Treatment of Distributions of Property From a Corporation to a Shareholder, 52612-52614 [2021-19980]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 86, Number 181 (Wednesday, September 22, 2021)]
[Rules and Regulations]
[Pages 52612-52614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19980]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9954]
RIN 1545-BN80


Treatment of Distributions of Property From a Corporation to a 
Shareholder

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 301 of 
the Internal Revenue Code of 1986 (Code). These regulations 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 regulations affect shareholders that receive 
a distribution of property from a corporation.

DATES: 
    Effective date: These regulations are effective on September 22, 
2021.
    Applicability date: For dates of applicability, see Sec.  1.301-
1(f)(3), (m)(4), and (n).

FOR FURTHER INFORMATION CONTACT: Grid R. Glyer, (202) 317-6847 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    This document contains amendments to 26 CFR part 1 under section 
301 of the Code relating to the treatment of distributions of property 
from a corporation to a shareholder. 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 1006(e)(10) and (e)(11) of the Technical and Miscellaneous 
Revenue Act of 1988, Public Law 100-647, 102 Stat. 3342 (1988) (Act), 
amended section 301(b)(1) and (d), respectively (such amendments, 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). Accordingly, the 
1988 Amendments generally are effective for taxable years beginning 
after December 31, 1986.
    As a result of the 1988 Amendments, section 301(b)(1) provides 
that, for purposes of section 301, the amount of any distribution is 
the amount of money received plus the fair market value of the other 
property received. Section 301(d) provides that the basis of property 
received in a distribution to which section 301(a) applies is 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.
    A notice of proposed rulemaking (REG-121694-16) published in the 
Federal Register on March 26, 2019 (84 FR 11263) proposed to amend 
Sec.  1.301-1 to reflect the 1988 Amendments (2019 proposed 
regulations). The scope of the 2019 proposed regulations was limited to 
(1) deleting provisions made obsolete by statutory changes, (2) making 
minor additions and revisions to reflect current statutory text, and 
(3) making certain non-substantive changes for purposes of clarity and 
readability, including reordering and redesignating paragraphs. The 
2019 proposed regulations also amended 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. For further discussion of the changes proposed to be 
made to Sec.  1.301-1 by the 2019 proposed

[[Page 52613]]

regulations, see the Explanation of Provisions section in the preamble 
to the 2019 proposed regulations at 84 FR 11264.
    The Department of the Treasury (Treasury Department) and the IRS 
received no comments on the 2019 proposed regulations, and no public 
hearing was requested or held. This document adopts the 2019 proposed 
regulations as final regulations with no substantive changes and with 
certain non-substantive changes for purposes of clarity and 
readability.

Applicability Date

    The final regulations apply to distributions made after September 
22, 2021. However, these regulations update the previous regulations 
under section 301 to reflect statutory changes made by the 1988 
Amendments, which 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 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 
within the meaning of section 601(6) of the Regulatory Flexibility Act. 
The Treasury Department and the IRS have determined that no additional 
burden will be associated with these final regulations. Therefore, a 
regulatory flexibility analysis is not required. Accordingly, the 
Secretary's delegate certifies that these regulations will not have a 
significant economic impact on a substantial number of small entities.
    Pursuant to section 7805(f), the notice of proposed rulemaking 
preceding this regulation has been submitted to the Chief Counsel for 
the Office of Advocacy of the Small Business Administration for comment 
on its impact on small business. No comments were received from the 
Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is 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 the 
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). 
Except as otherwise provided in chapter 1 of the Internal Revenue Code 
(Code), such distributions are 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 reduces the adjusted basis of the 
stock, treated as gain from the sale or exchange of property, or exempt 
from Federal income tax in the case of certain distributions out of 
increase in value accrued before March 1, 1913. The amount of a 
distribution 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 the fair market value 
of the property, as provided in section 301(d).
    (b) Amount of distribution and determination of fair market value. 
The amount of a distribution to which section 301 applies is 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 is 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 is 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, 
2021, that is received by, or unqualifiedly made subject to the demands 
of, its shareholders on January 3, 2022, the amount to be included in 
the gross income of the shareholders will be the fair market value of 
such property on December 30, 2021, determined under paragraph (b) of 
this section, although such amount will not be includible in the gross 
income of the shareholders until January 3, 2022.
    (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, 2021, A, an individual, owned all of the stock of 
Corporation M, consisting of a single share with an adjusted basis of 
$2,000. During 2021, 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, 2020, Corporation M had accumulated 
earnings and profits in the amount of $26,000, and it had no earnings 
and profits and no deficit for 2021. Of the $30,000 received by A, 
$26,000 is treated as an ordinary dividend; of the remaining $4,000, 
$2,000 is applied against and reduces the adjusted basis of A's stock 
under section 301(c)(2), and the $2,000 in excess of the adjusted basis 
of A's stock is treated as gain from the sale or exchange of property 
under section 301(c)(3)(A). If A immediately sells the 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 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).
    (2) No reduction below zero. Any reduction pursuant to paragraph 
(f)(1) of this section does not cause the amount of the distribution to 
be reduced below zero.
    (3) Applicability dates--(i) In general. This paragraph (f) applies 
to distributions occurring after January 4, 2001.

[[Page 52614]]

    (ii) Retroactive application. For distributions made on or before 
January 4, 2001, see Sec.  1.301-1(g) as contained in 26 CFR part 1 
revised April 1, 2021.
    (g) Basis. The basis of property received in a distribution to 
which section 301 applies is 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 is 
treated as having received a distribution to which section 301 applies. 
In such case, the amount of the distribution is 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, 2021, A, a 
shareholder of Corporation X, purchased property from X for $20 when 
the fair market value of such property 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 situation 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 with a principal amount of $10 for each share of 
outstanding common stock, the distribution of the bond will be a 
distribution of property (to the extent of its 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 may result in the 
shareholder not recognizing any gain or loss on the exchange by reason 
of section 354.
    (k) Cancellation of indebtedness. The cancellation of indebtedness 
of a shareholder by a corporation is 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 of the Code and 
the regulations in this part under sections 312 and 316.
    (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 
applies 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 is 
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) Applicability 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 
September 22, 2021.

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 that 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  [Amended]

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


Sec.  1.902-3  [Amended]

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

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
    Approved: August 18, 2021.
Mark J. Mazur,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-19980 Filed 9-21-21; 8:45 am]
BILLING CODE 4830-01-P