Treatment of Certain Interests in Corporations as Stock or Indebtedness; Correction, 8165-8169 [2017-00498]

Download as PDF Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations (ix) Withholding agent responsibility. A withholding agent is only responsible for dividend equivalent amounts determined (as provided in § 1.871– 15(j)(2)) during the period the withholding agent is a withholding agent for the section 871(m) transaction. * * * * * (f) * * * (1) Except as otherwise provided in this paragraph, paragraph (e)(7) of this section applies to payments made on or after September 18, 2015. Paragraphs (e)(7)(ii)(D) and (e)(7)(iv) through (viii) of this section apply to payments made on or after January 19, 2017. ■ Par. 8. Section 1.1441–7 is amended by: ■ 1. Revising Example 7 in paragraph (a)(3). ■ 2. Adding Example 8 and 9 to paragraph (a)(3). ■ 3. Adding a sentence to the end of paragraph (a)(4). The additions read as follows: § 1.1441–7 General provisions relating to withholding agents. (a) * * * (3) * * * Example 7. CO is a domestic clearing organization. CO serves as a central counterparty clearing and settlement service provider for derivatives exchanges in the United States. CB is a broker organized in Country X, a foreign country, and a clearing member of CO. CB is a nonqualified intermediary, as defined in § 1.1441–1(c)(14). FC is a foreign corporation that has an account with CB. FC instructs CB to purchase a call option that is a specified ELI (as described in § 1.871–15(e)). CB effects the trade for FC on the exchange. The exchange matches FC’s order with an order for a written call option with the same terms. The exchange then sends the matched trade to CO, which clears the trade. CB and the clearing member representing the person who sold the call option settle the trade with CO. Upon receiving the matched trade, the option contracts are novated and CO becomes the counterparty to CB and the counterparty to the clearing member representing the person who sold the call option. To the extent that there is a dividend equivalent with respect to the call option, both CO and CB are withholding agents as described in paragraph (a)(1) of this section. As a withholding agent, CO and CB must each determine whether it is obligated to withhold under chapter 3 of the Internal Revenue Code and the regulations thereunder. Example 8. FCO is a foreign clearing organization. FCO serves as a central counterparty clearing and settlement service provider for derivatives exchanges in Country A, a foreign country. CB is a broker organized in Country A, and a clearing member of FCO. CB is a nonqualified intermediary, as defined in § 1.1441–1(c)(14). FC is a foreign corporation that has an account with CB. FC instructs CB to purchase a call option that is a section 871(m) transaction. CB effects the trade for FC on the exchange. The exchange matches FC’s order with an order for a written call option with the same terms. The exchange then sends the matched trade to FCO, which clears the 8165 trade. CB and the clearing member representing the call option seller settle the trade with FCO. Upon receiving the matched trade, the option contracts are novated and FCO becomes the counterparty to CB and the counterparty to the clearing member representing the call option seller. To the extent that there is a dividend equivalent with respect to the call option, both FCO and CB are withholding agents as described in paragraph (a)(1) of this section. Example 9. The facts are the same as Example 8, except that CB is a qualified intermediary, as defined in § 1.1441–1(c)(15), that has assumed the primary obligation to withhold, deposit, and report amounts under chapters 3 and 4 of Internal Revenue Code. CB provides a written statement to FCO representing that it has assumed primary withholding responsibility for any dividend equivalent payment with respect to the call option. FCO, therefore, is not required withhold on a dividend equivalent payment to CB. (4) * * * Example 8 and Example 9 of paragraph (a)(3) of this section apply to payments made on or after January 19, 2017. * * * * * § 1.1461–1 [Amended] Par. 9. For each section listed in the table, remove the language in the ‘‘Remove’’ column and add in its place the language in the ‘‘Add’’ column as set forth below: ■ Section Remove Add § 1.1461–1(c)(2)(i) introductory text, fourth sentence. § 1.1461–1(c)(2)(i)(M) ......................................... § 1.1461–1(c)(2)(ii)(J) ......................................... a withholding agent withheld an amount ......... a withholding agent withheld (including under § 1.1441–2(e)(7)) an amount. references a dividend. or (xxiii). This exception does not apply to withholding agents that are qualified derivatives dealers; references the payment of a dividend ............. or (xxiii); ........................................................... John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: January 11, 2017. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). DEPARTMENT OF THE TREASURY [FR Doc. 2017–01163 Filed 1–19–17; 4:15 pm] RIN 1545–BN40 BILLING CODE 4830–01–P 26 CFR Part 1 The regulations relate to the determination of whether an interest in a corporation is treated as stock or indebtedness for all purposes of the Internal Revenue Code. [TD 9790] DATES: Internal Revenue Service These corrections are effective on January 23, 2017, and applicable October 21, 2016. Treatment of Certain Interests in Corporations as Stock or Indebtedness; Correction Internal Revenue Service (IRS), Treasury. ACTION: Correcting amendments. sradovich on DSK3GMQ082PROD with RULES AGENCY: This document contains corrections to the final and temporary regulations (T.D. 9790) that were published in the Federal Register on Friday, October 21, 2016 (81 FR 72858). SUMMARY: VerDate Sep<11>2014 17:47 Jan 23, 2017 Jkt 241001 PO 00000 Frm 00035 Fmt 4700 Sfmt 4700 FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317– 5363, or Joshua G. Rabon, (202) 317– 6938 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background The final and temporary regulations that are the subject of this correction are under sections 385 and 752 of the Internal Revenue Code. E:\FR\FM\24JAR1.SGM 24JAR1 8166 Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations Need for Correction As published, the final and temporary regulations contain errors which may prove to be misleading and need to be clarified. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Correction of Publication § 1.385–2 Treatment of certain interests between members of an expanded group. Accordingly, 26 CFR part 1 is corrected by making the following correcting amendments: 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 * * * Par. 2. Section 1.385–1 is amended by revising the fifth sentence of paragraph (c)(4)(vii) Example 2 (i) to read as follows: ■ § 1.385–1 * General provisions. * * (c) * * * (4) * * * (vii) * * * * * Example 2. * * * (i) * * * In addition to other assets representing 85% of the value of its total assets, S2 owns all of the stock of S3, which has elected to be treated as a taxable REIT subsidiary of S2 under section 856(l)(1). * * * * * * * * Par. 3. Section 1.385–2 is amended by: ■ 1. Revising paragraph (a)(3)(ii)(C)(3). ■ 2. Revising the third sentence of paragraph (a)(5)(i). ■ 3. Revising the first sentence of paragraph (a)(5)(ii). ■ 4. Revising the third sentence of paragraph (b)(1). ■ 5. Revising the third sentence of paragraph (c)(2)(ii). ■ 6. Revising the second sentence of paragraph (c)(2)(iii)(A). ■ 7. Revising the third sentence of paragraph (c)(2)(iii)(E). ■ 8. Revising the paragraph (c)(3)(i)(A) subject heading. ■ 9. Revising the first sentence of paragraph (c)(3)(i)(A)(3)(i). ■ 10. Revising the third sentence of paragraph (c)(4)(ii)(A). ■ 11. Revising the second sentence of paragraph (c)(4)(ii)(B)(1). ■ 12. Adding a subject heading to paragraph (c)(4)(ii)(B)(2)(i). ■ 13. Revising the paragraph (c)(4)(ii)(E) subject heading. ■ 14. Revising paragraph (c)(4)(ii)(E)(3). ■ 15. Revising paragraph (d)(2)(i)(A). sradovich on DSK3GMQ082PROD with RULES ■ VerDate Sep<11>2014 16. Revising the second sentence of paragraph (e)(3)(ii). ■ 17. Revising the paragraph (h)(4) Example introductory text. ■ 18. Revising the second sentence of paragraph (h)(4)(ii)(A). ■ 19. Revising the first sentence of paragraph (h)(4)(ii)(C). The addition and revisions read as follows: ■ 17:47 Jan 23, 2017 Jkt 241001 (a) * * * (3) * * * (ii) * * * (C) * * * (3) Overlapping assets and revenue. If there are multiple applicable financial statements that reflect the assets, portion of the assets, or revenue of the same expanded group member, any duplication (by stock, consolidation, or otherwise) of that expanded group member’s assets or revenue may be disregarded for purposes of paragraph (a)(3)(ii) of this section such that the total assets or annual total revenue of that expanded group member is only reflected once. * * * * * (5) * * * (i) * * * An issuer is also considered to have characterized an EGI as indebtedness if the issuer claims any federal income tax benefit with respect to an EGI resulting from characterizing the EGI as indebtedness for federal tax purposes, such as by claiming an interest deduction under section 163 with respect to interest paid or accrued on the EGI on a federal income tax return (or, if the issuer is a member of a consolidated group, the issuer or the common parent of the consolidated group claims a federal income tax benefit by claiming such an interest deduction), or if the issuer reports the EGI as indebtedness or amounts paid or accrued on the EGI as interest on an applicable financial statement. * * * (ii) * * * The consistency rule in paragraph (a)(5)(i) of this section and section 385(c)(1) does not apply with respect to an EGI to the extent that the EGI is treated as stock under this section or § 1.385–3, or it has been determined that the EGI is treated as stock under applicable federal tax principles. * * * (b) * * * (1) * * * If the documentation and information described in paragraph (c) of this section are not prepared and maintained with respect to an EGI in accordance with this section, and no exception listed in paragraph (b)(2) of this section applies, the EGI is treated as stock for all federal tax purposes. * * * * * * * * PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 (c) * * * (2) * * * (ii) * * * The rights of a creditor must include rights that superior to the rights of shareholders (other than holders of interests treated as stock solely by reason of § 1.385–3 and holders of interests with creditor’s rights under commercial law treated as stock under this section) to receive assets of the issuer in case of dissolution. * * * (iii) * * * (A) * * * Documentation with respect to an EGI that is nonrecourse under its terms must include information on any cash and property that secures the EGI, including— * * * * * (E) * * * Documentation required under paragraph (c)(2) of this section may be prepared by employees of expanded group members, by agents of expanded group members, or by third parties. (3) * * * (i) * * * (A) Revolving credit, omnibus, umbrella, master, cash pool, and similar agreements— (3) * * * (i) * * * If an EGI is issued under an agreement described in paragraph (c)(3)(i)(A) of this section, written documentation must be prepared with respect to the analysis date and written documentation with a new analysis date must be prepared at least annually to satisfy the requirements in paragraph (c)(2)(iii) of this section for EGIs issued under such an agreement on or after the most recent analysis date. * * * * * * * * (4) * * * (ii) * * * (A) * * * In the case of an applicable interest that becomes an EGI subsequent to issuance, including an intercompany obligation, as defined in § 1.1502– 13(g)(2)(ii), that ceases to be an intercompany obligation, the relevant date is the date on which the applicable interest becomes an EGI. (B) * * * (1) * * * In the case of an applicable interest that becomes an EGI subsequent to issuance, the relevant date is the date on which the applicable interest becomes an EGI and any relevant date after the date that the applicable interest becomes an EGI. (2) * * * (i) In general. * * * * * * * * (E) Revolving credit, omnibus, umbrella, master, cash pool, and similar agreements— * * * * * (3) Relevant dates for EGIs documented under an overall E:\FR\FM\24JAR1.SGM 24JAR1 Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations arrangement. A relevant date of an EGI under paragraphs (c)(4)(ii)(A) through (C) of this section is also a relevant date for each EGI documented under an overall arrangement described in paragraph (c)(3) of this section. * * * * * (d) * * * (2) * * * (i) * * * (A) Any interest that is issued or deemed issued in the legal form of a debt instrument (including a draw or separate amount borrowed under an overall arrangement described in paragraph (c)(3) of this section regardless of whether a separate legal document is issued in connection with the draw or separate amount borrowed), which therefore does not include, for example, a sale-repurchase agreement treated as indebtedness under federal tax principles; or * * * * * (e) * * * (3) * * * (ii) * * * For purposes of determining whether an EGI originally treated as indebtedness ceases to be treated as indebtedness by reason of this section, the rules of this section apply before the rules of § 1.1001–3. * * * * * * * * (h) * * * (4) * * * sradovich on DSK3GMQ082PROD with RULES Example. Application of paragraphs (c)(2)(iii) and (c)(4) of this section to an EGI. * * * (ii) * * * (A) * * * Because FP is traded on an established financial market within the meaning of § 1.1092(d)–1(b) and USS1 is a covered member, EGI A, EGI B, and EGI C are subject to the rules of this section. * * * * * (C) The credit analysis was prepared with an analysis date of Date B of Year 1. * * * * * * * * ■ Par. 4. Section 1.385–3 is amended by: ■ 1. Revising paragraph (b)(3)(iii)(E)(2). ■ 2. Revising the paragraph (b)(5) subject heading. ■ 3. Revising the first sentence of paragraph (c)(3)(i)(C)(1). ■ 4. Revising the paragraph (c)(3)(i)(C)(3) subject heading. ■ 5. Revising paragraph (c)(3)(i)(C)(3)(i). ■ 6. Adding subject headings to paragraphs (g)(3)(ii) introductory text, (g)(3)(iii) introductory text, and (g)(3)(iv) introductory text. ■ 7. Revising paragraph (g)(3)(iv)(B)(1). ■ 8. Adding a subject heading to paragraph (g)(3)(v). ■ 10. Revising paragraphs (g)(24)(ii)(B) and (C) VerDate Sep<11>2014 17:47 Jan 23, 2017 Jkt 241001 The additions and revisions read as follows: § 1.385–3 Transactions in which debt proceeds are distributed or that have a similar effect. * * * * * (b) * * * (3) * * * (iii) * * * (E) * * * (2) Effect of certain modifications. Notwithstanding paragraph (b)(3)(iii)(E)(1) of this section, if a covered debt instrument is treated as exchanged for a modified covered debt instrument pursuant to § 1.1001–3(b) and the modification, or one of the modifications, that results in the deemed exchange includes the substitution of an obligor on the covered debt instrument, the addition or deletion of a co-obligor on the covered debt instrument, or the material deferral of scheduled payments due under the covered debt instrument, then the modified covered debt instrument is treated as issued on the date of the deemed exchange for purposes of paragraph (b)(3)(iii)(A) of this section. * * * * * (5) Coordination between general rule and funding rule. * * * * * * * * (c) * * * (3) * * * (i) * * * (C) * * * (1) * * * The term expanded group earnings means, with respect to a covered member and an expanded group period of the covered member, the earnings and profits accumulated by the covered member during the expanded group period, computed as of the close of the taxable year of the covered member, without diminution by reason of any distributions or acquisitions by the covered member described in paragraphs (b)(2) and (b)(3)(i) of this section. * * * * * * * * (3) Look-through rule for dividends— (i) In general. For purposes of paragraph (c)(3)(i)(C)(1) of this section, a dividend from a member of the same expanded group (distributing member) is not taken into account for purposes of calculating a covered member’s expanded group earnings, except to the extent the dividend is attributable to earnings and profits accumulated by the distributing member in a taxable year ending after April 4, 2016, during its expanded group period (qualified earnings and profits). For purposes of the preceding sentence, a dividend received from a member (intermediate distributing PO 00000 Frm 00037 Fmt 4700 Sfmt 4700 8167 member) is not taken into account for purposes of calculating the qualified earnings and profits of a distributing member (or another intermediate distributing member), except to the extent the dividend is attributable to qualified earnings and profits of the intermediate distributing member. A dividend from a distributing member or an intermediate distributing member is considered to be attributable to qualified earnings and profits to the extent thereof. If the distributing member or the intermediate distributing member is not a covered member, the expanded group period of the member is determined under the principles of paragraph (c)(3)(i)(E) of this section. If a controlled partnership receives a dividend from a distributing member and a portion of the dividend is allocated (including through one or more partnerships) to a covered member, then, for purposes of this paragraph (c)(3)(i)(C)(3), the covered member is treated as receiving the dividend from the distributing member. * * * * * (g) * * * (3) * * * (ii) Qualified dealer debt instrument. * * * (iii) Excluded statutory or regulatory debt instrument. * * * (iv) Excepted regulated financial company. * * * (B) * * * (1) General rule. For purposes of paragraph (g)(3)(iv) of this section, except as otherwise provided in paragraph (g)(3)(iv)(B)(2) of this section, the term regulated financial group means any expanded group of which a covered member that is a regulated financial company within the meaning of paragraphs (g)(3)(iv)(A)(1) through (10) of this section would be the expanded group parent if no person owned, directly or indirectly (as defined in § 1.385–1(c)(4)(iii)), the regulated financial company. A domestic eligible entity (within the meaning of § 301.7701–5(a) of this chapter) treated as a partnership or disregarded as an entity separate from its owner is, for purposes of this paragraph (g)(3)(iv)(B), also treated as a covered member. * * * * * (v) Regulated insurance company. * * * (24) * * * (ii) * * * (B) A distribution or acquisition by either the seller or a successor seller to or from either the acquirer, the seller, or a successor seller is not treated as described in paragraph (b)(3) of this section for purposes of applying E:\FR\FM\24JAR1.SGM 24JAR1 8168 Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations paragraph (b)(3) of this section to a covered debt instrument of the acquirer. For purposes of the preceding sentence, the term successor seller means a member of the expanded group that receives property (other than expanded group stock) in a distribution or acquisition from the seller or another successor seller and is controlled by the acquirer as determined under the principles of paragraph (c)(2)(i) of this section. A successor seller is treated as a successor to the acquirer to the extent of the value of the property received in a distribution or acquisition described in the preceding sentence and, for purposes of applying this paragraph (g)(24)(ii)(B). (C) To the extent that a covered debt instrument of the acquirer is treated as funding a distribution or acquisition by the seller or successor seller described in paragraphs (b)(3)(i)(A) through (C) of this section, or would be treated but for the exceptions described in paragraphs (c)(3)(i) and (ii) of this section, the value of the expanded group stock described in paragraph (g)(24)(ii)(A) of this section is reduced by an amount equal to the distribution or acquisition for purposes of any further application of paragraph (g)(24)(ii)(A) of this section with respect to the acquirer and seller. * * * * * ■ Par. 5. Section 1.385–3T is amended by: ■ 1. Revising the third sentence of paragraph (b)(3)(vii)(A)(1)(iii). ■ 2. Revising the fifth sentence and adding a new sixth sentence to paragraph (h) Example 13(i). ■ 3. Revising the third sentence of paragraph (h) Example 13(ii)(D). ■ 4. Revising the third sentence of paragraph (h) Example 14(ii)(D). ■ 5. Revising paragraph (h) Example 15(i). ■ 6. Revising the fifth sentence of paragraph (h) Example 18(ii)(A). ■ 7. Revising paragraph (l). The revisions read as follows: § 1.385–3T Certain distributions of debt instruments and similar transactions (temporary). sradovich on DSK3GMQ082PROD with RULES * * * * * (b) * * * (3) * * * (vii) * * * (A) * * * (1) * * * (iii) * * * Additionally, the amount owed by any issuer shall be reduced by the amount of the issuer’s deposits with a qualified cash pool header, but only to the extent of amounts borrowed from the same qualified cash pool header that satisfy the requirements of paragraph (b)(3)(vii)(A)(2) (if the covered debt VerDate Sep<11>2014 17:47 Jan 23, 2017 Jkt 241001 instrument was issued in a prior taxable year) or (b)(3)(vii)(A)(1)(ii) of this section. * * * * * (h) * * * Example 13. * * * (i) * * * On Date A in Year 1, FP lends $200x to PRS in exchange for PRS Note with stated principal amount of $200x, which is payable at maturity. PRS Note also provides for annual payments of interest that are qualified stated interest. * * * (ii) * * * (D) * * * Similarly, FP is deemed to transfer a portion of PRS Note with a principal amount equal to $90x (the adjusted issue price of the specified portion with respect to USS2) to USS2 in exchange for deemed partner stock in USS2 with a fair market value of $90x. * * * Example 14. * * * (ii) * * * (D) * * * Similarly, FP is deemed to transfer a portion of PRS Note with a principal amount equal to $90x (the adjusted issue price of the specified portion with respect to USS2) to USS2 in exchange for stock of USS2 with a fair market value of $90x. * * * Example 15. * * * (i) Facts. The facts are the same as in Example 13 of this paragraph (h)(3), except that USS2 does not distribute $90x to FP until Date C in Year 2, which is less than 36 months after Date A in Year 1. On Date C in Year 2, DS’s, USS2’s, and USP’s issuance percentages under paragraph (g)(16) of this section are unchanged at 45%, 45%, and 10%, respectively. * * * * * Example 18. * * * (ii) * * * (A) * * * DS’s distribution to USS1 is a disregarded distribution because it is a distribution between members of a consolidated group that is disregarded under the one-corporation rule described in § 1.385–4T(b)(1). * * * * * * * * (l) Expiration date. This section expires on October 13, 2019. ■ Par. 6. Section 1.385–4T is amended by: ■ 1. Revising the first sentence of paragraph (b)(2). ■ 2. Revising the first sentence of paragraph (b)(3)(i). ■ 3. Revising paragraphs (b)(3)(ii) and (iii). ■ 4. Revising paragraph (b)(4)(ii)(A)(1). ■ 5. Revising paragraph (b)(5)(i). ■ 6. Revising the first sentence of paragraph (b)(6). ■ 7. Revising the first sentence of paragraph (c)(1)(i). ■ 8. Revising the first sentence of paragraph (d)(3). ■ 9. Revising the first sentence of paragraph (d)(4) introductory text. ■ 10. Revising paragraphs (d)(4)(i) and (ii). ■ 11. Revising paragraph (e)(3). PO 00000 Frm 00038 Fmt 4700 Sfmt 4700 12. Revising paragraph (e)(5). 13. Revising the second sentence of paragraph (f)(3) Example 1(ii). ■ 14. Revising the seventh sentence of paragraph (f)(3) Example 4(ii). ■ 15. Revising the sixth sentence of paragraph (f)(3) Example 5(ii). ■ 16. Revising paragraph (h). The revisions read as follows: ■ ■ § 1.385–4T groups. Treatment of consolidated * * * * * (b) * * * (2) * * * The one-corporation rule described in paragraph (b)(1) of this section does not apply in determining the members of an expanded group. * * * (3) * * * (i) * * * If a covered debt instrument treated as issued by a consolidated group under the one-corporation rule described in paragraph (b)(1) of this section is treated as stock under §§ 1.385–3 or 1.385–3T, the covered debt instrument is treated as stock in the member of the consolidated group that would be the issuer of such debt instrument without regard to this section. * * * (ii) Application of the covered debt instrument exclusions. For purposes of determining whether a debt instrument issued by a member of a consolidated group is a covered debt instrument, each test described in § 1.385–3(g)(3) is applied on a separate member basis without regard to the one-corporation rule described in paragraph (b)(1) of this section. (iii) Qualified short-term debt instrument. The determination of whether a member of a consolidated group has issued a qualified short-term debt instrument for purposes of § 1.385– 3(b)(3)(vii) is made on a separate member basis without regard to the onecorporation rule described in paragraph (b)(1) of this section. (4) * * * (ii) * * * (A) * * * (1) A qualified contribution to any member of a consolidated group that remains a member of the consolidated group immediately after the qualified contribution from a person other than a member of the same consolidated group is treated as made to the one corporation described in paragraph (b)(1) of this section; * * * * * (5) * * * (i) First, determine the characterization of the transaction under federal tax law without regard to the one-corporation rule described in paragraph (b)(1) of this section. * * * * * E:\FR\FM\24JAR1.SGM 24JAR1 sradovich on DSK3GMQ082PROD with RULES Federal Register / Vol. 82, No. 14 / Tuesday, January 24, 2017 / Rules and Regulations (6) * * * For purposes of this section and §§ 1.385–3 and 1.385–3T, and notwithstanding the one-corporation rule described in paragraph (b)(1) of this section, a partnership that is wholly owned by members of a consolidated group is treated as a partnership. * * * * * * * * (c) * * * (1) * * * (i) * * * For purposes of this section and §§ 1.385–3 and 1.385–3T, when a debt instrument ceases to be a consolidated group debt instrument as a result of a transaction in which the member of the consolidated group that issued the instrument (the issuer) or the member of the consolidated group holding the instrument (the holder) ceases to be a member of the same consolidated group but both the issuer and the holder continue to be members of the same expanded group, the issuer is treated as issuing a new debt instrument to the holder in exchange for property immediately after the debt instrument ceases to be a consolidated group debt instrument. * * * * * * * * (d) * * * (3) * * * If a departing member has issued a covered debt instrument (determined without regard to the onecorporation rule described in paragraph (b)(1) of this section) that is not a consolidated group debt instrument and that is not treated as stock immediately before the departing member ceases to be a consolidated group member, then the departing member (and not the consolidated group) is treated as issuing the covered debt instrument on the date and in the manner the covered debt instrument was issued. * * * (4) * * * This paragraph (d)(4) applies when a departing member ceases to be a consolidated group member in a transaction other than a distribution to which section 355 (or so much of section 356 as relates to section 355) applies, and the consolidated group has made a regarded distribution or acquisition. * * * (i) If the departing member made the regarded distribution or acquisition (determined without regard to the onecorporation rule described in paragraph (b)(1) of this section), the departing member (and not the consolidated group) is treated as having made the regarded distribution or acquisition. (ii) If the departing member did not make the regarded distribution or acquisition (determined without regard to the one-corporation rule described in paragraph (b)(1) of this section), then the consolidated group (and not the departing member) continues to be VerDate Sep<11>2014 17:47 Jan 23, 2017 Jkt 241001 treated as having made the regarded distribution or acquisition. (e) * * * (3) Disregarded distribution or acquisition. The term disregarded distribution or acquisition means a distribution or acquisition described in § 1.385–3(b)(2) or (b)(3)(i) between members of a consolidated group that is disregarded under the one-corporation rule described in paragraph (b)(1) of this section. * * * * * (5) Regarded distribution or acquisition. The term regarded distribution or acquisition means a distribution or acquisition described in § 1.385–3(b)(2) or (b)(3)(i) that is not disregarded under the one-corporation rule described in paragraph (b)(1) of this section. (f) * * * (3) * * * Example 1. * * * (ii) * * * Pursuant to paragraph (b)(5)(i) of this section, the transaction is first analyzed without regard to the one-corporation rule described in paragraph (b)(1) of this section, and therefore UST is treated as issuing a covered debt instrument in exchange for expanded group stock. * * * * * * * * Example 4. * * * (ii) * * * Under paragraph (c)(1)(i) of this section, for purposes of § 1.385–3, DS1 is treated as issuing a new debt instrument to USS1 in exchange for property immediately after DS1 Note ceases to be a consolidated group debt instrument. * * * Example 5. * * * (ii) * * * Under paragraph (c)(1)(i) of this section, for purposes of § 1.385–3, DS1 is treated as issuing a new debt instrument to USS1 in exchange for property immediately after DS1 Note ceases to be a consolidated group debt instrument. * * * * * * * * (h) Expiration date. This section expires on October 13, 2019. Par. 7. Section 1.752–2T is amended by revising paragraph (m)(2) to read as follows: ■ § 1.752–2T Partner’s share of recourse liabilities (temporary). * * * * * (m) * * * (2) Paragraphs (c)(3) and (l)(4) of this section expire on October 13, 2019. Martin V. Franks, Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel, Procedure and Administration. [FR Doc. 2017–00498 Filed 1–23–17; 8:45 am] BILLING CODE 4830–01–P PO 00000 Frm 00039 Fmt 4700 Sfmt 4700 8169 DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9790] RIN 1545–BN40 Treatment of Certain Interests in Corporations as Stock or Indebtedness; Correction. Internal Revenue Service (IRS), Treasury. ACTION: Final and temporary regulations; correction. AGENCY: This document contains corrections to the final and temporary regulations (T.D. 9790) that were published in the Federal Register on Friday, October 21, 2016 (81 FR 72858). The regulations relate to the determination of whether an interest in a corporation is treated as stock or indebtedness for all purposes of the Internal Revenue Code. DATES: These corrections are effective on January 23, 2017, and applicable October 21, 2016. FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317– 5363, or Joshua G. Rabon, (202) 317– 6938 (not toll-free numbers). SUPPLEMENTARY INFORMATION: SUMMARY: Background The final and temporary regulations that are the subject of this correction are under sections 385 and 752 of the Internal Revenue Code. Need for Correction As published, the final regulations contain errors which may prove to be misleading and need to be clarified. Correction of Publication Accordingly, the final and temporary regulations (TD 9790) that are the subject of FR Doc. 2016–25105 are corrected as follows: 1. On page 72877, in the preamble, second column, the fourth sentence of the second full paragraph, ‘‘The Treasury Department and the IRS have considered this comment and determined that it would be appropriate to disregard subordination if the recharacterization occurred as a result of § 1.385–3 and the final regulations reflect that decision’’ is corrected to read ‘‘The Treasury Department and the IRS have considered this comment and determined that it would be appropriate to disregard subordination if the recharacterization occurred as a result of § 1.385–3 or if a recharacterized EGI E:\FR\FM\24JAR1.SGM 24JAR1

Agencies

[Federal Register Volume 82, Number 14 (Tuesday, January 24, 2017)]
[Rules and Regulations]
[Pages 8165-8169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00498]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9790]
RIN 1545-BN40


Treatment of Certain Interests in Corporations as Stock or 
Indebtedness; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correcting amendments.

-----------------------------------------------------------------------

SUMMARY: This document contains corrections to the final and temporary 
regulations (T.D. 9790) that were published in the Federal Register on 
Friday, October 21, 2016 (81 FR 72858). The regulations relate to the 
determination of whether an interest in a corporation is treated as 
stock or indebtedness for all purposes of the Internal Revenue Code.

DATES: These corrections are effective on January 23, 2017, and 
applicable October 21, 2016.

FOR FURTHER INFORMATION CONTACT: Austin M. Diamond-Jones, (202) 317-
5363, or Joshua G. Rabon, (202) 317-6938 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    The final and temporary regulations that are the subject of this 
correction are under sections 385 and 752 of the Internal Revenue Code.

[[Page 8166]]

Need for Correction

    As published, the final and temporary regulations contain errors 
which may prove to be misleading and need to be clarified.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction of Publication

    Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

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


0
Par. 2. Section 1.385-1 is amended by revising the fifth sentence of 
paragraph (c)(4)(vii) Example 2 (i) to read as follows:


Sec.  1.385-1  General provisions.

* * * * *
    (c) * * *
    (4) * * *
    (vii) * * *

    Example 2.  * * *
    (i) * * * In addition to other assets representing 85% of the 
value of its total assets, S2 owns all of the stock of S3, which has 
elected to be treated as a taxable REIT subsidiary of S2 under 
section 856(l)(1). * * *
* * * * *

0
Par. 3. Section 1.385-2 is amended by:
0
1. Revising paragraph (a)(3)(ii)(C)(3).
0
2. Revising the third sentence of paragraph (a)(5)(i).
0
3. Revising the first sentence of paragraph (a)(5)(ii).
0
4. Revising the third sentence of paragraph (b)(1).
0
5. Revising the third sentence of paragraph (c)(2)(ii).
0
6. Revising the second sentence of paragraph (c)(2)(iii)(A).
0
7. Revising the third sentence of paragraph (c)(2)(iii)(E).
0
8. Revising the paragraph (c)(3)(i)(A) subject heading.
0
9. Revising the first sentence of paragraph (c)(3)(i)(A)(3)(i).
0
10. Revising the third sentence of paragraph (c)(4)(ii)(A).
0
11. Revising the second sentence of paragraph (c)(4)(ii)(B)(1).
0
12. Adding a subject heading to paragraph (c)(4)(ii)(B)(2)(i).
0
13. Revising the paragraph (c)(4)(ii)(E) subject heading.
0
14. Revising paragraph (c)(4)(ii)(E)(3).
0
15. Revising paragraph (d)(2)(i)(A).
0
16. Revising the second sentence of paragraph (e)(3)(ii).
0
17. Revising the paragraph (h)(4) Example introductory text.
0
18. Revising the second sentence of paragraph (h)(4)(ii)(A).
0
19. Revising the first sentence of paragraph (h)(4)(ii)(C).
    The addition and revisions read as follows:


Sec.  1.385-2  Treatment of certain interests between members of an 
expanded group.

    (a) * * *
    (3) * * *
    (ii) * * *
    (C) * * *
    (3) Overlapping assets and revenue. If there are multiple 
applicable financial statements that reflect the assets, portion of the 
assets, or revenue of the same expanded group member, any duplication 
(by stock, consolidation, or otherwise) of that expanded group member's 
assets or revenue may be disregarded for purposes of paragraph 
(a)(3)(ii) of this section such that the total assets or annual total 
revenue of that expanded group member is only reflected once.
* * * * *
    (5) * * *
    (i) * * * An issuer is also considered to have characterized an EGI 
as indebtedness if the issuer claims any federal income tax benefit 
with respect to an EGI resulting from characterizing the EGI as 
indebtedness for federal tax purposes, such as by claiming an interest 
deduction under section 163 with respect to interest paid or accrued on 
the EGI on a federal income tax return (or, if the issuer is a member 
of a consolidated group, the issuer or the common parent of the 
consolidated group claims a federal income tax benefit by claiming such 
an interest deduction), or if the issuer reports the EGI as 
indebtedness or amounts paid or accrued on the EGI as interest on an 
applicable financial statement. * * *
    (ii) * * * The consistency rule in paragraph (a)(5)(i) of this 
section and section 385(c)(1) does not apply with respect to an EGI to 
the extent that the EGI is treated as stock under this section or Sec.  
1.385-3, or it has been determined that the EGI is treated as stock 
under applicable federal tax principles. * * *
    (b) * * *
    (1) * * * If the documentation and information described in 
paragraph (c) of this section are not prepared and maintained with 
respect to an EGI in accordance with this section, and no exception 
listed in paragraph (b)(2) of this section applies, the EGI is treated 
as stock for all federal tax purposes. * * *
* * * * *
    (c) * * *
    (2) * * *
    (ii) * * * The rights of a creditor must include rights that 
superior to the rights of shareholders (other than holders of interests 
treated as stock solely by reason of Sec.  1.385-3 and holders of 
interests with creditor's rights under commercial law treated as stock 
under this section) to receive assets of the issuer in case of 
dissolution. * * *
    (iii) * * *
    (A) * * * Documentation with respect to an EGI that is nonrecourse 
under its terms must include information on any cash and property that 
secures the EGI, including--
* * * * *
    (E) * * * Documentation required under paragraph (c)(2) of this 
section may be prepared by employees of expanded group members, by 
agents of expanded group members, or by third parties.
    (3) * * *
    (i) * * *
    (A) Revolving credit, omnibus, umbrella, master, cash pool, and 
similar agreements--
    (3) * * *
    (i) * * * If an EGI is issued under an agreement described in 
paragraph (c)(3)(i)(A) of this section, written documentation must be 
prepared with respect to the analysis date and written documentation 
with a new analysis date must be prepared at least annually to satisfy 
the requirements in paragraph (c)(2)(iii) of this section for EGIs 
issued under such an agreement on or after the most recent analysis 
date. * * *
* * * * *
    (4) * * *
    (ii) * * *
    (A) * * * In the case of an applicable interest that becomes an EGI 
subsequent to issuance, including an intercompany obligation, as 
defined in Sec.  1.1502-13(g)(2)(ii), that ceases to be an intercompany 
obligation, the relevant date is the date on which the applicable 
interest becomes an EGI.
    (B) * * *
    (1) * * * In the case of an applicable interest that becomes an EGI 
subsequent to issuance, the relevant date is the date on which the 
applicable interest becomes an EGI and any relevant date after the date 
that the applicable interest becomes an EGI.
    (2) * * *
    (i) In general. * * *
* * * * *
    (E) Revolving credit, omnibus, umbrella, master, cash pool, and 
similar agreements--
* * * * *
    (3) Relevant dates for EGIs documented under an overall

[[Page 8167]]

arrangement. A relevant date of an EGI under paragraphs (c)(4)(ii)(A) 
through (C) of this section is also a relevant date for each EGI 
documented under an overall arrangement described in paragraph (c)(3) 
of this section.
* * * * *
    (d) * * *
    (2) * * *
    (i) * * *
    (A) Any interest that is issued or deemed issued in the legal form 
of a debt instrument (including a draw or separate amount borrowed 
under an overall arrangement described in paragraph (c)(3) of this 
section regardless of whether a separate legal document is issued in 
connection with the draw or separate amount borrowed), which therefore 
does not include, for example, a sale-repurchase agreement treated as 
indebtedness under federal tax principles; or
* * * * *
    (e) * * *
    (3) * * *
    (ii) * * * For purposes of determining whether an EGI originally 
treated as indebtedness ceases to be treated as indebtedness by reason 
of this section, the rules of this section apply before the rules of 
Sec.  1.1001-3. * * *
* * * * *
    (h) * * *
    (4) * * *
    Example.  Application of paragraphs (c)(2)(iii) and (c)(4) of 
this section to an EGI. * * *
    (ii) * * *
    (A) * * * Because FP is traded on an established financial market 
within the meaning of Sec.  1.1092(d)-1(b) and USS1 is a covered 
member, EGI A, EGI B, and EGI C are subject to the rules of this 
section.
* * * * *
    (C) The credit analysis was prepared with an analysis date of Date 
B of Year 1. * * *
* * * * *

0
Par. 4. Section 1.385-3 is amended by:
0
1. Revising paragraph (b)(3)(iii)(E)(2).
0
2. Revising the paragraph (b)(5) subject heading.
0
3. Revising the first sentence of paragraph (c)(3)(i)(C)(1).
0
4. Revising the paragraph (c)(3)(i)(C)(3) subject heading.
0
5. Revising paragraph (c)(3)(i)(C)(3)(i).
0
6. Adding subject headings to paragraphs (g)(3)(ii) introductory text, 
(g)(3)(iii) introductory text, and (g)(3)(iv) introductory text.
0
7. Revising paragraph (g)(3)(iv)(B)(1).
0
8. Adding a subject heading to paragraph (g)(3)(v).
0
10. Revising paragraphs (g)(24)(ii)(B) and (C)
    The additions and revisions read as follows:


Sec.  1.385-3  Transactions in which debt proceeds are distributed or 
that have a similar effect.

* * * * *
    (b) * * *
    (3) * * *
    (iii) * * *
    (E) * * *
    (2) Effect of certain modifications. Notwithstanding paragraph 
(b)(3)(iii)(E)(1) of this section, if a covered debt instrument is 
treated as exchanged for a modified covered debt instrument pursuant to 
Sec.  1.1001-3(b) and the modification, or one of the modifications, 
that results in the deemed exchange includes the substitution of an 
obligor on the covered debt instrument, the addition or deletion of a 
co-obligor on the covered debt instrument, or the material deferral of 
scheduled payments due under the covered debt instrument, then the 
modified covered debt instrument is treated as issued on the date of 
the deemed exchange for purposes of paragraph (b)(3)(iii)(A) of this 
section.
* * * * *
    (5) Coordination between general rule and funding rule. * * *
* * * * *
    (c) * * *
    (3) * * *
    (i) * * *
    (C) * * *
    (1) * * * The term expanded group earnings means, with respect to a 
covered member and an expanded group period of the covered member, the 
earnings and profits accumulated by the covered member during the 
expanded group period, computed as of the close of the taxable year of 
the covered member, without diminution by reason of any distributions 
or acquisitions by the covered member described in paragraphs (b)(2) 
and (b)(3)(i) of this section. * * *
* * * * *
    (3) Look-through rule for dividends--(i) In general. For purposes 
of paragraph (c)(3)(i)(C)(1) of this section, a dividend from a member 
of the same expanded group (distributing member) is not taken into 
account for purposes of calculating a covered member's expanded group 
earnings, except to the extent the dividend is attributable to earnings 
and profits accumulated by the distributing member in a taxable year 
ending after April 4, 2016, during its expanded group period (qualified 
earnings and profits). For purposes of the preceding sentence, a 
dividend received from a member (intermediate distributing member) is 
not taken into account for purposes of calculating the qualified 
earnings and profits of a distributing member (or another intermediate 
distributing member), except to the extent the dividend is attributable 
to qualified earnings and profits of the intermediate distributing 
member. A dividend from a distributing member or an intermediate 
distributing member is considered to be attributable to qualified 
earnings and profits to the extent thereof. If the distributing member 
or the intermediate distributing member is not a covered member, the 
expanded group period of the member is determined under the principles 
of paragraph (c)(3)(i)(E) of this section. If a controlled partnership 
receives a dividend from a distributing member and a portion of the 
dividend is allocated (including through one or more partnerships) to a 
covered member, then, for purposes of this paragraph (c)(3)(i)(C)(3), 
the covered member is treated as receiving the dividend from the 
distributing member.
* * * * *
    (g) * * *
    (3) * * *
    (ii) Qualified dealer debt instrument. * * *
    (iii) Excluded statutory or regulatory debt instrument. * * *
    (iv) Excepted regulated financial company. * * *
    (B) * * *
    (1) General rule. For purposes of paragraph (g)(3)(iv) of this 
section, except as otherwise provided in paragraph (g)(3)(iv)(B)(2) of 
this section, the term regulated financial group means any expanded 
group of which a covered member that is a regulated financial company 
within the meaning of paragraphs (g)(3)(iv)(A)(1) through (10) of this 
section would be the expanded group parent if no person owned, directly 
or indirectly (as defined in Sec.  1.385-1(c)(4)(iii)), the regulated 
financial company. A domestic eligible entity (within the meaning of 
Sec.  301.7701-5(a) of this chapter) treated as a partnership or 
disregarded as an entity separate from its owner is, for purposes of 
this paragraph (g)(3)(iv)(B), also treated as a covered member.
* * * * *
    (v) Regulated insurance company. * * *
    (24) * * *
    (ii) * * *
    (B) A distribution or acquisition by either the seller or a 
successor seller to or from either the acquirer, the seller, or a 
successor seller is not treated as described in paragraph (b)(3) of 
this section for purposes of applying

[[Page 8168]]

paragraph (b)(3) of this section to a covered debt instrument of the 
acquirer. For purposes of the preceding sentence, the term successor 
seller means a member of the expanded group that receives property 
(other than expanded group stock) in a distribution or acquisition from 
the seller or another successor seller and is controlled by the 
acquirer as determined under the principles of paragraph (c)(2)(i) of 
this section. A successor seller is treated as a successor to the 
acquirer to the extent of the value of the property received in a 
distribution or acquisition described in the preceding sentence and, 
for purposes of applying this paragraph (g)(24)(ii)(B).
    (C) To the extent that a covered debt instrument of the acquirer is 
treated as funding a distribution or acquisition by the seller or 
successor seller described in paragraphs (b)(3)(i)(A) through (C) of 
this section, or would be treated but for the exceptions described in 
paragraphs (c)(3)(i) and (ii) of this section, the value of the 
expanded group stock described in paragraph (g)(24)(ii)(A) of this 
section is reduced by an amount equal to the distribution or 
acquisition for purposes of any further application of paragraph 
(g)(24)(ii)(A) of this section with respect to the acquirer and seller.
* * * * *

0
Par. 5. Section 1.385-3T is amended by:
0
1. Revising the third sentence of paragraph (b)(3)(vii)(A)(1)(iii).
0
2. Revising the fifth sentence and adding a new sixth sentence to 
paragraph (h) Example 13(i).
0
3. Revising the third sentence of paragraph (h) Example 13(ii)(D).
0
4. Revising the third sentence of paragraph (h) Example 14(ii)(D).
0
5. Revising paragraph (h) Example 15(i).
0
6. Revising the fifth sentence of paragraph (h) Example 18(ii)(A).
0
7. Revising paragraph (l).
    The revisions read as follows:


Sec.  1.385-3T  Certain distributions of debt instruments and similar 
transactions (temporary).

* * * * *
    (b) * * *
    (3) * * *
    (vii) * * *
    (A) * * *
    (1) * * *
    (iii) * * * Additionally, the amount owed by any issuer shall be 
reduced by the amount of the issuer's deposits with a qualified cash 
pool header, but only to the extent of amounts borrowed from the same 
qualified cash pool header that satisfy the requirements of paragraph 
(b)(3)(vii)(A)(2) (if the covered debt instrument was issued in a prior 
taxable year) or (b)(3)(vii)(A)(1)(ii) of this section.
* * * * *
    (h) * * *
    Example 13.  * * *
    (i) * * * On Date A in Year 1, FP lends $200x to PRS in exchange 
for PRS Note with stated principal amount of $200x, which is payable 
at maturity. PRS Note also provides for annual payments of interest 
that are qualified stated interest. * * *
    (ii) * * *
    (D) * * * Similarly, FP is deemed to transfer a portion of PRS 
Note with a principal amount equal to $90x (the adjusted issue price 
of the specified portion with respect to USS2) to USS2 in exchange 
for deemed partner stock in USS2 with a fair market value of $90x. * 
* *
    Example 14.  * * *
    (ii) * * *
    (D) * * * Similarly, FP is deemed to transfer a portion of PRS 
Note with a principal amount equal to $90x (the adjusted issue price 
of the specified portion with respect to USS2) to USS2 in exchange 
for stock of USS2 with a fair market value of $90x. * * *
    Example 15.  * * *
    (i) Facts. The facts are the same as in Example 13 of this 
paragraph (h)(3), except that USS2 does not distribute $90x to FP 
until Date C in Year 2, which is less than 36 months after Date A in 
Year 1. On Date C in Year 2, DS's, USS2's, and USP's issuance 
percentages under paragraph (g)(16) of this section are unchanged at 
45%, 45%, and 10%, respectively.
* * * * *
    Example 18.  * * *
    (ii) * * *
    (A) * * * DS's distribution to USS1 is a disregarded 
distribution because it is a distribution between members of a 
consolidated group that is disregarded under the one-corporation 
rule described in Sec.  1.385-4T(b)(1). * * *
* * * * *
    (l) Expiration date. This section expires on October 13, 2019.

0
Par. 6. Section 1.385-4T is amended by:
0
1. Revising the first sentence of paragraph (b)(2).
0
2. Revising the first sentence of paragraph (b)(3)(i).
0
3. Revising paragraphs (b)(3)(ii) and (iii).
0
4. Revising paragraph (b)(4)(ii)(A)(1).
0
5. Revising paragraph (b)(5)(i).
0
6. Revising the first sentence of paragraph (b)(6).
0
7. Revising the first sentence of paragraph (c)(1)(i).
0
8. Revising the first sentence of paragraph (d)(3).
0
9. Revising the first sentence of paragraph (d)(4) introductory text.
0
10. Revising paragraphs (d)(4)(i) and (ii).
0
11. Revising paragraph (e)(3).
0
12. Revising paragraph (e)(5).
0
13. Revising the second sentence of paragraph (f)(3) Example 1(ii).
0
14. Revising the seventh sentence of paragraph (f)(3) Example 4(ii).
0
15. Revising the sixth sentence of paragraph (f)(3) Example 5(ii).
0
16. Revising paragraph (h).
    The revisions read as follows:


Sec.  1.385-4T  Treatment of consolidated groups.

* * * * *
    (b) * * *
    (2) * * * The one-corporation rule described in paragraph (b)(1) of 
this section does not apply in determining the members of an expanded 
group. * * *
    (3) * * *
    (i) * * * If a covered debt instrument treated as issued by a 
consolidated group under the one-corporation rule described in 
paragraph (b)(1) of this section is treated as stock under Sec. Sec.  
1.385-3 or 1.385-3T, the covered debt instrument is treated as stock in 
the member of the consolidated group that would be the issuer of such 
debt instrument without regard to this section. * * *
    (ii) Application of the covered debt instrument exclusions. For 
purposes of determining whether a debt instrument issued by a member of 
a consolidated group is a covered debt instrument, each test described 
in Sec.  1.385-3(g)(3) is applied on a separate member basis without 
regard to the one-corporation rule described in paragraph (b)(1) of 
this section.
    (iii) Qualified short-term debt instrument. The determination of 
whether a member of a consolidated group has issued a qualified short-
term debt instrument for purposes of Sec.  1.385-3(b)(3)(vii) is made 
on a separate member basis without regard to the one-corporation rule 
described in paragraph (b)(1) of this section.
    (4) * * *
    (ii) * * *
    (A) * * *
    (1) A qualified contribution to any member of a consolidated group 
that remains a member of the consolidated group immediately after the 
qualified contribution from a person other than a member of the same 
consolidated group is treated as made to the one corporation described 
in paragraph (b)(1) of this section;
* * * * *
    (5) * * *
    (i) First, determine the characterization of the transaction under 
federal tax law without regard to the one-corporation rule described in 
paragraph (b)(1) of this section.
* * * * *

[[Page 8169]]

    (6) * * * For purposes of this section and Sec. Sec.  1.385-3 and 
1.385-3T, and notwithstanding the one-corporation rule described in 
paragraph (b)(1) of this section, a partnership that is wholly owned by 
members of a consolidated group is treated as a partnership. * * *
* * * * *
    (c) * * *
    (1) * * *
    (i) * * * For purposes of this section and Sec. Sec.  1.385-3 and 
1.385-3T, when a debt instrument ceases to be a consolidated group debt 
instrument as a result of a transaction in which the member of the 
consolidated group that issued the instrument (the issuer) or the 
member of the consolidated group holding the instrument (the holder) 
ceases to be a member of the same consolidated group but both the 
issuer and the holder continue to be members of the same expanded 
group, the issuer is treated as issuing a new debt instrument to the 
holder in exchange for property immediately after the debt instrument 
ceases to be a consolidated group debt instrument. * * *
* * * * *
    (d) * * *
    (3) * * * If a departing member has issued a covered debt 
instrument (determined without regard to the one-corporation rule 
described in paragraph (b)(1) of this section) that is not a 
consolidated group debt instrument and that is not treated as stock 
immediately before the departing member ceases to be a consolidated 
group member, then the departing member (and not the consolidated 
group) is treated as issuing the covered debt instrument on the date 
and in the manner the covered debt instrument was issued. * * *
    (4) * * * This paragraph (d)(4) applies when a departing member 
ceases to be a consolidated group member in a transaction other than a 
distribution to which section 355 (or so much of section 356 as relates 
to section 355) applies, and the consolidated group has made a regarded 
distribution or acquisition. * * *
    (i) If the departing member made the regarded distribution or 
acquisition (determined without regard to the one-corporation rule 
described in paragraph (b)(1) of this section), the departing member 
(and not the consolidated group) is treated as having made the regarded 
distribution or acquisition.
    (ii) If the departing member did not make the regarded distribution 
or acquisition (determined without regard to the one-corporation rule 
described in paragraph (b)(1) of this section), then the consolidated 
group (and not the departing member) continues to be treated as having 
made the regarded distribution or acquisition.
    (e) * * *
    (3) Disregarded distribution or acquisition. The term disregarded 
distribution or acquisition means a distribution or acquisition 
described in Sec.  1.385-3(b)(2) or (b)(3)(i) between members of a 
consolidated group that is disregarded under the one-corporation rule 
described in paragraph (b)(1) of this section.
* * * * *
    (5) Regarded distribution or acquisition. The term regarded 
distribution or acquisition means a distribution or acquisition 
described in Sec.  1.385-3(b)(2) or (b)(3)(i) that is not disregarded 
under the one-corporation rule described in paragraph (b)(1) of this 
section.
    (f) * * *
    (3) * * *
    Example 1.  * * *
    (ii) * * * Pursuant to paragraph (b)(5)(i) of this section, the 
transaction is first analyzed without regard to the one-corporation 
rule described in paragraph (b)(1) of this section, and therefore 
UST is treated as issuing a covered debt instrument in exchange for 
expanded group stock. * * *
* * * * *
    Example 4.  * * *
    (ii) * * * Under paragraph (c)(1)(i) of this section, for 
purposes of Sec.  1.385-3, DS1 is treated as issuing a new debt 
instrument to USS1 in exchange for property immediately after DS1 
Note ceases to be a consolidated group debt instrument. * * *
    Example 5.  * * *
    (ii) * * * Under paragraph (c)(1)(i) of this section, for 
purposes of Sec.  1.385-3, DS1 is treated as issuing a new debt 
instrument to USS1 in exchange for property immediately after DS1 
Note ceases to be a consolidated group debt instrument. * * *
* * * * *
    (h) Expiration date. This section expires on October 13, 2019.

0
Par. 7. Section 1.752-2T is amended by revising paragraph (m)(2) to 
read as follows:


Sec.  1.752-2T  Partner's share of recourse liabilities (temporary).

* * * * *
    (m) * * *
    (2) Paragraphs (c)(3) and (l)(4) of this section expire on October 
13, 2019.

Martin V. Franks,
Chief, Publications and Regulations Branch, Legal Processing Division, 
Associate Chief Counsel, Procedure and Administration.
[FR Doc. 2017-00498 Filed 1-23-17; 8:45 am]
 BILLING CODE 4830-01-P