[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Rules and Regulations]
[Pages 66134-66139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30831]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602
[TD 8643]
RIN 1545-AQ42
Distributions of Stock and Stock Rights
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations amending regulations
under section 305(c) of the Internal Revenue Code relating to
constructive distributions on preferred stock. The final regulations
concern the treatment of stock redeemable at a premium by the issuer.
The regulations generally treat a call premium as giving rise to a
constructive distribution only if redemption pursuant to the call
provision is more likely than not to occur. The final regulations also
reflect 1990 amendments to section 305(c).
DATES: These regulations are effective December 20, 1995.
For dates of applicability of these regulations, see Effective
dates under SUPPLEMENTARY INFORMATION.
FOR FURTHER INFORMATION CONTACT: Kirsten L. Simpson, (202) 622-7790
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under
control number 1545-1438. Responses to this collection of information
are required to comply with the consistency requirements of the
regulation.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number. The
[[Page 66135]]
estimated annual burden per respondent varies from 5 minutes to 15
minutes, depending on individual circumstances, with an estimated
average of 10 minutes.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington,
DC 20224, and to the Office of Management and Budget, Attn: Desk
Officer for the Department of the Treasury, Office of Information and
Regulatory Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On June 22, 1994, a notice of proposed rulemaking (CO-8-91),
amending regulations under section 305(c) of the Internal Revenue Code
relating to constructive distributions on preferred stock, was
published in the Federal Register (59 FR 32160). No public hearing was
requested and none was held.
Written comments responding to the notice were received. After
consideration of all the comments, the regulations proposed by CO-8-91
are adopted as revised by this Treasury decision. The principal
revisions are discussed below.
Explanation of Provisions
The primary focus of the final regulations is on preferred stock
callable at a premium at the option of the issuer. The final
regulations retain the approach of the proposed regulations and require
constructive distribution treatment with respect to an issuer call only
if, based on all of the facts and circumstances as of the issue date,
redemption pursuant to the call right is more likely than not to occur.
Safe harbor rule. The proposed regulations provided a safe harbor,
under which constructive distribution treatment does not result from an
issuer call if the issuer and holder are unrelated, there are no
arrangements that effectively require the issuer to redeem the stock,
and exercise of the option to redeem would not reduce the yield of the
stock. In response to comments, the final regulations make certain
modifications to the safe harbor to clarify its scope.
Commentators suggested that the exclusion from the safe harbor
where there are ``arrangements that effectively require the issuer to
redeem'' is too narrow and will permit taxpayers who issue stock with
``understandings'' concerning redemption, whether or not legally
enforceable, to qualify for the safe harbor. Commentators recommended
safeguarding against abuse by changing the effectively requires
redemption test to one that requires a lesser degree of probability.
The IRS and Treasury intend that the safe harbor not be available where
an issuer and a holder have an underlying understanding. Although the
IRS and Treasury believe that the word ``arrangement'' is broad enough
to include such understandings, in response to these comments, this
prong of the safe harbor has been clarified.
To retain greater certainty for non-abusive transactions, however,
the effectively requires redemption test has not been substantially
modified. Instead, the final regulations safeguard against abuse by
lowering the threshold for determining whether an issuer and a holder
are related. The proposed regulations adopted a 50-percent threshold
for determining whether an issuer and a holder are related. The final
regulations lower this threshold to 20 percent. This threshold relates
only to eligibility for the safe harbor, and not to the application of
the general ``more likely than not'' test. When a holder's ownership
interest exceeds this threshold, the IRS and Treasury believe it is
appropriate to determine whether redemption is more likely than not to
occur based on all of the facts and circumstances.
Commentators also suggested that the IRS and Treasury except
preferred stock within the meaning of section 1504(a)(4) in determining
whether the issuer and holder are related. The regulations do not adopt
this suggestion. As noted above, the determination of whether the
issuer and holder are related only governs eligibility for the safe
harbor. The IRS and Treasury believe that when a holder's ownership
interest in an issuer exceeds the threshold, even if all that the
holder owns is preferred stock within the meaning of section
1504(a)(4), it is appropriate to determine whether redemption is more
likely than not to occur based on all of the facts and circumstances.
In response to comments, the final regulations clarify that the
``arrangements'' that effectively require or are intended to compel the
issuer to redeem the stock relate to the issuer call right, and not to
a later mandatory redemption feature.
In testing whether a call right meets the yield prong of the safe
harbor, the final regulations clarify that principles similar to the
principles of section 1272(a) and the original issue discount
regulations apply to determine whether exercise of the right to redeem
would reduce the yield of the stock.
Miscellaneous. The final regulations expand the definition of
issuer in certain circumstances. In particular, the regulations provide
that if preferred stock may be acquired by a person other than the
issuer (a third person), the term issuer includes such third person if
the regulations would apply to the stock if the third person were the
issuer, and acquisition of the stock by the third person would be
treated as a redemption for federal income tax purposes (under section
304 or otherwise). In addition, if the issuer and the third person are
members of the same affiliated group, the term issuer includes the
third person if a principal purpose of the arrangement is to avoid the
application of section 305 and the final regulations. Furthermore, an
agreement or other arrangement for a person other than the issuer of
the stock to acquire the stock may create a conversion transaction
within the meaning of section 1258.
The final regulations provide rules for the treatment of mandatory
redemption obligations and put options that are subject to
contingencies. Generally, premiums on such stock are not subject to
constructive distribution treatment if the contingency renders remote
the likelihood of redemption. For example, where an issuer issues stock
that is mandatorily redeemable in the event of an initial public
offering, the regulations require evaluation of the likelihood of the
occurrence of the initial public offering. The regulations provide,
however, that a contingency does not include the possibility of
default, insolvency, or similar circumstances, or that a redemption may
be precluded by applicable law due to insufficient capital.
The preamble to the proposed regulations requested comments on the
appropriate treatment of unpaid cumulative dividends. Because of the
complexity of this issue, the final regulations do not provide rules
for those dividends. The IRS and Treasury will continue to consider the
issue, as well as other issues involving the implementation of the
amendments to section 305(c) made by the Revenue Reconciliation Act of
1990. The IRS and Treasury continue to invite public comments on these
issues.
[[Page 66136]]
EFFECTIVE DATES. The regulations apply to stock issued on or after
December 20, 1995. Although the regulations do not apply to stock
issued before December 20, 1995, the rules of sections 305(c) (1), (2),
and (3) apply to stock described therein issued on or after October 10,
1990, except as provided in section 11322(b)(2) of the Revenue
Reconciliation Act of 1990 (Pub. L. 101-508 Stat.). Moreover, except as
provided in section 11322(b)(2) of the Revenue Reconciliation Act of
1990 (Pub. L. 101-508 Stat.), with respect to stock issued on or after
October 10, 1990, and issued before December 20, 1995, the economic
accrual rule of section 305(c)(3) will apply to the entire call premium
on stock that is not described in paragraph (b)(2) of this section if
the premium is considered to be unreasonable under the principles of
Sec. 1.305-5(b) (as contained in the 26 CFR part 1 edition revised
April 1, 1995). A call premium described in the preceding sentence will
be accrued over the period of time during which the preferred stock
cannot be called for redemption.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Kirsten L. Simpson of
the Office of Assistant Chief Counsel (Corporate), IRS. However, other
personnel of the IRS and Treasury Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
the following entries in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.305-3 also issued
under 26 U.S.C. 305. Section 1.305-5 also issued under 26 U.S.C.
305. Section 1.305-7 also issued under 26 U.S.C. 305. * * *
Par. 2. Section 1.305-3 is amended as follows: 1. In paragraph (e),
remove the parentheses from the numbers in the headings for Examples
(1) through (15).
2. In paragraph (e), Example 15 is revised to read as follows:
Sec. 1.305-3 Disproportionate distributions.
* * * * *
(e) * * *
Example 15. (i) Facts. Corporation V is organized with two
classes of stock, class A common and class B convertible preferred.
The class B stock is issued for $100 per share and is convertible at
the holder's option into class A at a fixed ratio that is not
subject to full adjustment in the event stock dividends or rights
are distributed to the class A shareholders. The class B stock pays
no dividends but it is mandatorily redeemable in 10 years for $200.
Under sections 305(c) and 305(b)(4), the entire redemption premium
(i.e., the excess of the redemption price over the issue price) is
deemed to be a distribution of preferred stock on preferred stock
which is taxable as a distribution of property under section 301.
This amount is considered to be distributed over the 10-year period
under principles similar to the principles of section 1272(a).
During the year, the corporation declares a dividend on the class A
stock payable in additional shares of class A stock.
(ii) Analysis. The distribution on the class A stock is a
distribution to which sections 305(b)(2) and 301 apply since it
increases the proportionate interests of the class A shareholders in
the assets and earnings and profits of the corporation and the class
B shareholders have received property (i.e., the constructive
distribution described above). If, however, the conversion ratio of
the class B stock were subject to full adjustment to reflect the
distribution of stock to class A shareholders, the distribution of
stock dividends on the class A stock would not increase the
proportionate interest of the class A shareholders in the assets and
earnings and profits of the corporation and such distribution would
not be a distribution to which section 301 applies.
(iii) Effective date. This Example 15 applies to stock issued on
or after December 20, 1995. For previously issued stock, see
Sec. 1.305-3(e) Example (15) (as contained in the 26 CFR part 1
edition revised April 1, 1995).
Par. 3. Section 1.305-5 is amended as follows:
1. Paragraph (b) is revised.
2. In paragraph (d), remove the parentheses from the numbers in the
headings for Examples (1) through (9), redesignate Examples 8 and 9 as
Examples 9 and 10, respectively.
3. In paragraph (d), Examples 4, 5, and 7 are revised, and Example
8 is added.
4. Paragraph (e) is added.
The revisions read as follows:
Sec. 1.305-5 Distributions on preferred stock.
* * * * *
(b) Redemption premium--(1) In general. If a corporation issues
preferred stock that may be redeemed under the circumstances described
in this paragraph (b) at a price higher than the issue price, the
difference (the redemption premium) is treated under section 305(c) as
a constructive distribution (or series of constructive distributions)
of additional stock on preferred stock that is taken into account under
principles similar to the principles of section 1272(a). However,
constructive distribution treatment does not result under this
paragraph (b) if the redemption premium does not exceed a de minimis
amount, as determined under the principles of section 1273(a)(3). For
purposes of this paragraph (b), preferred stock that may be acquired by
a person other than the issuer (the third person) is deemed to be
redeemable under the circumstances described in this paragraph (b), and
references to the issuer include the third person, if--
(i) This paragraph (b) would apply to the stock if the third person
were the issuer; and
(ii) Either--
(A) The acquisition of the stock by the third person would be
treated as a redemption for federal income tax purposes (under section
304 or otherwise); or
(B) The third person and the issuer are members of the same
affiliated group (having the meaning for this purpose given the term by
section 1504(a), except that section 1504(b) shall not apply) and a
principal purpose of the arrangement for the third person to acquire
the stock is to avoid the application of section 305 and paragraph
(b)(1) of this section.
(2) Mandatory redemption or holder put. Paragraph (b)(1) of this
section applies to stock if the issuer is required to redeem the stock
at a specified time or the holder has the option (whether or not
currently exercisable) to require the issuer to redeem the stock.
However, paragraph (b)(1) of this section will not
[[Page 66137]]
apply if the issuer's obligation to redeem or the holder's ability to
require the issuer to redeem is subject to a contingency that is beyond
the legal or practical control of either the holder or the holders as a
group (or through a related party within the meaning of section 267(b)
or 707(b)), and that, based on all of the facts and circumstances as of
the issue date, renders remote the likelihood of redemption. For
purposes of this paragraph, a contingency does not include the
possibility of default, insolvency, or similar circumstances, or that a
redemption may be precluded by applicable law which requires that the
issuer have a particular level of capital, surplus, or similar items. A
contingency also does not include an issuer's option to require earlier
redemption of the stock. For rules applicable if stock may be redeemed
at more than one time, see paragraph (b)(4) of this section.
(3) Issuer call--(i) In general. Paragraph (b)(1) of this section
applies to stock by reason of the issuer's right to redeem the stock
(even if the right is immediately exercisable), but only if, based on
all of the facts and circumstances as of the issue date, redemption
pursuant to that right is more likely than not to occur. However, even
if redemption is more likely than not to occur, paragraph (b)(1) of
this section does not apply if the redemption premium is solely in the
nature of a penalty for premature redemption. A redemption premium is
not a penalty for premature redemption unless it is a premium paid as a
result of changes in economic or market conditions over which neither
the issuer nor the holder has legal or practical control.
(ii) Safe harbor. For purposes of this paragraph (b)(3), redemption
pursuant to an issuer's right to redeem is not treated as more likely
than not to occur if--
(A) The issuer and the holder are not related within the meaning of
section 267(b) or 707(b) (for purposes of applying sections 267(b) and
707(b) (including section 267(f)(1)), the phrase ``20 percent'' shall
be substituted for the phrase ``50 percent'');
(B) There are no plans, arrangements, or agreements that
effectively require or are intended to compel the issuer to redeem the
stock (disregarding, for this purpose, a separate mandatory redemption
obligation described in paragraph (b)(2) of this section); and
(C) Exercise of the right to redeem would not reduce the yield of
the stock, as determined under principles similar to the principles of
section 1272(a) and the regulations under sections 1271 through 1275.
(iii) Effect of not satisfying safe harbor. The fact that a
redemption right is not described in paragraph (b)(3)(ii) of this
section does not affect the determination of whether a redemption
pursuant to the right to redeem is more likely than not to occur.
(4) Coordination of multiple redemption provisions. If stock may be
redeemed at more than one time, the time and price at which redemption
is most likely to occur must be determined based on all of the facts
and circumstances as of the issue date. Any constructive distribution
under paragraph (b)(1) of this section will result only with respect to
the time and price identified in the preceding sentence. However, if
redemption does not occur at that identified time, the amount of any
additional premium payable on any later redemption date, to the extent
not previously treated as distributed, is treated as a constructive
distribution over the period from the missed call or put date to that
later date, to the extent required under the principles of this
paragraph (b).
(5) Consistency. The issuer's determination as to whether there is
a constructive distribution under this paragraph (b) is binding on all
holders of the stock, other than a holder that explicitly discloses
that its determination as to whether there is a constructive
distribution under this paragraph (b) differs from that of the issuer.
Unless otherwise prescribed by the Commissioner, the disclosure must be
made on a statement attached to the holder's timely filed federal
income tax return for the taxable year that includes the date the
holder acquired the stock. The issuer must provide the relevant
information to the holder in a reasonable manner. For example, the
issuer may provide the name or title and either the address or
telephone number of a representative of the issuer who will make
available to holders upon request the information required for holders
to comply with this provision of this paragraph (b).
* * * * *
(d) * * *
Example 4--(i) Facts. Corporation X is a domestic corporation
with only common stock outstanding. In connection with its
acquisition of Corporation T, X issues 100 shares of its 4%
preferred stock to the shareholders of T, who are unrelated to X
both before and after the transaction. The issue price of the
preferred stock is $40 per share. Each share of preferred stock is
convertible at the shareholder's election into three shares of X
common stock. At the time the preferred stock is issued, the X
common stock has a value of $10 per share. The preferred stock does
not provide for its mandatory redemption or for redemption at the
option of the holder. It is callable at the option of X at any time
beginning three years from the date of issuance for $100 per share.
There are no other plans, arrangements, or agreements that
effectively require or are intended to compel X to redeem the stock.
(ii) Analysis. The preferred stock is described in the safe
harbor rule of paragraph (b)(3)(ii) of this section because X and
the former shareholders of T are unrelated, there are no plans,
arrangements, or agreements that effectively require or are intended
to compel X to redeem the stock, and calling the stock for $100 per
share would not reduce the yield of the preferred stock. Therefore,
the $60 per share call premium is not treated as a constructive
distribution to the shareholders of the preferred stock under
paragraph (b) of this section.
Example 5--(i) Facts--(A) Corporation Y is a domestic
corporation with only common stock outstanding. On January 1, 1996,
Y issues 100 shares of its 10% preferred stock to a holder. The
holder is unrelated to Y both before and after the stock issuance.
The issue price of the preferred stock is $100 per share. The
preferred stock is--
(1) Callable at the option of Y on or before January 1, 2001, at
a price of $105 per share plus any accrued but unpaid dividends; and
(2) Mandatorily redeemable on January 1, 2006, at a price of
$100 per share plus any accrued but unpaid dividends.
(B) The preferred stock provides that if Y fails to exercise its
option to call the preferred stock on or before January 1, 2001, the
holder will be entitled to appoint a majority of Y's directors.
Based on all of the facts and circumstances as of the issue date, Y
is likely to have the legal and financial capacity to exercise its
right to redeem. There are no other facts and circumstances as of
the issue date that would affect whether Y will call the preferred
stock on or before January 1, 2001.
(ii) Analysis. Under paragraph (b)(3)(i) of this section,
paragraph (b)(1) of this section applies because, by virtue of the
change of control provision and the absence of any contrary facts,
it is more likely than not that Y will exercise its option to call
the preferred stock on or before January 1, 2001. The safe harbor
rule of paragraph (b)(3)(ii) of this section does not apply because
the provision that failure to call will cause the holder to gain
control of the corporation is a plan, arrangement, or agreement that
effectively requires or is intended to compel Y to redeem the
preferred stock. Under paragraph (b)(4) of this section, the
constructive distribution occurs over the period ending on January
1, 2001. Redemption is most likely to occur on that date, because
that is the date on which the corporation minimizes the rate of
return to the holder while preventing the holder from gaining
control. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $5 per share difference between
the redemption price and the issue price exceeds the amount
determined under the principles of section 1273(a)(3)
(5 x .0025 x $105 = $1.31). Accordingly, $5 per share, the
difference between the redemption price and the issue price, is
treated as a constructive distribution
[[Page 66138]]
received by the holder on an economic accrual basis over the five-year
period ending on January 1, 2001, under principles similar to the
principles of section 1272(a). * * *
Example 7--(i) Facts--(A) Corporation Z is a domestic
corporation with only common stock outstanding. On January 1, 1996,
Z issues 100 shares of its 10% preferred stock to C, an individual
unrelated to Z both before and after the stock issuance. The issue
price of the preferred stock is $100 per share. The preferred stock
is--
(1) Not callable for a period of 5 years from the issue date;
(2) Callable at the option of Z on January 1, 2001, at a price
of $110 per share plus any accrued but unpaid dividends;
(3) Callable at the option of Z on July 1, 2002, at a price of
$120 per share plus any accrued but unpaid dividends; and
(4) Mandatorily redeemable on January 1, 2004, at a price of
$150 per share plus any accrued but unpaid dividends.
(B) There are no other plans, arrangements, or agreements
between Z and C concerning redemption of the stock. Moreover, there
are no other facts and circumstances as of the issue date that would
affect whether Z will call the preferred stock on either January 1,
2001, or July 1, 2002.
(ii) Analysis. This stock is described in paragraph (b)(2) of
this section because it is mandatorily redeemable. It is also
potentially described in paragraph (b)(3)(i) of this section because
it is callable at the option of the issuer. The safe harbor rule of
paragraph (b)(3)(ii) of this section does not apply to the option to
call on January 1, 2001, because the call would reduce the yield of
the stock when compared to the yield produced by the January 1,
2004, mandatory redemption feature. Moreover, absent any other facts
indicating a contrary result, the fact that redemption on January 1,
2001, would produce the lowest yield indicates that redemption is
most likely to occur on that date. Under paragraph (b)(4) of this
section, paragraph (b)(1) of this section applies with respect to
the issuer's right to call on January 1, 2001, because redemption is
most likely to occur on January 1, 2001, for $110 per share. The de
minimis exception of paragraph (b)(1) of this section does not apply
because the $10 per share difference between the redemption price
payable in 2001 and the issue price exceeds the amount determined
under the principles of section 1273(a)(3) (5 x .0025 x $110=$1.38).
Accordingly, $10 per share, the difference between the redemption
price and the issue price, is treated as a constructive distribution
received by the holder on an economic accrual basis over the five-
year period ending January 1, 2001, under principles similar to the
principles of section 1272(a).
(iii) Coordination rules--(A) If Z does not exercise its option
to call the preferred stock on January 1, 2001, paragraph (b)(4) of
this section provides that the principles of paragraph (b) of this
section must be applied to determine if any remaining constructive
distribution occurs. Under paragraphs (b)(3)(i) and (b)(4) of this
section, paragraph (b)(1) of this section applies because, absent
any other facts indicating a contrary result, the fact that
redemption on July 1, 2002, would produce a lower yield than the
yield produced by the mandatory redemption feature indicates that
redemption on that date is most likely to occur. The safe harbor
rule of paragraph (b)(3)(ii) of this section does not apply to the
option to call on July 1, 2002, because, as of January 1, 2001, a
call by Z on July 1, 2002, for $120 would reduce the yield of the
stock. The de minimis exception of paragraph (b)(1) of this section
does not apply because the $10 per share difference between the
redemption price and the issue price (revised as of the missed call
date as provided by paragraph (b)(4) of this section) exceeds the
amount determined under the principles of section 1273(a)(3)
(1 x .0025 x $120=$.30). Accordingly, the $10 per share of
additional redemption premium that is payable on July 1, 2002, is
treated as a constructive distribution received by the holder on an
economic accrual basis over the period between January 1, 2001, and
July 1, 2002, under principles similar to the principles of section
1272(a).
(B) If Z does not exercise its second option to call the
preferred stock on July 1, 2002, then the $30 additional redemption
premium that is payable on January 1, 2004, is treated as a
constructive distribution under paragraphs (b)(2) and (b)(1) of this
section. The de minimis exception of paragraph (b)(1) of this
section does not apply because the $30 per share difference between
the redemption price and the issue price (revised as of the second
missed call date) exceeds the amount determined under the principles
of section 1273(a)(3) (1 x .0025 x $150=$.38). The holder is treated
as receiving the constructive distribution on an economic accrual
basis over the period between July 1, 2002, and January 1, 2004,
under principles similar to the principles of section 1272(a).
Example 8--(i) Facts. The facts are the same as in paragraph (i)
of Example 7, except that, based on all of the facts and
circumstances as of the issue date (including an expected lack of
funds on the part of Z), it is unlikely that Z will exercise the
right to redeem on either January 1, 2001, or July 1, 2002.
(ii) Analysis. The safe harbor rule of paragraph (b)(3)(ii) of
this section does not apply to the option to call on either January
1, 2001, or July 1, 2002, because each call would reduce the yield
of the stock. Under paragraph (b)(3)(i) of this section, neither
option to call is more likely than not to occur, because, based on
all of the facts and circumstances as of the issue date (including
an expected lack of funds on the part of Z), it is not more likely
than not that Z will exercise either option. However, the $50 per
share redemption premium that is payable on January 1, 2004, is
treated as a constructive distribution under paragraphs (b) (1) and
(2) of this section, regardless of whether Z is anticipated to have
sufficient funds to redeem on that date, because Z is required to
redeem the stock on that date. The de minimis exception of paragraph
(b)(1) of this section does not apply because the $50 per share
difference between the redemption price and the issue price exceeds
the amount determined under the principles of section 1273(a)(3)
(8 x .0025 x $150=$3).
* * * * *
(e) Effective date. The rules of paragraph (b) of this section and
Examples 4, 5, 7, and 8 of paragraph (d) of this section apply to stock
issued on or after December 20, 1995. For rules applicable to
previously issued stock, see Sec. 1.305-5 (b) and (d) Examples (4),
(5), and (7) (as contained in the 26 CFR part 1 edition revised April
1, 1995). Although the rules of paragraph (b) of this section and the
revised examples do not apply to stock issued before December 20, 1995,
the rules of sections 305(c) (1), (2), and (3) apply to stock described
therein issued on or after October 10, 1990, except as provided in
section 11322(b)(2) of the Revenue Reconciliation Act of 1990 (Public
Law 101-508 Stat.). Moreover, except as provided in section 11322(b)(2)
of the Revenue Reconciliation Act of 1990 (Public Law 101-508 Stat.),
with respect to stock issued on or after October 10, 1990, and issued
before December 20, 1995, the economic accrual rule of section
305(c)(3) will apply to the entire call premium on stock that is not
described in paragraph (b)(2) of this section if the premium is
considered to be unreasonable under the principles of Sec. 1.305-5(b)
(as contained in the 26 CFR part 1 edition revised April 1, 1995). A
call premium described in the preceding sentence will be accrued over
the period of time during which the preferred stock cannot be called
for redemption.
Par. 4. Section 1.305-7 is amended by revising the fourth sentence
in the concluding text of paragraph (a) to read as follows:
Sec. 1.305-7 Certain transactions treated as distributions.
(a) * * *
* * * For example, where a redemption premium exists with respect to a
class of preferred stock under the circumstances described in
Sec. 1.305-5(b) and the other requirements of this section are also
met, the distribution will be deemed made with respect to such
preferred stock, in stock of the same class. * * *
* * * * *
[[Page 66139]]
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 5. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Sec. 602.101 [Amended]
Par. 6. In Sec. 602.101, paragraph (c) is amended in the table by
adding the entry ``1.305-5.........1545-1438'' in numerical order.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 11, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30831 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U
