Controlled Group Regulation Examples, 46851-46854 [2013-18717]
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Federal Register / Vol. 78, No. 149 / Friday, August 2, 2013 / Proposed Rules
B. Does the proposed rule create any
new burdens for FICUs?
NCUA believes that once manual
filers embrace online filing, they will
find it is quicker and easier than their
current practices, and it will reduce
their administrative burden. The
proposal does not create any new
regulatory burdens for FICUs, and
NCUA expects that electronic filing of
reports and profiles will improve a
FICU’s efficiency and reduce delays.
To assist FICUs making this
transition, NCUA already provides
instructions on how to report online and
has posted a ‘‘frequently asked
questions’’ section on NCUA’s Web site.
III. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis to
describe any significant economic
impact a regulation may have on a
substantial number of small entities.6
For purposes of this analysis, NCUA
considers small credit unions to be
those having under $50 million in
assets.7 This rule would affect relatively
few FICUs and the associated cost is
minimal. Accordingly, NCUA certifies
the rule will not have a significant
economic impact on small entities.
order. This rule will not have a
substantial direct effect on the states, on
the connection between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. NCUA has
determined this rule does not constitute
a policy that has federalism
implications for purposes of the
executive order.
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4. In § 748.1, revise paragraph (a) to
read as follows:
■
NCUA has determined that this
proposed rule will not affect family
well-being within the meaning of
Section 654 of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
List of Subjects
BILLING CODE 7535–01–P
Filing of reports.
[FR Doc. 2013–18299 Filed 8–1–13; 8:45 am]
12 CFR Part 741
Credit, Credit unions, Reporting and
recordkeeping requirements, Share
insurance.
12 CFR Part 748
For the reasons stated above, NCUA
proposes to amend 12 CFR parts 741
and 748 as follows:
PART 741—REQUIREMENTS FOR
INSURANCE
1. The authority for part 741
continues to read as follows:
■
Authority: 12 U.S.C. 1757, 1766(a), 1781–
1790, and 1790d; 31 U.S.C. 3717.
2. In § 741.6, revise paragraph (a) to
read as follows:
■
(a) Upon written notice from the
Board, Regional Director, Director of the
Office of Examination and Insurance, or
Director of the Office of National
Examinations and Supervision, insured
credit unions must file financial and
other reports in accordance with the
instructions in the notice. Insured credit
unions must use NCUA’s information
management system, or other electronic
means specified by NCUA, to submit
their data online.
*
*
*
*
*
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Credit unions, Reporting and
recordkeeping requirements, Security
measures.
§ 741.6 Financial and statistical and other
reports.
VerDate Mar<15>2010
Authority: 12 U.S.C. 1766(a), 1786(q); 15
U.S.C. 6801–6809; 31 U.S.C. 5311 and 5318.
(a) The president or managing official
of each federally-insured credit union
must certify compliance with the
requirements of this part in its Credit
Union Profile annually through NCUA’s
online information management system.
*
*
*
*
*
C. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. In adherence to
fundamental federalism principles,
NCUA, an independent regulatory
agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive
U.S.C. 603(a).
Ruling and Policy Statement 03–2,
68 FR 31949 (May 29, 2003), as amended by
Interpretative Ruling and Policy Statement 13–1, 78
FR 4032 (Jan. 18, 2013).
8 44 U.S.C. 3507(d); 5 CFR part 1320.
3. The authority for part 748
continues to read as follows:
■
§ 748.1
By the National Credit Union
Administration Board on July 25, 2013.
Mary F. Rupp,
Secretary of the Board.
7 Interpretive
PART 748—SECURITY PROGRAM,
REPORT OF SUSPECTED CRIMES,
SUSPICIOUS TRANSACTIONS,
CATASTROPHIC ACTS AND BANK
SECRECY ACT COMPLIANCE
D. Assessment of Federal Regulations
and Policies on Families
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden on regulated entities
or modifies an existing burden.8 For
purposes of the PRA, a paperwork
burden may take the form of either a
reporting or a recordkeeping
requirement, both referred to as
information collections. This proposed
rule requires the same information
previously required in a different
format, which NCUA believes should
require the same or less amount of time
to produce. This proposed rule will not
create new paperwork burdens or
modify any existing paperwork burdens.
65
46851
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[REG–114122–12]
RIN 1545–BK96
Controlled Group Regulation Examples
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
This document proposes
revisions to examples that illustrate the
controlled group rules related to
regulated investment companies (RICs).
These proposed revisions resolve an
issue with how the controlled group
rules should be applied in connection
with the RIC ‘‘asset diversification’’ test.
This document also provides notice of
a public hearing on the proposed
regulations.
SUMMARY:
Written or electronic comments
must be received by October 31, 2013.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for December 9, 2013, at 10
a.m., must be received by October 31,
2013.
DATES:
Send submissions to
CC:PA:LPD:PR (REG–114122–12), Room
5203, Internal Revenue Service, P.O.
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–114122–
12), Courier’s Desk, Internal Revenue
ADDRESSES:
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Federal Register / Vol. 78, No. 149 / Friday, August 2, 2013 / Proposed Rules
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–114122–12). The public hearing
will be held in the Auditorium,
beginning at 10 a.m., at the Internal
Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20224.
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulation,
Julanne Allen at (202) 622–3920;
concerning submissions of comments,
the public hearing, and/or to be placed
on the building access list to attend the
public hearing, Oluwafunmilayo
(Funmi) Taylor at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
emcdonald on DSK67QTVN1PROD with PROPOSALS
Background
This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1) relating to
the application of the ‘‘controlled
group’’ rules found in section 851(c) of
the Internal Revenue Code of 1986, as
amended (Code).
Section 851(b)(3)(B) provides that, to
qualify as a RIC, a taxpayer must meet
an asset diversification test pursuant to
which not more than 25 percent of the
value of the taxpayer’s total assets may
be invested in (i) the securities (other
than Government securities or the
securities of other regulated investment
companies) of any one issuer, (ii) the
securities (other than the securities of
other regulated investment companies)
of two or more issuers which the
taxpayer controls and which are
determined, under regulations
prescribed by the Secretary, to be
engaged in the same or similar trades or
businesses or related trades or
businesses, or (iii) the securities of one
or more qualified publicly traded
partnerships (as defined in section
851(h)).
The controlled group rules in section
851(c) provide that, when ascertaining
the value of a taxpayer’s investment in
the securities of a particular issuer for
purposes of determining whether the
asset diversification test has been met,
the proportion of any investment in the
securities of such issuer by a member of
the taxpayer’s ‘‘controlled group’’
should be aggregated with the taxpayer’s
investment in such issuer, as
determined under regulations. Section
851(c)(3) defines a controlled group as
one or more chains of corporations
connected through stock ownership
with the taxpayer if—(i) 20 percent or
more of the total combined voting
power of all classes of stock entitled to
vote of each of the corporations (except
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the taxpayer) is owned directly by one
or more of the other corporations; and
(ii) the taxpayer owns directly at least
20 percent or more of the total
combined voting power of all classes of
stock entitled to vote of at least one of
the other corporations. Clarification is
needed regarding whether a RIC and its
controlled subsidiary are a controlled
group if the subsidiary does not control
(within the meaning of section
851(c)(2)) at least one other corporation.
The definition of a controlled group
for purposes of the RIC rules was first
enacted in 1942 and appears to have
been modeled on the definition of an
‘‘affiliated group’’ in the predecessor to
current section 1504(a). The predecessor
to current section 1504(a) used language
nearly identical, save for different
ownership thresholds, to the definition
of controlled group for purposes of the
RIC rules. See HR Rep. No. 2333, 77th
Cong., 2nd Sess. 122 (1942), 1942–2 CB
372, 462–63; see also the Revenue Act
of 1928, ch. 852, sec. 141(d), 45 Stat.
791, 831 (1928) (enacting the
predecessor to section 1504(a)). The
current regulations under section 851
include a series of examples, two of
which reproduce, nearly verbatim,
examples contained in the 1942
legislative history. See § 1.851–5,
Examples 3 and 4. Some practitioners
have interpreted section 851(c)(3) to
require the presence of two levels of
controlled entities for a controlled group
to exist, and have relied on certain of
the examples in the regulations, and the
1942 legislative history, to support this
interpretation. The IRS and the Treasury
Department believe that this
interpretation is unwarranted.
Accordingly, through revisions to the
existing examples, these proposed
regulations clarify that two corporations
constitute a controlled group if the
ownership requirements of section
851(c)(3) are met.
The IRS and the Treasury Department
believe that the interpretation of the
controlled group rules reflected in these
proposed regulations is consistent both
with the statutory language of section
851(c)(3) and the interpretation of
analogous Code provisions. For
example, for purposes of the
consolidated return rules, the IRS has
consistently treated a parent and its
directly owned subsidiary as
‘‘affiliated’’ within the meaning of
section 1504(a)(1) regardless of whether
the subsidiary controlled another
subsidiary. Likewise, in limiting certain
tax benefits for affiliated corporations,
the IRS treats a parent and its subsidiary
as a ‘‘controlled group’’ under section
1563, which uses language similar to
section 1504(a), regardless of whether
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the subsidiary controls another entity.
See section 1563(a)(1) and § 1.1563–
1(a)(2)(ii), Example 1. The interpretation
reflected in these proposed regulations
is also consistent with the purpose of
section 851(c)(3), which is to aggregate
the investments of related corporations
for purposes of the asset diversification
test.
The IRS and the Treasury Department
believe that the language in the
examples in the existing regulations and
in the 1942 legislative history was
intended merely to simplify the
description of certain fact patterns, and
not to articulate a legal interpretation
that is inconsistent with the
construction of substantially similar
language elsewhere in the Code and that
is unsupported by practical or policy
considerations grounded in the statutory
scheme.
Explanation of Provisions
The proposed regulations update
examples in existing § 1.851–5. The
controlled group rules of section 851(c)
prevent a RIC from exceeding the
limitations set forth in section 851(b)(3)
by indirectly investing in the securities
of an issuer through a subsidiary. This
update clarifies the controlled group
rules and confirms that they are applied
in a manner consistent with sections
1504 and 1563.
First, the proposed changes to the
regulations clarify the two examples
that have caused confusion. In Example
1, additional language would clarify
which entities in the example are
members of a controlled group.
Currently, the example states that none
of the subsidiaries of the RIC in the
example is a member of a controlled
group. The IRS and the Treasury
Department believe that this statement
was intended merely to indicate that
none of the wholly owned subsidiaries
in the example controlled another
subsidiary. Consistent with the statutory
language of section 851(c)(3), the
proposed regulations would clarify that
each of the RIC’s wholly owned
subsidiaries is a member of a controlled
group with the RIC.
Example 4, which is derived from the
legislative history of section 851(c)(3), is
revised to remove references to
ownership by controlled group members
of greater than 20 percent interests in an
issuer. The existing language has
sometimes been misinterpreted to mean
that in order for a subsidiary’s holdings
in an issuer to be aggregated with the
holdings of the parent RIC, the
subsidiary must have a controlling
interest in the issuer. The proposed
revision to Example 4 would ensure that
Example 4 is applied in a manner
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Federal Register / Vol. 78, No. 149 / Friday, August 2, 2013 / Proposed Rules
46853
Internal Revenue Service, 1111
Constitution Avenue NW., Washington,
DC 20224. 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 or electronic
comments by October 31, 2013 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
October 31, 2013. A period of 10
minutes will be allotted to each person
for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for
receiving outlines has passed. Copies of
the agenda will be available free of
charge at the hearing.
Percent
consistent with the statutory language of
section 851(c)(3).
Second, the proposed changes would
add a new example to illustrate both the
mechanics of the controlled group rules
as applied to wholly owned subsidiaries
and the application of section
851(b)(3)(B)(iii)’s rule with respect to
securities of qualified publicly traded
partnerships.
Third, the proposed changes would
update the dates used in the examples
(1955) to the current year (2013 or 2014,
where appropriate) and would update
references from section 851(b)(4) to refer
instead to section 851(b)(3). Section
1271(b)(1) of the Taxpayer Relief Act of
1997, Public Law 105–34 (111 Stat. 788,
1063 (1997)), redesignated section
851(b)(4) as section 851(b)(3).
Finally, for additional clarity, these
proposed regulations would add
citations to section 851(d)(1) in
Examples 5 and 6.
Proposed Effective Date
The proposed changes apply to
quarters that begin at least 90 days after
the date of publication in the Federal
Register of a Treasury decision adopting
these rules as final regulations.
emcdonald on DSK67QTVN1PROD with PROPOSALS
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
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to this
regulation, and because the regulation
does not impose a collection of
information on small entitles, 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 has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Public Hearing
Before this proposed regulation is
adopted as a final regulation,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted to the IRS. The IRS and the
Treasury Department request comments
on all aspects of the proposed examples.
All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for December 9, 2013, beginning at
10:00 a.m. in the IRS Auditorium,
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17:00 Aug 01, 2013
Jkt 229001
Drafting Information
The principal author of this notice is
Julanne Allen of the Office of Associate
Chief Counsel (Financial Institutions &
Products). For further information
regarding this notice contact Julanne
Allen at (202) 622–3920 (not a toll-free
call).
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 is amended by adding an entry
in numerical order to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Section 1.851–5 also issued under 26
U.S.C. 851(c).
Par. 2. Section 1.851–5 is revised to
read as follows:
§ 1.851–5 Examples.—The
provisions of section 851 may be
illustrated by the following examples:
■
(a) Example 1. Investment Company W at
the close of its first quarter of its taxable year
has its assets invested as follows:
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Cash .............................................
Government securities ..................
Securities of regulated investment
companies .................................
Securities of Corporation A ..........
Securities of Corporation B ..........
Securities of Corporation C ..........
Securities of various corporations
(not exceeding 5 percent of its
assets in any one company) .....
5
10
Total ..........................................
100
20
10
15
20
20
Investment Company W owns all of the
voting stock of Corporations A and B, 15
percent of the voting stock of Corporation C,
and less than 10 percent of the voting stock
of regulated investment companies and
various other corporations. Neither
Corporation A nor Corporation B owns (i) 20
percent or more of the voting stock of any
other corporation, (ii) securities issued by
Corporation C, or (iii) securities issued by
any of the regulated investment companies or
various corporations whose securities are
owned by Investment Company W. Except
for Corporation A and Corporation B, none of
the corporations (including the regulated
investment companies) is a member of a
controlled group with Investment Company
W.
Investment Company W meets the
requirements under section 851(b)(3) at the
end of its first quarter. It complies with
subparagraph (A) of section 851(b)(3) because
it has 55 percent of its assets invested as
provided in that subparagraph. It complies
with subparagraph (B) of section 851(b)(3)
because it does not have more than 25
percent of its assets invested in the securities
of any one issuer, of two or more issuers that
it controls, or of one or more qualified
publicly traded partnerships (as defined in
section 851(h)).
Example 2. Investment Company V at the
close of a particular quarter of the taxable
year has its assets invested as follows:
Percent
Cash .........................................
Government securities ..............
Securities of Corporation A ......
Securities of Corporation B ......
Securities of Corporation C ......
Securities of Corporation D ......
10
35
7
12
15
21
Total ...................................
100
Investment Company V fails to meet the
requirements of subparagraph (A) of section
851(b)(3) since its assets invested in
Corporations A, B, C, and D exceed in each
case 5 percent of the value of the total assets
of the company at the close of the particular
quarter.
Example 3. Investment Company X at the
close of the particular quarter of the taxable
year has its assets invested as follows:
Percent
Cash and Government securities .........................................
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46854
Federal Register / Vol. 78, No. 149 / Friday, August 2, 2013 / Proposed Rules
Percent
Securities of Corporation A ......
Securities of Corporation B ......
Securities of Corporation C ......
Securities of various corporations (not exceeding 5 percent of its assets in any one
company) ..............................
5
10
25
Total ...................................
100
40
Investment Company X owns more than 20
percent of the voting power of Corporations
B and C and less than 10 percent of the
voting power of all of the other corporations.
Corporation B manufactures radios and
Corporation C acts as its distributor and also
distributes radios for other companies.
Investment Company X fails to meet the
requirements of subparagraph (B) of section
851(b)(3) since it has 35 percent of its assets
invested in the securities of two issuers
which it controls and which are engaged in
related trades or businesses.
Example 4. Investment Company Y at the
close of a particular quarter of its taxable year
has its assets invested as follows:
Percent
Cash and Government securities .........................................
Securities of Corporation K (a
regulated investment company) .....................................
Securities of Corporation A ......
Securities of Corporation B ......
Securities of various corporations (not exceeding 5 percent of its assets in any one
company) ..............................
15
30
10
20
25
Total ...................................
100
Corporation K has 20 percent of its assets
invested in Corporation L, and Corporation L
has 40 percent of its assets invested in
Corporation B. Corporation A also has 30
percent of its assets invested in Corporation
B. Investment Company Y owns more than
20 percent of the voting power of
Corporations A and K. Corporation K owns
more than 20 percent of the voting power of
Corporation L.
At the end of that quarter, Investment
Company Y is disqualified under
subparagraph (B)(i) of section 851(b)(3)
because, after applying section 851(c)(1),
more than 25 percent of the value of
Investment Company Y’s total assets is
invested in the securities of Corporation B.
This result is shown by the following
calculation:
emcdonald on DSK67QTVN1PROD with PROPOSALS
Percent
Percentage of assets invested
directly in Corporation B .......
Percentage invested through K
and L (30% × 20% × 40%) ...
Percentage invested indirectly
through A (10% × 30%) ........
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Total percentage of assets
of Investment Company
Y invested in Corporation B ..............................
25.4
Example 5. Investment Company Z, which
keeps its books and makes its returns on the
basis of the calendar year, at the close of the
first quarter of 2013 meets the requirements
of section 851(b)(3) and has 20 percent of its
assets invested in Corporation A. Later
during the taxable year it makes distributions
to its shareholders and because of such
distributions, it finds at the close of the
taxable year that it has more than 25 percent
of its remaining assets invested in
Corporation A. Investment Company Z does
not lose its status as a regulated investment
company for the taxable year 2013 because of
such distributions, nor will it lose its status
as a regulated investment company for 2014
or any subsequent year solely as a result of
such distributions. See section 851(d)(1).
Example 6. Investment Company Q, which
keeps its books and makes its returns on the
basis of a calendar year, at the close of the
first quarter of 2013, meets the requirements
of section 851(b)(3) and has 20 percent of its
assets invested in Corporation P. At the close
of the taxable year 2013, it finds that it has
more than 25 percent of its assets invested in
Corporation P. This situation results entirely
from fluctuations in the market values of the
securities in Investment Company Q’s
portfolio and is not due in whole or in part
to the acquisition of any security or other
property. Corporation Q does not lose its
status as a regulated investment company for
the taxable year 2013 because of such
fluctuations in the market values of the
securities in its portfolio, nor will it lose its
status as a regulated investment company for
2014 or any subsequent year solely as a result
of such market value fluctuations. See
section 851(d)(1).
Example 7. Investment Company T at the
close of a particular quarter of its taxable year
has its assets invested as follows:
Percent
Cash and Government securities .........................................
Securities of Corporation A ......
Securities of various qualified
publicly traded partnerships
(within the meaning of sections 851(b)(3) and 851(h)) ...
Securities of various corporations (not exceeding 5 percent of its assets in any one
company) ..............................
851(c)(1), more than 25 percent of the value
of Investment Company T’s total assets is
invested in the securities of one or more
qualified publicly traded partnerships. This
result is shown by the following calculation:
40
20
Percent
Percentage of assets invested
directly in qualified publicly
traded partnerships ...............
Percentage invested in qualified publicly traded partnerships indirectly through A
(20% × 80%) .........................
Total percentage of assets
of Investment Company
T invested in qualified
publicly traded partnerships ...............................
15.0
16.0
31.0
(b) Effective/applicability date. The
proposed revisions apply to quarters
that begin at least 90 days after the date
of publication of the Treasury decision
adopting these rules as a final regulation
in the Federal Register.
Beth Tucker,
Deputy Commissioner for Operations
Support.
[FR Doc. 2013–18717 Filed 8–1–13; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–112815–12]
RIN 1545–BK99
Mixed Straddles; Straddle-by-Straddle
Identification Under Section
1092(b)(2)(A)(i)(I)
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary
regulations and notice of public hearing.
AGENCY:
In the Rules and Regulations
section of this issue of the Federal
15 Register the Treasury Department and
the IRS are issuing temporary
regulations that explain how to account
for unrealized gain or loss on a position
25
held by a taxpayer prior to the time the
Total ...................................
100 taxpayer establishes a mixed straddle
using straddle-by-straddle
Percent
Investment Company T owns more than 20 identification. The text of the temporary
percent of the voting power of Corporation A regulations also serves as the text of
and less than 10 percent of the voting power
these proposed regulations. This
20.0 of all of the other corporations. Corporation
document also provides notice of a
A has 80 percent of its assets invested in
public hearing on these proposed
2.4 qualified publicly traded partnerships.
regulations.
Investment Company T is disqualified
DATES: Comments must be received by
3.0 under subparagraph (B)(iii) of section
851(b)(3), because, after applying section
October 31, 2013. Request to speak and
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SUMMARY:
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]]>Agencies
[Federal Register Volume 78, Number 149 (Friday, August 2, 2013)]
[Proposed Rules]
[Pages 46851-46854]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18717]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-114122-12]
RIN 1545-BK96
Controlled Group Regulation Examples
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document proposes revisions to examples that illustrate
the controlled group rules related to regulated investment companies
(RICs). These proposed revisions resolve an issue with how the
controlled group rules should be applied in connection with the RIC
``asset diversification'' test. This document also provides notice of a
public hearing on the proposed regulations.
DATES: Written or electronic comments must be received by October 31,
2013. Requests to speak and outlines of topics to be discussed at the
public hearing scheduled for December 9, 2013, at 10 a.m., must be
received by October 31, 2013.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-114122-12), Room 5203,
Internal Revenue Service, P.O. 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-
114122-12), Courier's Desk, Internal Revenue
[[Page 46852]]
Service, 1111 Constitution Avenue NW., Washington, DC, or sent
electronically, via the Federal eRulemaking Portal at
www.regulations.gov (indicate IRS and REG-114122-12). The public
hearing will be held in the Auditorium, beginning at 10 a.m., at the
Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC
20224.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation,
Julanne Allen at (202) 622-3920; concerning submissions of comments,
the public hearing, and/or to be placed on the building access list to
attend the public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 622-
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) relating to the application of the
``controlled group'' rules found in section 851(c) of the Internal
Revenue Code of 1986, as amended (Code).
Section 851(b)(3)(B) provides that, to qualify as a RIC, a taxpayer
must meet an asset diversification test pursuant to which not more than
25 percent of the value of the taxpayer's total assets may be invested
in (i) the securities (other than Government securities or the
securities of other regulated investment companies) of any one issuer,
(ii) the securities (other than the securities of other regulated
investment companies) of two or more issuers which the taxpayer
controls and which are determined, under regulations prescribed by the
Secretary, to be engaged in the same or similar trades or businesses or
related trades or businesses, or (iii) the securities of one or more
qualified publicly traded partnerships (as defined in section 851(h)).
The controlled group rules in section 851(c) provide that, when
ascertaining the value of a taxpayer's investment in the securities of
a particular issuer for purposes of determining whether the asset
diversification test has been met, the proportion of any investment in
the securities of such issuer by a member of the taxpayer's
``controlled group'' should be aggregated with the taxpayer's
investment in such issuer, as determined under regulations. Section
851(c)(3) defines a controlled group as one or more chains of
corporations connected through stock ownership with the taxpayer if--
(i) 20 percent or more of the total combined voting power of all
classes of stock entitled to vote of each of the corporations (except
the taxpayer) is owned directly by one or more of the other
corporations; and (ii) the taxpayer owns directly at least 20 percent
or more of the total combined voting power of all classes of stock
entitled to vote of at least one of the other corporations.
Clarification is needed regarding whether a RIC and its controlled
subsidiary are a controlled group if the subsidiary does not control
(within the meaning of section 851(c)(2)) at least one other
corporation.
The definition of a controlled group for purposes of the RIC rules
was first enacted in 1942 and appears to have been modeled on the
definition of an ``affiliated group'' in the predecessor to current
section 1504(a). The predecessor to current section 1504(a) used
language nearly identical, save for different ownership thresholds, to
the definition of controlled group for purposes of the RIC rules. See
HR Rep. No. 2333, 77th Cong., 2nd Sess. 122 (1942), 1942-2 CB 372, 462-
63; see also the Revenue Act of 1928, ch. 852, sec. 141(d), 45 Stat.
791, 831 (1928) (enacting the predecessor to section 1504(a)). The
current regulations under section 851 include a series of examples, two
of which reproduce, nearly verbatim, examples contained in the 1942
legislative history. See Sec. 1.851-5, Examples 3 and 4. Some
practitioners have interpreted section 851(c)(3) to require the
presence of two levels of controlled entities for a controlled group to
exist, and have relied on certain of the examples in the regulations,
and the 1942 legislative history, to support this interpretation. The
IRS and the Treasury Department believe that this interpretation is
unwarranted. Accordingly, through revisions to the existing examples,
these proposed regulations clarify that two corporations constitute a
controlled group if the ownership requirements of section 851(c)(3) are
met.
The IRS and the Treasury Department believe that the interpretation
of the controlled group rules reflected in these proposed regulations
is consistent both with the statutory language of section 851(c)(3) and
the interpretation of analogous Code provisions. For example, for
purposes of the consolidated return rules, the IRS has consistently
treated a parent and its directly owned subsidiary as ``affiliated''
within the meaning of section 1504(a)(1) regardless of whether the
subsidiary controlled another subsidiary. Likewise, in limiting certain
tax benefits for affiliated corporations, the IRS treats a parent and
its subsidiary as a ``controlled group'' under section 1563, which uses
language similar to section 1504(a), regardless of whether the
subsidiary controls another entity. See section 1563(a)(1) and Sec.
1.1563-1(a)(2)(ii), Example 1. The interpretation reflected in these
proposed regulations is also consistent with the purpose of section
851(c)(3), which is to aggregate the investments of related
corporations for purposes of the asset diversification test.
The IRS and the Treasury Department believe that the language in
the examples in the existing regulations and in the 1942 legislative
history was intended merely to simplify the description of certain fact
patterns, and not to articulate a legal interpretation that is
inconsistent with the construction of substantially similar language
elsewhere in the Code and that is unsupported by practical or policy
considerations grounded in the statutory scheme.
Explanation of Provisions
The proposed regulations update examples in existing Sec. 1.851-5.
The controlled group rules of section 851(c) prevent a RIC from
exceeding the limitations set forth in section 851(b)(3) by indirectly
investing in the securities of an issuer through a subsidiary. This
update clarifies the controlled group rules and confirms that they are
applied in a manner consistent with sections 1504 and 1563.
First, the proposed changes to the regulations clarify the two
examples that have caused confusion. In Example 1, additional language
would clarify which entities in the example are members of a controlled
group. Currently, the example states that none of the subsidiaries of
the RIC in the example is a member of a controlled group. The IRS and
the Treasury Department believe that this statement was intended merely
to indicate that none of the wholly owned subsidiaries in the example
controlled another subsidiary. Consistent with the statutory language
of section 851(c)(3), the proposed regulations would clarify that each
of the RIC's wholly owned subsidiaries is a member of a controlled
group with the RIC.
Example 4, which is derived from the legislative history of section
851(c)(3), is revised to remove references to ownership by controlled
group members of greater than 20 percent interests in an issuer. The
existing language has sometimes been misinterpreted to mean that in
order for a subsidiary's holdings in an issuer to be aggregated with
the holdings of the parent RIC, the subsidiary must have a controlling
interest in the issuer. The proposed revision to Example 4 would ensure
that Example 4 is applied in a manner
[[Page 46853]]
consistent with the statutory language of section 851(c)(3).
Second, the proposed changes would add a new example to illustrate
both the mechanics of the controlled group rules as applied to wholly
owned subsidiaries and the application of section 851(b)(3)(B)(iii)'s
rule with respect to securities of qualified publicly traded
partnerships.
Third, the proposed changes would update the dates used in the
examples (1955) to the current year (2013 or 2014, where appropriate)
and would update references from section 851(b)(4) to refer instead to
section 851(b)(3). Section 1271(b)(1) of the Taxpayer Relief Act of
1997, Public Law 105-34 (111 Stat. 788, 1063 (1997)), redesignated
section 851(b)(4) as section 851(b)(3).
Finally, for additional clarity, these proposed regulations would
add citations to section 851(d)(1) in Examples 5 and 6.
Proposed Effective Date
The proposed changes apply to quarters that begin at least 90 days
after the date of publication in the Federal Register of a Treasury
decision adopting these rules as final regulations.
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 the Administrative Procedure Act (5 U.S.C. chapter 5)
does not apply to this regulation, and because the regulation does not
impose a collection of information on small entitles, 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 has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
Before this proposed regulation is adopted as a final regulation,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted to the IRS. The
IRS and the Treasury Department request comments on all aspects of the
proposed examples. All comments will be available for public inspection
and copying.
A public hearing has been scheduled for December 9, 2013, beginning
at 10:00 a.m. in the IRS Auditorium, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC 20224. 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 or
electronic comments by October 31, 2013 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 October 31, 2013. A period of 10 minutes will
be allotted to each person for making comments. An agenda showing the
scheduling of the speakers will be prepared after the deadline for
receiving outlines has passed. Copies of the agenda will be available
free of charge at the hearing.
Drafting Information
The principal author of this notice is Julanne Allen of the Office
of Associate Chief Counsel (Financial Institutions & Products). For
further information regarding this notice contact Julanne Allen at
(202) 622-3920 (not a toll-free call).
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
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 1.851-5 also issued under 26 U.S.C. 851(c).
0
Par. 2. Section 1.851-5 is revised to read as follows:
Sec. 1.851-5 Examples.--The provisions of section 851 may be
illustrated by the following examples:
(a) Example 1. Investment Company W at the close of its first
quarter of its taxable year has its assets invested as follows:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Cash......................................................... 5
Government securities........................................ 10
Securities of regulated investment companies................. 20
Securities of Corporation A.................................. 10
Securities of Corporation B.................................. 15
Securities of Corporation C.................................. 20
Securities of various corporations (not exceeding 5 percent 20
of its assets in any one company)...........................
----------
Total...................................................... 100
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Investment Company W owns all of the voting stock of
Corporations A and B, 15 percent of the voting stock of Corporation
C, and less than 10 percent of the voting stock of regulated
investment companies and various other corporations. Neither
Corporation A nor Corporation B owns (i) 20 percent or more of the
voting stock of any other corporation, (ii) securities issued by
Corporation C, or (iii) securities issued by any of the regulated
investment companies or various corporations whose securities are
owned by Investment Company W. Except for Corporation A and
Corporation B, none of the corporations (including the regulated
investment companies) is a member of a controlled group with
Investment Company W.
Investment Company W meets the requirements under section
851(b)(3) at the end of its first quarter. It complies with
subparagraph (A) of section 851(b)(3) because it has 55 percent of
its assets invested as provided in that subparagraph. It complies
with subparagraph (B) of section 851(b)(3) because it does not have
more than 25 percent of its assets invested in the securities of any
one issuer, of two or more issuers that it controls, or of one or
more qualified publicly traded partnerships (as defined in section
851(h)).
Example 2. Investment Company V at the close of a particular
quarter of the taxable year has its assets invested as follows:
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Percent
------------------------------------------------------------------------
Cash....................................................... 10
Government securities...................................... 35
Securities of Corporation A................................ 7
Securities of Corporation B................................ 12
Securities of Corporation C................................ 15
Securities of Corporation D................................ 21
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Total.................................................. 100
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Investment Company V fails to meet the requirements of
subparagraph (A) of section 851(b)(3) since its assets invested in
Corporations A, B, C, and D exceed in each case 5 percent of the
value of the total assets of the company at the close of the
particular quarter.
Example 3. Investment Company X at the close of the particular
quarter of the taxable year has its assets invested as follows:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Cash and Government securities............................. 20
[[Page 46854]]
Securities of Corporation A................................ 5
Securities of Corporation B................................ 10
Securities of Corporation C................................ 25
Securities of various corporations (not exceeding 5 percent 40
of its assets in any one company).........................
------------
Total.................................................. 100
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Investment Company X owns more than 20 percent of the voting
power of Corporations B and C and less than 10 percent of the voting
power of all of the other corporations. Corporation B manufactures
radios and Corporation C acts as its distributor and also
distributes radios for other companies. Investment Company X fails
to meet the requirements of subparagraph (B) of section 851(b)(3)
since it has 35 percent of its assets invested in the securities of
two issuers which it controls and which are engaged in related
trades or businesses.
Example 4. Investment Company Y at the close of a particular
quarter of its taxable year has its assets invested as follows:
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Percent
------------------------------------------------------------------------
Cash and Government securities............................. 15
Securities of Corporation K (a regulated investment 30
company)..................................................
Securities of Corporation A................................ 10
Securities of Corporation B................................ 20
Securities of various corporations (not exceeding 5 percent 25
of its assets in any one company).........................
------------
Total.................................................. 100
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Corporation K has 20 percent of its assets invested in
Corporation L, and Corporation L has 40 percent of its assets
invested in Corporation B. Corporation A also has 30 percent of its
assets invested in Corporation B. Investment Company Y owns more
than 20 percent of the voting power of Corporations A and K.
Corporation K owns more than 20 percent of the voting power of
Corporation L.
At the end of that quarter, Investment Company Y is disqualified
under subparagraph (B)(i) of section 851(b)(3) because, after
applying section 851(c)(1), more than 25 percent of the value of
Investment Company Y's total assets is invested in the securities of
Corporation B. This result is shown by the following calculation:
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Percent
------------------------------------------------------------------------
Percentage of assets invested directly in Corporation B.... 20.0
Percentage invested through K and L (30% x 20% x 40%)...... 2.4
Percentage invested indirectly through A (10% x 30%)....... 3.0
------------
Total percentage of assets of Investment Company Y 25.4
invested in Corporation B.............................
------------------------------------------------------------------------
Example 5. Investment Company Z, which keeps its books and
makes its returns on the basis of the calendar year, at the close of
the first quarter of 2013 meets the requirements of section
851(b)(3) and has 20 percent of its assets invested in Corporation
A. Later during the taxable year it makes distributions to its
shareholders and because of such distributions, it finds at the
close of the taxable year that it has more than 25 percent of its
remaining assets invested in Corporation A. Investment Company Z
does not lose its status as a regulated investment company for the
taxable year 2013 because of such distributions, nor will it lose
its status as a regulated investment company for 2014 or any
subsequent year solely as a result of such distributions. See
section 851(d)(1).
Example 6. Investment Company Q, which keeps its books and
makes its returns on the basis of a calendar year, at the close of
the first quarter of 2013, meets the requirements of section
851(b)(3) and has 20 percent of its assets invested in Corporation
P. At the close of the taxable year 2013, it finds that it has more
than 25 percent of its assets invested in Corporation P. This
situation results entirely from fluctuations in the market values of
the securities in Investment Company Q's portfolio and is not due in
whole or in part to the acquisition of any security or other
property. Corporation Q does not lose its status as a regulated
investment company for the taxable year 2013 because of such
fluctuations in the market values of the securities in its
portfolio, nor will it lose its status as a regulated investment
company for 2014 or any subsequent year solely as a result of such
market value fluctuations. See section 851(d)(1).
Example 7. Investment Company T at the close of a particular
quarter of its taxable year has its assets invested as follows:
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Percent
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Cash and Government securities............................. 40
Securities of Corporation A................................ 20
Securities of various qualified publicly traded 15
partnerships (within the meaning of sections 851(b)(3) and
851(h))...................................................
Securities of various corporations (not exceeding 5 percent 25
of its assets in any one company).........................
------------
Total.................................................. 100
------------------------------------------------------------------------
Investment Company T owns more than 20 percent of the voting
power of Corporation A and less than 10 percent of the voting power
of all of the other corporations. Corporation A has 80 percent of
its assets invested in qualified publicly traded partnerships.
Investment Company T is disqualified under subparagraph (B)(iii)
of section 851(b)(3), because, after applying section 851(c)(1),
more than 25 percent of the value of Investment Company T's total
assets is invested in the securities of one or more qualified
publicly traded partnerships. This result is shown by the following
calculation:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Percentage of assets invested directly in qualified 15.0
publicly traded partnerships..............................
Percentage invested in qualified publicly traded 16.0
partnerships indirectly through A (20% x 80%).............
------------
Total percentage of assets of Investment Company T 31.0
invested in qualified publicly traded partnerships....
------------------------------------------------------------------------
(b) Effective/applicability date. The proposed revisions apply to
quarters that begin at least 90 days after the date of publication of
the Treasury decision adopting these rules as a final regulation in the
Federal Register.
Beth Tucker,
Deputy Commissioner for Operations Support.
[FR Doc. 2013-18717 Filed 8-1-13; 8:45 am]
BILLING CODE 4830-01-P
