
the contingent event benefit is taken into account only for those
employees who are affected by the contingent event under the terms of
the plan. For purposes of this section, an unpredictable contingent
event benefit is an unpredictable contingent event benefit as described
in section 412(l)(7).
(ii) Example. The following example illustrates the rules of this
paragraph (f)(5).
Example. (a) Employer X operates various manufacturing plants and
maintains Plan A, a defined benefit plan that covers all its
nonexcludable employees. Plan A provides an early retirement benefit
under which employees who retire after age 55 but before normal
retirement age and who have at least 10 years of service receive a
benefit equal to their normal retirement benefit reduced by 4 percent
per year for each year prior to normal retirement age. Plan A also
provides a plant-closing benefit under which employees who satisfy the
conditions for receiving the early retirement benefit and who work at a
plant where operations have ceased and whose employment has been
terminated will receive an unreduced normal retirement benefit. The
plant-closing benefit is an unpredictable contingent event benefit
within the meaning of section 412(l)(7).
(b) During the 1993 plan year, Employer X had no plant closings.
Therefore, the plant-closing benefit is not taken into account for the
1993 plan year in determining accrual rates or in applying the safe
harbors in paragraph (b) of this section.
(c) During the 1994 plan year, one of Employer X's plants closes.
Employees M through Z, who are employees at the plant that is closing,
will satisfy the conditions for the plant-closing benefit. Therefore,
in testing Plan A for compliance with this section for the 1994 plan
year, the availability of the plant-closing benefit to Employees M
through Z must be taken into account in determining their accrual rates
or in determining whether the plan satisfies one of the safe harbors
under paragraph (b) of this section.
(6) Determination of benefits on other than plan year basis. For
purposes of this section, accruals are generally determined based on the
plan year. Nevertheless, an employer may, but need not, determine
accruals on the basis of any period ending within the plan year as long
as the period is at least 12 months in duration and is applied uniformly
to all employees in the plan for that plan year. For example, accruals
for all employees may be determined based on accrual computation periods
ending within the plan year.
(7) Adjustments for certain plan distributions. An employee's
accrued benefit includes the actuarial equivalent of prior distributions
from the plan to the employee, provided that the years of service taken
into account in determining the prior distributions continue to be taken
into account under the plan for purposes of determining the employee's
current accrued benefit. For purposes of this paragraph (f)(7),
actuarial equivalence must be determined in a uniform manner for all
employees in the plan using reasonable actuarial assumptions. A
standard interest rate and a standard mortality table are considered
reasonable. Thus, for example, if an employee has commenced receipt of
benefits in accordance with the minimum distribution requirements of
section 401(a)(9), and the plan reduces the employee's accrued benefit
to take into account the amount of the distributions, the employee's
accrued benefit is restored to the value it would have had if the
distributions had not occurred.
(8) Adjustment for certain QPSA charges. An employee's accrued
benefit includes the cost of a qualified preretirement survivor annuity
(QPSA) that reduces the employee's accrued benefit otherwise determined
under the plan, as permitted under 1.401(a)-20, Q&A-21. Thus, an
employee's accrued benefit is determined as if the cost of the QPSA had
not been charged against the accrued benefit. This paragraph (f)(8)
applies only if the QPSA charges apply uniformly to all employees in the
plan.
(T.D. 8360, 56 FR 47547, Sept. 19, 1991; 57 FR 4719, 4720, Feb. 7,
1992; 57 FR 10952, Mar. 31, 1992)
26 CFR 1.401(a)(4)-4 Nondiscriminatory availability of benefits,
rights, and features.
(a) Introduction -- (1) General rule. The availability of benefits,
rights, and features provided under a plan does not discriminate in
favor of highly compensated employees if the plan satisfies the
requirements of this section. The benefits, rights, and features
subject to this requirement are all optional forms of benefit, ancillary
benefits, and other rights and features available to any employee under
the plan. In general, each benefit, right, and feature provided under a
plan is separately subject to the requirements of this section
regardless of whether the particular benefit, right, or feature is
actuarially equivalent to any other benefit, right, or feature provided
under the plan. Thus, for example, a plan may not condition or
otherwise limit the availability of an optional form of benefit provided
under the plan in a manner that violates the requirements of this
section, even though the optional form of benefit is only one of several
actuarially equivalent optional forms of benefit under the plan.
(2) Overview. A benefit, right, or feature provided under a plan is
made available to employees in the plan in a nondiscriminatory manner
only if the benefit, right, or feature separately satisfies the current
availability requirement of paragraph (b) of this section and the
effective availability requirement of paragraph (c) of this section.
Paragraph (d) of this section provides special rules for mergers and
acquisitions, employees with accrued benefits who are not currently
benefiting under the plan, early retirement window benefits, permissive
aggregation of certain benefits, rights, or features, and certain
spousal benefits. Paragraph (e) of this section defines optional forms
of benefit, ancillary benefits, and other rights and features. See
1.401(a)(4)-9(b)(3) for special rules regarding how this section is
applied where one or more defined contribution plans and one or more
defined benefit plans are permissively aggregated and treated as a
single plan pursuant to 1.410(b)-7(d).
(b) Current availability -- (1) General rule. The group of employees
in the plan to whom a benefit, right, or feature is currently available
during the plan year must satisfy either the ratio percentage test of
1.410(b)-2(b)(2) or the nondiscriminatory classification test of
1.410(b)-4 (without regard to the average benefit percentage test of
1.410(b)-5). In determining whether the group of employees satisfies the
ratio percentage test or the nondiscriminatory classification test, an
employee is treated as benefiting only if the benefit, right, or feature
is currently available to the employee under the plan.
(2) Determination of current availability -- (i) General rule.
Whether a benefit, right, or feature that is subject to specified
eligibility conditions is currently available to an employee generally
is determined based on the current facts and circumstances with respect
to the employee (e.g., current compensation, current accrued benefit,
current position, or current net worth). Thus, the fact that an
employee may, in the future, satisfy a precondition to receipt of the
benefit, right, or feature generally does not cause the benefit, right,
or feature to be currently available to the employee.
(ii) Certain age and service conditions disregarded -- (A) General
rule. Notwithstanding paragraph (b)(2)(i) of this section, any
specified age or service condition with respect to an optional form of
benefit or a social security supplement is disregarded in determining
whether the optional form of benefit or the social security supplement
is currently available to an employee. Thus, for example, an optional
form of benefit that is available to all employees in the plan who
terminate employment on or after age 55 with at least 10 years of
service is treated as currently available to an employee, without regard
to the employee's current age or years of service and without regard to
whether the employee could potentially meet the age and service
conditions prior to attaining the plan's normal retirement age. The
exception in this paragraph (b)(2)(ii)(A) does not apply in the case of
ancillary benefits (other than social security supplements) or other
rights and features.
(B) Time-limited age or service conditions not disregarded.
Notwithstanding paragraph (b)(2)(ii)(A) of this section, an age or
service condition is not disregarded in determining the current
availability of an optional form of benefit or social security
supplement if the condition must be satisfied within a limited period of
time. However, in determining the current availability of an optional
form of benefit or a social security supplement subject to such an age
or service condition, the age and service of employees may be projected
to the last date by which the age condition or service condition must be
satisfied in order to be eligible for the optional form of benefit or
social security supplement under the plan. Thus, for example, an
optional form of benefit that is available only to employees who
terminate employment between July 1, 1993, and December 31, 1993, after
attainment of age 55 with at least 10 years of service is treated as
currently available to an employee only if the employee could satisfy
those age and service conditions by December 31, 1993.
(iii) Certain other conditions disregarded. Specified conditions on
the availability of a benefit, right, or feature requiring termination
of employment, death, satisfaction of a specified health condition (or
failure to meet such condition), disability, hardship, marital status,
default on a plan loan secured by a participant's account balance,
execution of a covenant not to compete, application for benefits,
election of a benefit form, or absence from service (for which imputed
service or imputed compensation is granted in accordance with
1.401(a)(4)-11(d) or 1.414(s)-1(e), respectively), are disregarded in
determining the employees to whom the benefit, right, or feature is
currently available.
(iv) Mandatory cash-outs. In the case of a plan that provides for
mandatory cash-outs of all terminated employees who have a vested
accrued benefit with an actuarial present value less than or equal to a
specified dollar amount (not to exceed $3,500) as permitted by sections
411(a)(11) and 417(e), any condition on a benefit, right, or feature
that requires the employee to have a vested accrued benefit with an
actuarial present value in excess of the specified dollar amount is
disregarded. In addition, the condition that an employee's vested
accrued benefit have an actuarial present value less than or equal to
the specified dollar amount (not to exceed 3,500) may be disregarded in
determining the employees to whom the mandatory cash-out described in
the preceding sentence is available.
(v) Certain conditions on plan loans. In the case of an employee's
right to a loan from the plan, the condition that an employee must have
an account balance sufficient to be eligible to receive a minimum loan
amount specified in the plan (not to exceed $1,000) is disregarded in
determining the employees to whom the right is available.
(3) Optional forms of benefit and other rights and features that are
eliminated prospectively -- (i) Special testing rule. Notwithstanding
paragraph (b)(1) of this section, an optional form of benefit or other
right or feature that is permanently eliminated with respect to benefits
accrued after the later of the eliminating amendment's adoption or
effective date (the ''elimination date''), but is retained with respect
to benefits accrued as of the elimination date, and that satisfies this
paragraph (b) as of the elimination date, is treated as satisfying this
paragraph (b) for all subsequent periods. This rule does not apply in
the case of ancillary benefits. In addition, this rule does not apply
if there are any changes in the terms of the optional form of benefit or
other right or feature (including changes in the employees to whom it is
available) after the elimination date.
(ii) Treatment of earnings. For purposes of this paragraph (b)(3),
in the case of a defined contribution plan, benefits accrued as of the
elimination date include subsequent earnings, expenses, gains, and
losses attributable to the balance in an employee's account as of the
elimination date. Notwithstanding the foregoing, in the case of a right
to a plan loan that is prospectively eliminated, a plan may treat, on a
uniform basis, the benefits accrued as of the elimination date as
consisting exclusively of the dollar amount of the balance in the
employee's account as of the elimination date.
(iii) Example. The following example illustrates this paragraph
(b)(3).
Example. Plan A is a defined benefit plan that provides a single sum
optional form of benefit that is available to all employees on
termination of employment. Plan A is amended January 1, 1993, to
eliminate this single sum optional form of benefit with respect to
benefits accured after December 31, 1993. As of December 31, 1993, the
single sum optional form of benefit is currently available to a group of
employees that satisfies the ratio percentage test of 1.410(b)-2(b)(2).
As of January 1, 2001, all nonhighly compensated employees who were
entitled to the single sum optional form of benefit have terminated from
employment with the employer and have taken a distribution of their
benefits. The only remaining employees who have a right to take a
portion of their benefits in the form of a single sum optional form of
benefit on termination of employment are highly compensated employees.
Because the availability of the single sum optional form of benefit
satisfied the current availability requirements of this paragraph (b) on
December 31, 1993 (i.e., immediately prior to the later of the date on
which the amendment was adopted or effective), the optional form of
benefit is deemed to continue to satisfy the current availability
requirement of this paragraph (b) for subsequent plan years without
further testing.
(c) Effective availability -- (1) In general. Based on all the facts
and circumstances, the group of employees to whom the benefit, right, or
feature is effectively available must not substantially favor highly
compensated employees. This requirement must be met even if the
benefit, right, or feature is, or has been, currently available to a
group of employees that satisfies the current availability requirement
of paragraph (b) of this section.
(2) Examples. The following examples illustrate the provisions of
this paragraph (c).
Example 1. Employer X maintains Plan A, a defined benefit plan that
covers both of its highly compensated nonexcludable employees and 9 of
its 12 nonhighly compensated nonexcludable employees. Plan A provides
for a normal retirement benefit payable as an annuity and based on a
normal retirement age of 65, and an early retirement benefit payable
upon termination in the form of an annuity to employees who terminate
from service with the employer on or after age 55 with 30 or more years
of service. Both highly compensated employees of Employer X currently
meet the age and service requirement, or will have 30 years of service
by the time they reach age 55. All but 2 of the 9 nonhighly compensated
employees of Employer X who are covered by Plan A were hired on or after
age 35 and, thus, cannot qualify for the early retirement benefit. Even
though the group of employees to whom the early retirement benefit is
currently available satisfies the ratio percentage test of
1.410(b)-2(b)(2) when age and service are disregarded pursuant to
paragraph (b)(2)(ii)(A) of this section, under these facts, the group of
employees to whom the early retirement benefit is effectively available
substantially favors highly compensated employees.
Example 2. Employer Y maintains Plan B, a defined benefit plan that
provides for a normal retirement benefit payable as an annuity and based
on a normal retirement age of 65. By a plan amendment first adopted and
effective December 1, 1993, Employer Y amends Plan B to provide an early
retirement benefit that is available only to employees who terminate
employment by December 15, 1993, and who are at least age 55 with 30 or
more years of service. Assume that all employees were hired prior to
attaining age 25, and that the group of employees who have, or will have
attained age 55 with 30 years of service by December 15, 1993, satisfies
the ratio percentage test of 1.410(b)-2(b)(2). Assume, further, that
the employer takes no steps to inform all eligible employees of the
early retirement option on a timely basis, and that the only employees
who terminate from employment with the employer during the 2-week period
in which the early retirement benefit is available are highly
compensated employees. Under these facts, the group of employees to
whom this early retirement window benefit is effectively available
substantially favors highly compensated employees.
Example 3. Employer Z amends Plan C on June 30, 1992, to provide for
a single sum optional form of benefit for employees who terminate from
employment with Employer Z after June 30, 1992, and before January 1,
1993. The availability of this single sum optional form of benefit is
conditioned on the employee's having a particular disability at the time
of termination of employment. The only employee of the employer who
meets this disability requirement at the time of the amendment and
thereafter through December 31, 1992, is a highly compensated employee.
Under paragraph (b)(2)(iii) of this section, the disability condition is
disregarded in determining the current availability of the single sum
optional form of benefit. Nevertheless, under these facts, the group of
employees to whom the single sum optional form of benefit is effectively
available substantially favors highly compensated employees.
(d) Special rules -- (1) Mergers and acquisitions -- (i) Special
testing rule. In the case of a transaction described in paragraph
(d)(1)(ii)(A) of this section, an optional form of benefit or other
right or feature available under a plan of an employer is treated as
satisfying the requirements of this section for the plan year of the
transaction and all subsequent plan years if all the following
requirements are satisfied --
(A) The optional form of benefit or other right or feature satisfied
the requirements of paragraphs (b) and (c) of this section immediately
before the transaction (without taking into account section
410(b)(6)(C)). This determination is made with reference to the plan of
the prior employer and its nonexcludable employees.
(B) The optional form of benefit or other right or feature satisfies
the requirements of paragraphs (b) and (c) of this section immediately
after the transaction (without taking into account section 410(b)(6)(C)
or this paragraph (d)(1)). This determination is made with reference to
the plan of the current employer and its nonexcludable employees.
(C) The optional form of benefit or other right or feature is
available under the plan of the current employer after the transaction
on the same terms as it was available under the plan of the prior
employer before the transaction. Thus, for example, the optional form
of benefit or other right or feature must continue to be available to
the acquired employees to whom the optional form of benefits or other
right or feature was available before the transaction, and may not be
made available to any additional employees after the transaction to whom
the optional form of benefit or other right or feature was not available
before the transaction.
(ii) Scope of special testing rule. This paragraph (d)(1) applies
only --
(A) In the case of a transaction between the current employer and the
prior employer that is a stock or asset acquisition, a merger, or other
similar transaction involving a change in the employer of the employees
of a trade or business.
(B) For the period that the requirements in paragraph (d)(1)(i) of
this section are satisfied.
(C) To optional forms of benefit and other rights and features, but
not to ancillary benefits.
(D) To optional forms of benefit and other rights and features with
respect to benefits accrued under the plan of the current employer, and
not to optional forms of benefit and other rights and features with
respect to benefits accrued under the plan of the prior employer
(unless, pursuant to the transaction, the plan of the prior employer
becomes the plan of the current employer, or the assets and liabilities
with respect to the acquired employees under the plan of the prior
employer are transferred to the plan of the current employer in a plan
merger, consolidation, or other transfer described in section 414(l)).
(iii) Option to extend availability to new employees.
Notwithstanding paragraph (d)(1)(i)(C) of this section, the optional
form of benefit or other right or feature may be extended to additional
employees who are either hired by or transferred into the acquired trade
or business during the transition period defined in section
410(b)(6)(C)(ii). The option in this paragraph (d)(1)(iii) applies only
if the optional form of benefit or other right or feature satisfies the
requirements of paragraphs (b) and (c) of this section immediately after
the transition period (without taking into account this paragraph
(d)(1)), in addition to the requirements in paragraph (d)(1)(i) of this
section.
(iv) Example. The following example illustrates this paragraph
(d)(1).
Example. Employer X maintains Plan A, a defined benefit plan with a
single sum optional form of benefit for all employees in the plan.
Employer Y acquires Employer X and merges Plan A into Plan B, a defined
benefit plan maintained by Employer Y that does not otherwise provide a
single sum optional form of benefit. Employer Y continues to provide
the single sum optional form of benefit under Plan B on the same terms
as it was offered under Plan A to all employees who were acquired in the
transaction with Employer X (and to no other employees). The single sum
optional form of benefit satisfied paragraphs (b) and (c) of this
section immediately prior to the transaction (without regard to section
410(b)(6)(C)), when tested with reference to Plan A and Employer X's
nonexcludable employees. The optional form of benefit satisfies
paragraphs (b) and (c) of this section immediately following the
transaction (determined without taking into account section 410(b)(6)(C)
or this paragraph (d)(1)), when tested with reference to Plan B and
Employer Y's nonexcludable employees. Under these facts, Plan B is
treated as satisfying the requirements of this section with respect to
the single sum optional form of benefit for the plan year of the
transaction and all subsequent plan years.
(2) Frozen participants. A plan must satisfy the nondiscriminatory
availability requirement of this section, not only with respect to
benefits, rights, and features provided to employees who are currently
benefiting under the plan, but also separately with respect to benefits,
rights, and features provided to nonexcludable employees with accrued
benefits who are not currently benefiting under the plan (''frozen
participants''). Thus, each benefit, right, and feature available to
any frozen participant under the plan is separately subject to the
requirements of this section. A plan satisfies this section with
respect to a benefit, right, or feature available to any frozen
participant under the plan only if one or more of the following
requirements is satisfied --
(i) The benefit, right, or feature would satisfy the requirements of
paragraphs (b) and (c) of this section if the benefit, right, or feature
were not available to any employee currently benefiting under the plan;
(ii) The benefit, right, or feature would satisfy the requirements of
paragraphs (b) and (c) of this section if all frozen participants were
treated as employees currently benefiting under the plan;
(iii) No change in the availability of the benefit, right, or feature
has been made that is first effective in the current plan year with
respect to a frozen participant; or
(iv) Any change in the availability of the benefit, right, or feature
that is first effective in the current plan year with respect to a
frozen participant is made in a nondiscriminatory manner. Thus, any
expansion in the availability of the benefit, right, or feature to any
highly compensated frozen participant must be applied on a consistent
basis to all nonhighly compensated frozen participants. Similarly, any
contraction in the availability of the benefit, right, or feature that
affects any nonhighly compensated frozen participant must be applied on
a consistent basis to all highly compensated frozen participants.
(3) Early retirement window benefits. A benefit, right, or feature
that is only available to employees who terminate employment within a
specified time period must separately satisfy the requirements of this
section. Nonetheless, if the benefit, right, or feature meets the
definition of an early retirement window benefit in
1.401(a)(4)-3(f)(4)(iii) (or would meet that definition if the
definition applied to all benefits, rights, and features) and if the
benefit, right, or feature is available for a specified period that
begins in one plan year and ends in the immediately succeeding plan
year, the benefit, right, or feature is disregarded for purposes of
applying this section to the plan for the second plan year. The
preceding sentence applies solely in the case of employees to whom the
benefit, right, or feature was treated as currently available for
purposes of applying this section to the plan for the first plan year.
(4) Permissive aggregation of certain benefits, rights, or features
-- (i) General rule. In general, each optional form of benefit,
ancillary benefit, and other right or feature must separately satisfy
the requirements of this section. However, an optional form of benefit,
ancillary benefit, or other right or feature may be aggregated with
another optional form of benefit, ancillary benefit, or other right or
feature, respectively, and the two may be treated as a single optional
form of benefit, ancillary benefit, or other right or feature, if both
of the following requirements are satisfied --
(A) One of the two optional forms of benefit, ancillary benefits, or
other rights or features is in all cases of inherently equal or greater
value than the other. For this purpose, one benefit, right, or feature
is of inherently equal or greater value than another benefit, right, or
feature only if, at any time and under any conditions, it is impossible
for any employee to receive a smaller amount under the first benefit,
right, or feature than under the second benefit, right, or feature.
(B) The optional form of benefit, ancillary benefit, or other right
or feature of inherently equal or greater value separately satisfies the
requirements of this section (without regard to this paragraph (d)(4)).
(ii) Aggregation may be applied more than once. The aggregation rule
in this paragraph (d)(4) may be applied more than once. Thus, for
example, an optional form of benefit may be aggregated with another
optional form of benefit that itself constitutes two separate optional
forms of benefit that are aggregated and treated as a single optional
form of benefit under this paragraph (d)(4).
(iii) Examples. The following examples illustrate the permissive
aggregation rule in this paragraph (d)(4).
Example 1. Plan A is a defined benefit plan that provides a single
sum optional form of benefit to all employees in the plan. The single
sum optional form of benefit is available on the same terms to all
employees in the plan, except that for employees in Division A, a
5-percent discount factor is applied, and for employees of Division B, a
7-percent discount factor is applied. Under paragraph (e)(1) of this
section, the single sum optional form of benefit constitutes two
separate optional forms of benefit. Assume that the single sum optional
form of benefit available to employees of Division A separately
satisfies the requirements of this section without taking into account
this paragraph (d)(4). Because a lower discount factor is applied in
determining the single sum optional form of benefit available to
employees of Division A than is applied in determining the single sum
optional form of benefit available to employees of Division B, the first
single sum optional form of benefit is inherently more valuable than the
second single sum optional form of benefit. Under these facts, these
two single sum optional forms of benefit may be aggregated and treated
as a single optional form of benefit for purposes of this section.
Example 2. The facts are the same as in Example 1, except that in
order to receive the single sum optional form of benefit, employees of
Division A (but not employees of Division B) must have completed at
least 20 years of service. The single sum optional form of benefit
available to employees of Division A is not of inherently equal or
greater value than the single sum optional form of benefit available to
employees of Division B, because an employee of Division A who
terminates employment with less than 20 years of service would receive a
smaller amount (i.e., zero) than a similarly situated employee of
Division B who terminates employment with less than 20 years of service.
Under these facts, the two single sum optional forms of benefit may not
be aggregated and treated as a single optional form of benefit for
purposes of this section.
(5) Certain spousal benefits. In the case of a plan that includes
two or more plans that have been permissively aggregated under
1.410(b)-7(d), the aggregated plan satisfies the requirements of this
section with respect to the availability of any nonsubsidized qualified
joint and survivor annuities, qualified preretirement survivor
annuities, or spousal death benefits described in section 401(a)(11), if
each plan that is part of the aggregated plan satisfies section
401(a)(11). If any subsidized qualified joint and survivor annuities,
qualified preretirement survivor annuities, or spousal death benefits
described in section 401(a)(11) are provided, the availability of these
subsidized benefits under the aggregated plan must satisfy either the
requirements of this section or the special rule of
1.401(a)(4)-9(b)(3)(i) (regarding non-core benefits, rights, and
features under a DB/DC plan), whichever is applicable. Whether a
benefit is considered subsidized for this purpose may be determined
using the interest rate, mortality, and other actuarial assumptions
specified in the plan, provided those assumptions are reasonable.
Whether those assumptions are reasonable is determined taking into
account any other assumptions used under the plan. In addition, for
purposes of this paragraph (d)(5), a qualified joint and survivor
annuity, qualified preretirement survivor annuity, or spousal death
benefit is deemed to be nonsubsidized if it is provided under a defined
contribution plan.
(e) Definitions -- (1) Optional form of benefit -- (i) General rule.
For purposes of this section, the term ''optional form of benefit''
means a distribution alternative (including the normal form of benefit)
that is available under a plan with respect to benefits described in
section 411(d)(6)(A) or early retirement benefits and retirement-type
subsidies described in section 411(d)(6)(B)(i), including QSUPPs.
Except as provided in paragraph (e)(1)(ii) of this section, different
optional forms of benefit exist if the distribution alternative is not
payable on substantially the same terms. The relevant terms include all
terms affecting the value of the optional form, such as the method of
benefit calculation and the actuarial assumptions used to determine the
amount distributed. Different optional forms of benefit may result from
differences in payment schedule, timing, commencement, medium of
distribution (e.g., in cash or in kind), election rights, or the portion
of the benefit to which the distribution alternative applies.
(ii) Exceptions -- (A) Differences in benefit formula or accrual
method. An optional form of benefit available under a defined benefit
plan does not fail to be a single optional form of benefit merely
because the benefit formula or accrual method (or both) underlying the
optional form of benefit are different for different employees to whom
the optional form of benefit is available. Notwithstanding the
foregoing, differences in the normal retirement ages of employees or in
the form in which the accrued benefit of employees is payable at normal
retirement age under a plan are taken into account in determining
whether an optional form of benefit constitutes one or more optional
forms of benefit.
(B) Differences in allocation formula. An optional form of benefit
available under a defined contribution plan does not fail to be a single
optional form of benefit merely because the method of determining
allocations (including allocations of earnings, expenses, gains, and
losses described in 1.401(a)(4)-2(c)(2)(iii)) to account balances are
different for different employees to whom the optional form of benefit
is available.
(C) Distributions subject to section 417(e). An optional form of
benefit available under a defined benefit plan does not fail to be a
single optional form of benefit merely because, in determining the
amount of a distribution, the plan applies a lower interest rate to
determine the distribution for employees with a vested accrued benefit
having an actuarial present value not in excess of $25,000, as required
by section 417(e) and 1.417(e)-1.
(iii) Examples. The following examples illustrate the definition of
optional form of benefit in this paragraph (e)(1).
Example 1. Plan A is a defined benefit plan that benefits all
employees of Divisions M and N. The plan offers a qualified joint and
50-percent survivor annuity at normal retirement age, calculated by
multiplying an employee's single life annuity payment by a factor. For
an employee of Division M whose benefit commences at age 65, the plan
provides a factor of 0.90, but for a similarly situated employee of
Division N the plan provides a factor of 0.85. The qualified joint and
survivor annuity is not available to employees of Division M and N on
substantially the same terms.
Example 2. Plan B is a defined benefit plan that benefits all
employees of Divisions R and S. The plan offers a single sum optional
form of benefit which, for employees of Division R, is determined using
a fixed interest rate assumption and, for employees of Division S, is
determined using a different fixed interest rate assumption. The single
sum optional form of benefit is not available to employees of Divisions
R and S on substantially the same terms.
Example 3. Plan C is a defined benefit plan that benefits all
employees of Divisions T and U. The plan offers a single sum optional
form of benefit, available on the same terms and determined using the
same actuarial assumptions, to all employees. However, different
benefit formulas are provided to each division. Despite that fact,
under the exception provided in paragraph (e)(1)(ii)(A) of this section,
the single sum optional form of benefit available to employees of
Division T is not a separate optional form of benefit from the single
sum optional form available to employees of Division U.
(2) Ancillary benefit. For purposes of this section, the term
''ancillary benefit'' includes social security supplements (other than
QSUPPs), disability benefits not in excess of a qualified disability
benefit described in section 411(a)(9), ancillary life insurance and
health insurance benefits, death benefits under a defined contribution
plan, preretirement death benefits under a defined benefit plan,
shut-down benefits not protected under section 411(d)(6), and other
similar benefits. Different ancillary benefits exist with respect to
each benefit that is not available on substantially the same terms.
(3) Other right or feature. For purposes of this section, the term
''other right or feature'' means any right or feature applicable to
employees under the plan, other than a right or feature taken into
account under paragraph (e)(1) or (e)(2) of this section as part of an
optional form of benefit or an ancillary benefit under plan, and other
than a right or feature that cannot reasonably be expected to be of more
than insignificant value to an employee (e.g., administrative details).
Different rights or features exist if the right or feature is not
available on substantially the same terms. Other rights and features
include, but are not limited to, the following --
(i) Plan loan provisions (other than those relating to distribution
of an employee's accrued benefit upon default under a loan);
(ii) The right to direct investments;
(iii) The right to a particular form of investment;
(iv) The right to a particular class or type of employer securities
(taking into account any difference in conversion, dividend, voting,
liquidation preference, or other rights conferred under the security);
(v) The right to make each rate of elective contributions described
in 1.401(k)-1(g)(3) (taking into account the definition of compensation
under the plan out of which elective contributions are made);
(vi) The right to make after-tax employee contributions to a defined
benefit plan that are not allocated to separate accounts;
(vii) The right to make each rate of employee contributions described
in 1.401(m)-1(f)(6) (taking into account the definition of compensation
under the plan out of which employee contributions are made);
(viii) The right to an allocation of each rate of matching
contributions described in 1.401(m)-1(f)(12) and the formulas and
requirements of matching contributions (taking into account, if
applicable, the definition of compensation under the plan by reference
to which matching contributions are made, and any corrective
distributions of excess deferrals, excess contributions, or excess
aggregate contributions);
(ix) The right to purchase additional retirement or ancillary
benefits under the plan; and
(x) The right to make rollover contributions and transfers to and
from the plan.
(T.D. 8360, 56 FR 47568, Sept. 19, 1991; 57 FR 4720, Feb. 7, 1992;
57 FR 10952, Mar. 31, 1992)