Updating Section 301 Regulations To Reflect Statutory Changes, 11263-11266 [2019-05649]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 58 (Tuesday, March 26, 2019)]
[Proposed Rules]
[Pages 11263-11266]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05649]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-121694-16]
RIN 1545-BN80


Updating Section 301 Regulations To Reflect Statutory Changes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 301 
of the Internal Revenue Code of 1986 (Code). The proposed regulations 
would update existing regulations under section 301 to reflect 
statutory changes made by the Technical and Miscellaneous Revenue Act 
of 1988, which changes provide that the amount of a distribution of 
property made by a corporation to its shareholder is the fair market 
value of the distributed property. The proposed regulations would 
affect any shareholder who receives a distribution of property from a 
corporation.

DATES: Written or electronic comments and requests for a public hearing 
must be received by June 24, 2019.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-121694-16), Room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
121694-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically, via the 
Federal eRulemaking Portal at www.regulations.gov (indicate IRS and 
REG-121694-16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Grid R. Glyer, (202) 317-6847; concerning submission of comments, 
Regina Johnson, (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

[[Page 11264]]

Background

    Section 301 of the Code originally was enacted as part of the 
Internal Revenue Code of 1954. Section 301 provides rules for the 
treatment of a distribution of property, including money, made by a 
corporation to its shareholder with respect to that shareholder's stock 
ownership in that corporation (distribution).
    Section 301(b)(1) provides general rules for determining the amount 
of a distribution. As enacted in 1954, section 301(b)(1) provided rules 
for determining the amount of a distribution that differed depending on 
whether the shareholder receiving the distribution (distributee) was a 
corporation. Pre-1986 amendments to section 301(b)(1) added special 
rules to determine the amount of distributions received from foreign 
distributing corporations and by foreign corporate distributees. 
Similarly, section 301(d), as enacted in 1954, provided rules for 
determining the basis of property received in a distribution that 
differed depending on whether the distributee was a corporation. As 
with section 301(b)(1), pre-1986 amendments to section 301(d) added 
special rules to determine the basis of property received from foreign 
distributing corporations and by foreign corporate distributees.
    Section 1006(e)(10) of the Technical and Miscellaneous Revenue Act 
of 1988, Public Law 100-647, 102 Stat. 3342 (1988) (the Act), amended 
section 301(b)(1) to eliminate the distinction between corporate and 
noncorporate distributees as well as the special rules relating to 
foreign corporations. Similarly, section 1006(e)(11) of the Act amended 
section 301(d) to eliminate the distinction between corporate and 
noncorporate distributees. (These amendments to section 301(b)(1) and 
(d) are referred to as the 1988 Amendments.) Section 1019(a) of the Act 
provided that, in general, the 1988 Amendments were effective as if 
included in the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 
2085 (1986).
    As a result of the 1988 Amendments, effective for taxable years 
beginning after December 31, 1986, section 301(b)(1) provides that, for 
purposes of section 301, the amount of any distribution shall be the 
amount of money received plus the fair market value of the other 
property received. Section 301(d), as amended by the 1988 Amendments 
and effective for taxable years beginning after December 31, 1986, 
provides that the basis of property received in a distribution to which 
section 301(a) applies shall be the fair market value of such property.
    The current regulations issued under section 301 reflect the rules 
of sections 301(b)(1) and 301(d) as they existed prior to the 1988 
Amendments. Accordingly, to the extent preempted by statute, the 
current regulations have no application.

Explanation of Provisions

    The proposed regulations update Sec.  1.301-1 to reflect the 
statutory changes made to section 301(b)(1) and (d) by the 1988 
Amendments. The scope of the changes to the current regulations issued 
under section 301 made by these proposed regulations is limited to (1) 
deleting regulatory provisions made obsolete by statutory changes, (2) 
making minor additions and revisions to regulatory provisions to 
reflect current statutory text, and (3) making certain non-substantive 
changes for purposes of clarity and readability, including reordering 
and redesignating paragraphs of the current regulations. The proposed 
regulations also update cross-references in Sec. Sec.  1.356-1(f), 
1.368-2(m)(3)(iii), 1.902-1(a)(12), and 1.902-3(a)(7) to reflect the 
proposed reordering and redesignating of paragraphs in Sec.  1.301-1.
    Specifically, some of the provisions of current Sec.  1.301-1(b) 
are now found in proposed Sec.  1.301-1(c). Thus, the definition of the 
amount of a distribution subject to section 301 and the determination 
of the fair market value of a distribution remain in Sec.  1.301-1(b), 
while the determination of when to include a distribution in gross 
income, and its fair market value, is now found in proposed Sec.  
1.301-1(c).
    In addition, current Sec.  1.301-1(g) is redesignated as proposed 
Sec.  1.301-1(f) and is revised to clarify the application of the 
principles of section 357(d) to the limitation on the amount of a 
distribution provided by section 301(b)(2). Section 357(d) was added to 
the Code by section 3001(b)(1) of the Miscellaneous Trade and Technical 
Corrections Act of 1999, Public Law No. 106-36, 113 Stat. 127. On 
January 4, 2001, the Treasury Department and the IRS published a 
temporary regulation (T.D. 8924) in the Federal Register (66 FR 723) to 
address this interaction. Current Sec.  1.301-1(g), published in the 
Federal Register (66 FR 49278) on September 27, 2001 as T.D. 8964, 
provides that no reduction shall be made for the amount of any 
liability, unless the liability is assumed by the shareholder within 
the meaning of section 357(d). Proposed Sec.  1.301-1(f) would clarify 
the language of current Sec.  1.301-1(g) by providing that no reduction 
in the amount of a distribution is made for the amount of any liability 
except to the extent the liability is assumed by the shareholder within 
the meaning of section 357(d).
    The specific changes to Sec.  1.301-1 are shown in the following 
table:

------------------------------------------------------------------------
   Paragraph designation in Sec.
              1.301-1                              Change
------------------------------------------------------------------------
(a)...............................  Updated to reflect current law.
(b)...............................  Updated to reflect current law, with
                                     the definition of the amount of a
                                     distribution subject to section 301
                                     and the determination of the fair
                                     market value of a distribution
                                     remaining in paragraph (b) and the
                                     determination of when to include a
                                     distribution in gross income, and
                                     its fair market value, redesignated
                                     as paragraph (c).
(c)...............................  Redesignated as paragraph (d).
(d)...............................  Deleted as obsolete.
(e)...............................  Deleted as obsolete.
(f)...............................  Updated to reflect current law and
                                     redesignated as paragraph (e).
(g)...............................  Redesignated as paragraph (f) and
                                     revised to clarify that no
                                     reduction in the amount of a
                                     distribution is made for the amount
                                     of any liability except to the
                                     extent the liability is assumed by
                                     the shareholder within the meaning
                                     of section 357(d).
(h)...............................  Updated to reflect current law and
                                     redesignated as paragraph (g).
(i)...............................  No change.
(j)...............................  Updated to reflect current law and
                                     redesignated as paragraph (h).
(k)...............................  Deleted as obsolete.
(l)...............................  Redesignated as paragraph (j).
(m)...............................  Redesignated as paragraph (k).
(n)...............................  Deleted as obsolete.
(o)...............................  Deleted as obsolete.

[[Page 11265]]

 
(p)...............................  Redesignated as paragraph (l).
(q)...............................  Redesignated as paragraph (m).
(n)...............................  New effective date paragraph.
------------------------------------------------------------------------

Proposed Effective/Applicability Date

    The proposed regulations would apply to distributions made after 
the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register. However, these proposed 
regulations would update current regulations under section 301 to 
reflect statutory changes made by the 1988 Amendments, which statutory 
changes apply to distributions made in taxable years beginning after 
December 31, 1986.

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 Department of the Treasury 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), this notice of proposed rulemaking has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the Addresses heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is Grid R. Glyer of the 
Office of Associate Chief Counsel (Corporate). Other personnel from the 
Treasury Department and the IRS participated in developing these 
regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX REGULATIONS

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 1.301-1 is revised to read as follows:


Sec.  1.301-1  Rules applicable with respect to distributions of money 
and other property.

    (a) General. Section 301 provides the general rule for treatment of 
distributions made in taxable years beginning after December 31, 1986, 
of property by a corporation to a shareholder with respect to its 
stock. The term property is defined in section 317(a). Such 
distributions, except as otherwise provided in this chapter, shall be 
treated as provided in section 301(c). Under section 301(c), 
distributions may be included in gross income to the extent the amount 
distributed is considered a dividend under section 316, applied against 
and reduce the adjusted basis of the stock, treated as gain from the 
sale or exchange of property, or (in the case of certain distributions 
out of increase in value accrued before March 1, 1913) may be exempt 
from tax. The amount of the distributions to which section 301 applies 
is determined in accordance with the provisions of section 301(b). The 
basis of property received in a distribution to which section 301 
applies is determined in accordance with the provisions of section 
301(d).
    (b) Amount of distribution and determination of fair market value. 
The amount of a distribution to which section 301 applies shall be the 
amount of money received in the distribution, plus the fair market 
value of other property received in the distribution. The fair market 
value of any property distributed shall be determined as of the date of 
the distribution.
    (c) Time of inclusion in gross income and time of determination of 
fair market value. A distribution made by a corporation to its 
shareholders shall be included in the gross income of the distributees 
when the cash or other property is unqualifiedly made subject to their 
demands without regard to whether such date is the same as that on 
which the corporation made the distribution. For example, if a 
corporation distributes a taxable dividend in property on December 30, 
2018, which is received by, or unqualifiedly made subject to the demand 
of, its shareholders on January 3, 2019, the amount to be included in 
the gross income of the shareholders will be the fair market value of 
such property on December 30, 2018, although such amount will not be 
includible in the gross income of the shareholders until January 3, 
2019.
    (d) Application of section to shareholders. Section 301 is not 
applicable to an amount paid by a corporation to a shareholder unless 
the amount is paid to the shareholder in the shareholder's capacity as 
such.
    (e) Example. Corporation M, formed in 1998, has never been an 
acquiring corporation in a transaction to which section 381(a) applies. 
On January 1, 2019, A, an individual owned all of the stock of 
Corporation M, consisting of a single share, with an adjusted basis of 
$2,000. During 2019, A received distributions from Corporation M 
totaling $30,000, consisting of $10,000 in cash and listed securities 
having a basis in the hands of Corporation M and a fair market value on 
the date distributed of $20,000. Corporation M's taxable year is the 
calendar year. As of December 31, 2018, Corporation M had accumulated 
earnings and profits in the amount of $26,000, and it had no earnings 
and profits and no deficit for 2019. Of the $30,000 received by A, 
$26,000 will be treated as an ordinary dividend; the remaining $4,000 
will be applied against the adjusted basis of his stock; the $2,000 in 
excess of the adjusted basis of his stock will be treated as gain from 
the sale or exchange of property under section 301(c)(3)(A). If A 
subsequently sells his stock in Corporation M, the basis for 
determining gain or loss on the sale will be zero.
    (f) Reduction for liabilities--(1) General rule. For purposes of 
section 301(b)(2), no reduction in the amount of a distribution shall 
be made for the amount of any liability, except to the

[[Page 11266]]

extent the liability is assumed by the shareholder within the meaning 
of section 357(d).
    (2) No reduction below zero. Any reduction pursuant to paragraph 
(f)(1) of this section shall not cause the amount of the distribution 
to be reduced below zero.
    (3) Effective dates--(i) In general. This paragraph (f) applies to 
distributions occurring after January 4, 2001.
    (ii) Retroactive application. This paragraph (f) also applies to 
distributions made on or before January 4, 2001, if the distribution is 
made as part of a transaction described in, or substantially similar 
to, the transaction in Notice 99-59 (1999-2 C.B. 761), including 
transactions designed to reduce gain (see Sec.  601.601(d)(2) of this 
chapter). For rules for distributions on or before January 4, 2001 
(other than distributions on or before that date to which this 
paragraph (f) applies), see rules in effect on January 4, 2001 (see 
Sec.  1.301-1(g) as contained in 26 CFR part 1 revised April 1, 2001).
    (g) Basis. The basis of property received in a distribution to 
which section 301 applies shall be the fair market value of such 
property. See paragraph (b) of this section.
    (h) Transfers for less than fair market value. If property is 
transferred by a corporation to a shareholder for an amount less than 
its fair market value in a sale or exchange, such shareholder shall be 
treated as having received a distribution to which section 301 applies. 
In such case, the amount of the distribution shall be the excess of the 
fair market value of the property over the amount paid for such 
property at the time of the transfer. For example, on January 3, 2019, 
A, a shareholder of Corporation X, purchased property from X for $20. 
The fair market value of such property on January 3, 2019 was $100. The 
amount of the distribution to A determined under section 301(b) is $80.
    (i) [Reserved]
    (j) Transactions treated as distributions. A distribution to 
shareholders with respect to their stock is within the terms of section 
301 although it takes place at the same time as another transaction if 
the distribution is in substance a separate transaction whether or not 
connected in a formal sense. This is most likely to occur in the case 
of a recapitalization, a reincorporation, or a merger of a corporation 
with a newly organized corporation having substantially no property. 
For example, if a corporation having only common stock outstanding, 
exchanges one share of newly issued common stock and one bond in the 
principal amount of $10 for each share of outstanding common stock, the 
distribution of the bonds will be a distribution of property (to the 
extent of their fair market value) to which section 301 applies, even 
though the exchange of common stock for common stock may be pursuant to 
a plan of reorganization under the terms of section 368(a)(1)(E) 
(recapitalization) and even though the exchange of common stock for 
common stock may be tax free by virtue of section 354.
    (k) Cancellation of indebtedness. The cancellation of indebtedness 
of a shareholder by a corporation shall be treated as a distribution of 
property.
    (l) Cross references. For certain rules relating to adjustments to 
earnings and profits and for determining the extent to which a 
distribution is a dividend, see sections 312 and 316 and regulations 
thereunder.
    (m) Split-dollar and other life insurance arrangements--(1) Split-
dollar life insurance arrangements--(i) Distribution of economic 
benefits. The provision by a corporation to its shareholder pursuant to 
a split-dollar life insurance arrangement, as defined in Sec.  1.61-
22(b)(1) or (2), of economic benefits described in Sec.  1.61-22(d) or 
of amounts described in Sec.  1.61-22(e) is treated as a distribution 
of property, the amount of which is determined under Sec.  1.61-22(d) 
and (e), respectively.
    (ii) Distribution of entire contract or undivided interest therein. 
A transfer (within the meaning of Sec.  1.61-22(c)(3)) of the ownership 
of a life insurance contract (or an undivided interest therein) that is 
part of a split-dollar life insurance arrangement is a distribution of 
property, the amount of which is determined pursuant to Sec.  1.61-
22(g)(1) and (2).
    (2) Other life insurance arrangements. A payment by a corporation 
on behalf of a shareholder of premiums on a life insurance contract or 
an undivided interest therein that is owned by the shareholder 
constitutes a distribution of property, even if such payment is not 
part of a split-dollar life insurance arrangement under Sec.  1.61-
22(b).
    (3) When distribution is made--(i) In general. Except as provided 
in paragraph (m)(3)(ii) of this section, paragraph (c) of this section 
shall apply to determine when a distribution described in paragraph 
(m)(1) or (2) of this section is taken into account by a shareholder.
    (ii) Exception. Notwithstanding paragraph (c) of this section, a 
distribution described in paragraph (m)(1)(ii) of this section shall be 
treated as made by a corporation to its shareholder at the time that 
the life insurance contract, or an undivided interest therein, is 
transferred (within the meaning of Sec.  1.61-22(c)(3)) to the 
shareholder.
    (4) Effective date--(i) General rule. This paragraph (m) applies to 
split-dollar and other life insurance arrangements entered into after 
September 17, 2003. For purposes of this paragraph (m)(4), a split-
dollar life insurance arrangement is entered into as determined under 
Sec.  1.61-22(j)(1)(ii).
    (ii) Modified arrangements treated as new arrangements. If a split-
dollar life insurance arrangement entered into on or before September 
17, 2003 is materially modified (within the meaning of Sec.  1.61-
22(j)(2)) after September 17, 2003, the arrangement is treated as a new 
arrangement entered into on the date of the modification.
    (n) Applicability date. Paragraphs (a) through (c), (e), (g), and 
(h) of this section apply to distributions under section 301 made after 
the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register.
0
Par. 3. Section 1.356-1 is amended by revising paragraph (f) to read as 
follows:


Sec.  1.356-1   Receipt of additional consideration in connection with 
an exchange.

* * * * *
    (f) See Sec.  1.301-1(j) for certain transactions which are not 
within the scope of section 356.
* * * * *
0
Par. 4. Section 1.368-2 is amended by revising the last sentence of 
paragraph (m)(3)(iii) to read as follows:


Sec.  1.368-2  Definition of terms.

* * * * *
    (m) * * *
    (3) * * *
    (iii) * * * See Sec.  1.301-1(j).
* * * * *


Sec.  1.902-1(a)(12)  [Amended]

0
Par. 5. In Sec.  1.902-1(a)(12), remove the reference ``Sec.  1.301-
1(b)'' and add in its place ``Sec.  1.301-1(c)''.


Sec.  1.902-3(a)(7)   [Amended]

0
Par. 6. In Sec.  1.902-3(a)(7), remove the reference ``Sec.  1.301-
1(b)'' and add in its place ``Sec.  1.301-1(c)''.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-05649 Filed 3-25-19; 8:45 am]
 BILLING CODE 4830-01-P