Basis of Indebtedness of S Corporations to Their Shareholders, 34884-34887 [2012-14188]
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34884
Federal Register / Vol. 77, No. 113 / Tuesday, June 12, 2012 / Proposed Rules
Notice of proposed rulemaking
and request for comments; amendment.
ACTION:
On May 30, 2012, the
Minority Business Development Agency
(MBDA) published a notice of proposed
rulemaking and request for comments
regarding a petition received on January
11, 2012 from the American-Arab AntiDiscrimination Committee (ADC)
requesting formal designation of ArabAmericans as a minority group that is
socially or economically disadvantaged
pursuant to 15 CFR part 1400. The
Notice includes a thirty-day comment
deadline of June 29, 2012, but also states
that MBDA will make a decision on the
petition no later than June 27, 2012.
Due to the complexity of the subject
matter, the Department finds that it is
not practicable to complete an in depth
review of the issues involved in the
petition, give adequate consideration to
all comments, and make a reasoned
determination on the petition by June
27, 2012. Therefore, the Department has
determined that it is necessary to extend
the time in which it will make its
decision on the petition until July 30,
2012. This extension will not prejudice
the petitioner. The deadline for the
comments on the petition remains
unchanged, and continues to be June 29,
2012.
FOR FURTHER INFORMATION CONTACT: For
further information about this Notice,
contact Josephine Arnold, Minority
Business Development Agency, 1401
Constitution Avenue NW, Room 5053,
Washington, DC 20230, (202) 482–2332,
and jarnold@mbda.gov.
SUMMARY:
David Hinson,
National Director, Minority Business
Development Agency.
[FR Doc. 2012–14225 Filed 6–11–12; 8:45 am]
BILLING CODE 3510–21–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–134042–07]
RIN 1545–BG81
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Basis of Indebtedness of S
Corporations to Their Shareholders
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
This document contains
proposed regulations relating to basis of
indebtedness of S corporations to their
shareholders. These proposed
regulations provide that S corporation
SUMMARY:
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shareholders increase their basis of
indebtedness of the S corporation to the
shareholder only if the indebtedness is
bona fide. The proposed regulations
affect shareholders of S corporations.
This document also provides notice of
a public hearing on these proposed
regulations.
DATES: Written or electronic comments
must be received by September 10,
2012. Requests to speak and outlines of
topics to be discussed at the public
hearing scheduled for October 8, 2012,
must be received by September 10,
2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–134042–07), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–134042–07),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
www.regulations.gov (IRS REG–134042–
07). The public hearing will be held in
the auditorium, Internal Revenue
Building, 1111 Constitution Avenue
NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Caroline E. Hay at (202) 622–3070;
concerning the submissions of
comments, the hearing, and/or to be
placed on the building access list to
attend the hearing, Oluwafunmilayo
(Funmi) P. Taylor at (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document proposes amendments
to § 1.1366–2 of the Income Tax
Regulations. In addition, this document
proposes conforming changes to the
effective date rules provided in
§ 1.1366–5.
Under section 1366(d)(1) of the
Internal Revenue Code (Code), the
aggregate amount of losses and
deductions that a shareholder takes into
account for any taxable year cannot
exceed the sum of that shareholder’s
adjusted basis in stock and adjusted
basis of any indebtedness of the S
corporation to that shareholder. The
Senate Report discussing section 1374
(the predecessor statute to section 1366)
illustrates Congress’s intent to limit the
loss that a shareholder takes into
account to that shareholder’s investment
in the corporation; that is, to the
adjusted basis of the stock in the
corporation owned by the shareholder
and the adjusted basis of any
indebtedness of the corporation to the
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shareholder. S. Rept. 1983, 85th Cong.,
2d Sess. 219–220 (1958) (1958–3 CB
922, 1141).
Section 1.1366–2 provides rules
relating to limitations on deduction of
passthrough items of an S corporation to
its shareholder. Under § 1.1366–2(a)(1),
a shareholder’s aggregate amount of
losses and deductions taken into
account under § 1.1366–1(a)(2), (3), and
(4) for any taxable year of the S
corporation cannot exceed that
shareholder’s adjusted basis in stock in
the corporation and adjusted basis of
any indebtedness of the corporation to
that shareholder. These proposed
amendments to the regulations provide
that, in order to increase a shareholder’s
basis of indebtedness, a loan must
represent bona fide indebtedness of the
S corporation that runs directly to the
shareholder. These proposed regulations
also reaffirm that a shareholder acting as
guarantor of S corporation indebtedness
does not create or increase basis of
indebtedness simply by becoming a
guarantor.
Explanation of Provisions
Section 1366(d)(1) provides that a
shareholder can take into account losses
and deductions to the extent of the
adjusted basis of the shareholder’s stock
and the adjusted basis of any
indebtedness of the S corporation to the
shareholder (basis of indebtedness). The
Code does not define basis of
indebtedness, but several court cases
involving passthrough losses from an S
corporation interpret section 1366 to
require an investment in the S
corporation that constitutes ‘‘an actual
economic outlay’’ by the shareholder to
create basis of indebtedness. See, for
example, Maloof v. Comm’r, 456 F.3d
645, 649–650 (6th Cir. 2006); Spencer v.
Comm’r, 110 T.C. 62, 78–79 (1998), aff’d
without published opinion, 194 F.3d
1324 (11th Cir. 1999); Hitchins v.
Comm’r, 103 T.C. 711, 715 (1994); Perry
v. Comm’r, 54 T.C. 1293, 1296 (1970).
Often, the cases involve attempts by an
S corporation shareholder to obtain
basis of indebtedness by borrowing from
another person—typically, a related
entity—and then lending the proceeds
to the S corporation (a back-to-back loan
transaction). Alternatively, an S
corporation shareholder might seek to
restructure an existing loan of the S
corporation into a back-to-back loan by
assuming the S corporation’s liability on
the loan and creating a commensurate
obligation from the S corporation to the
shareholder. Disputes continue to arise
concerning when a back-to-back loan
gives rise to an actual economic outlay,
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Federal Register / Vol. 77, No. 113 / Tuesday, June 12, 2012 / Proposed Rules
in particular whether a shareholder has
been made ‘‘poorer in a material sense’’
as a result of the loan. See, for example,
Oren v. Comm’r, 357 F.3d 854, 857–859
(8th Cir. 2004); Bergman v. U.S., 174
F.3d 928, 932 (8th Cir. 1999).
The frequency of disputes between S
corporation shareholders and the
government regarding whether certain
loan transactions involving multiple
parties, including back-to-back loan
transactions, create shareholder basis of
indebtedness demonstrates the
complexity of and uncertainty about
this issue for both shareholders and the
government. The Treasury Department
and the IRS propose these regulations to
clarify the requirements for increasing
basis of indebtedness and to assist S
corporation shareholders in determining
with greater certainty whether their
particular arrangement creates basis of
indebtedness. These proposed
regulations require that loan
transactions represent bona fide
indebtedness of the S corporation to the
shareholder in order to increase basis of
indebtedness; therefore, an S
corporation shareholder need not
otherwise satisfy the ‘‘actual economic
outlay’’ doctrine for purposes of section
1366(d)(1)(B).
The key requirement of these
proposed regulations is that purported
indebtedness of the S corporation to a
shareholder must be bona fide
indebtedness to the shareholder. These
proposed regulations do not attempt to
provide a different standard for
purposes of section 1366 as to what
constitutes bona fide indebtedness.
Rather, general Federal tax principles—
many of which have developed outside
of section 1366—determine whether
indebtedness is bona fide. See, for
example, Knetsch v. U.S., 364 U.S. 361
(1960) (disallowing interest deductions
for lack of actual indebtedness);
Geftman v. Comm’r, 154 F.3d 61, 68–75
(3d Cir. 1998) (based on the objective
attributes and the economic realities of
the transaction, holding that the
transaction at issue was not a bona fide
debt); Estate of Mixon v. U.S., 464 F.2d
394, 402 (5th Cir. 1972) (discussion of
factors indicative that debt is bona fide);
Litton Business Systems, Inc. v. Comm’r,
61 T.C. 367, 376–77 (1973).
By contrast, shareholder guarantees of
S corporation debt do not result in basis
of indebtedness. An overwhelming
majority of courts considering whether
shareholders may increase basis of
indebtedness from their guarantees of S
corporation debt determined that the
shareholders’ guarantees did not create
basis of indebtedness. Where an S
corporation shareholder acts merely as a
guarantor of a loan made by another
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party directly to the S corporation, or
acts in a capacity similar to a guarantor
(for example, as a surety or
accommodation party), then the courts
have held that the shareholder adjusts
basis of indebtedness only to the extent
the shareholder actually performs under
the guarantee. See, for example, Estate
of Leavitt v. Comm’r, 875 F.2d 420 (4th
Cir. 1989); Frankel v. Comm’r, 61 T.C.
343 (1973), aff’d without published
opinion, 506 F.2d 1051 (3d Cir. 1974);
Raynor v. Comm’r, 50 T.C. 762 (1968);
Weisberg v. Comm’r, T.C. Memo. 2010–
55; Maloof v. Comm’r, T.C. Memo.
2005–75, aff’d, 456 F.3d 645 (6th Cir.
2006); Wise v. Comm’r, T.C. Memo.
1997–135. But see Selfe v. U.S., 778
F.2d 769 (11th Cir. 1985) (holding that
under unique and limited
circumstances, a shareholder who
guarantees a loan to an S corporation
may increase basis of indebtedness
where, in substance, that shareholder
has borrowed funds and subsequently
advanced them to the S corporation).
These proposed regulations provide that
an S corporation shareholder who
merely acts as a guarantor or in a similar
capacity has not created basis of
indebtedness unless the shareholder
actually makes a payment, and then
only to the extent of such payment. See
also Rev. Rul. 70–50 (1970–1 CB 178),
(see § 601.601(d)(2)).
Additionally, some taxpayers have
relied on an ‘‘incorporated pocketbook’’
theory to claim an increase in basis of
indebtedness in circumstances that
involve a loan directly to the S
corporation from an entity related to the
S corporation shareholder. In these
transactions, an S corporation
shareholder claims that a transfer from
the related entity directly to the
shareholder’s S corporation was made
on the shareholder’s behalf and is, in
substance, a loan from the related entity
to the shareholder, followed by a loan
from the shareholder to the S
corporation. A limited number of court
decisions have allowed shareholders to
increase basis of indebtedness as a
result of incorporated pocketbook
transactions. See Yates v. Comm’r, T.C.
Memo. 2001–280; Culnen v. Comm’r,
T.C. Memo. 2000–139. Under these
proposed regulations, an incorporated
pocketbook transaction increases basis
of indebtedness only where the
transaction creates a bona fide creditordebtor relationship between the
shareholder and the borrowing S
corporation.
These proposed regulations only
address whether a shareholder has basis
of indebtedness for purposes of section
1366(d)(1)(B) and do not address how to
determine the basis of the shareholder’s
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34885
stock in the S corporation for purposes
of section 1366(d)(1)(A). Therefore,
these proposed regulations leave
unchanged the conclusion found in
published guidance that a shareholder
of an S corporation does not increase
basis in stock for purposes of section
1366(d)(1)(A) upon the contribution of
the shareholder’s own unsecured
demand promissory note to the
corporation. Rev. Rul. 81–187 (1981–2
CB 167). This conclusion is consistent
with published guidance and case law
in the partnership context that the
contribution of the partner’s own note
will not increase such partner’s basis in
its partnership interest under section
722. Rev. Rul. 80–235 (1980–2 CB 229);
Oden v. Comm’r, T.C. Memo. 1981–184,
aff’d without published opinion, 679
F.2d 885 (4th Cir. 1982) (because the
partner incurred no cost in making the
note, the partner’s basis in the note to
him was zero). In developing this
project, the Treasury Department and
the IRS have considered whether the
principal holding of Rev. Rul. 81–187,
and the holding of Rev. Rul. 80–235 as
it relates to a partner’s basis in its
partnership interest upon the
contribution of the partner’s own note,
should be promulgated as regulations.
The Treasury Department and the IRS
have considered alternatives to the
discussion of the applicable law in
those revenue rulings. As one model,
the Treasury Department and the IRS
have, with respect to basis calculations
in the S corporation and partnership
context, considered adopting a rule
similar to the one currently in § 1.704–
1(b)(2)(iv)(d)(2), which provides that a
partner’s capital account is increased
with respect to non-readily tradable
partner notes only (i) when there is a
taxable disposition of such note by the
partnership, or (ii) when the partner
makes principal payments on such note.
The Treasury Department and the IRS
request comments concerning the
propriety of this model in the S
corporation and the partnership context.
Proposed Effective Date
The regulations, as proposed, apply to
loan transactions entered into on or after
the date of publication of a Treasury
decision adopting these rules as final
regulations in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
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Federal Register / Vol. 77, No. 113 / Tuesday, June 12, 2012 / Proposed Rules
from the IRS and Treasury Department
participated in their development.
Comments and Requests for a Public
Hearing
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the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
proposed regulations. Because these
proposed 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 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.
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) or electronic comments
that are submitted timely to the IRS. The
Treasury Department and the IRS
request comments on all aspects of the
proposed rules. All comments will be
available for public inspection and
copying.
A public hearing has been scheduled
for October 8, 2012, beginning at 10 a.m.
in the auditorium of the Internal
Revenue Building, 1111 Constitution
Avenue NW., Washington, DC. Due to
building security procedures, visitors
must enter at the Constitution Avenue
entrance. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 15
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written comments and an
outline of the topics to be discussed and
the time to be devoted to each topic
(signed original and eight (8) copies) by
September 10, 2012. A period of 10
minutes is 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 authors of these
proposed regulations are Caroline E.
Hay, Michael H. Beker, and Stacy L.
Short, Office of the Associate Chief
Counsel (Passthroughs and Special
Industries). However, other personnel
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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 1—INCOME TAXES
Authority: 26 U.S.C. 7805 * * *
§ 1.108–7
[Amended]
Par. 2. Section 1.108–7 is amended
by:
1. Removing the language ‘‘§ 1.1366–
2(a)(5)’’ in paragraph (d)(2)(iii) and
adding ‘‘§ 1.1366–2(a)(6)’’ in its place.
2. Adding a sentence to the end of
paragraph (f)(2).
The addition reads as follows:
§ 1.108–7
Reduction of attributes.
*
*
*
*
*
(f) Effective/applicability date.
(2) * * * The revision to the citation
to § 1.1366–2(a) in paragraph (d)(2)(iii)
of this section is applicable on and after
the date these proposed regulations are
published as final in the Federal
Register.
*
*
*
*
*
§ 1.1366–0
[Amended]
Par. 3. Section 1.1366–0 is amended
by:
1. Redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as
paragraphs (a)(3), (a)(4), (a)(5), (a)(6),
and (a)(7) in the table of contents for
§ 1.1366–2, respectively, and adding a
new paragraph (a)(2).
2. Revising the title of § 1.1366–5 in
the table of contents.
The additions read as follows:
§ 1.1366–0
Table of contents.
*
*
*
*
*
§ 1.1366–2 Limitations on deduction of
passthrough items of an S corporation to
its shareholders.
(a) * * *
(2) Basis of indebtedness.
(i) In general.
(ii) Guarantees.
(iii) Examples.
*
*
*
*
*
§ 1.1366–5
Effective/Applicability date.
§ 1.1366–2
[Amended]
Par. 4. Section 1.1366–2 is amended
by:
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1. Redesignating paragraphs (a)(2),
(a)(3), (a)(4), (a)(5), and (a)(6) as
paragraphs (a)(3), (a)(4), (a)(5), (a)(6),
and (a)(7) respectively, and adding a
new paragraph (a)(2).
2. Removing the language ‘‘(a)(3)(i)’’
in paragraph (a)(1)(i), and adding the
language ‘‘(a)(4)(i)’’ in its place.
3. Removing the language ‘‘paragraph
(a)(3)(ii)’’ in paragraph (a)(1)(ii), and
adding the language ‘‘paragraphs (a)(2)
and (a)(4)(ii)’’ in its place.
4. Removing the language ‘‘(a)(3)(i)
and (ii)’’ in newly redesignated
paragraph (a)(3), and adding the
language ‘‘(a)(4)(i) and (ii)’’ in its place.
5. Removing the language ‘‘paragraphs
(a)(1)(i) and (2)’’ in newly redesignated
paragraph (a)(4)(i), and adding the
language ‘‘paragraphs (a)(1)(i) and (3)’’
in its place.
6. Removing the language ‘‘paragraphs
(a)(1)(ii) and (2)’’ in newly redesignated
paragraph (a)(4)(ii), and adding
‘‘paragraphs (a)(1)(ii) and (3)’’ in its
place.
7. Removing the language ‘‘(a)(3)(i)’’
and ‘‘(a)(3)(ii)’’ in newly redesignated
paragraph (a)(5), and adding the
language ‘‘(a)(4)(i)’’ and ‘‘(a)(4)(ii)’’,
respectively, in their place.
8. Removing the language ‘‘(a)(5)(ii)’’
in newly redesignated paragraph
(a)(6)(i) and (a)(6)(iii), and adding the
language ‘‘(a)(6)(ii)’’ in its place.
9. Removing the language ‘‘(a)(4)’’ in
newly redesignated paragraph (a)(6)(ii),
and adding the language ‘‘(a)(5)’’ in its
place.
10. Removing the language
‘‘paragraphs (a)(1)(i) and (2)’’ in newly
redesignated paragraph (a)(7), and
adding the language ‘‘paragraphs
(a)(1)(i) and (3)’’ in its place.
The additions read as follows:
§ 1.1366–2 Limitations on deduction of
passthrough items of an S corporation to
its shareholders.
(a) * * *
(2) Basis of indebtedness—(i) In
general. The term basis of any
indebtedness of the S corporation to the
shareholder means the shareholder’s
adjusted basis (as defined in § 1.1011–
1 and as specifically provided in section
1367(b)(2)) in any bona fide
indebtedness of the S corporation that
runs directly to the shareholder.
Whether indebtedness is bona fide
indebtedness to a shareholder is
determined under general Federal tax
principles and depends upon all of the
facts and circumstances.
(ii) Guarantees. A shareholder does
not obtain basis of indebtedness in the
S corporation merely by guaranteeing a
loan or acting as a surety,
accommodation party, or in any similar
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capacity relating to a loan. When a
shareholder makes a payment on bona
fide indebtedness for which the
shareholder has acted as guarantor or in
a similar capacity, based on the facts
and circumstances, the shareholder may
increase its basis of indebtedness to the
extent of that payment.
(iii) Examples. The following
examples illustrate the provisions of
paragraph (a)(2)(i) and (ii) of this
section:
Example 1. Shareholder loan transaction.
A is the sole shareholder of S, an S
corporation. S received a loan from A.
Whether the loan from A to S constitutes
bona fide indebtedness from S to A is
determined under general Federal tax
principles and depends upon all of the facts
and circumstances. See paragraph (a)(2)(i) of
this section. If the loan constitutes bona fide
indebtedness from S to A, A’s loan to S
increases A’s basis of indebtedness under
paragraph (a)(2)(i) of this section. The result
is the same if A made the loan to S through
an entity that is disregarded as an entity
separate from A under § 301.7701–3.
Example 2. Guarantee. A is a shareholder
of S, an S corporation. In 2013, S received
a loan from Bank. Bank required A’s
guarantee as a condition of making the loan
to S. Beginning in 2014, S could no longer
make payments on the loan and A made
payments directly to Bank from A’s personal
funds until the loan obligation was satisfied.
For each payment A made on the note, A
obtains basis of indebtedness under
paragraph (a)(2)(ii) of this section. Thus, A’s
basis of indebtedness is increased during
2014 under paragraph (a)(2)(ii) of this section
to the extent of A’s payments to Bank
pursuant to the guarantee agreement.
Example 3. Back-to-back loan transaction.
A is the sole shareholder of two S
corporations, S1 and S2. S1 loaned $200,000
to A. A then loaned $200,000 to S2. Whether
the loan from A to S2 constitutes bona fide
indebtedness from S2 to A is determined
under general Federal tax principles and
depends upon all of the facts and
circumstances. See paragraph (a)(2)(i) of this
section. If A’s loan to S2 constitutes bona fide
indebtedness from S2 to A, A’s back-to-back
loan increases A’s basis of indebtedness in S2
under paragraph (a)(2)(i) of this section.
Example 4. Loan restructuring through
distributions. A is the sole shareholder of two
S corporations, S1 and S2. In March 2013, S1
made a loan to S2. In December 2013, S1
assigned its creditor position in the note to
A by making a distribution to A of the note.
Under local law, after S1 distributed the note
to A, S2 was relieved of its liability to S1 and
was directly liable to A. Whether S2 is
indebted to A rather than S1 is determined
under general Federal tax principles and
depends upon all of the facts and
circumstances. See paragraph (a)(2)(i) of this
section. If the note constitutes bona fide
indebtedness from S2 to A, the note increases
A’s basis of indebtedness in S2 under
paragraph (a)(2)(i) of this section.
*
*
*
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§ 1.1366–5
[Amended]
Effective/Applicability date.
* * * Upon the publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register, § 1.1366–2(a)(2) will apply to
transactions entered into on or after the
date these proposed regulations are
published as final in the Federal
Register. In addition, the revisions to
§§ 1.1366–0, 1.1366–2, and this section
are applicable on and after the date
these proposed regulations are
published as final in the Federal
Register.
§ 1.1367–1
[Amended]
Par. 6. Section 1.1367–1(h) Example
5(iii) is amended by removing the
language ‘‘§ 1.1366–2(a)(2)’’ in the third
and fourth sentences and adding the
language ‘‘§ 1.1366–2(a)(3)’’ in its place.
§ 1.1367–3
[Amended]
Par. 7. Section 1.1367–3 is amended
by adding one sentence to the end of the
paragraph to read as follows:
§ 1.1367–3
Effective/Applicability date.
* * * The revisions to citations to
§ 1.1366–2(a) in § 1.1367–1(h) Example
5(iii) are applicable on and after the date
these proposed regulations are
published as final in the Federal
Register.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2012–14188 Filed 6–11–12; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG 107889–12]
RIN 1545–BK85
Substantial Business Activities
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations.
AGENCY:
PO 00000
Frm 00034
Fmt 4702
Sfmt 4702
In the Rules and Regulations
section of this issue of the Federal
Register, the IRS and the Treasury
Department are issuing temporary
regulations regarding whether a foreign
corporation has substantial business
activities in a foreign country. These
regulations affect certain domestic
corporations and partnerships (and
certain parties related thereto), and
foreign corporations that acquire
substantially all of the properties of
such domestic corporations or
partnerships. The text of the temporary
regulations also serves as the text of
these proposed regulations. The
preamble to the temporary regulations
explains the temporary regulations and
these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must
be received by September 10, 2012.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–107889–12), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–107889–12),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically
via the Federal eRulemaking Portal at
www.regulations.gov (IRS and REG–
107889–12).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Mary W. Lyons, (202) 622–3860 and
David A. Levine, (202) 622–3860;
concerning submissions of comments or
requests for a public hearing,
Oluwafunmilayo (Funmi) Taylor, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:
Par. 5. Section 1.1366–5 is amended
by:
1. Removing the language ‘‘Sections
1.1366–2(a)(5)(i), (ii) and (iii)’’, and
adding the language ‘‘Sections 1.1366–
2(a)(6)(i), (ii) and (iii)’’ in its place.
2. Adding two sentences to the end of
the paragraph.
The additions read as follows:
§ 1.1366–5
34887
Background and Explanation of
Provisions
Temporary regulations in the Rules
and Regulations section of this issue of
the Federal Register amend the Income
Tax Regulations (26 CFR part 1) relating
to section 7874 of the Code. The
temporary regulations provide guidance
regarding whether a foreign corporation
has substantial business activities in a
foreign country for purposes of whether
a foreign corporation is treated as a
surrogate foreign corporation under
section 7874(a)(2)(B). The text of those
regulations also serves as the text of
these proposed regulations. The
preamble to the temporary regulations
explains these amendments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
E:\FR\FM\12JNP1.SGM
12JNP1
]]>Agencies
[Federal Register Volume 77, Number 113 (Tuesday, June 12, 2012)]
[Proposed Rules]
[Pages 34884-34887]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14188]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-134042-07]
RIN 1545-BG81
Basis of Indebtedness of S Corporations to Their Shareholders
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations relating to basis
of indebtedness of S corporations to their shareholders. These proposed
regulations provide that S corporation shareholders increase their
basis of indebtedness of the S corporation to the shareholder only if
the indebtedness is bona fide. The proposed regulations affect
shareholders of S corporations. This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by September 10,
2012. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for October 8, 2012, must be received by
September 10, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-134042-07), room
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
134042-07), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal at www.regulations.gov (IRS REG-134042-07). The
public hearing will be held in the auditorium, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Caroline E. Hay at (202) 622-3070; concerning the submissions of
comments, the hearing, and/or to be placed on the building access list
to attend the hearing, Oluwafunmilayo (Funmi) P. Taylor at (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document proposes amendments to Sec. 1.1366-2 of the Income
Tax Regulations. In addition, this document proposes conforming changes
to the effective date rules provided in Sec. 1.1366-5.
Under section 1366(d)(1) of the Internal Revenue Code (Code), the
aggregate amount of losses and deductions that a shareholder takes into
account for any taxable year cannot exceed the sum of that
shareholder's adjusted basis in stock and adjusted basis of any
indebtedness of the S corporation to that shareholder. The Senate
Report discussing section 1374 (the predecessor statute to section
1366) illustrates Congress's intent to limit the loss that a
shareholder takes into account to that shareholder's investment in the
corporation; that is, to the adjusted basis of the stock in the
corporation owned by the shareholder and the adjusted basis of any
indebtedness of the corporation to the shareholder. S. Rept. 1983, 85th
Cong., 2d Sess. 219-220 (1958) (1958-3 CB 922, 1141).
Section 1.1366-2 provides rules relating to limitations on
deduction of passthrough items of an S corporation to its shareholder.
Under Sec. 1.1366-2(a)(1), a shareholder's aggregate amount of losses
and deductions taken into account under Sec. 1.1366-1(a)(2), (3), and
(4) for any taxable year of the S corporation cannot exceed that
shareholder's adjusted basis in stock in the corporation and adjusted
basis of any indebtedness of the corporation to that shareholder. These
proposed amendments to the regulations provide that, in order to
increase a shareholder's basis of indebtedness, a loan must represent
bona fide indebtedness of the S corporation that runs directly to the
shareholder. These proposed regulations also reaffirm that a
shareholder acting as guarantor of S corporation indebtedness does not
create or increase basis of indebtedness simply by becoming a
guarantor.
Explanation of Provisions
Section 1366(d)(1) provides that a shareholder can take into
account losses and deductions to the extent of the adjusted basis of
the shareholder's stock and the adjusted basis of any indebtedness of
the S corporation to the shareholder (basis of indebtedness). The Code
does not define basis of indebtedness, but several court cases
involving passthrough losses from an S corporation interpret section
1366 to require an investment in the S corporation that constitutes
``an actual economic outlay'' by the shareholder to create basis of
indebtedness. See, for example, Maloof v. Comm'r, 456 F.3d 645, 649-650
(6th Cir. 2006); Spencer v. Comm'r, 110 T.C. 62, 78-79 (1998), aff'd
without published opinion, 194 F.3d 1324 (11th Cir. 1999); Hitchins v.
Comm'r, 103 T.C. 711, 715 (1994); Perry v. Comm'r, 54 T.C. 1293, 1296
(1970). Often, the cases involve attempts by an S corporation
shareholder to obtain basis of indebtedness by borrowing from another
person--typically, a related entity--and then lending the proceeds to
the S corporation (a back-to-back loan transaction). Alternatively, an
S corporation shareholder might seek to restructure an existing loan of
the S corporation into a back-to-back loan by assuming the S
corporation's liability on the loan and creating a commensurate
obligation from the S corporation to the shareholder. Disputes continue
to arise concerning when a back-to-back loan gives rise to an actual
economic outlay,
[[Page 34885]]
in particular whether a shareholder has been made ``poorer in a
material sense'' as a result of the loan. See, for example, Oren v.
Comm'r, 357 F.3d 854, 857-859 (8th Cir. 2004); Bergman v. U.S., 174
F.3d 928, 932 (8th Cir. 1999).
The frequency of disputes between S corporation shareholders and
the government regarding whether certain loan transactions involving
multiple parties, including back-to-back loan transactions, create
shareholder basis of indebtedness demonstrates the complexity of and
uncertainty about this issue for both shareholders and the government.
The Treasury Department and the IRS propose these regulations to
clarify the requirements for increasing basis of indebtedness and to
assist S corporation shareholders in determining with greater certainty
whether their particular arrangement creates basis of indebtedness.
These proposed regulations require that loan transactions represent
bona fide indebtedness of the S corporation to the shareholder in order
to increase basis of indebtedness; therefore, an S corporation
shareholder need not otherwise satisfy the ``actual economic outlay''
doctrine for purposes of section 1366(d)(1)(B).
The key requirement of these proposed regulations is that purported
indebtedness of the S corporation to a shareholder must be bona fide
indebtedness to the shareholder. These proposed regulations do not
attempt to provide a different standard for purposes of section 1366 as
to what constitutes bona fide indebtedness. Rather, general Federal tax
principles--many of which have developed outside of section 1366--
determine whether indebtedness is bona fide. See, for example, Knetsch
v. U.S., 364 U.S. 361 (1960) (disallowing interest deductions for lack
of actual indebtedness); Geftman v. Comm'r, 154 F.3d 61, 68-75 (3d Cir.
1998) (based on the objective attributes and the economic realities of
the transaction, holding that the transaction at issue was not a bona
fide debt); Estate of Mixon v. U.S., 464 F.2d 394, 402 (5th Cir. 1972)
(discussion of factors indicative that debt is bona fide); Litton
Business Systems, Inc. v. Comm'r, 61 T.C. 367, 376-77 (1973).
By contrast, shareholder guarantees of S corporation debt do not
result in basis of indebtedness. An overwhelming majority of courts
considering whether shareholders may increase basis of indebtedness
from their guarantees of S corporation debt determined that the
shareholders' guarantees did not create basis of indebtedness. Where an
S corporation shareholder acts merely as a guarantor of a loan made by
another party directly to the S corporation, or acts in a capacity
similar to a guarantor (for example, as a surety or accommodation
party), then the courts have held that the shareholder adjusts basis of
indebtedness only to the extent the shareholder actually performs under
the guarantee. See, for example, Estate of Leavitt v. Comm'r, 875 F.2d
420 (4th Cir. 1989); Frankel v. Comm'r, 61 T.C. 343 (1973), aff'd
without published opinion, 506 F.2d 1051 (3d Cir. 1974); Raynor v.
Comm'r, 50 T.C. 762 (1968); Weisberg v. Comm'r, T.C. Memo. 2010-55;
Maloof v. Comm'r, T.C. Memo. 2005-75, aff'd, 456 F.3d 645 (6th Cir.
2006); Wise v. Comm'r, T.C. Memo. 1997-135. But see Selfe v. U.S., 778
F.2d 769 (11th Cir. 1985) (holding that under unique and limited
circumstances, a shareholder who guarantees a loan to an S corporation
may increase basis of indebtedness where, in substance, that
shareholder has borrowed funds and subsequently advanced them to the S
corporation). These proposed regulations provide that an S corporation
shareholder who merely acts as a guarantor or in a similar capacity has
not created basis of indebtedness unless the shareholder actually makes
a payment, and then only to the extent of such payment. See also Rev.
Rul. 70-50 (1970-1 CB 178), (see Sec. 601.601(d)(2)).
Additionally, some taxpayers have relied on an ``incorporated
pocketbook'' theory to claim an increase in basis of indebtedness in
circumstances that involve a loan directly to the S corporation from an
entity related to the S corporation shareholder. In these transactions,
an S corporation shareholder claims that a transfer from the related
entity directly to the shareholder's S corporation was made on the
shareholder's behalf and is, in substance, a loan from the related
entity to the shareholder, followed by a loan from the shareholder to
the S corporation. A limited number of court decisions have allowed
shareholders to increase basis of indebtedness as a result of
incorporated pocketbook transactions. See Yates v. Comm'r, T.C. Memo.
2001-280; Culnen v. Comm'r, T.C. Memo. 2000-139. Under these proposed
regulations, an incorporated pocketbook transaction increases basis of
indebtedness only where the transaction creates a bona fide creditor-
debtor relationship between the shareholder and the borrowing S
corporation.
These proposed regulations only address whether a shareholder has
basis of indebtedness for purposes of section 1366(d)(1)(B) and do not
address how to determine the basis of the shareholder's stock in the S
corporation for purposes of section 1366(d)(1)(A). Therefore, these
proposed regulations leave unchanged the conclusion found in published
guidance that a shareholder of an S corporation does not increase basis
in stock for purposes of section 1366(d)(1)(A) upon the contribution of
the shareholder's own unsecured demand promissory note to the
corporation. Rev. Rul. 81-187 (1981-2 CB 167). This conclusion is
consistent with published guidance and case law in the partnership
context that the contribution of the partner's own note will not
increase such partner's basis in its partnership interest under section
722. Rev. Rul. 80-235 (1980-2 CB 229); Oden v. Comm'r, T.C. Memo. 1981-
184, aff'd without published opinion, 679 F.2d 885 (4th Cir. 1982)
(because the partner incurred no cost in making the note, the partner's
basis in the note to him was zero). In developing this project, the
Treasury Department and the IRS have considered whether the principal
holding of Rev. Rul. 81-187, and the holding of Rev. Rul. 80-235 as it
relates to a partner's basis in its partnership interest upon the
contribution of the partner's own note, should be promulgated as
regulations. The Treasury Department and the IRS have considered
alternatives to the discussion of the applicable law in those revenue
rulings. As one model, the Treasury Department and the IRS have, with
respect to basis calculations in the S corporation and partnership
context, considered adopting a rule similar to the one currently in
Sec. 1.704-1(b)(2)(iv)(d)(2), which provides that a partner's capital
account is increased with respect to non-readily tradable partner notes
only (i) when there is a taxable disposition of such note by the
partnership, or (ii) when the partner makes principal payments on such
note. The Treasury Department and the IRS request comments concerning
the propriety of this model in the S corporation and the partnership
context.
Proposed Effective Date
The regulations, as proposed, apply to loan transactions entered
into on or after the date of publication of a Treasury decision
adopting these rules as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of
[[Page 34886]]
the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations. Because these proposed 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 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 Requests for a 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) or electronic comments that are submitted timely
to the IRS. The Treasury Department and the IRS request comments on all
aspects of the proposed rules. All comments will be available for
public inspection and copying.
A public hearing has been scheduled for October 8, 2012, beginning
at 10 a.m. in the auditorium of the Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 15 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time to
be devoted to each topic (signed original and eight (8) copies) by
September 10, 2012. A period of 10 minutes is 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 authors of these proposed regulations are Caroline E.
Hay, Michael H. Beker, and Stacy L. Short, Office of the Associate
Chief Counsel (Passthroughs and Special Industries). 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.108-7 [Amended]
Par. 2. Section 1.108-7 is amended by:
1. Removing the language ``Sec. 1.1366-2(a)(5)'' in paragraph
(d)(2)(iii) and adding ``Sec. 1.1366-2(a)(6)'' in its place.
2. Adding a sentence to the end of paragraph (f)(2).
The addition reads as follows:
Sec. 1.108-7 Reduction of attributes.
* * * * *
(f) Effective/applicability date.
(2) * * * The revision to the citation to Sec. 1.1366-2(a) in
paragraph (d)(2)(iii) of this section is applicable on and after the
date these proposed regulations are published as final in the Federal
Register.
* * * * *
Sec. 1.1366-0 [Amended]
Par. 3. Section 1.1366-0 is amended by:
1. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and
(a)(6) as paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and (a)(7) in the
table of contents for Sec. 1.1366-2, respectively, and adding a new
paragraph (a)(2).
2. Revising the title of Sec. 1.1366-5 in the table of contents.
The additions read as follows:
Sec. 1.1366-0 Table of contents.
* * * * *
Sec. 1.1366-2 Limitations on deduction of passthrough items of an S
corporation to its shareholders.
(a) * * *
(2) Basis of indebtedness.
(i) In general.
(ii) Guarantees.
(iii) Examples.
* * * * *
Sec. 1.1366-5 Effective/Applicability date.
Sec. 1.1366-2 [Amended]
Par. 4. Section 1.1366-2 is amended by:
1. Redesignating paragraphs (a)(2), (a)(3), (a)(4), (a)(5), and
(a)(6) as paragraphs (a)(3), (a)(4), (a)(5), (a)(6), and (a)(7)
respectively, and adding a new paragraph (a)(2).
2. Removing the language ``(a)(3)(i)'' in paragraph (a)(1)(i), and
adding the language ``(a)(4)(i)'' in its place.
3. Removing the language ``paragraph (a)(3)(ii)'' in paragraph
(a)(1)(ii), and adding the language ``paragraphs (a)(2) and
(a)(4)(ii)'' in its place.
4. Removing the language ``(a)(3)(i) and (ii)'' in newly
redesignated paragraph (a)(3), and adding the language ``(a)(4)(i) and
(ii)'' in its place.
5. Removing the language ``paragraphs (a)(1)(i) and (2)'' in newly
redesignated paragraph (a)(4)(i), and adding the language ``paragraphs
(a)(1)(i) and (3)'' in its place.
6. Removing the language ``paragraphs (a)(1)(ii) and (2)'' in newly
redesignated paragraph (a)(4)(ii), and adding ``paragraphs (a)(1)(ii)
and (3)'' in its place.
7. Removing the language ``(a)(3)(i)'' and ``(a)(3)(ii)'' in newly
redesignated paragraph (a)(5), and adding the language ``(a)(4)(i)''
and ``(a)(4)(ii)'', respectively, in their place.
8. Removing the language ``(a)(5)(ii)'' in newly redesignated
paragraph (a)(6)(i) and (a)(6)(iii), and adding the language
``(a)(6)(ii)'' in its place.
9. Removing the language ``(a)(4)'' in newly redesignated paragraph
(a)(6)(ii), and adding the language ``(a)(5)'' in its place.
10. Removing the language ``paragraphs (a)(1)(i) and (2)'' in newly
redesignated paragraph (a)(7), and adding the language ``paragraphs
(a)(1)(i) and (3)'' in its place.
The additions read as follows:
Sec. 1.1366-2 Limitations on deduction of passthrough items of an S
corporation to its shareholders.
(a) * * *
(2) Basis of indebtedness--(i) In general. The term basis of any
indebtedness of the S corporation to the shareholder means the
shareholder's adjusted basis (as defined in Sec. 1.1011-1 and as
specifically provided in section 1367(b)(2)) in any bona fide
indebtedness of the S corporation that runs directly to the
shareholder. Whether indebtedness is bona fide indebtedness to a
shareholder is determined under general Federal tax principles and
depends upon all of the facts and circumstances.
(ii) Guarantees. A shareholder does not obtain basis of
indebtedness in the S corporation merely by guaranteeing a loan or
acting as a surety, accommodation party, or in any similar
[[Page 34887]]
capacity relating to a loan. When a shareholder makes a payment on bona
fide indebtedness for which the shareholder has acted as guarantor or
in a similar capacity, based on the facts and circumstances, the
shareholder may increase its basis of indebtedness to the extent of
that payment.
(iii) Examples. The following examples illustrate the provisions of
paragraph (a)(2)(i) and (ii) of this section:
Example 1. Shareholder loan transaction. A is the sole
shareholder of S, an S corporation. S received a loan from A.
Whether the loan from A to S constitutes bona fide indebtedness from
S to A is determined under general Federal tax principles and
depends upon all of the facts and circumstances. See paragraph
(a)(2)(i) of this section. If the loan constitutes bona fide
indebtedness from S to A, A's loan to S increases A's basis of
indebtedness under paragraph (a)(2)(i) of this section. The result
is the same if A made the loan to S through an entity that is
disregarded as an entity separate from A under Sec. 301.7701-3.
Example 2. Guarantee. A is a shareholder of S, an S corporation.
In 2013, S received a loan from Bank. Bank required A's guarantee as
a condition of making the loan to S. Beginning in 2014, S could no
longer make payments on the loan and A made payments directly to
Bank from A's personal funds until the loan obligation was
satisfied. For each payment A made on the note, A obtains basis of
indebtedness under paragraph (a)(2)(ii) of this section. Thus, A's
basis of indebtedness is increased during 2014 under paragraph
(a)(2)(ii) of this section to the extent of A's payments to Bank
pursuant to the guarantee agreement.
Example 3. Back-to-back loan transaction. A is the sole
shareholder of two S corporations, S1 and S2. S1 loaned $200,000 to
A. A then loaned $200,000 to S2. Whether the loan from A to S2
constitutes bona fide indebtedness from S2 to A is determined under
general Federal tax principles and depends upon all of the facts and
circumstances. See paragraph (a)(2)(i) of this section. If A's loan
to S2 constitutes bona fide indebtedness from S2 to A, A's back-to-
back loan increases A's basis of indebtedness in S2 under paragraph
(a)(2)(i) of this section.
Example 4. Loan restructuring through distributions. A is the
sole shareholder of two S corporations, S1 and S2. In March 2013, S1
made a loan to S2. In December 2013, S1 assigned its creditor
position in the note to A by making a distribution to A of the note.
Under local law, after S1 distributed the note to A, S2 was relieved
of its liability to S1 and was directly liable to A. Whether S2 is
indebted to A rather than S1 is determined under general Federal tax
principles and depends upon all of the facts and circumstances. See
paragraph (a)(2)(i) of this section. If the note constitutes bona
fide indebtedness from S2 to A, the note increases A's basis of
indebtedness in S2 under paragraph (a)(2)(i) of this section.
* * * * *
Sec. 1.1366-5 [Amended]
Par. 5. Section 1.1366-5 is amended by:
1. Removing the language ``Sections 1.1366-2(a)(5)(i), (ii) and
(iii)'', and adding the language ``Sections 1.1366-2(a)(6)(i), (ii) and
(iii)'' in its place.
2. Adding two sentences to the end of the paragraph.
The additions read as follows:
Sec. 1.1366-5 Effective/Applicability date.
* * * Upon the publication of the Treasury decision adopting these
rules as final regulations in the Federal Register, Sec. 1.1366-
2(a)(2) will apply to transactions entered into on or after the date
these proposed regulations are published as final in the Federal
Register. In addition, the revisions to Sec. Sec. 1.1366-0, 1.1366-2,
and this section are applicable on and after the date these proposed
regulations are published as final in the Federal Register.
Sec. 1.1367-1 [Amended]
Par. 6. Section 1.1367-1(h) Example 5(iii) is amended by removing
the language ``Sec. 1.1366-2(a)(2)'' in the third and fourth sentences
and adding the language ``Sec. 1.1366-2(a)(3)'' in its place.
Sec. 1.1367-3 [Amended]
Par. 7. Section 1.1367-3 is amended by adding one sentence to the
end of the paragraph to read as follows:
Sec. 1.1367-3 Effective/Applicability date.
* * * The revisions to citations to Sec. 1.1366-2(a) in Sec.
1.1367-1(h) Example 5(iii) are applicable on and after the date these
proposed regulations are published as final in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-14188 Filed 6-11-12; 8:45 am]
BILLING CODE 4830-01-P
