[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Rules and Regulations]
[Pages 19544-19546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10394]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8663]
RIN 1545-AT43
Transfers to Investment Companies
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations amending regulations
under section 351(e) of the Internal Revenue Code relating to transfers
to investment companies. The final regulations concern the treatment of
certain transfers to a controlled corporation. Generally, the final
regulations amend the regulations to provide when certain transfers
will not cause a diversification of the transferors' interests.
EFFEFCITVE DATE: These regulations are effective May 2, 1996.
FOR FURTHER INFORMATION CONTACT: Andrew M. Eisenberg, (202) 622-7790
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
1. Background
This document contains final regulations under section 351. The
final regulations provide for the treatment of
[[Page 19545]]
certain transfers to a controlled corporation. Section 351(a) provides
that no gain or loss will be recognized if one or more persons transfer
property to a corporation solely in exchange for stock in the
corporation and immediately after the exchange such person or persons
are in control of the corporation. Section 351(e)(1) provides that
section 351(a) will not apply to a transfer of property to an
investment company.
On August 10, 1995, the Federal Register published a notice of
proposed rulemaking (CO-19-95), amending regulations under section 351
of the Internal Revenue Code relating to transfers of property to an
investment company (60 FR 40794). The proposed rules were based on the
conclusion that transfers of diversified portfolios are not
inconsistent with the Congressional purpose of section 351(e)(1).
2. Public Comments and the Final Regulations
The IRS received comments from the public on the proposed
regulations. No public hearing was requested and none was held. The
comments received were generally supportive of the proposed
regulations. After consideration of all the comments, the regulations
proposed by CO-19-95 are adopted as revised by this Treasury decision.
The principal comments on the proposed regulations are discussed below.
Government securities are not treated as securities of an issuer
for purposes of the 25 and 50-percent tests. Several commentators
suggested that the final regulations include specific assurance that
Government securities are not treated as securities of an issuer in
applying the 25 and 50-percent tests contained in section
368(a)(2)(F)(ii). The proposed regulations generally adopt the section
368(a)(2)(F)(ii) tests for purposes of determining whether a portfolio
of stocks and securities is diversified. However, the proposed
regulations modify the 25 and 50-percent tests of section
368(a)(2)(F)(ii) by including Government securities in total assets
(clause (iv) of section 368(a)(2)(F) excludes Government securities
from total assets for purposes of the 25 and 50-percent tests in clause
(ii) of section 368(a)(2)(F)). The final regulations clarify that
Government securities, while included in total assets, are not treated
as securities of an issuer for purposes of the numerator of the 25 and
50-percent tests of section 368(a)(2)(F)(ii).
The transfer of a diversified portfolio of stocks and securities by
any transferor satisfies the modified diversification test. One
commentator suggested that the final regulations should clarify that
any person, rather than corporate transferors only, may satisfy the
modified diversification test. The commentator is concerned that the
use of the section 368(a)(2)(F)(ii) tests, which are adopted from a
provision that applies only to transfers by corporations, may imply
that the tests as applied in section 351 are limited to corporate
transferors.
The Treasury and IRS do not intend to limit application of the
final regulations solely to corporate transferors. The final
regulations provide that a portfolio will be diversified if it
satisfies the 25 and 50-percent tests of section 368(a)(2)(F)(ii) (as
modified), rather than section 368(a)(2)(F)(ii), generally.
Transfers of interests in real property to an investment company.
One commentator suggested that the final regulations adopt a rule
whereby transfers of real property would not result in the
diversification of the transferors' interests if each transferor
transfers a diversified portfolio of real property to a Real Estate
Investment Trust. The subject of real property transfers is beyond the
scope of these final regulations.
Retroactive effect of the final regulations. Several commentators
suggested that the final regulations include a retroactive effective
date. The final regulations allow taxpayers who transfer diversified,
but nonidentical, portfolios of stocks and securities before May 2,
1996, to choose to treat the transfers consistent with the final
regulations or as transfers resulting in diversification. However,
transfers completed on or after May 2, 1996, are subject to the final
regulations.
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 also has 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 Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Drafting Information. The principal author of these regulations is
Andrew M. Eisenberg, Office of Assistant Chief Counsel (Corporate),
IRS. However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendment to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.351-1 also issued under 26 U.S.C. 351. * * * .
Par. 2. Section 1.351-1 is amended by:
1. Redesignating paragraph (c)(6) as paragraph (c)(7).
2. Adding new paragraph (c)(6) to read as follows:
Sec. 1.351-1 Transfer to corporation controlled by transferor.
* * * * *
(c) * * *
(6)(i) For purposes of paragraph (c)(5) of this section, a transfer
of stocks and securities will not be treated as resulting in a
diversification of the transferors' interests if each transferor
transfers a diversified portfolio of stocks and securities. For
purposes of this paragraph(c)(6), a portfolio of stocks and securities
is diversified if it satisfies the 25 and 50-percent tests of section
368(a)(2)(F)(ii), applying the relevant provisions of section
368(a)(2)(F). However, Government securities are included in total
assets for purposes of the denominator of the 25 and 50-percent tests
(unless the Government securities are acquired to meet the 25 and 50-
percent tests), but are not treated as securities of an issuer for
purposes of the numerator of the 25 and 50-percent tests.
(ii) Paragraph (c)(6)(i) of this section is effective for transfers
completed on or after May 2, 1996. Transfers of diversified (within the
meaning of paragraph (c)(6)(i) of this section), but nonidentical,
portfolios of stocks and securities completed before May 2, 1996, may
be treated either--
(A) Consistent with paragraph (c)(6)(i) of this section; or
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(B) As resulting in diversification of the transferors' interests.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: March 6, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-10394 Filed 5-1-96; 8:45 am]
BILLING CODE 4830-01-U
