Certain Transfers of Property to Regulated Investment Companies [RICs] and Real Estate Investment Trusts [REITs], 26559-26565 [2019-11753]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 110 (Friday, June 7, 2019)]
[Rules and Regulations]
[Pages 26559-26565]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11753]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9862]
RIN 1545-BO01


Certain Transfers of Property to Regulated Investment Companies 
[RICs] and Real Estate Investment Trusts [REITs]

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations effecting the repeal 
of the General Utilities doctrine by the Tax Reform Act of 1986 and 
preventing abuse of the Protecting Americans from Tax Hikes Act of 2015 
(PATH Act). The final regulations impose corporate-level tax on certain 
transactions in which property of a C corporation becomes the property 
of a REIT. The final regulations affect RICs, REITs, C corporations the 
property of which becomes the property of a RIC or a REIT, and their 
shareholders.

DATES: Effective Date: These regulations are effective on June 7, 2019.
    Applicability Dates: For dates of applicability, see Sec.  
1.337(d)-7(g)(2)(ii).

FOR FURTHER INFORMATION CONTACT: Austin Diamond-Jones, (202) 317-5363 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
337(d) of the Internal Revenue Code (Code).
    In General Utilities & Operating Co. v. Helvering, 296 U.S. 200 
(1935), the Supreme Court held that corporations generally could 
distribute appreciated property to their shareholders without the 
recognition of any corporate-level gain (General Utilities doctrine). 
Beginning with legislation in 1969 and culminating in the Tax Reform 
Act of 1986, Public Law 99-514 (100 Stat. 2085), Congress repealed the 
General Utilities doctrine by enacting section 336(a) to apply gain and 
loss recognition

[[Page 26560]]

to liquidating distributions. Section 337(d) directs the Secretary of 
the Treasury (Secretary) to prescribe regulations that are necessary or 
appropriate to carry out the purposes of General Utilities repeal, 
including ``regulations to ensure that such purposes may not be 
circumvented through the use of any provision of law or regulations 
(including . . . part III of this subchapter) or through the use of a 
regulated investment company, real estate investment trust, or tax 
exempt entity. . . .''
    On June 8, 2016, the Department of the Treasury (Treasury 
Department) and the IRS published temporary regulations (TD 9770) under 
section 337(d) (Temporary Regulations) in the Federal Register (81 FR 
36793) effecting the repeal of the General Utilities doctrine as 
applied to certain transfers of property to RICs and REITs. A notice of 
proposed rulemaking (REG-126452-15) was published in the Federal 
Register (81 FR 36816) on the same day (2016 Proposed Regulations). The 
text of the Temporary Regulations served as the text for part of the 
2016 Proposed Regulations, which also included an amendment not 
included in the Temporary Regulations. A correction to the Temporary 
Regulations was published in the Federal Register (81 FR 41800) on June 
28, 2016.
    In response to the 2016 Proposed Regulations, the Treasury 
Department and the IRS received one written comment and a letter 
addressed to the Secretary by the Chairmen and Ranking Members of the 
Ways and Means Committee of the U.S. House of Representatives and the 
Finance Committee of the U.S. Senate (Letter). The comment requested a 
public hearing, which was held on November 9, 2016.
    After consideration of the written comment, the Letter, and 
comments made at the public hearing, the Treasury Department and the 
IRS adopted the 2016 Proposed Regulations, in part, in final 
regulations (TD 9810) published in the Federal Register (82 FR 5387) on 
January 18, 2017 (2017 Final Regulations). The 2017 Final Regulations 
adopted a definition of the term ``recognition period'' consistent with 
the definition used in section 1374(d), regarding S corporations, and 
amended and removed corresponding provisions in the Temporary 
Regulations. The preamble to the 2017 Final Regulations indicated that 
the Treasury Department and the IRS would continue to study other 
issues addressed in the Temporary Regulations and the 2016 Proposed 
Regulations.
    Executive Order 13789 (E.O. 13789), issued on April 21, 2017, 
instructed the Secretary to review all significant tax regulations 
issued on or after January 1, 2016, and to take concrete action to 
alleviate the burdens of regulations that (i) impose an undue financial 
burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax 
laws; or (iii) exceed the statutory authority of the IRS. E.O. 13789 
further instructed the Secretary to submit to the President within 60 
days an interim report identifying regulations that meet these 
criteria.
    Notice 2017-38 (2017-30 I.R.B. 147 (July 24, 2017)) included the 
Temporary Regulations in a list of eight regulations identified by the 
Secretary in the interim report as meeting at least one of the first 
two criteria specified in E.O. 13789. In particular, Notice 2017-38 
mentioned a concern raised by commenters that the Temporary Regulations 
``could result in over-inclusion of gain in some cases, particularly 
where a large corporation acquires a small corporation that engaged in 
a Section 355 spinoff and the large corporation subsequently makes a 
REIT election.'' See also Executive Order 13789--Second Report to the 
President on Identifying and Reducing Tax Regulatory Burdens (Second 
Report), 82 FR 48013 (October 16, 2017) (stating that the Treasury 
Department and the IRS ``agree that the temporary regulations may 
produce inappropriate results in some cases''). In response to comments 
received addressing the Temporary Regulations and the 2016 Proposed 
Regulations, the Treasury Department and the IRS published a notice of 
proposed rulemaking (REG-113943-17) addressing the potential over-
inclusion of gain in the Federal Register (84 FR 11259) on March 26, 
2019 (2019 Proposed Regulations). A correction to the 2019 Proposed 
Regulations was published in the Federal Register (84 FR 18999) on May 
3, 2019. One substantive comment was received in response to the 2019 
Proposed Regulations.

Summary of Comments and Explanation of Revisions

    This Summary of Comments and Explanation of Revisions discusses the 
comments received in response to the 2016 Proposed Regulations, Notice 
2017-38, and the 2019 Proposed Regulations. However, certain comments 
received in response to the 2016 Proposed Regulations and Notice 2017-
38 were addressed in the Explanation of Provisions in the preamble to 
the 2019 Proposed Regulations and are not repeated in this Summary of 
Comments and Explanation of Revisions.

I. Consideration of Limitation for Planned Transactions

    Under proposed Sec.  1.337(d)-7(c)(6), a C corporation described in 
paragraph (f)(1) of that section would be treated as having made an 
election under Sec.  1.337(d)-7(c)(5) (deemed sale election) with 
respect to a conversion transaction if (i) the conversion transaction 
occurs following a related section 355 distribution (as defined in 
paragraph (f)(1)(i) of that section), and (ii) the C corporation has 
not made such election (automatic deemed sale rule). Proposed Sec.  
1.337(d)-7(f)(1) would provide that the automatic deemed sale rule (or 
the corresponding rule in paragraph (b)(4) of that section) applies to 
a C corporation if (i) the C corporation engages in a conversion 
transaction involving a REIT during the twenty-year period beginning on 
the date that is ten years before the date of a related section 355 
distribution and (ii) the C corporation engaging in the related section 
355 distribution is either the distributing corporation or the 
controlled corporation (as those terms are defined in section 
355(a)(1)), or a member of the separate affiliated group (as defined in 
section 355(b)(3)(B)) (SAG) of the distributing corporation or the 
controlled corporation. A conversion transaction occurs through (i) the 
qualification of a C corporation as a RIC or a REIT, or (ii) the 
transfer of property owned by a C corporation to a RIC or a REIT. 
Section 1.337(d)-7(a)(2)(ii).
    One commenter recommended that the automatic deemed sale rule apply 
only if the conversion transaction and the related section 355 
distribution are carried out as part of the same plan. To facilitate 
the identification of such a plan, the commenter requested a two-year 
presumption rule. Under that rule, (i) a conversion transaction 
completed within two years of a related section 355 distribution would 
be presumed to have been carried out as part of a plan that included 
the related section 355 distribution, and (ii) a conversion transaction 
not completed within two years of a related section 355 distribution 
would be presumed not to have been carried out as part of such a plan. 
The commenter also recommended additional provisions similar to the 
section 355(e) safe harbor rules and the section 707(a)(2)(B) disguised 
sale rules.
    The Treasury Department and the IRS agree that the automatic deemed 
sale rule could apply to a conversion transaction and related section 
355

[[Page 26561]]

distribution carried out as part of the same plan, but they have 
determined that the text and purposes of sections 355(h) and 856(c)(8) 
do not require the existence of a plan. Those provisions, as added by 
section 311 of the PATH Act, enacted as Division Q of the Consolidated 
Appropriations Act, 2016, Public Law 114-113 (129 Stat. 2422), prevent 
the circumvention of General Utilities repeal and apply without regard 
to the existence of a plan that includes both a related section 355 
distribution and a conversion transaction. Under section 355(h), a 
distribution of the stock of a controlled corporation does not qualify 
for tax-free treatment under section 355(a) if either the distributing 
corporation or the controlled corporation (but not both) is a REIT. The 
section 856(c)(8) limitation on eligibility for REIT elections focuses 
on the ten-year period (rather than a two-year period) beginning on the 
date of a distribution to which section 355 (or so much of section 356 
as relates to section 355) applies. In addition, the Treasury 
Department and the IRS have determined that the introduction of a plan 
concept (as well as the recommended safe harbor and anti-abuse rules) 
into the automatic deemed sale rule would substantially increase the 
rule's complexity, and thereby reduce its effectiveness and 
predictability.

II. Time Period Between Conversion Transaction and Related Section 355 
Distribution

    As described in part I of this Summary of Comments and Explanation 
of Revisions, application of the automatic deemed sale rule depends in 
part on whether a C corporation engages in a conversion transaction 
involving a REIT during the twenty-year period beginning on the date 
that is ten years before the date of a related section 355 
distribution. See proposed Sec.  1.337(d)-7(c)(6). A commenter 
requested that these final regulations reduce that twenty-year period 
to a ten-year period. The commenter relied upon Sec.  1.337(d)-
7(b)(2)(iii), which incorporates the five-year recognition period 
described in section 1374(d)(7)(A) specifically for purposes of 
applying the rules of section 1374 and the regulations thereunder. The 
commenter noted that the PATH Act had reduced the ten-year period 
historically required under section 1374(d)(7)(A) to the current five-
year period, and asserted that the automatic deemed sale rule should 
employ a five-year recognition period, both before and after a related 
section 355 distribution, to maintain consistency with the recognition 
rules specific to section 1374.
    The Treasury Department and the IRS recognize the commenter's 
preference for consistency. However, they have concluded that section 
1374 treatment does not adequately implement the purposes of General 
Utilities repeal if a taxpayer effects a tax-free separation of REIT-
qualifying assets from non-qualifying assets in a section 355 
distribution and the REIT-qualifying assets become the assets of a 
REIT. See preamble to the Temporary Regulations (81 FR at 36795). As an 
example, the REIT and its shareholders may realize the benefit of 
appreciation on converted property without a transaction that is 
taxable at the corporate level. See id. at 36795-6. Moreover, without a 
section 355 distribution, a taxpayer generally could not separate REIT-
qualifying assets from non-qualifying assets and cause one corporation 
to hold the REIT-qualifying assets and another corporation to hold the 
non-qualifying assets except by means of a taxable transaction. See id. 
at 36796. Consequently, the Treasury Department and the IRS have 
concluded that a five-year recognition period provided specifically for 
section 1374 and its underlying regulations should not affect the 
length of the recognition period for the automatic deemed sale rule.
    The Treasury Department and the IRS have concluded that the ten-
year eligibility limitation regarding REIT elections under section 
856(c)(8) provides a more appropriate safeguard for General Utilities 
repeal, and supports the twenty-year recognition period in proposed 
Sec.  1.337(d)-7(f)(1)(i). In general, section 856(c)(8) provides that 
a corporation may not elect REIT status during the ten-year period 
following a distribution qualifying under section 355 if such 
corporation was the distributing corporation or the controlled 
corporation in that distribution. When describing existing law prior to 
the enactment of section 856(c)(8), the staff of the Joint Committee on 
Taxation observed that, following a section 355 distribution, ``income 
from the assets held in the REIT is no longer subject to corporate 
level tax (unless there is a disposition of such assets that incurs tax 
under the built in gain rules).'' See Staff, Joint Committee on 
Taxation, Technical Explanation of the Protecting Americans from Tax 
Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 
2029, JCX-144-15, at 170 (2015). Consequently, to ensure the continuing 
integrity of General Utilities repeal, the Treasury Department and the 
IRS have concluded that the twenty-year period described in proposed 
Sec.  1.337(d)-7(f)(1)(i) would provide a more appropriate recognition 
period.

III. Application of Automatic Deemed Sale Rule to Predecessors and 
Successors

    Proposed Sec.  1.337(d)-7(f)(2) would provide that, for purposes of 
identifying C corporations to which the automatic deemed sale rule 
could apply, ``any reference to a controlled corporation or a 
distributing corporation includes a reference to any predecessor or 
successor of such corporation.'' The terms ``predecessor'' and 
``successor'' would ``include corporations which succeed to and take 
into account items described in section 381(c) of the distributing 
corporation or the controlled corporation, and corporations having such 
items to which the distributing corporation or the controlled 
corporation succeeded and took into account.'' Proposed Sec.  1.337(d)-
7(f)(2). Commenters have expressed concern that the word ``include'' 
will create uncertainty regarding the scope of the terms 
``predecessor'' and ``successor'' and consequently would cause 
difficulties in performing due diligence. As a result, these commenters 
have requested that the word ``include'' be clarified or otherwise 
limited.
    The Treasury Department and the IRS acknowledge these concerns, 
particularly those regarding due diligence burdens, but have determined 
that proposed Sec.  1.337(d)-7(f)(2) strikes an appropriate balance 
between providing sufficiently predictable application of the automatic 
deemed sale rule and preventing avoidance of that rule. The application 
of predecessor and successor concepts to distributing corporations and 
controlled corporations in the 2016 Proposed Regulations, extended to 
members of the SAGs of those corporations in the 2019 Proposed 
Regulations, limits the potential avoidance of the automatic deemed 
sale rule. The Treasury Department and the IRS have determined that the 
language of proposed Sec.  1.337(d)-7(f)(2) will provide sufficient 
certainty regarding the scope of the terms ``predecessor'' and 
``successor,'' particularly in light of the 2019 Proposed Regulations' 
policy of ensuring that gain will be recognized ``only on property that 
is traceable to the section 355 distribution.'' Preamble to 2019 
Proposed Regulations (84 FR 11261). Moreover, the distribution property 
limitation will reduce uncertainty as to the consequences of a

[[Page 26562]]

determination that a corporation is a predecessor or successor.

IV. Application to SAG Members of Distributing and Controlled 
Corporations

    One commenter contended that the 2016 Proposed Regulations should 
not apply to a member of the SAG of the distributing corporation or the 
controlled corporation because corporate-level taxation would not be 
avoided in such a situation unless the stock of the SAG member itself 
were distributed in a section 355 distribution. The Treasury Department 
and the IRS have determined that corporate-level taxation could be 
avoided regardless of whether the stock of the SAG member were 
distributed.
    As an example, a distributing corporation owns all of the stock of 
a controlled corporation, the sole assets of which consist of all of 
the stock in a subsidiary that owns only real estate assets. The 
distributing corporation distributes all of the controlled corporation 
stock in a distribution qualifying under section 355. Within ten years 
thereafter, the subsidiary elects REIT status. During the year 
following the election, the controlled corporation merges downstream 
into the subsidiary in a reorganization described in section 368(a), 
with the subsidiary surviving. Section 856(c)(8) would not apply to 
that transaction because the subsidiary was not a distributing 
corporation, a controlled corporation, or a successor to either 
corporation at the time of the REIT election (although the subsidiary 
subsequently becomes a successor to the controlled corporation as a 
result of the merger). Accordingly, the Treasury Department and the IRS 
have determined that the application of the automatic deemed sale rule 
to SAG members of the distributing corporation or a controlled 
corporation would further the intent of Congress to prevent avoidance 
of General Utilities repeal.

V. Scope of, and Exclusions to, the Automatic Deemed Sale Rule

A. Two-Year Requirement for Post-Distribution Distributing and 
Controlled REITs
    Proposed Sec.  1.337(d)-7(f)(3)(i) would preclude application of 
the automatic deemed sale rule if the distributing corporation and the 
controlled corporation are both REITs immediately after the related 
section 355 distribution and at all times during the two-year period 
thereafter. Commenters have requested the elimination of the two-year 
requirement.
    The Treasury Department and the IRS have concluded, however, that 
the two-year requirement would appropriately limit potential avoidance 
of proposed Sec.  1.337(d)-7(f)(3)(i). The two-year requirement is 
designed to protect the purposes of the PATH Act, and therefore General 
Utilities repeal, by ensuring that distributing corporations and 
controlled corporations that pursue the exception provided by section 
355(h)(2)(A) continue to operate for a substantial duration as REITs. 
The Treasury Department and the IRS acknowledge concerns raised by 
commenters regarding the risk of inadvertent terminations of REIT 
status during this initial two-year period. However, section 856 
provides opportunities for a REIT to cure an inadvertent technical 
failure to comply with that section's requirements without loss of REIT 
status. See, for example, sections 856(c)(6), (c)(7), and (g)(5) 
(election of REIT status terminates for failure to meet REIT 
requirements unless failure is due to reasonable cause and not due to 
willful neglect). Consequently, the Treasury Department and the IRS do 
not believe that the two-year requirement would cause the distributing 
corporation or the controlled corporation to recognize gain as a result 
of inadvertent noncompliance.
B. Consideration of Exclusion Involving REITs and Qualified REIT 
Subsidiaries
    A commenter requested that the automatic deemed sale rule not apply 
to certain section 355 distributions within corporate groups, after 
which the corporate parent of the distributing corporation and the 
controlled corporation elects REIT status, and the distributing 
corporation, the controlled corporation, or both become qualified REIT 
subsidiaries (QRS).
    The Treasury Department and the IRS decline to adopt this proposed 
exception to the automatic deemed sale rule based on the determination 
that such exception would create opportunities for circumventing 
General Utilities repeal. For example, a section 355 distribution of a 
controlled corporation that will be a QRS following the parent's 
election of REIT status could be used to reduce the value of the 
distributing corporation in order for such corporation to be a taxable 
REIT subsidiary following its parent's election of REIT status, even 
though, without such a reduction, the value of the distributing 
corporation would cause the parent to fail the requirement of section 
856(c)(4)(B)(ii). In addition, the Treasury Department and the IRS note 
that, if the distributing corporation or the controlled corporation had 
liquidated (or had been deemed to liquidate) prior to the parent's REIT 
election, the parent would be a successor to the liquidated corporation 
and therefore ineligible to elect REIT status as a result of section 
856(c)(8).
C. Consideration of Knowledge Standard for Automatic Deemed Sale Rule
    A commenter requested the incorporation of a knowledge standard 
into the automatic deemed sale rule. Specifically, the commenter 
recommended that the automatic deemed sale rule should not apply to a 
REIT that receives property from a C corporation if the REIT (i) 
receives a representation that the C corporation (including specified 
predecessors and SAG members) has not engaged in a related section 355 
distribution, and (ii) has no actual knowledge contrary to such 
representation. The commenter contended that, without a knowledge 
component, the level of diligence necessary to apply the automatic 
deemed sale rule could prove burdensome (for example, in situations 
that involve predecessors of SAG members or significant time lapses 
between relevant transactions). For similar reasons, the commenter 
asserted that the absence of a knowledge component could limit the 
practical utility of the distribution property limitation under 
proposed Sec.  1.337(d)-7(c)(6)(ii), which would require the REIT to 
establish through such diligence that a subject property is not 
distribution property.
    The Treasury Department and the IRS acknowledge the concerns 
expressed by the commenter, but have decided not to adopt this 
recommendation. The Treasury Department and the IRS have concluded that 
adoption of a knowledge component would reduce, rather than increase, 
certainty regarding the application of the automatic deemed sale rule 
because a knowledge component would inject subjectivity into the rule. 
Moreover, as the commenter noted, REITs ordinarily undertake extensive 
due diligence in connection with corporate transactions, such as 
mergers with C corporations, to ensure that the transaction will not 
terminate REIT status. For example, a REIT would routinely conduct an 
earnings and profits study of the C corporation. As a result, the 
Treasury Department and the IRS believe that REITs generally will 
possess adequate data to determine the appropriate tax consequences of 
a conversion transaction and make use of the distribution property 
limitation,

[[Page 26563]]

particularly because this limitation will apply on a property-by-
property basis and thereby apply even if a REIT possesses incomplete 
records. In addition, a contemporaneous documentation of property owned 
at the time of a related section 355 distribution generally will 
provide sufficient records for establishing that any property not 
listed in such documentation is not distribution property.

VI. Definition of the Term ``Converted Property''

    The 2016 Proposed Regulations would define the term ``converted 
property'' as ``property owned by a C corporation that becomes the 
property of a RIC or a REIT and any other property the basis of which 
is determined, directly or indirectly, in whole or in part, by 
reference to the basis of the property owned by a C corporation that 
becomes the property of a RIC or a REIT.'' Proposed Sec.  1.337(d)-
7(a)(2)(vii). A commenter requested that the definition be clarified to 
confirm the commenter's interpretation that the phrase ``any other 
property'' refers only to property of a RIC or a REIT. The Treasury 
Department and the IRS agree with the commenter's interpretation and 
have clarified the definition accordingly.

VII. Interaction of 2016 Proposed Regulations With Section 856(c)(8)

    A commenter inquired whether the Treasury Department or the IRS 
intended the 2016 Proposed Regulations to override section 856(c)(8) 
(described in part I of this Summary of Comments and Explanation of 
Revisions). The 2016 Proposed Regulations do not override section 
856(c)(8). Accordingly, if section 856(c)(8) would prevent a 
distributing corporation or a controlled corporation from electing REIT 
status, no gain would be recognized, absent further action (for 
example, a merger of the distributing corporation or the controlled 
corporation into a REIT).

VIII. Application of 2016 Proposed Regulations to RICs

    The Treasury Department and the IRS requested comments on whether 
the rules set forth in the 2016 Proposed Regulations (other than the 
definition of the term ``converted property'') should apply to RICs. No 
recommendations were received in response to this request. The Treasury 
Department and the IRS have not become aware of a need to extend the 
rules to RICs and therefore decline to extend such rules to RICs at 
this time.

Effective/Applicability Dates

    The 2019 proposed regulations included a proposal to issue the 
final rule with a 30-day delayed effective date. The Treasury 
Department and the IRS have concluded, however, that a 30-day delay in 
the effective date of these final regulations would be unnecessary and 
contrary to public interest. Specifically, the Treasury Department and 
the IRS have determined that any duration between the expiration of the 
Temporary Regulations and the effective date of these final regulations 
could cause significant confusion regarding the current state of the 
law. In addition, the Treasury Department and the IRS have concluded 
that the benefit of public notice ordinarily provided by such 30-day 
delay is significantly reduced in this particular instance because 
these final regulations adopt the proposed regulations without 
substantive change. In addition, the Treasury Department and the IRS 
note that these final regulations adopt the distribution property 
limitation under proposed Sec.  1.337(d)-7(c)(6)(ii), which provides an 
exception to the general automatic deemed sale rule.

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. Pursuant to the 
Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified 
that these final regulations will not have a significant economic 
impact on a substantial number of small entities. These final 
regulations would affect transactions in which property of a C 
corporation becomes the property of a REIT following a section 355 
distribution of controlled C corporation stock. Generally, these 
section 355 distributions involve publicly traded C corporations, which 
typically are not small entities as defined by the Regulatory 
Flexibility Act. Transactions in which the property of such C 
corporation becomes the property of a REIT generally involve the 
transfer of all of the assets of the C corporation. Therefore, the 
transferee REIT likely also would not be a small entity, as defined by 
the Regulatory Flexibility Act. As a result, this certification is 
based on the conclusion that these final regulations would primarily 
affect large C corporations and REITs that have substantial numbers of 
shareholders. Therefore, a regulatory flexibility analysis is not 
required. Pursuant to section 7805(f) of the Code, the proposed rule 
preceding this final regulation 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.

Drafting Information

    The principal author of these regulations is Austin Diamond-Jones, 
Office of Associate Chief Counsel (Corporate). 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 1.337(d)-7 is amended by:
0
1. Revising paragraphs (a)(1) and (a)(2)(vi) through (vii).
0
2. Adding paragraph (a)(2)(viii).
0
3. Revising paragraphs (b)(4), (c)(1) and (6), (f), and (g)(2)(ii).
    The revisions and additions read as follows:


Sec.  1.337(d)-7   Tax on property owned by a C corporation that 
becomes property of a RIC or REIT.

    (a) General rule--(1) Property owned by a C corporation that 
becomes property of a RIC or a REIT. If property owned by a C 
corporation (as defined in paragraph (a)(2)(i) of this section) becomes 
the property of a RIC or a REIT in a conversion transaction (as defined 
in paragraph (a)(2)(ii) of this section), then section 1374 treatment 
will apply as described in paragraph (b) of this section, unless the C 
corporation elects, or is treated as electing, deemed sale treatment 
with respect to the conversion transaction as provided in paragraph (c) 
of this section. See paragraph (d) of this section for exceptions to 
this paragraph (a).
    (2) * * *
    (vi) Section 355 distribution. The term section 355 distribution 
means any distribution to which section 355 (or so much of section 356 
as relates to section 355) applies, including a distribution on which 
the distributing corporation

[[Page 26564]]

recognizes gain pursuant to sections 355(d) or 355(e).
    (vii) Converted property. The term converted property means--
    (A) Property owned by a C corporation that becomes the property of 
a RIC or a REIT; and
    (B) Any other property of a RIC or a REIT the basis of which is 
determined, directly or indirectly, in whole or in part, by reference 
to the basis of property described in paragraph (a)(2)(vii)(A) of this 
section.
    (viii) Distribution property. The term distribution property 
means--
    (A) Property owned immediately after a section 355 distribution by 
the distributing corporation, a controlled corporation (as those terms 
are defined in section 355(a)(1)), or a member of a separate affiliated 
group (as defined in section 355(b)(3)(B)) of which the distributing 
corporation or a controlled corporation is the common parent (but no 
formulation of the step transaction doctrine will be used to determine 
whether property acquired after the distribution is distribution 
property pursuant to this paragraph (a)(2)(viii)(A)); and
    (B) Property with a basis determined, directly or indirectly, in 
whole or in part, by reference to property described in paragraph 
(a)(2)(viii)(A) of this section.
    (b) * * *
    (4) Section 355 distribution following a conversion transaction--
(i) In general. If a REIT is described in paragraph (f)(1) of this 
section and the related section 355 distribution (as defined in 
paragraph (f)(1)(i) of this section) follows a conversion transaction, 
then for the taxable year in which the related section 355 distribution 
occurs, Sec.  1.1374-2(a)(1) and (2) (as modified by paragraph 
(b)(2)(i) of this section) do not apply, and the REIT's net recognized 
built-in gain for such taxable year is the amount of its net unrealized 
built-in gain limitation (as defined in Sec.  1.1374-2(a)(3)) for such 
taxable year.
    (ii) Basis adjustment--(A) In general. If a REIT recognizes gain 
under paragraph (b)(4)(i) of this section, the aggregate basis of the 
converted property held by the REIT at the end of the taxable year in 
which the related section 355 distribution occurs shall be increased by 
an amount equal to the amount of gain so recognized, increased by the 
amount of the REIT's recognized built-in loss for such taxable year, 
and reduced by the amount of the REIT's recognized built-in gain and 
recognized built-in gain carryover for such taxable year.
    (B) Allocation of basis increase. The aggregate increase in basis 
by reason of paragraph (b)(4)(ii)(A) of this section shall be allocated 
among the converted property in proportion to their respective built-in 
gains on the date of the conversion transaction.
* * * * *
    (c) Election of deemed sale treatment--(1) In general. Paragraph 
(b) of this section does not apply if the C corporation that qualifies 
as a RIC or a REIT or transfers property to a RIC or a REIT makes the 
election described in paragraph (c)(5) of this section or is treated as 
making such election under paragraph (c)(6) of this section, except to 
the extent permitted by paragraph (c)(6)(ii) of this section. A C 
corporation that makes, or that is treated as making, such an election 
recognizes gain and loss as if it sold the converted property to an 
unrelated party at fair market value on the deemed sale date (as 
defined in paragraph (c)(3) of this section). See paragraph (c)(4) of 
this section concerning limitations on the use of loss in computing 
gain. Paragraph (c) of this section does not apply if its application 
would result in the recognition of a net loss. For this purpose, net 
loss is the excess of aggregate losses over aggregate gains (including 
items of income), without regard to character.
* * * * *
    (6) Conversion transaction following a section 355 distribution--
(i) In general. Except as provided in paragraph (c)(6)(ii) of this 
section, a C corporation described in paragraph (f)(1) of this section 
is treated as having made the election under paragraph (c)(5) of this 
section with respect to a conversion transaction if the conversion 
transaction occurs following the related section 355 distribution (as 
defined in paragraph (f)(1)(i) of this section) and the C corporation 
has not made such an election.
    (ii) Limitation. A C corporation treated as having made the 
election under paragraph (c)(5) of this section as a result of 
paragraph (c)(6)(i) of this section is not treated as having made the 
election with respect to property that the taxpayer establishes is not 
distribution property with respect to the related section 355 
distribution. For purposes of this paragraph (c)(6)(ii), any property 
with an adjusted basis in excess of its fair market value as of the 
date of the conversion transaction will not be treated as distribution 
property unless the taxpayer establishes that it owned such asset 
immediately after the related section 355 distribution. Paragraph (b) 
of this section will apply to property with respect to which the 
taxpayer is not treated as having made the election under paragraph 
(c)(5) of this section as a result of this paragraph (c)(6)(ii).
* * * * *
    (f) Conversion transaction preceding or following a section 355 
distribution--(1) In general. A C corporation or a REIT is described in 
this paragraph (f)(1) if--
    (i) The C corporation or the REIT engages in a conversion 
transaction involving a REIT during the twenty-year period beginning on 
the date that is ten years before the date of a section 355 
distribution (the related section 355 distribution); and
    (ii) The C corporation or the REIT engaging in the related section 
355 distribution is either--
    (A) The distributing corporation or the controlled corporation, as 
those terms are defined in section 355(a)(1); or
    (B) A member of the separate affiliated group (as defined in 
section 355(b)(3)(B)) of the distributing corporation or the controlled 
corporation.
    (2) Predecessors and successors. For purposes of this paragraph 
(f), any reference to a controlled corporation, a distributing 
corporation, or a member of the separate affiliated group of a 
distributing corporation or a controlled corporation includes a 
reference to any predecessor or successor of such corporation. 
Successors include corporations which succeed to and take into account 
items described in section 381(c) of the distributing corporation or 
the controlled corporation. Predecessors include corporations having 
such items to which the distributing corporation or the controlled 
corporation succeeded and took into account.
    (3) Exclusion of certain conversion transactions. A C corporation 
or a REIT is not described in paragraph (f)(1) of this section if--
    (i) The distributing corporation and the controlled corporation are 
both REITs immediately after the related section 355 distribution 
(including by reason of elections under section 856(c)(1) made after 
the related section 355 distribution that are effective before the 
related section 355 distribution) and at all times during the two years 
thereafter;
    (ii) Section 355(h)(1) does not apply to the related section 355 
distribution by reason of section 355(h)(2)(B); or
    (iii) The related section 355 distribution occurred before December 
7, 2015, or is described in a ruling request referred to in section 
311(c) of Division Q of the Consolidated Appropriations Act, 2016, 
Public Law 114-113, 129 Stat. 2422.
    (g) * * *

[[Page 26565]]

    (2) * * *
    (ii) Conversion transactions occurring on or after June 7, 2019, 
and certain prior conversion transactions. Paragraphs (a)(1), 
(a)(2)(vi), (vii), and (viii), (b)(4), (c)(1) and (6), and (f) of this 
section apply to conversion transactions occurring on or after June 7, 
2019, and to conversion transactions and related section 355 
distributions for which the conversion transaction occurs before, and 
the related section 355 distribution occurs on or after, June 7, 2019. 
For conversion transactions that occurred on or after June 7, 2016, and 
before June 7, 2019 (other than conversion transactions and related 
section 355 distributions for which the conversion transaction occurs 
before, and the related section 355 distribution occurs on or after, 
June 7, 2019), see Sec. Sec.  1.337(d)-7 and 1.337(d)-7T as contained 
in 26 CFR part 1 in effect on April 1, 2019.
* * * * *


Sec.  1.337(d)-7T   [Removed]

0
Par. 3. Section 1.337(d)-7T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: May 29, 2019.

David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-11753 Filed 6-3-19; 4:15 pm]
 BILLING CODE 4830-01-P