| Treasury Decision 9236 |
January 30, 2006 |
Section 1374 Effective Dates
Internal Revenue Service (IRS), Treasury.
This document contains final regulations that provide guidance concerning
the applicability of section 1374 of the Internal Revenue Code to S corporations
that acquire assets in carryover basis transactions from C corporations on
or after December 27, 1994, and to certain corporations that terminate S corporation
status and later elect again to become S corporations.
Effective Date: These regulations are effective
December 21, 2005.
Applicability Dates: Section 1.1374-8 applies to
any transaction described in section 1374(d)(8) that occurs on or after December
27, 1994. Section 1.1374-10 applies for taxable years beginning after December
22, 2004.
FOR FURTHER INFORMATION CONTACT:
Stephen R. Cleary, (202) 622-7750, (not a toll-free number).
SUPPLEMENTARY INFORMATION:
This document contains amendments to 26 CFR Part 1. On December 22,
2004, temporary regulations (T.D. 9170, 2005-4 I.R.B. 363) regarding the applicability
of section 1374 to S corporations that acquire assets in certain carryover
basis transactions and to certain corporations that terminate S corporation
status and later elect again to become S corporations were published in the Federal Register (69 FR 76612). A notice of proposed
rule-making (REG-139683-04, 2005-4 I.R.B. 371) cross-referencing the temporary
regulations was published in the Federal Register for
the same day (69 FR 76635). The temporary regulations provide that (1) section
1374(d)(8) applies to any transaction described in that section that occurs
on or after December 27, 1994, regardless of the date of the S corporation’s
election under section 1362, and (2) for purposes of section 633(d)(8) of
the Tax Reform Act of 1986, as amended by the Technical and Miscellaneous
Revenue Act of 1988, a corporation’s most recent S election, not an
earlier election that has been revoked or terminated, determines whether or
not it is subject to current section 1374.
No comments were received responding to the notice of proposed rulemaking,
and no public hearing was requested or held. The proposed regulations are
adopted with no substantive change by this Treasury decision, and the corresponding
temporary regulations are removed.
It has been determined that this regulation is not a significant regulatory
action as defined in Executive Order 12866. Therefore, a regulatory assessment
is not required. It also has been determined that section 553(b) and (d)
of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
§1.1374-8(a)(2) of these regulations. With respect to §1.1374-10(c)
of these regulations, it has been determined, pursuant to 5 U.S.C. 553(d)(3),
that good cause exists to dispense with a delayed effective date. This section,
which is substantively identical to currently effective temporary regulations,
merely continues to provide necessary guidance to taxpayers with respect to
the application of the transition rule regarding qualified corporations in
section 633(d)(8) of TRA, as amended by TAMRA, and, accordingly, with respect
to the application of section 1374 to asset dispositions which occur during
taxable years beginning after December 22, 2004. Because §1.1374-8(a)(2)
does not impose a collection of information on small entities, it is not subject
to the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6).
It is hereby certified that §1.1374-10(c) of these regulations will
not have a significant economic impact on a substantial number of small entities.
This certification is based on the fact that §1.1374-10(c) of these
regulations addresses an uncommon fact situation not likely to affect a significant
number of small entities. Therefore, a regulatory flexibility analysis is
not required. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these final regulations was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its impact
on small business.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1374-8 also issued under 26 U.S.C 337(d) and 1374(e).* * *
Section 1.1374-10 also issued under 26 U.S.C. 337(d) and 1374(e).* *
*
Par. 2. Section 1.1374-0 is amended by revising the entries for §1.1374-8
and adding an entry for §1.1374-10(c) to read as follows:
§1.1374-0 Table of contents.
* * * * *
§1.1374-8 Section 1374(d)(8) transactions.
(a) In general.
(b) Effective date of section 1374(d)(8).
(c) Separate determination of tax.
(d) Taxable income limitation.
(e) Examples.
* * * * *
§1.1374-10 Effective date and additional rules.
* * * * *
(c) Revocation and re-election of S corporation status.
(1) In general.
(2) Example.
Par. 3. Section 1.1374-8 is amended by:
1. Redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d),
and (e), respectively.
2. Revising paragraph (a).
3. Adding new paragraph (b).
The revision and addition read as follows:
§1.1374-8 Section 1374(d)(8) transactions.
(a) In general. If any S corporation acquires
any asset in a transaction in which the S corporation’s basis in the
asset is determined (in whole or in part) by reference to a C corporation’s
basis in the assets (or any other property) (a section 1374(d)(8) transaction),
section 1374 applies to the net recognized built-in gain attributable to the
assets acquired in any section 1374(d)(8) transaction.
(b) Effective date of section 1374(d)(8). Section
1374(d)(8) applies to any section 1374(d)(8) transaction, as defined in paragraph
(a)(1) of this section, that occurs on or after December 27, 1994, without
regard to the date of the corporation’s election to be an S corporation
under section 1362.
* * * * *
Par. 4. Section 1.1374-8T is removed.
Par. 5. Section 1.1374-10 is amended by revising paragraph (c) to read
as follows:
§1.1374-10 Effective date and additional rules.
* * * * *
(c) Termination and re-election of S corporation status—(1) In
general. For purposes of section 633(d)(8) of the Tax Reform Act
of 1986, as amended, any reference to an election to be an S corporation under
section 1362 shall be treated as a reference to the corporation’s most
recent election to be an S corporation under section 1362. This paragraph
(c) applies for taxable years beginning after December 22, 2004, without regard
to the date of the corporation’s most recent election to be an S corporation
under section 1362.
(2) Example. The following example illustrates
the rules of this paragraph (c):
Example. (i) Effective January 1, 1988, X, a C
corporation that is a qualified corporation under section 633(d) of the Tax
Reform Act of 1986, as amended, elects to be an S corporation under section
1362. Effective January 1, 1990, X revokes its S status and becomes a C corporation.
On January 1, 2004, X again elects to be an S corporation under section 1362.
X disposes of assets in 2006, 2007, and 2008, recognizing gain.
(ii) X is not eligible for treatment under the transition rule of section
633(d)(8) of the Tax Reform Act of 1986, as amended, with respect to these
assets. Accordingly, X is subject to section 1374, as amended by the Tax
Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988,
and the 10-year recognition period begins on January 1, 2004.
(iii) To the extent the gain that X recognizes on the asset sales in
2006, 2007, and 2008 reflects built-in gain inherent in such assets in X’s
hands on January 1, 2004, such gain is subject to tax under section 1374 as
amended by the Tax Reform Act of 1986 and the Technical and Miscellaneous
Revenue Act of 1988.
Par. 6. Section 1.1374-10T is removed.
Mark E. Matthews,
Deputy
Commissioner for
Services and Enforcement.
Approved December 9, 2005.
Eric Solomon,
Acting
Deputy Assistant
Secretary of the Treasury (Tax Policy).
Note
(Filed by the Office of the Federal Register on December 20, 2005, 8:45
a.m., and published in the issue of the Federal Register for December 21,
2005, 70 F.R. 75730)
The principal author of these regulations is Stephen R. Cleary of the
Office of Associate Chief Counsel (Corporate). Other personnel from Treasury
and the IRS participated in their development.
* * * * *
Internal Revenue Bulletin 2006-05
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