81 FR 36793 - Certain Transfers of Property to Regulated Investment Companies [RICs] and Real Estate Investment Trusts [REITs]; Final and Temporary Regulations

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 81, Issue 110 (June 8, 2016)

Page Range		36793-36798
FR Document		2016-13443
This document contains final and temporary regulations effecting the repeal of the General Utilities doctrine by the Tax Reform Act of 1986 and preventing abuse of the Protecting Americans from Tax Hikes Act of 2015. The temporary regulations impose corporate level tax on certain transactions in which property of a C corporation becomes the property of a REIT. The temporary regulations affect RICs, REITs, C corporations the property of which becomes the property of a RIC or a REIT, and their shareholders. The text of these temporary regulations also serves as the text of part of the proposed regulations in the related notice of proposed rulemaking (REG-126452-15) set forth in the Proposed Rules section in this issue of the Federal Register.
Federal Register, Volume 81 Issue 110 (Wednesday, June 8, 2016)
[Federal Register Volume 81, Number 110 (Wednesday, June 8, 2016)]
[Rules and Regulations]
[Pages 36793-36798]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-13443]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9770]
RIN 1545-BN39


Certain Transfers of Property to Regulated Investment Companies 
[RICs] and Real Estate Investment Trusts [REITs]; Final and Temporary 
Regulations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations 
effecting the repeal of the General Utilities doctrine by the Tax 
Reform Act of 1986 and preventing abuse of the Protecting Americans 
from Tax Hikes Act of 2015. The temporary regulations impose corporate 
level tax on certain transactions in which property of a C corporation 
becomes the property of a REIT. The temporary regulations affect RICs, 
REITs, C corporations the property of which becomes the property of a 
RIC or a REIT, and their shareholders. The text of these temporary 
regulations also serves as the text of part of the proposed regulations 
in the related notice of proposed rulemaking (REG-126452-15) set forth 
in the Proposed Rules section in this issue of the Federal Register.

DATES: These regulations are effective June 7, 2016.

[[Page 36794]]


FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317-
5085 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

1. The General Utilities Doctrine, Its Repeal, and Section 337(d)

    In general, gain on a sale of appreciated property by a C 
corporation is taxed to the corporation when the sale occurs and to the 
shareholders when the proceeds are distributed as dividends. 
Historically however, a corporation generally could distribute 
appreciated property to its shareholders without recognition of gain to 
the corporation under the so-called General Utilities doctrine arising 
from interpretations of General Utilities & Operating Co. v. Helvering, 
296 U.S. 200 (1935). See H.R. Rep. No. 99-841, at 198 (1986) (Conf. 
Rep.); H.R. Rep. No. 99-426, at 274-75 (1985).
    Beginning in 1969, a series of statutory limitations on the General 
Utilities doctrine were enacted into law. In the Tax Equity and Fiscal 
Responsibility Act of 1982, Public Law 97-248, 96 Stat. 324, current 
section 311(b) (originally designated as section 311(d)) was added to 
the Internal Revenue Code (Code) and required a corporation to 
recognize gain on appreciated property distributed to a shareholder in 
redemption of shares. Legislation enacted in 1984 required gain 
recognition for all non-liquidating distributions. Finally, what 
remained of the General Utilities doctrine was repealed (General 
Utilities repeal) by the enactment of subtitle D of title VI of the Tax 
Reform Act of 1986, Public Law 99-514, 100 Stat. 2085 (the Act), which 
amended sections 336 and 337 of the Code to require corporations to 
recognize gain or loss on the distribution of property in connection 
with complete liquidations other than certain subsidiary liquidations. 
Section 337(d) was added to the Code by section 631(a) of the Act and 
subsequently amended by section 1006(e)(5)(A)(i) through (ii) of the 
Technical and Miscellaneous Revenue Act of 1988, Public Law 100-647,102 
Stat. 3342 (the Technical Amendment). This document contains amendments 
to 26 CFR part 1 under section 337(d).
    Section 337(d) directs the Secretary of the Treasury to prescribe 
regulations that are necessary or appropriate to carry out the purposes 
of General Utilities repeal, including ``regulations to ensure that 
such purposes may not be circumvented through the use of any provision 
of law or regulations (including . . . part III of this subchapter) or 
through the use of a regulated investment company, real estate 
investment trust, or tax exempt entity. . . .'' The legislative 
histories of the Act and the Technical Amendment underscore the broad 
grant of regulatory authority and Congress' expectation that the 
Treasury Department and the IRS would issue or amend regulations as 
necessary to further the purposes of General Utilities repeal, 
``includ[ing] rules to require the recognition of gain if appreciated 
property of a C corporation is transferred to a RIC or a REIT in a 
carryover basis transaction that would otherwise eliminate corporate 
level tax on the built-in appreciation.'' H.R. Rep. No. 100-391, at 
1199 (1987); see also H.R. Rep. No. 99-841, at 204 (1986) (Conf. Rep.). 
Section 337(d)(1) specifically refers to ensuring that the purposes of 
General Utilities repeal are not circumvented through the use of the 
corporate organization and reorganization provisions of part III, 
subchapter C, chapter 1 of the Code, which include section 355.

2. Section 355 and the PATH Act

    Section 355 generally provides that, if certain requirements are 
satisfied, a corporation may distribute stock (or stock and securities) 
of one or more controlled corporations to its shareholders and security 
holders without the distributing corporation, its shareholders, or its 
security holders recognizing income, gain, or loss on the distribution 
(a section 355 distribution). In the course of enacting certain 
amendments to section 355 as part of the Omnibus Budget Reconciliation 
Act of 1990, Public Law 101-508, 104 Stat. 1388, Congress described 
section 355 as a ``limited exception to the repeal of the General 
Utilities doctrine intended to permit historic shareholders to continue 
to carry on their historic corporate businesses in separate 
corporations'' and stated that ``[t]he present-law provisions granting 
tax-free treatment at the corporate level are particularly troublesome 
because they may offer taxpayers an opportunity to avoid the general 
rule that corporate-level tax is recognized when an asset (including 
stock of a subsidiary) is disposed of.'' 136 Cong. Rec. S15704 (daily 
ed. Oct 18, 1990).\1\ Further, Congress noted that ``[t]he bill is not 
intended to limit in any way the continuing Treasury Department 
authority to issue regulations to prevent the avoidance of the repeal 
of the General Utilities doctrine through any provision of law or 
regulations, including section 355.'' Id. at S15705.
---------------------------------------------------------------------------

    \1\ The bill that resulted in Public Law 101-508, S.3209, was 
brought to the floor without printing a formal report, and language 
from the various committees to consider the bill was printed in the 
Congressional Record at the request of Senator Sasser to complete 
the legislative record.
---------------------------------------------------------------------------

    On December 18, 2015, the President signed into law the Protecting 
Americans Against Tax Hikes Act of 2015 (PATH Act), enacted as Division 
Q of the Consolidated Appropriations Act, 2016, Public Law 114-113, 129 
Stat. 2422. Section 311(a) and (b) of the PATH Act added to the Code 
sections 355(h) and 856(c)(8), respectively. Section 355(h)(1) of the 
Code provides that section 355 shall not apply to a distribution if 
either the distributing corporation or the controlled corporation is a 
REIT. Section 355(h)(2) provides exceptions permitting a REIT to 
distribute the stock of another REIT or of a taxable REIT subsidiary 
under certain conditions. Section 856(c)(8) provides that a corporation 
may not elect REIT status during the ten-year period following a 
section 355 distribution if such corporation was the distributing 
corporation or the controlled corporation in that distribution. Section 
311(c) of the PATH Act provides that sections 355(h) and 856(c)(8) 
apply to distributions on or after December 7, 2015, but do not apply 
to any distribution pursuant to a transaction described in a ruling 
request initially submitted to the IRS on or before such date, which 
request has not been withdrawn and with respect to which a ruling has 
not been issued or denied in its entirety as of such date.

3. Prior Regulations

    In certain cases, General Utilities repeal could be circumvented if 
property of a C corporation becomes the property of a RIC or a REIT 
(converted property) by a transfer of the converted property from a C 
corporation to a RIC or a REIT or by the qualification of the C 
corporation as a RIC or a REIT (either, a conversion transaction). A 
conversion transaction could result in elimination of the corporate 
level of gain in the converted property, including gain from the sale 
of the property, because RICs and REITs generally are not subject to 
tax on income that is distributed to their shareholders.
    The Treasury Department and the IRS issued Notice 88-19 (1988-1 
C.B. 486) on February 4, 1988. Notice 88-19 announced the IRS's 
intention to promulgate regulations providing that a C corporation 
engaging in a conversion transaction would be treated, for all federal 
income tax purposes, as if it had sold all of its assets at their 
respective fair market values (deemed sale treatment) and immediately 
liquidated, unless the C corporation elected to be

[[Page 36795]]

subject to tax under section 1374 with respect to the C corporation 
property (section 1374 treatment). If elected, section 1374 treatment 
would subject the RIC or REIT to corporate-level taxation on the built-
in gain recognized during the ten-year period following the conversion 
transaction on the converted property. Temporary regulations under 
Sec.  1.337(d)-5T (TD 8872) and a notice of proposed rulemaking cross-
referencing the temporary regulations (REG-209135-88) were published in 
the Federal Register (65 FR 5775, 65 FR 5805) on February 7, 2000, and 
reflected the principles set forth in Notice 88-19.
    Additional temporary regulations under Sec. Sec.  1.337(d)-6T and 
1.337(d)-7T (TD 8975) and a notice of proposed rulemaking cross-
referencing the temporary regulations (REG-142299-01 and REG-209135-88) 
were published in the Federal Register (67 FR 8, 67 FR 28) on January 
2, 2002. The proposed regulations cross-referencing Sec. Sec.  
1.337(d)-5T through -7T, with modifications, were adopted on March 18, 
2003 (TD 9047), and published as final regulations in the Federal 
Register (68 FR 12817).

4. Current Regulations

    The final regulations in Sec.  1.337(d)-6 apply to conversion 
transactions occurring on or after June 10, 1987, and before January 2, 
2002, and provide that a C corporation engaging in such a conversion 
transaction is subject to deemed sale treatment unless the C 
corporation elects section 1374 treatment with respect to the converted 
property. The final regulations in Sec.  1.337(d)-7 apply to conversion 
transactions occurring on or after January 2, 2002, and provide that 
the RIC or the REIT owning the property after the conversion 
transaction is subject to section 1374 treatment unless the C 
corporation engaging in a conversion transaction elects deemed sale 
treatment with respect to the converted property.
    In response to concerns expressed by commentators (described 
subsequently), the Treasury Department and the IRS published in the 
Federal Register (77 FR 22516) on April 16, 2012, a notice of proposed 
rulemaking (REG-139991-08) proposing amendments to Sec.  1.337(d)-7. 
These amendments (the 2013 amendments) were adopted as final 
regulations (TD 9626) and were published in the Federal Register (78 FR 
46805) on August 2, 2013.
    The 2013 amendments address two principal areas of concern. First, 
the 2013 amendments provide an exception from the general rule 
subjecting the RIC or the REIT to section 1374 treatment in the case of 
a transfer of property by a C corporation to a RIC or a REIT to the 
extent the transfer qualifies for nonrecognition treatment under 
section 1031 (relating to like-kind exchanges) or section 1033 
(relating to involuntary conversions). The Treasury Department and the 
IRS did not extend this treatment to all exchanged basis transactions, 
such as exchanges that would otherwise qualify for nonrecognition 
treatment under section 351 of the Code, out of concern that such an 
exception could create opportunities to avoid corporate-level tax on 
built-in gains. Second, the 2013 amendments provide an exception for 
conversion transactions in which the C corporation that owned the 
converted property is a tax-exempt entity to the extent that gain would 
not be subject to tax if a deemed sale election were made. In such 
circumstances, the C corporation is not required to make a deemed sale 
election, and the RIC or the REIT is not subject to section 1374 
treatment.

5. Notice 2015-59 and Revenue Procedure 2015-43

    Congress, the Treasury Department, and the IRS are aware of 
transactions in which a C corporation that does not qualify as a REIT 
distributes the stock of a controlled corporation in a transaction 
intended to qualify under section 355 so that either the distributing 
corporation or the controlled corporation can qualify as a REIT. In 
many cases, a C corporation that owns both assets qualifying as real 
estate assets for purposes of part II, subchapter M, chapter 1 of the 
Code (REIT-qualifying assets) and assets that do not so qualify (non-
qualifying assets) transfers either the REIT-qualifying assets or the 
non-qualifying assets to a controlled corporation in exchange for its 
stock and then distributes the controlled corporation stock to its 
shareholders. Before or after the distribution, the corporation holding 
the REIT-qualifying assets elects REIT status. If the transaction 
satisfies the requirements of sections 368(a)(1)(D), 355, and 361, no 
gain is recognized on either the transfer of assets by the distributing 
corporation to the controlled corporation or the distribution of the 
controlled corporation stock to the shareholders of the distributing 
corporation.
    Prior to the enactment of the PATH Act, the IRS issued Notice 2015-
59 (2015-40 I.R.B. 467) and Revenue Procedure 2015-43 (2015-40 I.R.B. 
495) on September 14, 2015, in part to respond to the transactions 
described in the preceding paragraph. Revenue Procedure 2015-43 
provides that the IRS will not ordinarily issue a ruling relating to 
the qualification under section 355 and related provisions of a 
distribution in certain circumstances in which property owned by the 
distributing corporation or the controlled corporation becomes the 
property of a RIC or a REIT. Notice 2015-59 states that such 
transactions ``may circumvent the purposes of Code provisions intended 
to repeal the Supreme Court's decision'' in General Utilities, such as 
section 337(d). The Notice also requested comments with respect to the 
facts and circumstances relevant to whether such transactions 
circumvent the purposes of General Utilities repeal. The Treasury 
Department and the IRS are aware of informal commentary, but no formal 
comments have been received.

Explanation of Provisions

    The Treasury Department and the IRS believe that section 1374 
treatment imposes an appropriate regime for recognizing built-in gain 
for many conversion transactions. The Treasury Department and the IRS 
are concerned, however, that section 1374 treatment may not adequately 
implement the purposes of General Utilities repeal if a taxpayer 
effects a tax-free separation of REIT-qualifying assets from non-
qualifying assets in a section 355 distribution (the related section 
355 distribution) and the REIT-qualifying assets become the assets of a 
REIT. After such transactions, gain on the assets held by the REIT may 
not be taxed at the corporate level because such gain is unlikely to be 
recognized within the recognition period during which the REIT is 
subject to section 1374 treatment under the final regulations in Sec.  
1.337(d)-7. In contrast, without a section 355 distribution, a taxpayer 
generally could not separate REIT-qualifying assets from non-qualifying 
assets and cause one corporation to hold the REIT-qualifying assets and 
another corporation to hold the non-qualifying assets except by means 
of a sale or exchange to which section 1001 applies or a distribution 
to which section 311(b) applies.
    Moreover, the REIT and its shareholders may realize the benefit of 
appreciation on converted property without a transaction subject to 
section 1374 treatment or otherwise taxable at the corporate level. For 
example, a REIT that distributes rental income on appreciated converted 
property to its shareholders may be entitled to a dividends paid 
deduction under section 562 and, therefore, effectively does not pay 
income tax at the REIT level on that income, which in many cases will

[[Page 36796]]

reflect the appreciation in the value of the property. Additionally, if 
the lessee is a C corporation (such as the other party to the section 
355 distribution), the rental deductions reduce the C corporation's 
taxable income. In such circumstances, the Treasury Department and the 
IRS have determined that section 355 does not serve as a ``limited 
exception to General Utilities repeal intended to enable historic 
shareholders to carry on their historic businesses in separate 
corporations'' but rather creates an ``opportunity to avoid the general 
rule that corporate-level tax is recognized when an asset . . . is 
disposed of.'' 136 Cong. Rec. S15704.
    Section 311 of the PATH Act addresses some of the concerns just 
described. However, the Treasury Department and the IRS are concerned 
that some variations of the transactions previously described may 
continue to be used to circumvent the purposes of section 311 of the 
PATH Act. In particular, there is concern that corporations affiliated 
with the distributing corporation or the controlled corporation could 
be used to circumvent the Congressional policy implemented through 
section 311 of the PATH Act. The Treasury Department and the IRS thus 
have determined that temporary regulations are necessary to prevent 
abuses of sections 355(h) and 856(c)(8) and to further the purposes of 
General Utilities repeal.
    Therefore, the Treasury Department and the IRS are issuing these 
temporary regulations providing that a C corporation engaging in a 
conversion transaction involving a REIT within the ten-year period 
following a related section 355 distribution is treated as making an 
election to recognize gain and loss as if it had sold all of the 
converted property to an unrelated party at fair market value on the 
deemed sale date (as defined in Sec.  1.337(d)-7(c)(3)). Section 1374 
treatment is accordingly not available in these cases as an alternative 
to recognizing any gain with respect to the converted property on the 
deemed sale date.
    The temporary regulations also provide that a REIT that is a party 
to a section 355 distribution occurring within the ten-year period 
following a conversion transaction for which a deemed sale election has 
not been made recognizes any remaining unrecognized built-in gains and 
losses resulting from the conversion transaction (after taking into 
account the impact of section 1374 in the interim period, as described 
subsequently).
    For the taxable year in which the related section 355 distribution 
occurs, the REIT's net recognized built-in gain is the amount of its 
net unrealized built-in gain limitation (as defined in Sec.  1.1374-
2(a)(3)) for such taxable year. For this purpose, the limitations in 
Sec.  1.1374-2(a)(1) and (2) do not apply because the net unrealized 
built-in gain limitation generally achieves the effect of a deemed sale 
election, adjusted for prior recognized built-in gains and recognized 
built-in losses. As a result, the temporary regulations cause the REIT 
to recognize any built-in gains or losses attributable to time periods 
in which the REIT was a C corporation while ensuring that gains and 
losses recognized in previous taxable years during the recognition 
period on which taxes have been paid are accounted for appropriately. 
The temporary regulations provide an appropriate increase to the basis 
of the converted property held by the REIT.
    Consistent with section 311 of the PATH Act, the temporary 
regulations contain two exceptions. First, the temporary regulations do 
not apply if both the distributing corporation and the controlled 
corporation are REITs immediately after the date of the section 355 
distribution and at all times during the two years thereafter. Second, 
the temporary regulations also do not apply to certain section 355 
distributions in which the distributing corporation is a REIT and the 
controlled corporation is a taxable REIT subsidiary. In addition, and 
consistent with the effective date in section 311(c) of the PATH Act, 
the temporary regulations under Sec.  1.337(d)-7T(f) do not apply to 
distributions pursuant to a transaction described in a ruling request 
initially submitted to the IRS on or before December 7, 2015, which 
request has not been withdrawn and with respect to which a ruling has 
not been issued or denied in its entirety as of December 7, 2015.
    To prevent avoidance, these temporary regulations apply to 
predecessors and successors of the distributing corporation or the 
controlled corporation and to all members of the separate affiliated 
group, within the meaning of section 355(b)(3)(B), of which the 
distributing corporation or the controlled corporation are members. 
Predecessors and successors include corporations that succeed to and 
take into account items described in section 381(c) of the distributing 
corporation or the controlled corporation, and corporations having such 
items to which the distributing corporation or the controlled 
corporation succeed and take into account.
    The temporary regulations also make a clarifying amendment to the 
generally applicable rules of Sec.  1.337(d)-7 in response to section 
127 of the PATH Act, which amended Code section 1374(d)(7) to provide 
that the term ``recognition period'' means the 5-year period beginning 
with the first day of the first taxable year for which a corporation 
was an S corporation. The temporary regulations replace the term ``10-
year recognition period'' with the new defined term ``recognition 
period'' and clarify that the recognition period is no longer 
determined by reference to section 1374(d)(7), but is the ten-year 
period beginning on the first day of the RIC or the REIT's first 
taxable year (in the case of a conversion transaction that is a 
qualification of a C corporation as a RIC or a REIT) or on the date the 
property is acquired by the RIC or the REIT. As a result, after August 
8, 2016, Sec.  1.337(d)-7 will no longer be affected by section 127 of 
the PATH Act, which amended section 1374(d)(7) of the Code to shorten 
the length of the recognition period from 10 years to 5 years with 
respect to C corporations that elect to be, or transfer property to, S 
corporations.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13653. Therefore, a regulatory impact assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (APA) (5 U.S.C. chapter 5) does not apply 
to these regulations because good cause exists under section 
553(b)(3)(B) of the APA to dispense with notice and public comment 
because doing so would be contrary to the public interest. These 
temporary regulations are necessary to prevent abuse of section 311 of 
the PATH Act through certain section 355 distributions that would 
contradict the intent of Congress. These temporary regulations are also 
necessary to update existing regulations under Sec.  1.337(d)-7 to 
delink the determination of the recognition period from the rules of 
section 1374(d)(7) modified by the enactment of section 127 of the PATH 
Act. Accordingly, good cause exists for dispensing with notice and 
public

[[Page 36797]]

comment pursuant to section 553(b) of the APA. In addition, pursuant to 
26 U.S.C. 7805(b)(3) and section 553(d)(3) of the APA, the requirements 
in section 553(d) of the APA for a delayed effective date are 
inapplicable to the temporary regulations necessary to prevent abuse of 
section 311 of the PATH Act. For the applicability of the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses 
section of the preamble to the cross-reference notice of proposed 
rulemaking published in the Proposed Rules section in this issue of the 
Federal Register. Pursuant to section 7805(f) of the Internal Revenue 
Code, these temporary regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

    The principal author of these regulations is Austin M. Diamond-
Jones, Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.337(d)-7T also issued under 26 U.S.C. 337(d) and 
355(h).
* * * * *

0
Par. 2. Section 1.337(d)-7 is amended by:
0
1. Revising paragraph (a)(1) and adding paragraphs (a)(2)(vi) and 
(vii).
0
2. In paragraph (b)(1)(ii), removing the language ``10-year recognition 
period'' and adding ``recognition period'' in its place wherever it 
appears.
0
3. Revising paragraph (b)(2)(iii).
0
4. Redesignating paragraph (b)(4) as paragraph (b)(5) and adding a new 
paragraph (b)(4).
0
5. Revising paragraph (c)(1).
0
6. Redesignating paragraph (c)(6) as paragraph (c)(7) and adding a new 
paragraph (c)(6).
0
7. In paragraph (d)(2)(iii), removing the language ``10-year 
recognition period'' and adding ``recognition period'' in its place 
wherever it appears.
0
8. Redesignating paragraph (f) as paragraph (g) and adding a new 
paragraph (f).
0
9. In newly redesignated paragraph (g)(1), removing the language 
``(f)(2)'' and adding ``(g)(2)'' in its place.
0
10. Revising newly redesignated paragraph (g)(2).
    The additions and revisions read as follows:


Sec.  1.337(d)-7  Tax on property owned by a C corporation that becomes 
property of a RIC or REIT.

    (a) General rule. (1) [Reserved]. For further guidance, see Sec.  
1.337(d)-7T(a)(1).
    (2) * * *
    (vi) through (vii) [Reserved]. For further guidance, see Sec.  
1.337(d)-7T(a)(2)(vi) through (vii).
    (b) * * *
    (2) * * *
    (iii) [Reserved]. For further guidance, see Sec.  1.337(d)-
7T(b)(2)(iii).
* * * * *
    (4) [Reserved]. For further guidance, see Sec.  1.337(d)-7T(b)(4).
* * * * *
    (c) Election of deemed sale treatment. (1) [Reserved]. For further 
guidance, see Sec.  1.337(d)-7T(c)(1).
* * * * *
    (6) [Reserved]. For further guidance, see Sec.  1.337(d)-7T(c)(6).
* * * * *
    (f) [Reserved]. For further guidance, see Sec.  1.337(d)-7T(f).
    (g) * * *
    (2) Special rules--(i) Conversion transactions occurring on or 
after August 2, 2013 and certain prior conversion transactions. 
Paragraphs (a)(2)(i) through (v), (d)(1), (d)(3), (d)(4), and (e) of 
this section apply to conversion transactions that occur on or after 
August 2, 2013. However, taxpayers may apply paragraphs (a)(2)(i) 
through (v), (d)(1), (d)(3), (d)(4), and (e) of this section to 
conversion transactions that occurred before August 2, 2013. For 
conversion transactions that occurred on or after January 2, 2002 and 
before August 2, 2013, see Sec.  1.337(d)-7 as contained in 26 CFR part 
1 in effect on April 1, 2013.
    (ii) through (iii) [Reserved]. For further guidance, see Sec.  
1.337(d)-7T(g)(2)(ii) through (iii).

0
Par. 3. Section 1.337(d)-7T is added to read as follows:


Sec.  1.337(d)-7T  Tax on property owned by a C corporation that 
becomes property of a RIC or REIT.

    (a) General Rule--(1) Property owned by a C corporation that 
becomes property of a RIC or REIT. If property owned by a C corporation 
(as defined in Sec.  1.337(d)-7(a)(2)(i)) becomes the property of a RIC 
or a REIT in a conversion transaction (as defined in Sec.  1.337(d)-
7(a)(2)(ii)), then section 1374 treatment will apply as described in 
Sec.  1.337(d)-7(b) and paragraph (b) of this section, unless the C 
corporation elects, or is treated as electing, deemed sale treatment 
with respect to the conversion transaction as provided in Sec.  
1.337(d)-7(c) and paragraph (c) of this section. See Sec.  1.337(d)-
7(d) for exceptions to this paragraph (a).
    (2)(i) through (v) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(a)(2)(i) through (v).
    (vi) Section 355 distribution. The term section 355 distribution 
means any distribution to which section 355 (or so much of section 356 
as relates to section 355) applies, including a distribution on which 
the distributing corporation recognizes gain pursuant to sections 
355(d) or 355(e).
    (vii) Converted property. The term converted property means 
property owned by a C corporation that becomes the property of a RIC or 
a REIT.
    (b)(1) through (2)(ii) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(b)(1) through (2)(ii).
    (iii) Recognition period. For purposes of applying the rules of 
section 1374 and the regulations thereunder, as modified by Sec.  
1.337(d)-7(b) and paragraph (b) of this section, the term recognition 
period means the 10-year period beginning--
    (A) In the case of a conversion transaction that is a qualification 
of a C corporation as a RIC or a REIT, on the first day of the RIC's or 
the REIT's first taxable year; and
    (B) In the case of other conversion transactions, on the day the 
property is acquired by the RIC or the REIT.
    (3) [Reserved]. For further guidance, see Sec.  1.337(d)-7(b)(3).
    (4) Section 355 distribution following a conversion transaction--
(i) In general. If a REIT is described in paragraph (f)(1) of this 
section and the related section 355 distribution (as defined in 
paragraph (f)(1)(i) of this section) follows a conversion transaction, 
then for the taxable year in which the related section 355 distribution 
occurs, Sec.  1.1374-2(a)(1) and (2) (as modified by Sec.  1.337(d)-
7(b)(2)(i)) do not apply, and the REIT's net recognized built-in gain 
for such taxable year is the amount of its net unrealized built-in gain 
limitation (as defined in Sec.  1.1374-2(a)(3)) for such taxable year.
    (ii) Basis adjustment--(A) In general. If a REIT recognizes gain 
under paragraph (b)(4)(i) of this section, the aggregate basis of the 
converted

[[Page 36798]]

property held by the REIT at the end of the taxable year in which the 
related section 355 distribution occurs shall be increased by an amount 
equal to the amount of gain so recognized, increased by the amount of 
the REIT's recognized built-in loss for such taxable year, and reduced 
by the amount of the REIT's recognized built-in gain and recognized 
built-in gain carryover for such taxable year.
    (B) Allocation of basis increase. The aggregate increase in basis 
by reason of paragraph (b)(4)(ii)(A) of this section shall be allocated 
among the converted property in proportion to their respective built-in 
gains on the date of the conversion transaction.
    (5) [Reserved]. For further guidance, see Sec.  1.337(d)-7(b)(5).
    (c) Election of deemed sale treatment--(1) In general. Section 
1.337(d)-7(b) and paragraph (b) of this section do not apply if the C 
corporation that qualifies as a RIC or a REIT or transfers property to 
a RIC or a REIT makes the election described in Sec.  1.337(d)-7(c)(5) 
or is treated as making such election under paragraph (c)(6) of this 
section. A C corporation that makes, or is treated as making, such an 
election recognizes gain and loss as if it sold the converted property 
to an unrelated party at fair market value on the deemed sale date (as 
defined in Sec.  1.337(d)-7(c)(3)). See Sec.  1.337(d)-7(c)(4) 
concerning limitations on the use of loss in computing gain. Section 
1.337(d)-7(c) and this paragraph (c) do not apply if their application 
would result in the recognition of a net loss. For this purpose, net 
loss is the excess of aggregate losses over aggregate gains (including 
items of income), without regard to character.
    (2) through (5) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(c)(2) through (5).
    (6) Conversion transaction following a section 355 distribution. A 
C corporation described in paragraph (f)(1) of this section is treated 
as having made the election under Sec.  1.337(d)-7(c)(5) with respect 
to a conversion transaction if the conversion transaction occurs 
following the related section 355 distribution (as defined in paragraph 
(f)(1)(i) of this section) and the C corporation has not made such 
election.
    (7) through (e) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(c)(7) through (e).
    (f) Conversion transaction preceding or following a section 355 
distribution--(1) In general. A C corporation or a REIT is described in 
this paragraph (f)(1) if--
    (i) The C corporation or the REIT engages in a conversion 
transaction involving a REIT during the twenty-year period beginning on 
the date that is ten years before the date of a section 355 
distribution (the related section 355 distribution); and
    (ii) The C corporation or the REIT engaging in the related section 
355 distribution is either--
    (A) The distributing corporation or the controlled corporation, as 
those terms are defined in section 355(a)(1); or
    (B) A member of the separate affiliated group (as defined in 
section 355(b)(3)(B)) of the distributing corporation or the controlled 
corporation.
    (2) Predecessors and successors. For purposes of this paragraph 
(f), any reference to a controlled corporation or a distributing 
corporation includes a reference to any predecessor or successor of 
such corporation. Predecessors and successors include corporations 
which succeed to and take into account items described in section 
381(c) of the distributing corporation or the controlled corporation, 
and corporations having such items to which the distributing 
corporation or the controlled corporation succeeded and took into 
account.
    (3) Exclusion of certain conversion transactions. A C corporation 
or a REIT is not described in paragraph (f)(1) of this section if--
    (i) The distributing corporation and the controlled corporation are 
both REITs immediately after the related section 355 distribution 
(including by reason of elections under section 856(c)(1) made after 
the related section 355 distribution that are effective before the 
related section 355 distribution) and at all times during the two years 
thereafter;
    (ii) Section 355(h)(1) does not apply to the related section 355 
distribution by reason of section 355(h)(2)(B); or
    (iii) The related section 355 distribution is described in a ruling 
request referred to in section 311(c) of Division Q of the Consolidated 
Appropriations Act, 2016, Public Law 114-113, 129 Stat. 2422.
    (g) Effective/Applicability date. (1) [Reserved]. For further 
guidance, see Sec.  1.337(d)-7(g)(1).
    (2) Special rules. (i) [Reserved]. For further guidance, see Sec.  
1.337(d)-7(g)(2)(i).
    (ii) Conversion transactions occurring on or after June 7, 2016. 
Paragraphs (a)(1), (a)(2)(vi) and (vii), (b)(4), (c)(1), (c)(6), and 
(f) of this section apply to conversion transactions occurring on or 
after June 7, 2016 and to conversion transactions and related section 
355 distributions for which the conversion transaction occurs before, 
and the related section 355 distribution occurs on or after, June 7, 
2016. For conversion transactions that occurred on or after January 2, 
2002 and before June 7, 2016, see Sec.  1.337(d)-7 as contained in 26 
CFR part 1 in effect on April 1, 2016.
    (iii) Recognition period. Paragraphs (b)(1)(ii), (b)(2)(iii), and 
(d)(2)(iii) of this section applies to conversion transactions that 
occur on or after August 8, 2016. For conversion transactions that 
occurred on or after January 2, 2002 and before August 8, 2016, see 
Sec.  1.337(d)-7 as contained in 26 CFR part 1 in effect on April 1, 
2016.
    (h) Expiration date. The applicability of this section expires on 
June 7, 2019.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: May 11, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-13443 Filed 6-7-16; 8:45 am]
BILLING CODE 4830-01-P
Federal Register / Vol. 81, No. 110 / Wednesday, June 8, 2016 / Rules and Regulations 36793

impact statement. The regulations PART 35—PROGRAM FRAUD CIVIL (2) The civil penalty may be either in
implementing Executive Order 12372 REMEDIES addition to, or in lieu of, any other
regarding intergovernmental liability or penalty which may be
consultation on federal programs and ■ 1. The authority citation for part 35 is imposed.
activities do not apply to this revised to read as follows: * * * * *
rulemaking. Authority: 22 U.S.C. 2651a; 31 U.S.C. 3801
et seq.; Pub. L. 114–74, 129 Stat. 584. PART 138—NEW RESTRICTIONS ON
Executive Orders 12866 and 13563
LOBBYING
The Department believes that benefits ■ 2. In § 35.3:
■ a. Remove ‘‘$5,000’’ and add in its ■ 7. The authority citation for part 138
of the rulemaking outweigh any costs,
place ‘‘$10,781’’, wherever it occurs. is revised to read as follows:
and there are no feasible alternatives to
■ b. Add paragraph (f) to read as Authority: 22 U.S.C. 2651a; 31 U.S.C.
this rulemaking. It is the Department’s
follows: 1352; Pub. L. 114–74, 129 Stat. 584.
position that this rulemaking is not an
economically significant rule under the § 35.3 Basis for civil penalties and § 138.400 [Amended]
criteria of Executive Order 12866, and is assessments.
consistent with the provisions of ■ 8. Amend § 138.400 by removing
* * * * * ‘‘$10,000’’ and ‘‘$100,000’’, and adding
Executive Order 13563. (f) The maximum penalty for each in their place ‘‘$18,936’’ and ‘‘$189,361’’
Executive Order 12988 false claim or statement is $10,781, up respectively, wherever they occur.
to a maximum of $323,442.
The Department of State has reviewed Dated: June 1, 2016.
the proposed amendment in light of PART 103—REGULATIONS FOR Lisa Aguirre,
Executive Order 12988 to eliminate IMPLEMENTATION OF THE CHEMICAL Managing Director, Directorate of Defense
ambiguity, minimize litigation, establish WEAPONS CONVENTION AND THE Trade Controls Department of State.
clear legal standards, and reduce CHEMICAL WEAPONS CONVENTION [FR Doc. 2016–13455 Filed 6–7–16; 8:45 am]
burden. IMPLEMENTATION ACT OF 1998 ON BILLING CODE 4710–25–P
THE TAKING OF SAMPLES AND ON
Executive Order 13175 ENFORCEMENT OF REQUIREMENTS
The Department of State has CONCERNING RECORDKEEPING AND DEPARTMENT OF THE TREASURY
determined that this rulemaking will INSPECTIONS
not have tribal implications, will not Internal Revenue Service
■ 3. The authority citation for part 103
impose substantial direct compliance is revised to read as follows:
costs on Indian tribal governments, and 26 CFR Part 1
will not preempt tribal law. Authority: 22 U.S.C. 2651a; 22 U.S.C. 6701
[TD 9770]
et seq.; Pub. L. 114–74, 129 Stat. 584.
Accordingly, Executive Order 13175
RIN 1545–BN39
does not apply to this rulemaking. § 103.6 [Amended]
Paperwork Reduction Act ■ 4. Amend § 103.6 to remove Certain Transfers of Property to
‘‘$25,000’’ and add in its place Regulated Investment Companies
This rulemaking does not impose or ‘‘$36,256’’ in paragraph (a)(1), and to [RICs] and Real Estate Investment
revise any information collections remove ‘‘$5,000’’, and add in its place Trusts [REITs]; Final and Temporary
subject to 44 U.S.C. Chapter 35. $7,251’’ in paragraph (a)(2). Regulations
List of Subjects AGENCY: Internal Revenue Service (IRS),
PART 127—VIOLATIONS AND
22 CFR Part 35 Treasury.
PENALTIES
ACTION: Final and temporary
Administrative practice and ■ 5. The authority citation for part 127 regulations.
procedure, Claims, Fraud, Penalties. is revised to read as follows:
SUMMARY: This document contains final
22 CFR Part 103 Authority: Sections 2, 38, and 42, Pub. L. and temporary regulations effecting the
90–629, 90 Stat. 744 (22 U.S.C. 2752, 2778, repeal of the General Utilities doctrine
Administrative practice and 2791); 22 U.S.C. 401; 22 U.S.C. 2651a; 22
procedure, Chemicals, Classified by the Tax Reform Act of 1986 and
U.S.C. 2779a; 22 U.S.C. 2780; E.O. 13637, 78
information, Foreign relations, Freedom FR 16129; Pub. L. 114–74, 129 Stat. 584. preventing abuse of the Protecting
of information, International Americans from Tax Hikes Act of 2015.
■ 6. Section 127.10 is amended by
organization, Investigations, Penalties, The temporary regulations impose
revising paragraph (a) to read as follows:
Reporting and recordkeeping corporate level tax on certain
requirements. § 127.10 Civil penalty. transactions in which property of a C
(a)(1) The Assistant Secretary of State corporation becomes the property of a
22 CFR Part 127 for Political-Military Affairs is REIT. The temporary regulations affect
authorized to impose a civil penalty, as RICs, REITs, C corporations the property
Arms and munitions, Exports.
follows: of which becomes the property of a RIC
22 CFR Part 138 (i) For each violation of 22 U.S.C. or a REIT, and their shareholders. The
2778, an amount not to exceed text of these temporary regulations also
Government contracts, Grant serves as the text of part of the proposed
$1,094,010;
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programs, Loan programs, Lobbying, regulations in the related notice of
(ii) For each violation of 22 U.S.C.
Penalties, Reporting and recordkeeping proposed rulemaking (REG–126452–15)
2779a, an amount not to exceed
requirements. set forth in the Proposed Rules section
$795,445; and
For the reasons set forth above, 22 (iii) For each violation of 22 U.S.C. in this issue of the Federal Register.
CFR parts 127, 35, 103, and 138 are 2780, an amount not to exceed DATES: These regulations are effective
amended as follows: $946,805. June 7, 2016.

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FOR FURTHER INFORMATION CONTACT: subchapter) or through the use of a the repeal of the General Utilities
Austin M. Diamond-Jones, (202) 317– regulated investment company, real doctrine through any provision of law or
5085 (not a toll-free number). estate investment trust, or tax exempt regulations, including section 355.’’ Id.
SUPPLEMENTARY INFORMATION: entity. . . .’’ The legislative histories of at S15705.
the Act and the Technical Amendment On December 18, 2015, the President
Background underscore the broad grant of regulatory signed into law the Protecting
1. The General Utilities Doctrine, Its authority and Congress’ expectation that Americans Against Tax Hikes Act of
Repeal, and Section 337(d) the Treasury Department and the IRS 2015 (PATH Act), enacted as Division Q
would issue or amend regulations as of the Consolidated Appropriations Act,
In general, gain on a sale of
necessary to further the purposes of 2016, Public Law 114–113, 129 Stat.
appreciated property by a C corporation
General Utilities repeal, ‘‘includ[ing] 2422. Section 311(a) and (b) of the
is taxed to the corporation when the sale
rules to require the recognition of gain PATH Act added to the Code sections
occurs and to the shareholders when the
if appreciated property of a C 355(h) and 856(c)(8), respectively.
proceeds are distributed as dividends. Section 355(h)(1) of the Code provides
corporation is transferred to a RIC or a
Historically however, a corporation that section 355 shall not apply to a
REIT in a carryover basis transaction
generally could distribute appreciated distribution if either the distributing
that would otherwise eliminate
property to its shareholders without corporation or the controlled
corporate level tax on the built-in
recognition of gain to the corporation corporation is a REIT. Section 355(h)(2)
appreciation.’’ H.R. Rep. No. 100–391, at
under the so-called General Utilities provides exceptions permitting a REIT
1199 (1987); see also H.R. Rep. No. 99–
doctrine arising from interpretations of 841, at 204 (1986) (Conf. Rep.). Section to distribute the stock of another REIT
General Utilities & Operating Co. v. 337(d)(1) specifically refers to ensuring or of a taxable REIT subsidiary under
Helvering, 296 U.S. 200 (1935). See H.R. that the purposes of General Utilities certain conditions. Section 856(c)(8)
Rep. No. 99–841, at 198 (1986) (Conf. repeal are not circumvented through the provides that a corporation may not
Rep.); H.R. Rep. No. 99–426, at 274–75 use of the corporate organization and elect REIT status during the ten-year
(1985). reorganization provisions of part III, period following a section 355
Beginning in 1969, a series of distribution if such corporation was the
subchapter C, chapter 1 of the Code,
statutory limitations on the General distributing corporation or the
which include section 355.
Utilities doctrine were enacted into law. controlled corporation in that
In the Tax Equity and Fiscal 2. Section 355 and the PATH Act distribution. Section 311(c) of the PATH
Responsibility Act of 1982, Public Law Section 355 generally provides that, if Act provides that sections 355(h) and
97–248, 96 Stat. 324, current section certain requirements are satisfied, a 856(c)(8) apply to distributions on or
311(b) (originally designated as section corporation may distribute stock (or after December 7, 2015, but do not apply
311(d)) was added to the Internal stock and securities) of one or more to any distribution pursuant to a
Revenue Code (Code) and required a controlled corporations to its transaction described in a ruling request
corporation to recognize gain on shareholders and security holders initially submitted to the IRS on or
appreciated property distributed to a without the distributing corporation, its before such date, which request has not
shareholder in redemption of shares. shareholders, or its security holders been withdrawn and with respect to
Legislation enacted in 1984 required recognizing income, gain, or loss on the which a ruling has not been issued or
gain recognition for all non-liquidating distribution (a section 355 distribution). denied in its entirety as of such date.
distributions. Finally, what remained of In the course of enacting certain
the General Utilities doctrine was amendments to section 355 as part of 3. Prior Regulations
repealed (General Utilities repeal) by the the Omnibus Budget Reconciliation Act In certain cases, General Utilities
enactment of subtitle D of title VI of the of 1990, Public Law 101–508, 104 Stat. repeal could be circumvented if
Tax Reform Act of 1986, Public Law 99– 1388, Congress described section 355 as property of a C corporation becomes the
514, 100 Stat. 2085 (the Act), which a ‘‘limited exception to the repeal of the property of a RIC or a REIT (converted
amended sections 336 and 337 of the General Utilities doctrine intended to property) by a transfer of the converted
Code to require corporations to permit historic shareholders to continue property from a C corporation to a RIC
recognize gain or loss on the to carry on their historic corporate or a REIT or by the qualification of the
distribution of property in connection businesses in separate corporations’’ C corporation as a RIC or a REIT (either,
with complete liquidations other than and stated that ‘‘[t]he present-law a conversion transaction). A conversion
certain subsidiary liquidations. Section provisions granting tax-free treatment at transaction could result in elimination
337(d) was added to the Code by section the corporate level are particularly of the corporate level of gain in the
631(a) of the Act and subsequently troublesome because they may offer converted property, including gain from
amended by section 1006(e)(5)(A)(i) taxpayers an opportunity to avoid the the sale of the property, because RICs
through (ii) of the Technical and general rule that corporate-level tax is and REITs generally are not subject to
Miscellaneous Revenue Act of 1988, recognized when an asset (including tax on income that is distributed to their
Public Law 100–647,102 Stat. 3342 (the stock of a subsidiary) is disposed of.’’ shareholders.
Technical Amendment). This document 136 Cong. Rec. S15704 (daily ed. Oct 18, The Treasury Department and the IRS
contains amendments to 26 CFR part 1 1990).1 Further, Congress noted that issued Notice 88–19 (1988–1 C.B. 486)
under section 337(d). ‘‘[t]he bill is not intended to limit in any on February 4, 1988. Notice 88–19
Section 337(d) directs the Secretary of way the continuing Treasury announced the IRS’s intention to
the Treasury to prescribe regulations Department authority to issue promulgate regulations providing that a
that are necessary or appropriate to regulations to prevent the avoidance of C corporation engaging in a conversion
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carry out the purposes of General transaction would be treated, for all
Utilities repeal, including ‘‘regulations 1 The bill that resulted in Public Law 101–508, federal income tax purposes, as if it had
to ensure that such purposes may not be S.3209, was brought to the floor without printing sold all of its assets at their respective
a formal report, and language from the various
circumvented through the use of any committees to consider the bill was printed in the
fair market values (deemed sale
provision of law or regulations Congressional Record at the request of Senator treatment) and immediately liquidated,
(including . . . part III of this Sasser to complete the legislative record. unless the C corporation elected to be

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subject to tax under section 1374 with the case of a transfer of property by a C IRS will not ordinarily issue a ruling
respect to the C corporation property corporation to a RIC or a REIT to the relating to the qualification under
(section 1374 treatment). If elected, extent the transfer qualifies for section 355 and related provisions of a
section 1374 treatment would subject nonrecognition treatment under section distribution in certain circumstances in
the RIC or REIT to corporate-level 1031 (relating to like-kind exchanges) or which property owned by the
taxation on the built-in gain recognized section 1033 (relating to involuntary distributing corporation or the
during the ten-year period following the conversions). The Treasury Department controlled corporation becomes the
conversion transaction on the converted and the IRS did not extend this property of a RIC or a REIT. Notice
property. Temporary regulations under treatment to all exchanged basis 2015–59 states that such transactions
§ 1.337(d)–5T (TD 8872) and a notice of transactions, such as exchanges that ‘‘may circumvent the purposes of Code
proposed rulemaking cross-referencing would otherwise qualify for provisions intended to repeal the
the temporary regulations (REG– nonrecognition treatment under section Supreme Court’s decision’’ in General
209135–88) were published in the 351 of the Code, out of concern that Utilities, such as section 337(d). The
Federal Register (65 FR 5775, 65 FR such an exception could create Notice also requested comments with
5805) on February 7, 2000, and reflected opportunities to avoid corporate-level respect to the facts and circumstances
the principles set forth in Notice 88–19. tax on built-in gains. Second, the 2013 relevant to whether such transactions
Additional temporary regulations amendments provide an exception for circumvent the purposes of General
under §§ 1.337(d)–6T and 1.337(d)–7T conversion transactions in which the C Utilities repeal. The Treasury
(TD 8975) and a notice of proposed corporation that owned the converted Department and the IRS are aware of
rulemaking cross-referencing the property is a tax-exempt entity to the informal commentary, but no formal
temporary regulations (REG–142299–01 extent that gain would not be subject to comments have been received.
and REG–209135–88) were published in tax if a deemed sale election were made.
the Federal Register (67 FR 8, 67 FR 28) Explanation of Provisions
In such circumstances, the C
on January 2, 2002. The proposed corporation is not required to make a The Treasury Department and the IRS
regulations cross-referencing deemed sale election, and the RIC or the believe that section 1374 treatment
§§ 1.337(d)–5T through –7T, with REIT is not subject to section 1374 imposes an appropriate regime for
modifications, were adopted on March treatment. recognizing built-in gain for many
18, 2003 (TD 9047), and published as conversion transactions. The Treasury
final regulations in the Federal Register 5. Notice 2015–59 and Revenue Department and the IRS are concerned,
(68 FR 12817). Procedure 2015–43 however, that section 1374 treatment
Congress, the Treasury Department, may not adequately implement the
4. Current Regulations and the IRS are aware of transactions in purposes of General Utilities repeal if a
The final regulations in § 1.337(d)–6 which a C corporation that does not taxpayer effects a tax-free separation of
apply to conversion transactions qualify as a REIT distributes the stock of REIT-qualifying assets from non-
occurring on or after June 10, 1987, and a controlled corporation in a transaction qualifying assets in a section 355
before January 2, 2002, and provide that intended to qualify under section 355 so distribution (the related section 355
a C corporation engaging in such a that either the distributing corporation distribution) and the REIT-qualifying
conversion transaction is subject to or the controlled corporation can qualify assets become the assets of a REIT. After
deemed sale treatment unless the C as a REIT. In many cases, a C such transactions, gain on the assets
corporation elects section 1374 corporation that owns both assets held by the REIT may not be taxed at the
treatment with respect to the converted qualifying as real estate assets for corporate level because such gain is
property. The final regulations in purposes of part II, subchapter M, unlikely to be recognized within the
§ 1.337(d)–7 apply to conversion chapter 1 of the Code (REIT-qualifying recognition period during which the
transactions occurring on or after assets) and assets that do not so qualify REIT is subject to section 1374
January 2, 2002, and provide that the (non-qualifying assets) transfers either treatment under the final regulations in
RIC or the REIT owning the property the REIT-qualifying assets or the non- § 1.337(d)–7. In contrast, without a
after the conversion transaction is qualifying assets to a controlled section 355 distribution, a taxpayer
subject to section 1374 treatment unless corporation in exchange for its stock generally could not separate REIT-
the C corporation engaging in a and then distributes the controlled qualifying assets from non-qualifying
conversion transaction elects deemed corporation stock to its shareholders. assets and cause one corporation to hold
sale treatment with respect to the Before or after the distribution, the the REIT-qualifying assets and another
converted property. corporation holding the REIT-qualifying corporation to hold the non-qualifying
In response to concerns expressed by assets elects REIT status. If the assets except by means of a sale or
commentators (described subsequently), transaction satisfies the requirements of exchange to which section 1001 applies
the Treasury Department and the IRS sections 368(a)(1)(D), 355, and 361, no or a distribution to which section 311(b)
published in the Federal Register (77 gain is recognized on either the transfer applies.
FR 22516) on April 16, 2012, a notice of assets by the distributing corporation Moreover, the REIT and its
of proposed rulemaking (REG–139991– to the controlled corporation or the shareholders may realize the benefit of
08) proposing amendments to distribution of the controlled appreciation on converted property
§ 1.337(d)–7. These amendments (the corporation stock to the shareholders of without a transaction subject to section
2013 amendments) were adopted as the distributing corporation. 1374 treatment or otherwise taxable at
final regulations (TD 9626) and were Prior to the enactment of the PATH the corporate level. For example, a REIT
published in the Federal Register (78 Act, the IRS issued Notice 2015–59 that distributes rental income on
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FR 46805) on August 2, 2013. (2015–40 I.R.B. 467) and Revenue appreciated converted property to its
The 2013 amendments address two Procedure 2015–43 (2015–40 I.R.B. 495) shareholders may be entitled to a
principal areas of concern. First, the on September 14, 2015, in part to dividends paid deduction under section
2013 amendments provide an exception respond to the transactions described in 562 and, therefore, effectively does not
from the general rule subjecting the RIC the preceding paragraph. Revenue pay income tax at the REIT level on that
or the REIT to section 1374 treatment in Procedure 2015–43 provides that the income, which in many cases will

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reflect the appreciation in the value of is the amount of its net unrealized built- response to section 127 of the PATH
the property. Additionally, if the lessee in gain limitation (as defined in Act, which amended Code section
is a C corporation (such as the other § 1.1374–2(a)(3)) for such taxable year. 1374(d)(7) to provide that the term
party to the section 355 distribution), For this purpose, the limitations in ‘‘recognition period’’ means the 5-year
the rental deductions reduce the C § 1.1374–2(a)(1) and (2) do not apply period beginning with the first day of
corporation’s taxable income. In such because the net unrealized built-in gain the first taxable year for which a
circumstances, the Treasury Department limitation generally achieves the effect corporation was an S corporation. The
and the IRS have determined that of a deemed sale election, adjusted for temporary regulations replace the term
section 355 does not serve as a ‘‘limited prior recognized built-in gains and ‘‘10-year recognition period’’ with the
exception to General Utilities repeal recognized built-in losses. As a result, new defined term ‘‘recognition period’’
intended to enable historic shareholders the temporary regulations cause the and clarify that the recognition period is
to carry on their historic businesses in REIT to recognize any built-in gains or no longer determined by reference to
separate corporations’’ but rather creates losses attributable to time periods in section 1374(d)(7), but is the ten-year
an ‘‘opportunity to avoid the general which the REIT was a C corporation period beginning on the first day of the
rule that corporate-level tax is while ensuring that gains and losses RIC or the REIT’s first taxable year (in
recognized when an asset . . . is recognized in previous taxable years the case of a conversion transaction that
disposed of.’’ 136 Cong. Rec. S15704. during the recognition period on which is a qualification of a C corporation as
Section 311 of the PATH Act taxes have been paid are accounted for a RIC or a REIT) or on the date the
addresses some of the concerns just appropriately. The temporary property is acquired by the RIC or the
described. However, the Treasury regulations provide an appropriate REIT. As a result, after August 8, 2016,
Department and the IRS are concerned increase to the basis of the converted § 1.337(d)–7 will no longer be affected
that some variations of the transactions property held by the REIT. by section 127 of the PATH Act, which
previously described may continue to be Consistent with section 311 of the amended section 1374(d)(7) of the Code
used to circumvent the purposes of PATH Act, the temporary regulations to shorten the length of the recognition
section 311 of the PATH Act. In contain two exceptions. First, the period from 10 years to 5 years with
particular, there is concern that temporary regulations do not apply if respect to C corporations that elect to
corporations affiliated with the both the distributing corporation and be, or transfer property to, S
distributing corporation or the the controlled corporation are REITs corporations.
controlled corporation could be used to immediately after the date of the section
circumvent the Congressional policy 355 distribution and at all times during Statement of Availability of IRS
implemented through section 311 of the the two years thereafter. Second, the Documents
PATH Act. The Treasury Department temporary regulations also do not apply IRS Revenue Procedures, Revenue
and the IRS thus have determined that to certain section 355 distributions in Rulings, notices, and other guidance
temporary regulations are necessary to which the distributing corporation is a cited in this document are published in
prevent abuses of sections 355(h) and REIT and the controlled corporation is the Internal Revenue Bulletin (or
856(c)(8) and to further the purposes of a taxable REIT subsidiary. In addition, Cumulative Bulletin) and are available
General Utilities repeal. and consistent with the effective date in from the Superintendent of Documents,
Therefore, the Treasury Department section 311(c) of the PATH Act, the U.S. Government Printing Office,
and the IRS are issuing these temporary temporary regulations under § 1.337(d)– Washington, DC 20402, or by visiting
regulations providing that a C 7T(f) do not apply to distributions the IRS Web site at http://www.irs.gov.
corporation engaging in a conversion pursuant to a transaction described in a Special Analyses
transaction involving a REIT within the ruling request initially submitted to the
ten-year period following a related IRS on or before December 7, 2015, Certain IRS regulations, including this
section 355 distribution is treated as which request has not been withdrawn one, are exempt from the requirements
making an election to recognize gain and with respect to which a ruling has of Executive Order 12866, as
and loss as if it had sold all of the not been issued or denied in its entirety supplemented and reaffirmed by
converted property to an unrelated party as of December 7, 2015. Executive Order 13653. Therefore, a
at fair market value on the deemed sale To prevent avoidance, these regulatory impact assessment is not
date (as defined in § 1.337(d)–7(c)(3)). temporary regulations apply to required. It has also been determined
Section 1374 treatment is accordingly predecessors and successors of the that section 553(b) of the Administrative
not available in these cases as an distributing corporation or the Procedure Act (APA) (5 U.S.C. chapter
alternative to recognizing any gain with controlled corporation and to all 5) does not apply to these regulations
respect to the converted property on the members of the separate affiliated because good cause exists under section
deemed sale date. group, within the meaning of section 553(b)(3)(B) of the APA to dispense with
The temporary regulations also 355(b)(3)(B), of which the distributing notice and public comment because
provide that a REIT that is a party to a corporation or the controlled doing so would be contrary to the public
section 355 distribution occurring corporation are members. Predecessors interest. These temporary regulations
within the ten-year period following a and successors include corporations are necessary to prevent abuse of section
conversion transaction for which a that succeed to and take into account 311 of the PATH Act through certain
deemed sale election has not been made items described in section 381(c) of the section 355 distributions that would
recognizes any remaining unrecognized distributing corporation or the contradict the intent of Congress. These
built-in gains and losses resulting from controlled corporation, and corporations temporary regulations are also necessary
the conversion transaction (after taking having such items to which the to update existing regulations under
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into account the impact of section 1374 distributing corporation or the § 1.337(d)–7 to delink the determination
in the interim period, as described controlled corporation succeed and take of the recognition period from the rules
subsequently). into account. of section 1374(d)(7) modified by the
For the taxable year in which the The temporary regulations also make enactment of section 127 of the PATH
related section 355 distribution occurs, a clarifying amendment to the generally Act. Accordingly, good cause exists for
the REIT’s net recognized built-in gain applicable rules of § 1.337(d)–7 in dispensing with notice and public

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Federal Register / Vol. 81, No. 110 / Wednesday, June 8, 2016 / Rules and Regulations 36797

comment pursuant to section 553(b) of ■ 8. Redesignating paragraph (f) as owned by a C corporation (as defined in
the APA. In addition, pursuant to 26 paragraph (g) and adding a new § 1.337(d)–7(a)(2)(i)) becomes the
U.S.C. 7805(b)(3) and section 553(d)(3) paragraph (f). property of a RIC or a REIT in a
of the APA, the requirements in section ■ 9. In newly redesignated paragraph conversion transaction (as defined in
553(d) of the APA for a delayed effective (g)(1), removing the language ‘‘(f)(2)’’ § 1.337(d)–7(a)(2)(ii)), then section 1374
date are inapplicable to the temporary and adding ‘‘(g)(2)’’ in its place. treatment will apply as described in
regulations necessary to prevent abuse ■ 10. Revising newly redesignated § 1.337(d)–7(b) and paragraph (b) of this
of section 311 of the PATH Act. For the paragraph (g)(2). section, unless the C corporation elects,
applicability of the Regulatory The additions and revisions read as or is treated as electing, deemed sale
Flexibility Act (5 U.S.C. chapter 6) refer follows: treatment with respect to the conversion
to the Special Analyses section of the transaction as provided in § 1.337(d)–
preamble to the cross-reference notice of § 1.337(d)–7 Tax on property owned by a C 7(c) and paragraph (c) of this section.
corporation that becomes property of a RIC
proposed rulemaking published in the or REIT.
See § 1.337(d)–7(d) for exceptions to
Proposed Rules section in this issue of this paragraph (a).
the Federal Register. Pursuant to (a) General rule. (1) [Reserved]. For (2)(i) through (v) [Reserved]. For
section 7805(f) of the Internal Revenue further guidance, see § 1.337(d)– further guidance, see § 1.337(d)–
Code, these temporary regulations will 7T(a)(1). 7(a)(2)(i) through (v).
be submitted to the Chief Counsel for (2) * * * (vi) Section 355 distribution. The term
Advocacy of the Small Business (vi) through (vii) [Reserved]. For section 355 distribution means any
Administration for comment on their further guidance, see § 1.337(d)– distribution to which section 355 (or so
impact on small business. 7T(a)(2)(vi) through (vii). much of section 356 as relates to section
(b) * * * 355) applies, including a distribution on
Drafting Information (2) * * * which the distributing corporation
The principal author of these (iii) [Reserved]. For further guidance, recognizes gain pursuant to sections
regulations is Austin M. Diamond-Jones, see § 1.337(d)–7T(b)(2)(iii). 355(d) or 355(e).
Office of Associate Chief Counsel * * * * * (vii) Converted property. The term
(Corporate). However, other personnel (4) [Reserved]. For further guidance, converted property means property
from the Treasury Department and the see § 1.337(d)–7T(b)(4). owned by a C corporation that becomes
IRS participated in their development. * * * * * the property of a RIC or a REIT.
(c) Election of deemed sale treatment. (b)(1) through (2)(ii) [Reserved]. For
List of Subjects in 26 CFR Part 1 further guidance, see § 1.337(d)–7(b)(1)
(1) [Reserved]. For further guidance, see
Income taxes, Reporting and § 1.337(d)–7T(c)(1). through (2)(ii).
recordkeeping requirements. (iii) Recognition period. For purposes
* * * * * of applying the rules of section 1374
Amendments to the Regulations (6) [Reserved]. For further guidance, and the regulations thereunder, as
see § 1.337(d)–7T(c)(6). modified by § 1.337(d)–7(b) and
Accordingly, 26 CFR part 1 is
amended as follows: * * * * * paragraph (b) of this section, the term
(f) [Reserved]. For further guidance, recognition period means the 10-year
PART 1—INCOME TAXES see § 1.337(d)–7T(f). period beginning—
(g) * * * (A) In the case of a conversion
■ Paragraph 1. The authority citation (2) Special rules—(i) Conversion transaction that is a qualification of a C
for part 1 is amended by adding an entry transactions occurring on or after corporation as a RIC or a REIT, on the
in numerical order to read in part as August 2, 2013 and certain prior first day of the RIC’s or the REIT’s first
follows: conversion transactions. Paragraphs taxable year; and
Authority: 26 U.S.C. 7805 * * * (a)(2)(i) through (v), (d)(1), (d)(3), (d)(4), (B) In the case of other conversion
Section 1.337(d)–7T also issued under 26 and (e) of this section apply to transactions, on the day the property is
U.S.C. 337(d) and 355(h). conversion transactions that occur on or acquired by the RIC or the REIT.
after August 2, 2013. However, (3) [Reserved]. For further guidance,
* * * * *
taxpayers may apply paragraphs (a)(2)(i) see § 1.337(d)–7(b)(3).
■ Par. 2. Section 1.337(d)–7 is amended through (v), (d)(1), (d)(3), (d)(4), and (e) (4) Section 355 distribution following
by: of this section to conversion a conversion transaction—(i) In general.
■ 1. Revising paragraph (a)(1) and transactions that occurred before August If a REIT is described in paragraph (f)(1)
adding paragraphs (a)(2)(vi) and (vii). 2, 2013. For conversion transactions that of this section and the related section
■ 2. In paragraph (b)(1)(ii), removing the occurred on or after January 2, 2002 and 355 distribution (as defined in
language ‘‘10-year recognition period’’ before August 2, 2013, see § 1.337(d)–7 paragraph (f)(1)(i) of this section)
and adding ‘‘recognition period’’ in its as contained in 26 CFR part 1 in effect follows a conversion transaction, then
place wherever it appears. on April 1, 2013. for the taxable year in which the related
■ 3. Revising paragraph (b)(2)(iii). (ii) through (iii) [Reserved]. For section 355 distribution occurs,
■ 4. Redesignating paragraph (b)(4) as further guidance, see § 1.337(d)– § 1.1374–2(a)(1) and (2) (as modified by
paragraph (b)(5) and adding a new 7T(g)(2)(ii) through (iii). § 1.337(d)–7(b)(2)(i)) do not apply, and
paragraph (b)(4). ■ Par. 3. Section 1.337(d)–7T is added the REIT’s net recognized built-in gain
■ 5. Revising paragraph (c)(1). for such taxable year is the amount of
to read as follows:
■ 6. Redesignating paragraph (c)(6) as its net unrealized built-in gain
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paragraph (c)(7) and adding a new § 1.337(d)–7T Tax on property owned by a limitation (as defined in § 1.1374–
paragraph (c)(6). C corporation that becomes property of a 2(a)(3)) for such taxable year.
■ 7. In paragraph (d)(2)(iii), removing RIC or REIT. (ii) Basis adjustment—(A) In general.
the language ‘‘10-year recognition (a) General Rule—(1) Property owned If a REIT recognizes gain under
period’’ and adding ‘‘recognition by a C corporation that becomes paragraph (b)(4)(i) of this section, the
period’’ in its place wherever it appears. property of a RIC or REIT. If property aggregate basis of the converted

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Document Created: 2016-06-08 03:10:15
Document Modified: 2016-06-08 03:10:15
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Final and temporary regulations.
Dates		These regulations are effective June 7, 2016.
Contact		Austin M. Diamond-Jones, (202) 317- 5085 (not a toll-free number).
FR Citation		81 FR 36793
RIN Number		1545-BN39
CFR Associated		Income Taxes and Reporting and Recordkeeping Requirements
81 FR 36793 - Certain Transfers of Property to Regulated Investment Companies [RICs] and Real Estate Investment Trusts [REITs]; Final and Temporary Regulations

DEPARTMENT OF THE TREASURYInternal Revenue Service

Federal Register Volume 81, Issue 110 (June 8, 2016)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
