97-771. Certain Asset Transfers to a Tax-Exempt Entity  

  • [Federal Register Volume 62, Number 10 (Wednesday, January 15, 1997)]
    [Proposed Rules]
    [Pages 2064-2068]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-771]
    
    
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    DEPARTMENT OF THE TREASURY
    
    Internal Revenue Service
    
    26 CFR Part 1
    
    [REG-209121-89]
    RIN 1545-AN21
    
    
    Certain Asset Transfers to a Tax-Exempt Entity
    
    AGENCY: Internal Revenue Service (IRS), Treasury.
    
    ACTION: Notice of proposed rulemaking and notice of public hearing.
    
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    SUMMARY: This document contains proposed regulations. The proposed 
    regulations effectuate provisions of the Tax Reform Act of 1986 and the 
    Technical and Miscellaneous Revenue Act of 1988. The proposed 
    regulations generally affect a taxable corporation that transfers all 
    or substantially all of its assets to a tax-exempt entity or converts 
    from a taxable corporation to a
    
    [[Page 2065]]
    
    tax-exempt entity, and generally require the taxable corporation to 
    recognize gain or loss in such a transaction.
    
    DATES: Written comments must be received by April 15, 1997. Requests to 
    speak (with outlines of oral comments to be discussed) at the public 
    hearing scheduled for May 6, 1997, at 10:00 a.m. must be submitted by 
    April 15, 1997.
    
    ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209121-89), Room 
    5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
    Washington, DC 20044. Submissions also may be hand delivered between 
    the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209121-89), 
    Courier's Desk, Internal Revenue Service, 1111 Constitution Ave. NW., 
    Washington, DC. Alternatively, taxpayers may submit comments 
    electronically via the Internet by selecting the ``Tax Regs'' option on 
    the IRS Home Page, or by submitting comments directly to the IRS 
    Internet site at http://www.irs.ustreas.gov/prod/tax__regs/
    comments.html. The public hearing will be held in the IRS Auditorium, 
    Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
    DC.
    
    FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Stephen R. 
    Cleary (202) 622-7530; concerning submissions and the hearing, 
    Evangelista Lee, (202) 622-7180, (not toll-free numbers).
    
    SUPPLEMENTARY INFORMATION:
    
    Background
    
        This document contains proposed amendments to the Income Tax 
    Regulations (26 CFR Part 1) relating to the repeal of the General 
    Utilities doctrine in the Tax Reform Act of 1986. Under the General 
    Utilities doctrine, which took its name from General Utilities & 
    Operating Co. v. Helvering, 296 U.S. 200 (1935), corporations were not 
    required to recognize gain or loss when they distributed appreciated or 
    depreciated property to their shareholders. The General Utilities 
    doctrine applied to distributions of property in complete liquidation, 
    certain sales of property that were in connection with a complete 
    liquidation, and nonliquidating distributions of property. It was 
    codified in former sections 311, 336, and 337 of the Internal Revenue 
    Code of 1954.
        The General Utilities doctrine was an exception to the general rule 
    that income earned by a corporation is taxed twice, once to the 
    corporation when the income is earned and a second time to the 
    corporation's shareholders when the earnings are distributed. The 
    General Utilities doctrine generally permitted the permanent 
    elimination of corporate-level tax on the disposition of appreciated 
    assets because the transferee received a fair market value basis in the 
    assets and the corporation generally did not recognize any gain. Thus, 
    the appreciated assets left corporate solution without any corporate-
    level tax having been paid.
        Beginning in 1969, the scope of the General Utilities doctrine was 
    restricted by a series of amendments (initially relating to 
    nonliquidating distributions governed by section 311), until ultimately 
    the General Utilities doctrine was repealed, with limited exceptions, 
    in the Tax Reform Act of 1986. Sections 336 and 337 were amended to 
    generally require corporations to recognize gain or loss when 
    appreciated or depreciated property is distributed in complete 
    liquidation or sold in connection with a complete liquidation.
        Section 337(a) provides one of the limited exceptions from the 
    repeal of the General Utilities doctrine by allowing a subsidiary to 
    liquidate into its 80-percent distributee (a corporation meeting the 
    stock ownership requirements of section 332(b) in the liquidating 
    corporation) without recognizing gain or loss. The 80-percent 
    distributee takes a carryover basis in the distributed property. 
    However, under section 337(b)(2), this nonrecognition exception 
    generally does not apply if the 80-percent distributee is a tax-exempt 
    entity.
        The Tax Reform Act of 1986 added section 337(d), directing the 
    Secretary to prescribe regulations as may be necessary to carry out the 
    purposes of the repeal of the General Utilities doctrine. The 
    legislative history of the Tax Reform Act of 1986 indicates that the 
    General Utilities doctrine was repealed because it tended to undermine 
    the corporate income tax by allowing appreciated property to leave 
    corporate solution without imposition of a corporate level tax. H.R. 
    Rep. No. 99-426, 99th Cong., 1st Sess. 282 (1985). The Technical and 
    Miscellaneous Revenue Act of 1988 amended section 337(d) to specify 
    that the section authorizes regulations to ``ensure that these purposes 
    shall not be circumvented * * * through the use of a * * * tax-exempt 
    entity.'' The legislative history concerning the 1988 amendment to 
    section 337(d) explains:
    
        The bill also clarifies in connection with the built-in gain 
    provisions of the Act that the Treasury Department shall prescribe 
    such regulations as may be necessary or appropriate to carry out 
    those provisions * * *. For example, this includes rules to require 
    the recognition of gain if appreciated property of a C corporation 
    is transferred to a * * * tax-exempt entity [footnote 32] in a 
    carryover basis transaction that would otherwise eliminate corporate 
    level tax on the built-in appreciation.
        [footnote 32] The Act generally requires recognition of gain if 
    a C corporation transfers appreciated assets to a tax exempt entity 
    in a section 332 liquidation. See Code section 337(b)(2).
    
    S. Rep. No. 145, 100th Cong., 2d Sess. 66 (1988).
    
    Explanation of Provision
    
        An acquisition by a tax-exempt entity of all or substantially all 
    of the assets of a taxable corporation or a change in status of a 
    taxable corporation to a tax-exempt entity, like a liquidation into an 
    80-percent tax-exempt distributee that is taxable under section 
    337(b)(2), could eliminate the corporate level tax on the appreciation 
    in the taxable corporation's assets. Accordingly, the proposed 
    regulations apply rules similar to section 337(b)(2) to these 
    transactions. The proposed regulations generally do not affect the tax 
    treatment of the taxable corporation's shareholders or the availability 
    of any charitable contribution deduction.
        The proposed regulations provide that a taxable corporation that 
    transfers all or substantially all of its assets to one or more tax-
    exempt entities is required to recognize gain or loss as if the assets 
    transferred were sold at their fair market values. Like section 
    337(b)(2), the proposed regulations provide that no gain or loss will 
    be recognized on any of the assets transferred that are used by the 
    tax-exempt entity in an activity the income from which is subject to 
    the unrelated business tax under section 511(a). However, gain on such 
    assets will later be recognized as unrelated business taxable income if 
    the tax-exempt entity disposes of the assets or ceases to use the 
    assets in an unrelated trade or business activity.
        The proposed regulations generally treat a taxable corporation that 
    changes its status to a tax-exempt entity as having transferred all of 
    its assets to a tax-exempt entity immediately before the change in 
    status becomes effective, irrespective of whether an actual transfer of 
    the assets has occurred. For this purpose, if a state, a political 
    subdivision thereof, or an entity any portion of whose income is 
    excluded from gross income under section 115, acquires the stock of a 
    taxable corporation and thereafter any of the taxable corporation's 
    income is excluded from gross income under section 115, the taxable 
    corporation will be treated as if it transferred all of its assets to a 
    tax-exempt entity
    
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    immediately before the stock acquisition.
        Certain exceptions are provided to the change in status rule for 
    organizations that are tax-exempt or are seeking tax-exempt status 
    under section 501(a). These exceptions provide relief for corporations 
    needing a brief start-up period to establish their tax-exempt status 
    and for those that temporarily lose their tax-exempt status. Under the 
    proposed regulations, the change in status rule does not apply to a 
    corporation that is tax-exempt within three taxable years of the 
    taxable year of its formation, or to a corporation that regains its 
    tax-exempt status within three years after either a final adverse 
    adjudication on its tax-exempt status or filing a tax return as a 
    taxable corporation. The change in status rule also does not apply to 
    an organization that before publication of these proposed regulations 
    was exempt or unsuccessfully applied for exemption, if the organization 
    is tax-exempt within three years after the date of publication of final 
    regulations. An organization that files for recognition of its exempt 
    status during one of the three-year periods will be deemed to have or 
    regain tax-exempt status if the application ultimately results in 
    recognition as of a date during the three-year period. An anti-abuse 
    rule makes all these exceptions unavailable to a taxable corporation 
    that acquires all or substantially all of the assets of another taxable 
    corporation and then changes its status with a principal purpose of 
    avoiding the gain or loss recognition rule made applicable by these 
    regulations.
        The proposed regulations disallow the recognition of loss if assets 
    are acquired by the taxable corporation in a section 351 transaction or 
    a contribution to capital, or if assets are distributed by the taxable 
    corporation to a shareholder, with a principal purpose to recognize 
    loss by the taxable corporation on the transfer of its assets to a tax-
    exempt entity (loss limitation rule). For example, the loss limitation 
    rule may apply if (a) a loss asset is contributed to a taxable 
    corporation and then is transferred with substantially all of the 
    taxable corporation's assets to a tax-exempt entity; (b) loss assets 
    not constituting substantially all of a taxable corporation's assets 
    are contributed to a new subsidiary and then the new subsidiary 
    transfers the loss assets which are its only assets to a tax-exempt 
    entity, or (c) assets are distributed by a taxable corporation to its 
    parent and then the taxable corporation transfers loss assets now 
    constituting substantially all of its assets to a tax-exempt entity. 
    For purposes of the loss limitation rule, the principles of section 
    336(d)(2) apply.
        Under the proposed regulations, a ``taxable corporation'' is any 
    corporation that is not a tax-exempt entity as defined in the proposed 
    regulations. Thus, taxable corporations include all S corporations 
    whether or not subject to tax on built-in gain under section 1374. 
    After the repeal of the General Utilities doctrine, an S corporation 
    like a C corporation is required to recognize gain or loss when it 
    liquidates. This gain or loss passes through to the S corporation's 
    shareholders under section 1366. The proposed regulations parallel this 
    treatment.
        Under the proposed regulations, a ``tax-exempt entity'' includes 
    organizations exempt from tax under section 501, section 527, section 
    528, or section 529; Federal, state, and local governments; Indian 
    tribal governments and federally chartered Indian tribal corporations; 
    foreign governments and international organizations; and entities any 
    portion of whose income is excluded from gross income under section 
    115. The term does not, however, include a cooperative described in 
    section 521, paralleling the exception to section 337(b)(2).
        A transaction conveying all or substantially all of the assets of a 
    taxable corporation to an Indian tribal government or a corporation 
    organized under section 17 of the Indian Reorganization Act (IRA) or 
    section 3 of the Oklahoma Welfare Act (OWA) will be covered by these 
    regulations. Rev. Rul. 94-16, 1994-1 C.B. 19, held that an 
    unincorporated Indian tribe or a corporation organized under section 17 
    of the IRA is not subject to federal income tax, but a corporation 
    wholly owned by an Indian tribe and organized under state law is 
    subject to federal income tax. Rev. Rul. 94-65, 1994-2 C.B. 14, held 
    that a corporation organized under section 3 of the OWA also was not 
    subject to federal income tax. In that ruling, the Service announced 
    that an Indian tribe seeking to dissolve a corporation organized under 
    state law and organized into a federally chartered corporation 
    (corporation organized under either section 17 of the IRA or section 3 
    of the OWA) will be granted relief under section 7805(b) of the Code 
    upon application for such relief provided it demonstrates to the 
    Service that it has acted reasonably and in good faith to achieve the 
    dissolution and organization. The relief described in that ruling 
    applied to taxes on income earned after September 30, 1994, by a 
    corporation organized by an Indian tribe under state law from income 
    earned within the boundaries of the reservation (including gain or loss 
    properly allocable to such activities from the sale or exchange of 
    assets). The Service intends to provide similar relief from tax 
    resulting from any gain or loss recognized under the rules provided in 
    these regulations. The relief will be available to state law 
    corporations wholly owned by Indian tribes that have acted reasonably 
    and in good faith to dissolve and reorganize as federally chartered 
    corporations.
    
    Proposed Effective Date
    
        These regulations are proposed to be applicable for transfers of 
    assets as described in the regulations occurring after [date that is 30 
    days after publication in the Federal Register of these regulations as 
    final regulations], unless the transfer is pursuant to a written 
    agreement which is (subject to customary conditions) binding on or 
    before [date that is 30 days after publication in the Federal Register 
    of these regulations as final regulations].
    
    Special Analyses
    
        It has been determined that this notice of proposed rulemaking 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) does not apply to these regulations and because the 
    regulations do not impose a collection of information on small 
    entities, the Regulatory Flexibility Act (5 U.S.C. Chapter 6) does not 
    apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
    notice of proposed rulemaking will be submitted to the Chief Counsel 
    for Advocacy of the Small Business Administration for comment on its 
    impact on small business.
    
    Comments and Public Hearing
    
        Before these proposed regulations are adopted as final regulations, 
    consideration will be given to any written comments (a signed original 
    and eight (8) copies) that are submitted timely to the IRS. All 
    comments will be available for public inspection and copying.
        A public hearing has been scheduled for Tuesday, May 6, 1997, at 10 
    a.m. in the IRS Auditorium, Internal Revenue Building, 1111 
    Constitution Avenue, NW., Washington, DC. Because of access 
    restrictions, visitors will not be admitted beyond the Internal Revenue 
    Service Building lobby more than 15 minutes before the hearing starts.
        The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    
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        Persons that wish to present oral comments at the hearing must 
    submit written comments by April 15, 1997, and submit an outline of the 
    topics to be discussed and the time to be devoted to each topic (signed 
    original and eight (8) copies) by April 15, 1997.
        A period of 10 minutes will be allotted to each person for making 
    comments.
        An agenda showing the scheduling of the speakers will be prepared 
    after the deadline for receiving outlines has passed. Copies of the 
    agenda will be available free of charge at the hearing.
    
        Drafting Information: The principal author of these regulations 
    is Stephen R. Cleary of the Office of Assistant Chief Counsel 
    (Corporate), IRS. However, other personnel from the IRS and the 
    Treasury Department participated in their development.
    
    List of Subjects in 26 CFR Part 1
    
        Income taxes, Reporting and recordkeeping requirements.
    
    Proposed Amendments to the Regulations
    
        Accordingly, 26 CFR Part 1 is proposed to be amended as follows:
    
    PART I--INCOME TAXES
    
        Paragraph 1. The authority citation for 26 CFR Part 1 is amended by 
    adding an entry in numerical order to read as follows:
    
        Authority: 26 U.S.C. 7805 * * *.
    
        Section 1.337(d)-4 also issued under 26 U.S.C. 337 * * *.
        Par. 2. Section 1.337(d)-4 is added to read as follows:
    
    
    Sec. 1.337(d)-4  Taxable to tax-exempt.
    
        (a) Gain or loss recognition--(1) General rule. If a taxable 
    corporation transfers all or substantially all of its assets to one or 
    more tax-exempt entities, the taxable corporation must recognize gain 
    or loss immediately before the transfer as if the assets transferred 
    were sold at their fair market values. But see section 267 and 
    paragraph (d) of this section concerning limitations on the recognition 
    of loss.
        (2) Change in corporation's tax status treated as asset transfer. 
    Except as provided in paragraph (a)(3) of this section, a taxable 
    corporation's change in status to a tax-exempt entity will be treated 
    as if it transferred all of its assets to a tax-exempt entity 
    immediately before the change in status becomes effective in a 
    transaction to which paragraph (a)(1) of this section applies. For 
    purposes of this paragraph (a), if a state, a political subdivision 
    thereof, or an entity any portion of whose income is excluded from 
    gross income under section 115, acquires the stock of a taxable 
    corporation and thereafter any of the taxable corporation's income is 
    excluded from gross income under section 115, the taxable corporation 
    will be treated as if it transferred all of its assets to a tax-exempt 
    entity immediately before the stock acquisition.
        (3) Exceptions for certain changes in status--(i) To whom 
    available. Paragraph (a)(2) of this section does not apply to the 
    following corporations--
        (A) A corporation previously exempt under section 501(a) which 
    regains its tax-exempt status under section 501(a) within three years 
    from the later of a final adverse adjudication on the corporation's tax 
    exempt status, or the filing by the corporation, or by the Secretary or 
    his delegate under section 6020(b), of a federal income tax return of 
    the type filed by a taxable corporation;
        (B) A newly-formed corporation that is tax-exempt under section 
    501(a) within three taxable years from the end of the taxable year in 
    which it was formed;
        (C) A corporation previously exempt under section 501(a) or that 
    applied for but did not receive recognition of exemption under section 
    501(a), before January 15, 1997, if such corporation is tax-exempt 
    under section 501(a) within three years from [date of publication of 
    these regulations in the Federal Register as final regulations].
        (ii) Application for recognition. An organization is deemed to have 
    or regain tax-exempt status within one of the three-year periods 
    described in paragraph (a)(3)(i) of this section if it files an 
    application for recognition of exemption with the Commissioner within 
    the three-year period and the application either results in a 
    determination by the Commissioner or a final adjudication that the 
    organization is tax-exempt under section 501(a) during any part of the 
    three-year period. The preceding sentence does not require the filing 
    of an application for recognition of exemption by any organization not 
    otherwise required, such as by Sec. 1.501(a)-1, Sec. 1.505(c)-1T, and 
    Sec. 1.508-1(a), to apply for recognition of exemption.
        (iii) Anti-abuse rule. This paragraph (a)(3) does not apply to a 
    corporation that, with a principal purpose of avoiding the application 
    of paragraphs (a)(1) and (a)(2) of this section, acquires all or 
    substantially all of the assets of another taxable corporation and then 
    changes its status to that of a tax-exempt entity.
        (4) Related transactions. This section applies to any series of 
    related transactions having an effect similar to any of the 
    transactions to which this section applies.
        (b) Exceptions. Paragraph (a) of this section does not apply to--
        (1) Any assets transferred to a tax-exempt entity if the assets are 
    used in an activity the income from which is subject to tax under 
    section 511(a). However, if assets on which no gain or loss was 
    recognized by reason of the preceding sentence are disposed of by the 
    tax-exempt entity, then, notwithstanding any other provision of law, 
    any gain (not in excess of the amount not recognized by reason of the 
    preceding sentence) shall be included in the tax-exempt entity's 
    unrelated business taxable income. If the tax-exempt entity ceases to 
    use the assets in an activity the income from which is subject to tax 
    under section 511(a), the entity will be treated for purposes of this 
    subparagraph as having disposed of the assets on the date of the 
    cessation;
        (2) Any transfer of assets to the extent gain or loss otherwise is 
    recognized by the taxable corporation on the transfer. See, for 
    example, sections 336, 337(b)(2), 367, and 1001;
        (3) Any forfeiture of a taxable corporation's assets in a criminal 
    or civil action to the United States, the government of a possession of 
    the United States, a state, the District of Columbia, the government of 
    a foreign country, or a political subdivision of any of the foregoing; 
    or any expropriation of a taxable corporation's assets by the 
    government of a foreign country; and
        (4) Any transfer of assets to a cooperative described in section 
    521.
        (c) Definitions. For purposes of this section--
        (1) Taxable corporation. A taxable corporation is any corporation 
    that is not a tax-exempt entity as defined in paragraph (c)(2) of this 
    section.
        (2) Tax-exempt entity. A tax-exempt entity is--
        (i) Any entity that is exempt from tax under section 501(a), 
    section 527, section 528, or section 529;
        (ii) A charitable remainder annuity trust or charitable remainder 
    unitrust as defined in section 664(d);
        (iii) The United States, the government of a possession of the 
    United States, a state, the District of Columbia, the government of a 
    foreign country, or a political subdivision of any of the foregoing;
        (iv) An Indian Tribal Government as defined in section 7701(a)(40), 
    a subdivision of an Indian tribal government determined in accordance 
    with section 7871(d), or an agency or
    
    [[Page 2068]]
    
    instrumentality of an Indian tribal government or subdivision thereof;
        (v) An Indian Tribal Corporation organized under section 17 of the 
    Indian Reorganization Act of 1934, 25 U.S.C. 477, or section 3 of the 
    Oklahoma Welfare Act, 25 U.S.C. 503;
        (vi) An international organization as defined in section 
    7701(a)(18);
        (vii) An entity any portion of whose income is excluded under 
    section 115; or
        (viii) An entity that would not be taxable under the Internal 
    Revenue Code for reasons substantially similar to those applicable to 
    any entity listed in this paragraph (c)(2) unless otherwise explicitly 
    made exempt from the application of this section by statute or by 
    action of the Commissioner.
        (3) Substantially all. The term substantially all has the same 
    meaning as under section 368(a)(1)(C).
        (d) Loss limitation rule. For purposes of determining the amount of 
    loss recognized by a taxable corporation on the transfer of its assets 
    to a tax-exempt entity under paragraph (a) of this section, if assets 
    are acquired by the taxable corporation in a transaction to which 
    section 351 applied or as a contribution to capital, or assets are 
    distributed from the taxable corporation to a shareholder or another 
    member of the taxable corporation's affiliated group, and in either 
    case as part of a plan a principal purpose of which is to recognize 
    loss by the taxable corporation on the transfer of its assets to the 
    tax-exempt entity, the losses recognized by the taxable corporation on 
    the assets transferred to the tax-exempt entity will be disallowed. For 
    purposes of the preceding sentence, the principles of section 336(d)(2) 
    apply.
        (e) Effective date. This section is applicable for transfers of 
    assets as described in paragraph (a) of this section occurring after 
    [date that is 30 days after publication in the Federal Register of 
    these regulations as final regulations], unless the transfer is 
    pursuant to a written agreement which is (subject to customary 
    conditions) binding on or before [date that is 30 days after 
    publication in the Federal Register of these regulations as final 
    regulations].
    Margaret Milner Richardson,
    Commissioner of Internal Revenue.
    [FR Doc. 97-771 Filed 1-10-97; 8:45 am]
    BILLING CODE 4830-01-U
    
    
    

Document Information

Published:
01/15/1997
Department:
Internal Revenue Service
Entry Type:
Proposed Rule
Action:
Notice of proposed rulemaking and notice of public hearing.
Document Number:
97-771
Dates:
Written comments must be received by April 15, 1997. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for May 6, 1997, at 10:00 a.m. must be submitted by April 15, 1997.
Pages:
2064-2068 (5 pages)
Docket Numbers:
REG-209121-89
RINs:
1545-AN21: Certain Asset Transfers to a Tax-Exempt Entity
RIN Links:
https://www.federalregister.gov/regulations/1545-AN21/certain-asset-transfers-to-a-tax-exempt-entity
PDF File:
97-771.pdf
CFR: (2)
26 CFR 1.508-1(a)
26 CFR 1.337(d)-4