Guidance Under Section 851 Relating to Investments in Stock and Securities, 9959-9962 [2019-05130]
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Federal Register / Vol. 84, No. 53 / Tuesday, March 19, 2019 / Rules and Regulations
consistent with the provisions of
Executive Order 13563. This rule is not
an E.O. 13771 regulatory action because
this rule is not significant under E.O.
12866.
Executive Order 12988
The Department of State has reviewed
the proposed amendment in light of
Executive Order 12988 to eliminate
ambiguity, minimize litigation, establish
clear legal standards, and reduce
burden.
Executive Order 13175
The Department of State has
determined that this rulemaking will
not have tribal implications, will not
impose substantial direct compliance
costs on Indian tribal governments, and
will not preempt tribal law.
Accordingly, Executive Order 13175
does not apply to this rulemaking.
Paperwork Reduction Act
This rulemaking does not impose or
revise any information collections
subject to 44 U.S.C. chapter 35.
List of Subjects
22 CFR Part 35
Administrative practice and
procedure, Claims, Fraud, Penalties.
22 CFR Part 127
Arms and munitions, Exports.
22 CFR Part 138
Government contracts, Grant
programs, Loan programs, Lobbying,
Penalties, Reporting and recordkeeping
requirements.
For the reasons set forth above, 22
CFR parts 35, 103, 127, and 138 are
amended as follows:
1. The authority citation for part 35
continues to read as follows:
■
Authority: 22 U.S.C. 2651a; 31 U.S.C. 3801
et seq.; Pub. L. 114–74, 129 Stat. 584.
[Amended]
2. In § 35.3:
a. Remove ‘‘$11,181’’ and add in its
place ‘‘$11,463’’, wherever it occurs.
■ b. In paragraph (f), remove ‘‘$335,443’’
and add in its place ‘‘$343,903’’.
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Authority: 22 U.S.C. 2651a; 22 U.S.C. 6701
et seq.; Pub. L. 114–74, 129 Stat. 584.
§ 103.6
[Amended]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9851]
RIN 1545–BN55
Guidance Under Section 851 Relating
to Investments in Stock and Securities
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document provides final
regulations relating to the income test
used to determine whether a
corporation may qualify as a regulated
investment company (RIC) for Federal
income tax purposes. These final
regulations provide guidance to
corporations that intend to qualify as
RICs.
SUMMARY:
4. Amend § 103.6 by removing
‘‘$37,601’’ and adding in its place
‘‘$38,549’’ in paragraph (a)(1) and
removing ‘‘$7,520’’ and adding in its
place ‘‘$7,710’’ in paragraph (a)(2).
■
PART 127—VIOLATIONS AND
PENALTIES
■
DATES:
Authority: Sections 2, 38, and 42, Pub. L.
90–629, 90 Stat. 744 (22 U.S.C. 2752, 2778,
2791); 22 U.S.C. 401; 22 U.S.C. 2651a; 22
U.S.C. 2779a; 22 U.S.C. 2780; E.O. 13637, 78
FR 16129; Pub. L. 114–74, 129 Stat. 584.
Effective date: These regulations are
effective on March 19, 2019.
Applicability date: For the date of
applicability, see § 1.851–2(d).
FOR FURTHER INFORMATION CONTACT:
Matthew Howard at (202) 317–7053 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
5. The authority citation for part 127
continues to read as follows:
[Amended]
6. Section 127.10 is amended as
follows:
■ a. In paragraph (a)(1)(i), remove
‘‘$1,134,602’’ and add in its place
‘‘$1,163,217’’;
■ b. In paragraph (a)(1)(ii), remove
‘‘$824,959’’ and add in its place
‘‘$845,764’’; and
■ c. In paragraph (a)(1)(iii), remove
‘‘$981,935’’ and add in its place
‘‘$1,006,699’’.
■
PART 138—RESTRICTIONS ON
LOBBYING
7. The authority citation for part 138
continues to read as follows:
■
Authority: 22 U.S.C. 2651a; 31 U.S.C. 1352;
Pub. L. 114–74, 129 Stat. 584.
§ 138.400
[Amended]
8. In § 138.400:
a. Remove ‘‘$19,639’’ and ‘‘$196,387’’
and add in their place ‘‘$20,134’’ and
‘‘$201,340’’, respectively, wherever they
occur.
■ b. In paragraph (e), remove ‘‘$19,322’’
and add in its place ‘‘$19,809’’.
■
■
PART 35—PROGRAM FRAUD CIVIL
REMEDIES
■
■
3. The authority citation for part 103
continues to read as follows:
■
§ 127.10
22 CFR Part 103
Administrative practice and
procedure, Chemicals, Classified
information, Foreign relations, Freedom
of information, International
organization, Investigations, Penalties,
Reporting and recordkeeping
requirements.
§ 35.3
PART 103—REGULATIONS FOR
IMPLEMENTATION OF THE CHEMICAL
WEAPONS CONVENTION AND THE
CHEMICAL WEAPONS CONVENTION
IMPLEMENTATION ACT OF 1998 ON
THE TAKING OF SAMPLES AND ON
ENFORCEMENT OF REQUIREMENTS
CONCERNING RECORDKEEPING AND
INSPECTIONS
9959
Dated: February 27, 2019.
Alicia Frechette,
Executive Director, Office of the Legal Adviser
and Bureau of Legislative Affairs, Department
of State.
[FR Doc. 2019–05158 Filed 3–18–19; 8:45 am]
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Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) relating to RICs. Section 851 of
the Internal Revenue Code (Code) sets
forth requirements for qualifying as a
RIC.
On September 28, 2016, a notice of
proposed rulemaking (REG–123600–16)
was published in the Federal Register
(81 FR 66576) under section 851. No
public hearing was requested or held.
Written or electronic comments
responding to the notice of proposed
rulemaking were received. After
consideration of all the comments, the
proposed regulations are adopted as
revised by this Treasury decision
containing final regulations. The
revisions to the proposed regulations are
discussed in the Summary of Comments
and Explanation of Revisions.
Summary of Comments and
Explanation of Revisions
In response to the notice of proposed
rulemaking, the IRS received five
written comments that are available for
public inspection at
www.regulations.gov or upon request.
A. Revisions Due to Statutory Changes
The notice of proposed rulemaking
proposed revisions to § 1.851–2(b)(1),
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which had been published in the
Federal Register (25 FR 11910) on
November 26, 1960, as part of TD 6500
(1960 final regulations). The proposed
revisions would conform § 1.851–2(b)(1)
to several changes to the statutory text
of section 851(b)(2) enacted after the
1960 final regulations were published.
See Public Law 95–345, 2(a)(3), 92 Stat.
481, 481 (1978); Tax Reform Act of
1986, Public Law 99–514, 653(b), 100
Stat. 2085, 2298 (1986); Taxpayer Relief
Act of 1997, Public Law 105–34,
1271(a), 111 Stat. 788, 1036 (1997). No
comments were received on these
proposed revisions. Accordingly, the
final regulations adopt the revisions to
§ 1.851–2(b)(1) as proposed.
B. Defining Securities
In the notice of proposed rulemaking,
the Department of the Treasury
(Treasury Department) and the IRS
determined that the IRS should no
longer issue private letter rulings on
questions relating to the treatment of a
corporation as a RIC that require a
determination of whether a financial
instrument or position is a security
under the Investment Company Act of
1940, Public Law 76–768, 54 Stat. 789
(codified as amended at 15 U.S.C.
80a–1—80a–64 (2016)) (1940 Act).
Contemporaneously with the
publication of the notice of proposed
rulemaking, the Treasury Department
and the IRS issued Rev. Proc. 2016–50
(2016–43 I.R.B. 522), which provides
that the IRS ordinarily will not issue
rulings or determination letters on any
issue relating to the treatment of a
corporation as a RIC that requires a
determination of whether a financial
instrument or position is a security
under the 1940 Act. One commenter
recommended that the IRS not add this
issue to the no-rule list and that the IRS
continue to consider ruling requests in
situations in which the status of an
investment as a security under section
2(a)(36) of the 1940 Act is sufficiently
clear under the language of the 1940 Act
or under relevant guidance from the
SEC. In issuing the notice of proposed
rulemaking and Rev. Proc. 2016–50, the
Treasury Department and the IRS
considered the issues, the resource
constraints of the IRS, and the
jurisdiction of the SEC under the 1940
Act and determined that the IRS
ordinarily should not issue rulings that
require a determination by the IRS of
whether a financial instrument or
position is a security under the 1940
Act. If the security status of an
instrument is sufficiently clear under
the 1940 Act, or if the SEC has issued
relevant guidance, any other requested
ruling may be considered by the IRS
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subject to other limitations applicable to
all ruling requests. See, for example,
section 6 of Rev. Proc. 2019–1 (2019–1
I.R.B. 1, 18). The IRS therefore declines
to adopt the suggestion and has
continued to include the issue described
in Rev. Proc. 2016–50 in the list of areas
in which rulings or determinations
letters will not ordinarily be issued. See,
for example, section 4.01(44) of Rev.
Proc. 2019–3 (2019–1 I.R.B. 130, 140).
In the notice of proposed rulemaking,
the Treasury Department and the IRS
also requested comments as to whether
Rev. Rul. 2006–1 (2006–1 C.B. 261),
Rev. Rul. 2006–31 (2006–1 C.B. 1133),
and other previously issued guidance
involving determinations of whether a
financial instrument or position held by
a RIC is a security under the 1940 Act
should be withdrawn. Commenters
recommended that Rev. Rul. 2006–1 and
Rev. Rul. 2006–31 not be withdrawn
because RICs rely on those rulings to
invest with confidence in certain
derivatives on stocks and securities. The
commenters suggested that withdrawal
of those rulings would create confusion
and uncertainty with respect to
investments by a RIC. After
consideration of the comments, the
Treasury Department and the IRS have
decided not to withdraw the revenue
rulings at this time.
C. Inclusions Under Section 951(a)(1) or
1293(a)
In certain circumstances, a U.S.
person may be required under section
951(a)(1) or 1293(a) to include in taxable
income certain earnings of a foreign
corporation in which the U.S. person
holds an interest, without regard to
whether the foreign corporation makes a
distribution to the U.S. person. The Tax
Reduction Act of 1975, Public Law 94–
12, 602, 89 Stat. 26, 58 (1975 Act),
substantially increased the overall
amount of these inclusions. Because
these inclusions are not dividends (even
if accompanied by a corresponding
distribution), they would have been
non-qualifying gross income for RICs.
However, the same subsection of the
1975 Act that increased the amount of
inclusions also amended section 851(b).
This amendment provided that an
inclusion under section 951 was treated
as a dividend (and therefore qualifying
income for purposes of section
851(b)(2)) if the inclusion was
accompanied by a distribution out of the
earnings and profits of the taxable year
that are attributable to the amounts so
included. The Tax Reform Act of 1986,
Public Law 99–514, 1235, 100 Stat.
2085, 2575 (1986 Act), provided the
same dividend treatment for amounts
included in income under section
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1293(a). The current version of the
language added by the 1975 and 1986
amendments provides:
For purposes of [section 851(b)(2)], there
shall be treated as dividends amounts
included in gross income under section
951(a)(1)(A) or 1293(a) for the taxable year to
the extent that, under section 959(a)(1) or
1293(c) (as the case may be), there is a
distribution out of the earnings and profits of
the taxable year which are attributable to the
amounts so included.
The 1986 Act also added to the
description of a RIC’s qualifying income
‘‘other income (including but not
limited to gains from options, futures or
forward contracts) derived with respect
to its business of investing in . . . stock,
securities, or currencies.’’
The amendments to section 851(b) by
the 1975 Act and the 1986 Act
unambiguously condition dividend
treatment of an inclusion under section
951(a)(1)(A) or 1293(a) on a distribution
from the foreign corporation’s earnings
and profits attributable to the amount
included. Absent a distribution, there is
no support in the Code for treating an
inclusion under section 951(a)(1)(A) or
1293(a) as a dividend under section 851.
The proposed regulations would,
therefore, clarify that an inclusion under
section 951(a)(1)(A) or 1293(a) is treated
as a dividend for purposes of section
851(b)(2) only to the extent that the
distribution requirement in section
851(b) is met. All five commenters
acknowledged that the distribution
requirement for dividend treatment in
the proposed regulations is consistent
with the statutory language in section
851(b). Accordingly, the final
regulations adopt the clarification of the
distribution requirement as proposed.
The proposed regulations, however,
also would provide that dividend
treatment is the only manner in which
an inclusion under section 951(a)(1) or
1293(a) may be qualifying income. That
is, under the proposed regulations, for
purposes of section 851(b)(2) neither of
these inclusions would be other income
derived with respect to a RIC’s business
of investing in stock, securities, or
currencies (Non-qualifying Income
Proposal). Commenters unanimously
recommended that the Treasury
Department and the IRS exclude the
Non-qualifying Income Proposal from
the final regulations. Commenters noted
that some RICs have no ability to control
when, or whether, distributions are
made and may have income inclusions
in excess of available or allowable
distributions.
Commenters also suggested that the
Non-qualifying Income Proposal would
produce inconsistent results. For
example, if a RIC has income inclusions
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with respect to a passive foreign
investment company (PFIC) as a result
of making a mark-to-market election
under section 1296 with respect to the
PFIC, the RIC would have qualifying
income under section 851(b). See
section 1296(h), which specifically
treats that income as a dividend even
though there has been no distribution.
In contrast, if the RIC had made a
qualified electing fund election under
section 1293 with respect to a PFIC,
then the Non-qualifying Income
Proposal would prevent income
inclusions with respect to that PFIC
from being qualifying income.
The Treasury Department and the IRS
have carefully considered the comments
and recognize that the Non-qualifying
Income Proposal creates an unintended
effect on the RIC income test of section
851(b)(2). For example, certain types of
income, such as interest and dividends,
would be considered qualifying income
if earned directly by a RIC. These types
of income, however, would not be
qualifying income when received by a
controlled foreign corporation or PFIC
and included in a RIC’s income under
section 951(a)(1) or 1293(a), unless there
is a corresponding distribution.
Accordingly, the Treasury Department
and the IRS have decided not to include
the Non-qualifying Income Proposal in
these final regulations.
One commenter further recommended
that the final regulations treat inclusions
under sections 951(a)(1)(A) and 1293(a)
derived with respect to a RIC’s business
of investing in stock, securities, or
currencies as other qualifying income
for purposes of the RIC income test of
section 851(b)(2) (Qualifying Income
Proposal). The Treasury Department and
the IRS recognize that inclusions under
sections 951(a)(1) and 1293(a) with
respect to which there are no
corresponding distributions may be
accelerations of income derived from
stock that otherwise would be
recognized as a dividend or as gain from
the sale or other disposition of stock.
The Qualifying Income Proposal
recommended by the commenter would
treat these inclusions as qualifying
income for purposes of section
851(b)(2). That is, it would apply to
inclusions with respect to which there
are no corresponding contemporaneous
distributions and which otherwise
would not be treated as dividends even
though those inclusions are connected
to a RIC’s business of investing in stock,
securities, or currencies. After further
consideration of the issues raised by the
commenter and the provisions in ‘‘An
Act to provide for reconciliation
pursuant to titles II and V of the
concurrent resolution on the budget for
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fiscal year 2018,’’ Public Law 115–97,
title 1, § 11000, 131 Stat. 2054 (Dec. 22,
2017), affecting the taxation of income
earned outside of the United States, the
Treasury Department and the IRS adopt
the Qualifying Income Proposal in the
final regulations.
Special Analyses
This regulation is not subject to
review under section 6(b) of Executive
Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and
Budget regarding review of tax
regulations.
Because these regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business, and no
comments were received.
Statement of Availability of IRS
Documents
The IRS revenue procedures and
revenue rulings cited in this document
are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and
are available from the Superintendent of
Documents, U.S. Government
Publishing Office, Washington, DC
20402, or by visiting the IRS website at
www.irs.gov.
Drafting Information
The principal author of these final
regulations is Matthew Howard, Office
of Associate Chief Counsel (Financial
Institutions and Products). However,
other personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.851–2 is amended by
revising paragraphs (b)(1) and (b)(2)(i),
■
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9961
and adding paragraphs (b)(2)(iii) and (d)
to read as follows:
§ 1.851–2
Limitations.
*
*
*
*
*
(b) * * *
(1) General rule. A corporation will
not be a regulated investment company
for a taxable year unless 90 percent of
its gross income for that year is income
described in paragraph (b)(1)(i) or (ii) of
this section. Any loss from the sale or
other disposition of stock or securities is
not taken into account in the gross
income computation.
(i) Gross income amounts. Income is
described in this paragraph (b)(1)(i) if it
is gross income derived from:
(A) Dividends;
(B) Interest;
(C) Payments with respect to
securities loans (as defined in section
512(a)(5));
(D) Gains from the sale or other
disposition of stocks or securities (as
defined in section 2(a)(36) of the
Investment Company Act of 1940, as
amended);
(E) Gains from the sale or other
disposition of foreign currencies; or
(F) Other income (including but not
limited to gains from options, futures, or
forward contracts) derived with respect
to a regulated investment company’s
business of investing in such stock,
securities, or currencies.
(ii) Income from a publicly traded
partnership. Income is described in this
paragraph (b)(1)(ii) if it is net income
derived from an interest in a qualified
publicly traded partnership (as defined
in section 851(h)).
(2) * * *
(i) For purposes of section
851(b)(2)(A) and paragraph (b)(1)(i)(A)
of this section, amounts included in
gross income for the taxable year under
section 951(a)(1)(A) or 1293(a) are
treated as dividends only to the extent
that, under section 959(a)(1) or 1293(c)
(as the case may be), there is a
distribution out of the earnings and
profits of the taxable year that are
attributable to the amounts included in
gross income for the taxable year under
section 951(a)(1)(A) or 1293(a). For
allocation of distributions to earnings
and profits of foreign corporations, see
§ 1.959–3.
*
*
*
*
*
(iii) If an amount is included in gross
income under section 951(a)(1) or
1293(a) and is derived with respect to a
corporation’s business of investing in
stock, securities, or currencies then the
amount is other income described in
section 851(b)(2)(A) and paragraph
(b)(1)(i)(F) of this section.
Notwithstanding paragraph (d) of this
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section, a taxpayer may rely on the rule
in this paragraph (b)(2)(iii) for taxable
years that begin after September 28,
2016.
*
*
*
*
*
(d) Applicability date. The rules in
paragraphs (b)(1) and (b)(2)(i) and (iii) of
this section apply to taxable years that
begin after June 17, 2019.
Kirsten Wielobob,
Deputy Commissioner for Services and
Enforcement.
Approved: February 15, 2019,
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
therefore, E.O. 13771, ‘‘Reducing
Regulation and Controlling Regulatory
Costs’’ does not apply.
List of Subjects in 32 CFR Part 542
Elementary and secondary education.
List of Subjects in 32 CFR Part 562
Armed forces reserves, colleges and
universities.
PART 562—[REMOVED]
Accordingly, by the authority of 5
U.S.C. 301, 32 CFR part 562 is removed.
■
PART 542—[REMOVED]
■
Accordingly, by the authority of 5
U.S.C. 301, 32 CFR part 542 is removed.
Brenda S. Bowen,
Army Federal Register Liaison Officer.
Brenda S. Bowen,
Army Federal Register Liaison Officer.
[FR Doc. 2019–05134 Filed 3–18–19; 8:45 am]
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[FR Doc. 2019–05135 Filed 3–18–19; 8:45 am]
BILLING CODE 5001–03–P
[FR Doc. 2019–05130 Filed 3–18–19; 8:45 am]
DEPARTMENT OF HOMELAND
SECURITY
DEPARTMENT OF DEFENSE
Coast Guard
BILLING CODE 4830–01–P
Department of the Army
33 CFR Part 165
DEPARTMENT OF DEFENSE
Department of the Army
32 CFR Part 562
[Docket Number USCG–2019–0020]
[Docket ID: USA–2018–HQ–0019]
RIN 1625–AA00
RIN 0702–AA76
32 CFR Part 542
Reserve Officers’ Training Corps
[Docket ID: USA–2018–HQ–0018]
Schools and Colleges
This final rule removes DoD’s
regulation concerning policies for
conducting the Army’s Junior Reserve
Officers’ Training Corps (JROTC)
Program in high schools. This applies to
the program given at high school level
institutions. This part conveys internal
Army policy and procedures, and is
unnecessary.
SUMMARY:
This rule is effective on March
19, 2019.
FOR FURTHER INFORMATION CONTACT: LTC
Mark Rea at 703–695–9262.
SUPPLEMENTARY INFORMATION: It has been
determined that publication of this CFR
part removal for public comment is
impracticable, unnecessary, and
contrary to public interest since it is
based on removing DoD internal
policies and procedures that are
publicly available on the Department’s
issuance website.
DoD internal guidance will continue
to be published in Army Regulation
145–2, ‘‘Junior Reserve Officers’
Training Corps Program: Organization,
Administration, Operation and
Support,’’ available at https://
armypubs.army.mil/ProductMaps/
PubForm/AR.aspx.
This rule is not significant under
Executive Order (E.O.) 12866,
‘‘Regulatory Planning and Review,’’
DATES:
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16:02 Mar 18, 2019
AGENCY:
This final rule removes DoD’s
regulation containing administrative
staff instruction and internal policies for
conducting the Army’s Senior Reserve
Officers’ Training Corps (SROTC)
Program. This applies to the program
given at college-level institutions and at
the college-level in military junior
colleges. This part conveys internal
Army policy and procedures and is
unnecessary.
SUMMARY:
SUMMARY:
Department of the Army, DoD.
ACTION: Final rule.
AGENCY:
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Coast Guard, DHS.
Temporary final rule.
Department of the Army, DoD.
ACTION: Final rule.
AGENCY:
RIN 0702–AA89
Safety Zone; Tanapag Harbor, Saipan,
CNMI
This rule is effective on March
19, 2019.
FOR FURTHER INFORMATION CONTACT: LTC
Mark Rea at 703–695–9262.
SUPPLEMENTARY INFORMATION: It has been
determined that publication of this CFR
part removal for public comment is
impracticable, unnecessary, and
contrary to public interest since it is
based on removing DoD internal
policies and procedures that are
publicly available on the Department’s
issuance website. DoD internal guidance
will continue to be published in Army
Regulation 145–1, ‘‘Senior Reserve
Officers’ Training Corps Program:
Organization, Administration and
Training,’’ available at https://
armypubs.army.mil/ProductMaps/
PubForm/AR.aspx.
This rule is not significant under
Executive Order (E.O.) 12866,
‘‘Regulatory Planning and Review,’’
therefore, E.O. 13771, ‘‘Reducing
Regulation and Controlling Regulatory
Costs’’ does not apply.
DATES:
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ACTION:
The Coast Guard is
establishing a temporary safety zone for
navigable waters within Tanapag
Harbor, Saipan. This safety zone will
encompass the designated swim course
for the Escape from Managaha swim
event in the waters of Tanapag Harbor,
Saipan, Commonwealth of the Northern
Mariana Islands. This action is
necessary to protect all persons and
vessels participating in this marine
event from potential safety hazards
associated with vessel traffic in the area.
Race participants, chase boats, and
organizers of the event will be exempt
from the safety zone. Entry of persons or
vessels into the safety zone is prohibited
unless authorized by the Captain of the
Port (COTP) Guam.
DATES: This rule is effective from 6:30
a.m. through 8:30 a.m. on March 31,
2019.
To view documents
mentioned in this preamble as being
available in the docket, go to https://
www.regulations.gov, type USCG–2019–
0020 in the ‘‘SEARCH’’ box and click
‘‘SEARCH.’’ Click on Open Docket
Folder on the line associated with this
rule.
FOR FURTHER INFORMATION CONTACT: If
you have questions on this rule, call or
email Chief Petty Officer Todd Wheeler,
Sector Guam, U.S. Coast Guard, by
telephone at (671) 355–4866, or email at
WWMGuam@uscg.mil.
SUPPLEMENTARY INFORMATION:
ADDRESSES:
E:\FR\FM\19MRR1.SGM
19MRR1
Agencies
[Federal Register Volume 84, Number 53 (Tuesday, March 19, 2019)]
[Rules and Regulations]
[Pages 9959-9962]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05130]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9851]
RIN 1545-BN55
Guidance Under Section 851 Relating to Investments in Stock and
Securities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document provides final regulations relating to the
income test used to determine whether a corporation may qualify as a
regulated investment company (RIC) for Federal income tax purposes.
These final regulations provide guidance to corporations that intend to
qualify as RICs.
DATES:
Effective date: These regulations are effective on March 19, 2019.
Applicability date: For the date of applicability, see Sec. 1.851-
2(d).
FOR FURTHER INFORMATION CONTACT: Matthew Howard at (202) 317-7053 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) relating to RICs. Section 851 of the Internal Revenue Code
(Code) sets forth requirements for qualifying as a RIC.
On September 28, 2016, a notice of proposed rulemaking (REG-123600-
16) was published in the Federal Register (81 FR 66576) under section
851. No public hearing was requested or held. Written or electronic
comments responding to the notice of proposed rulemaking were received.
After consideration of all the comments, the proposed regulations are
adopted as revised by this Treasury decision containing final
regulations. The revisions to the proposed regulations are discussed in
the Summary of Comments and Explanation of Revisions.
Summary of Comments and Explanation of Revisions
In response to the notice of proposed rulemaking, the IRS received
five written comments that are available for public inspection at
www.regulations.gov or upon request.
A. Revisions Due to Statutory Changes
The notice of proposed rulemaking proposed revisions to Sec.
1.851-2(b)(1),
[[Page 9960]]
which had been published in the Federal Register (25 FR 11910) on
November 26, 1960, as part of TD 6500 (1960 final regulations). The
proposed revisions would conform Sec. 1.851-2(b)(1) to several changes
to the statutory text of section 851(b)(2) enacted after the 1960 final
regulations were published. See Public Law 95-345, 2(a)(3), 92 Stat.
481, 481 (1978); Tax Reform Act of 1986, Public Law 99-514, 653(b), 100
Stat. 2085, 2298 (1986); Taxpayer Relief Act of 1997, Public Law 105-
34, 1271(a), 111 Stat. 788, 1036 (1997). No comments were received on
these proposed revisions. Accordingly, the final regulations adopt the
revisions to Sec. 1.851-2(b)(1) as proposed.
B. Defining Securities
In the notice of proposed rulemaking, the Department of the
Treasury (Treasury Department) and the IRS determined that the IRS
should no longer issue private letter rulings on questions relating to
the treatment of a corporation as a RIC that require a determination of
whether a financial instrument or position is a security under the
Investment Company Act of 1940, Public Law 76-768, 54 Stat. 789
(codified as amended at 15 U.S.C. 80a-1--80a-64 (2016)) (1940 Act).
Contemporaneously with the publication of the notice of proposed
rulemaking, the Treasury Department and the IRS issued Rev. Proc. 2016-
50 (2016-43 I.R.B. 522), which provides that the IRS ordinarily will
not issue rulings or determination letters on any issue relating to the
treatment of a corporation as a RIC that requires a determination of
whether a financial instrument or position is a security under the 1940
Act. One commenter recommended that the IRS not add this issue to the
no-rule list and that the IRS continue to consider ruling requests in
situations in which the status of an investment as a security under
section 2(a)(36) of the 1940 Act is sufficiently clear under the
language of the 1940 Act or under relevant guidance from the SEC. In
issuing the notice of proposed rulemaking and Rev. Proc. 2016-50, the
Treasury Department and the IRS considered the issues, the resource
constraints of the IRS, and the jurisdiction of the SEC under the 1940
Act and determined that the IRS ordinarily should not issue rulings
that require a determination by the IRS of whether a financial
instrument or position is a security under the 1940 Act. If the
security status of an instrument is sufficiently clear under the 1940
Act, or if the SEC has issued relevant guidance, any other requested
ruling may be considered by the IRS subject to other limitations
applicable to all ruling requests. See, for example, section 6 of Rev.
Proc. 2019-1 (2019-1 I.R.B. 1, 18). The IRS therefore declines to adopt
the suggestion and has continued to include the issue described in Rev.
Proc. 2016-50 in the list of areas in which rulings or determinations
letters will not ordinarily be issued. See, for example, section
4.01(44) of Rev. Proc. 2019-3 (2019-1 I.R.B. 130, 140).
In the notice of proposed rulemaking, the Treasury Department and
the IRS also requested comments as to whether Rev. Rul. 2006-1 (2006-1
C.B. 261), Rev. Rul. 2006-31 (2006-1 C.B. 1133), and other previously
issued guidance involving determinations of whether a financial
instrument or position held by a RIC is a security under the 1940 Act
should be withdrawn. Commenters recommended that Rev. Rul. 2006-1 and
Rev. Rul. 2006-31 not be withdrawn because RICs rely on those rulings
to invest with confidence in certain derivatives on stocks and
securities. The commenters suggested that withdrawal of those rulings
would create confusion and uncertainty with respect to investments by a
RIC. After consideration of the comments, the Treasury Department and
the IRS have decided not to withdraw the revenue rulings at this time.
C. Inclusions Under Section 951(a)(1) or 1293(a)
In certain circumstances, a U.S. person may be required under
section 951(a)(1) or 1293(a) to include in taxable income certain
earnings of a foreign corporation in which the U.S. person holds an
interest, without regard to whether the foreign corporation makes a
distribution to the U.S. person. The Tax Reduction Act of 1975, Public
Law 94-12, 602, 89 Stat. 26, 58 (1975 Act), substantially increased the
overall amount of these inclusions. Because these inclusions are not
dividends (even if accompanied by a corresponding distribution), they
would have been non-qualifying gross income for RICs. However, the same
subsection of the 1975 Act that increased the amount of inclusions also
amended section 851(b). This amendment provided that an inclusion under
section 951 was treated as a dividend (and therefore qualifying income
for purposes of section 851(b)(2)) if the inclusion was accompanied by
a distribution out of the earnings and profits of the taxable year that
are attributable to the amounts so included. The Tax Reform Act of
1986, Public Law 99-514, 1235, 100 Stat. 2085, 2575 (1986 Act),
provided the same dividend treatment for amounts included in income
under section 1293(a). The current version of the language added by the
1975 and 1986 amendments provides:
For purposes of [section 851(b)(2)], there shall be treated as
dividends amounts included in gross income under section
951(a)(1)(A) or 1293(a) for the taxable year to the extent that,
under section 959(a)(1) or 1293(c) (as the case may be), there is a
distribution out of the earnings and profits of the taxable year
which are attributable to the amounts so included.
The 1986 Act also added to the description of a RIC's qualifying
income ``other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of
investing in . . . stock, securities, or currencies.''
The amendments to section 851(b) by the 1975 Act and the 1986 Act
unambiguously condition dividend treatment of an inclusion under
section 951(a)(1)(A) or 1293(a) on a distribution from the foreign
corporation's earnings and profits attributable to the amount included.
Absent a distribution, there is no support in the Code for treating an
inclusion under section 951(a)(1)(A) or 1293(a) as a dividend under
section 851. The proposed regulations would, therefore, clarify that an
inclusion under section 951(a)(1)(A) or 1293(a) is treated as a
dividend for purposes of section 851(b)(2) only to the extent that the
distribution requirement in section 851(b) is met. All five commenters
acknowledged that the distribution requirement for dividend treatment
in the proposed regulations is consistent with the statutory language
in section 851(b). Accordingly, the final regulations adopt the
clarification of the distribution requirement as proposed.
The proposed regulations, however, also would provide that dividend
treatment is the only manner in which an inclusion under section
951(a)(1) or 1293(a) may be qualifying income. That is, under the
proposed regulations, for purposes of section 851(b)(2) neither of
these inclusions would be other income derived with respect to a RIC's
business of investing in stock, securities, or currencies (Non-
qualifying Income Proposal). Commenters unanimously recommended that
the Treasury Department and the IRS exclude the Non-qualifying Income
Proposal from the final regulations. Commenters noted that some RICs
have no ability to control when, or whether, distributions are made and
may have income inclusions in excess of available or allowable
distributions.
Commenters also suggested that the Non-qualifying Income Proposal
would produce inconsistent results. For example, if a RIC has income
inclusions
[[Page 9961]]
with respect to a passive foreign investment company (PFIC) as a result
of making a mark-to-market election under section 1296 with respect to
the PFIC, the RIC would have qualifying income under section 851(b).
See section 1296(h), which specifically treats that income as a
dividend even though there has been no distribution. In contrast, if
the RIC had made a qualified electing fund election under section 1293
with respect to a PFIC, then the Non-qualifying Income Proposal would
prevent income inclusions with respect to that PFIC from being
qualifying income.
The Treasury Department and the IRS have carefully considered the
comments and recognize that the Non-qualifying Income Proposal creates
an unintended effect on the RIC income test of section 851(b)(2). For
example, certain types of income, such as interest and dividends, would
be considered qualifying income if earned directly by a RIC. These
types of income, however, would not be qualifying income when received
by a controlled foreign corporation or PFIC and included in a RIC's
income under section 951(a)(1) or 1293(a), unless there is a
corresponding distribution. Accordingly, the Treasury Department and
the IRS have decided not to include the Non-qualifying Income Proposal
in these final regulations.
One commenter further recommended that the final regulations treat
inclusions under sections 951(a)(1)(A) and 1293(a) derived with respect
to a RIC's business of investing in stock, securities, or currencies as
other qualifying income for purposes of the RIC income test of section
851(b)(2) (Qualifying Income Proposal). The Treasury Department and the
IRS recognize that inclusions under sections 951(a)(1) and 1293(a) with
respect to which there are no corresponding distributions may be
accelerations of income derived from stock that otherwise would be
recognized as a dividend or as gain from the sale or other disposition
of stock. The Qualifying Income Proposal recommended by the commenter
would treat these inclusions as qualifying income for purposes of
section 851(b)(2). That is, it would apply to inclusions with respect
to which there are no corresponding contemporaneous distributions and
which otherwise would not be treated as dividends even though those
inclusions are connected to a RIC's business of investing in stock,
securities, or currencies. After further consideration of the issues
raised by the commenter and the provisions in ``An Act to provide for
reconciliation pursuant to titles II and V of the concurrent resolution
on the budget for fiscal year 2018,'' Public Law 115-97, title 1, Sec.
11000, 131 Stat. 2054 (Dec. 22, 2017), affecting the taxation of income
earned outside of the United States, the Treasury Department and the
IRS adopt the Qualifying Income Proposal in the final regulations.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations.
Because these regulations do not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business, and no
comments were received.
Statement of Availability of IRS Documents
The IRS revenue procedures and revenue rulings cited in this
document are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at www.irs.gov.
Drafting Information
The principal author of these final regulations is Matthew Howard,
Office of Associate Chief Counsel (Financial Institutions and
Products). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.851-2 is amended by revising paragraphs (b)(1) and
(b)(2)(i), and adding paragraphs (b)(2)(iii) and (d) to read as
follows:
Sec. 1.851-2 Limitations.
* * * * *
(b) * * *
(1) General rule. A corporation will not be a regulated investment
company for a taxable year unless 90 percent of its gross income for
that year is income described in paragraph (b)(1)(i) or (ii) of this
section. Any loss from the sale or other disposition of stock or
securities is not taken into account in the gross income computation.
(i) Gross income amounts. Income is described in this paragraph
(b)(1)(i) if it is gross income derived from:
(A) Dividends;
(B) Interest;
(C) Payments with respect to securities loans (as defined in
section 512(a)(5));
(D) Gains from the sale or other disposition of stocks or
securities (as defined in section 2(a)(36) of the Investment Company
Act of 1940, as amended);
(E) Gains from the sale or other disposition of foreign currencies;
or
(F) Other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to a regulated
investment company's business of investing in such stock, securities,
or currencies.
(ii) Income from a publicly traded partnership. Income is described
in this paragraph (b)(1)(ii) if it is net income derived from an
interest in a qualified publicly traded partnership (as defined in
section 851(h)).
(2) * * *
(i) For purposes of section 851(b)(2)(A) and paragraph (b)(1)(i)(A)
of this section, amounts included in gross income for the taxable year
under section 951(a)(1)(A) or 1293(a) are treated as dividends only to
the extent that, under section 959(a)(1) or 1293(c) (as the case may
be), there is a distribution out of the earnings and profits of the
taxable year that are attributable to the amounts included in gross
income for the taxable year under section 951(a)(1)(A) or 1293(a). For
allocation of distributions to earnings and profits of foreign
corporations, see Sec. 1.959-3.
* * * * *
(iii) If an amount is included in gross income under section
951(a)(1) or 1293(a) and is derived with respect to a corporation's
business of investing in stock, securities, or currencies then the
amount is other income described in section 851(b)(2)(A) and paragraph
(b)(1)(i)(F) of this section. Notwithstanding paragraph (d) of this
[[Page 9962]]
section, a taxpayer may rely on the rule in this paragraph (b)(2)(iii)
for taxable years that begin after September 28, 2016.
* * * * *
(d) Applicability date. The rules in paragraphs (b)(1) and
(b)(2)(i) and (iii) of this section apply to taxable years that begin
after June 17, 2019.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
Approved: February 15, 2019,
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-05130 Filed 3-18-19; 8:45 am]
BILLING CODE 4830-01-P