[Federal Register Volume 78, Number 149 (Friday, August 2, 2013)]
[Rules and Regulations]
[Pages 46805-46807]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-18695]



[[Page 46805]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9626]
RIN 1545-BI84


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 337(d) 
of the Internal Revenue Code. These regulations provide guidance 
concerning certain transfers of property from a C corporation to a 
Regulated Investment Company (RIC) or a Real Estate Investment Trust 
(REIT). These regulations will affect the parties to such transactions.

DATES: Effective Date: These regulations are effective on August 2, 
2013.
    Applicability Date: For date of applicability, see Sec.  1.337(d)-
7(f)(2).

FOR FURTHER INFORMATION CONTACT: Grid Glyer (202) 622-7530 or Maury 
Passman (202) 622-7750 with respect to the corporate issues, and David 
H. Kirk (202) 622-3060 with respect to the partnership issues (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains an amendment to 26 CFR Part 1. On April 16, 
2012, a notice of proposed rulemaking (NPRM) concerning certain 
transfers of property (converted property) from a C corporation to a 
RIC or a REIT was published in the Federal Register (REG-139991-08; 77 
FR 22516). One written comment was received and no public hearing was 
requested or held. This Treasury Decision adopts the proposed 
regulations with the changes discussed in this preamble.

Explanation and Summary of Comments

    Section 1.337(d)-7 generally provides (in paragraphs (a) and 
(b)(1)) that if property of a C corporation (the C corporation 
transferor) becomes the property of a RIC or REIT by the qualification 
of that C corporation as a RIC or REIT or by the transfer of assets of 
that C corporation to a RIC or REIT (a conversion transaction), then 
the RIC or REIT will be subject to tax on the net built-in gain in the 
converted property under the rules of section 1374 and the underlying 
regulations (the general rule). The general rule, however, does not 
apply if the C corporation transferor makes a ``deemed sale election'' 
provided for under Sec.  1.337(d)-7(c) to recognize gain and loss as if 
it sold the converted property to an unrelated person at fair market 
value.
    The NPRM proposed to amend Sec.  1.337(d)-7 to provide two 
exceptions from the general rule. First, the general rule would not 
apply to the extent that the conversion transaction qualifies for 
nonrecognition treatment under either section 1031 (relating to like-
kind exchanges) or section 1033 (relating to involuntary conversions) 
(the exchange exception). Second, a conversion transaction in which the 
C corporation that owned the converted property is a tax-exempt entity 
(within the meaning of Sec.  1.337(d)-4(c)(2)) would not be subject to 
the general rule if the tax-exempt entity would not be subject to tax 
(such as under the unrelated business income tax rules of section 511) 
on gain resulting from a deemed sale election had such an election been 
made under Sec.  1.337(d)-7(c)(5) (the tax-exempt exception).
    The commenter requested clarification regarding the application of 
the tax-exempt exception. The IRS and Treasury Department recognize 
that it may be unclear whether the tax-exempt exception applies to a 
transaction in which some of the gain resulting from a deemed sale 
election would be subject to tax if such an election were made, and 
some of the resulting gain would not be subject to tax. For example, if 
a tax-exempt entity transferred an asset to a REIT and a portion of the 
gain resulting from a deemed sale election would be subject to tax 
under section 511, it may be unclear whether the tax-exempt exception 
applies to the portion of the gain that would be exempt from tax under 
section 501(a). Under one interpretation of the proposed regulations, 
the tax-exempt exception would not apply to any of the gain, including 
the portion that would be exempt from tax under section 501(a), because 
a portion of the gain would be subject to tax under section 511.
    As noted in the NPRM, the IRS and Treasury Department believe that 
the general rule should not apply to transfers by tax-exempt entities 
to the extent that resulting gain (if any) would not be subject to tax 
under some Code provision were a deemed sale election made. 
Accordingly, the final regulations clarify that the general rule does 
not apply to a conversion transaction in which the C corporation that 
owned the converted property is a tax-exempt entity to the extent that 
gain would not be subject to tax under Title 26 of the United States 
Code if a deemed sale election were made. Thus, in the example 
described, the tax-exempt exception applies to the extent the deemed 
sale gain with respect to the converted property would be exempt from 
tax under section 501(a) because that portion of the gain would not be 
subject to tax under any Code provision had a deemed sale election been 
made. This is the case even though the tax-exempt exception does not 
apply to the extent the deemed sale gain with respect to the converted 
property would be subject to tax under section 511. This clarification 
is made in a new paragraph in Sec.  1.337(d)-7(d).
    The commenter also requested clarification that the exchange 
exception applies to certain multi-party like-kind exchanges of 
property involving intermediaries, including ``reverse like-kind 
exchanges'' in which the replacement property is acquired before the 
relinquished property is transferred. The IRS and Treasury Department 
believe that the language of the exchange exception is sufficiently 
clear and operates to exclude from the general rule any realized gain 
that is not recognized by reason of either section 1031 or 1033, 
regardless of the specific transactional form. Accordingly, the IRS and 
Treasury Department do not believe that any change to the NPRM is 
necessary on this issue.
    In addition, the commenter requested that a new exception to the 
general rule be added to address the fact pattern in which a REIT 
purchases appreciated property from a C corporation for cash or other 
consideration equal to the property's fair market value. According to 
the commenter, if the REIT does not have a continuing relationship with 
the C corporation, the REIT would have no way of knowing the extent to 
which the C corporation might not recognize any gain, whether pursuant 
to section 1031, 1033, or some other Code provision. Because the REIT's 
basis in property purchased in an arm's length transaction generally is 
its cost, the REIT should generally not have any built-in gain in the 
converted property. Thus, the commenter suggested that this fact 
pattern should never give rise to a conversion transaction.
    The IRS and Treasury Department agree with the commenter that a RIC 
or REIT that purchases property in an arm's length transaction from a C 
corporation for an amount of cash equal to the property's fair market 
value should have a cost basis equal to fair market value. Thus, if the 
RIC or REIT

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subsequently were to sell the property at a gain during the recognition 
period, the RIC or REIT should be able to establish that the gain 
recognized is not built-in gain within the meaning of section 
1374(d)(3). Accordingly, the IRS and Treasury Department do not believe 
that any change to the NPRM is necessary on this issue.
    Finally, as suggested by the commenter, a reference in Sec.  
1.337(d)-7(d)(1) of the NPRM is corrected to refer to section 
1033(a)(2) instead of section 1033(b).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. Pursuant to the Regulatory Flexibility Act 
(5 U.S.C. chapter 6), it is hereby certified that these regulations 
would not have a significant economic impact on a substantial number of 
small entities. This certification is based on the fact that these 
regulations do not create additional obligations for, or impose an 
economic impact on, small entities. Instead, these regulations provide 
an additional exception to the current regulations, and thus have a 
more limited application to all businesses, including small businesses, 
than the current regulations. Therefore, a regulatory flexibility 
analysis is not required. Pursuant to section 7805(f) of the Code, the 
proposed regulations preceding these regulations were submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business, and no comments were 
received.

Drafting Information

    The principal authors of these regulations are Grid Glyer and Maury 
Passman of the Office of Associate Chief Counsel (Corporate). Other 
personnel from the IRS and Treasury Department 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 * * *
    Section 1.337(d)-7 is also issued under 26 U.S.C. 337(d) * * *


0
Par. 2. Section 1.337(d)-7 is amended by:
0
1. Revising paragraphs (a)(2), (d)(1), (e), and (f).
0
2. Adding paragraphs (d)(3) and (d)(4).
    The revisions and addition 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) * * *
    (2) Definitions. For purposes of this section:
    (i) C corporation. The term C corporation has the meaning provided 
in section 1361(a)(2) except that the term does not include a RIC or a 
REIT.
    (ii) Conversion transaction. The term conversion transaction means 
the qualification of a C corporation as a RIC or REIT or the transfer 
of property owned by a C corporation to a RIC or REIT.
    (iii) RIC. The term RIC means a regulated investment company within 
the meaning of section 851(a).
    (iv) REIT. The term REIT means a real estate investment trust 
within the meaning of section 856(a).
    (v) S corporation. The term S corporation has the meaning provided 
in section 1361(a)(1).
* * * * *
    (d) Exceptions--(1) Gain otherwise recognized. Paragraph (a)(1) of 
this section does not apply to any conversion transaction to the extent 
that gain or loss otherwise is recognized on such conversion 
transaction by the C corporation that either qualifies as a RIC or a 
REIT or that transfers property to a RIC or REIT. See, for example, 
sections 311(b), 336(a), 351(b), 351(e), 356, 357(c), 367, 
368(a)(2)(F), 1001, 1031(b), and 1033(a)(2).
* * * * *
    (3) Special rules for like-kind exchanges and involuntary 
conversions.--(i) In general. Paragraph (a)(1) of this section does not 
apply to a conversion transaction to the extent that a C corporation 
transfers property with a built-in gain to a RIC or REIT, and the C 
corporation's gain is not recognized by reason of either section 1031 
or 1033.
    (ii) Clarification regarding exchanged property previously subject 
to section 1374 treatment. Notwithstanding paragraph (d)(3)(i) of this 
section, if, in a transaction described in paragraph (d)(3)(i) of this 
section, a RIC or REIT surrenders property that was subject to section 
1374 treatment immediately prior to the transaction, the rules of 
section 1374(d)(6) will apply to continue section 1374 treatment to the 
replacement property acquired by the RIC or REIT in the transaction.
    (iii) Examples. The rules of this paragraph (d)(3) are illustrated 
by the following examples. In each of the examples, X is a REIT, Y is a 
C corporation, and X and Y are not related.
    Example 1. Section 1031(a) exchange. (i) Facts. X owned a 
building that it leased for commercial use (Property A). Y owned a 
building leased for commercial use (Property B). On January 1, Year 
3, Y transferred Property B to X in exchange for Property A in a 
nonrecognition transaction under section 1031(a). Immediately before 
the exchange, Properties A and B each had a value of $100, X had an 
adjusted basis of $60 in Property A, Y had an adjusted basis of $70 
in Property B, and X was not subject to section 1374 treatment with 
respect to Property A.
    (ii) Analysis. The transfer of property (Property B) by Y (a C 
corporation) to X (a REIT) is a conversion transaction within the 
meaning of paragraph (a)(2)(ii) of this section. The conversion 
transaction is a nonrecognition transaction under section 1031(a) as 
to Y; thus, Y does not recognize any of its $30 gain. Therefore, the 
conversion transaction is not subject to paragraph (a)(1) of this 
section by reason of paragraph (d)(3)(i) of this section.
    Example 2. Section 1031(a) exchange of section 1374 property. 
(i) Facts. The facts are the same as in Example 1, except that X had 
acquired Property A in a conversion transaction in Year 2, and 
immediately before the Year 3 exchange X was subject to section 1374 
treatment with respect to $25 of net built-in gain in Property A.
    (ii) Analysis. The Year 3 transfer of Property B by Y to X is a 
conversion transaction within the meaning of paragraph (a)(2)(ii) of 
this section. The conversion transaction is a nonrecognition 
transaction under section 1031(a) as to Y; thus, Y does not 
recognize any of its $30 gain. Therefore, the Year 3 transfer is not 
subject to paragraph (a)(1) of this section by reason of paragraph 
(d)(3)(i) of this section. However, X had been subject to section 
1374 treatment with respect to $25 of net built-in gain in Property 
A immediately before the Year 3 transfer, and X's basis in Property 
B is determined (in whole or in part) by reference to its adjusted 
basis in Property A. Accordingly, the rules of section 1374(d)(6) 
apply and X is subject to section 1374 treatment on Property B with 
respect to the $25 net built-in gain. See paragraph (d)(3)(ii) of 
this section.
    Example 3. Section 1031(b) exchange. (i) Facts. The facts are 
the same as in Example 1, except that immediately before the Year 3 
exchange Property A had a value of $92, and X transferred Property A 
and $8 to Y in exchange for Property B in a nonrecognition 
transaction under section 1031(b).
    (ii) Analysis. The transfer of Property B by Y to X is a 
conversion transaction within the meaning of paragraph (a)(2)(ii) of 
this section. Pursuant to section 1031(b), Y recognizes $8 of its 
gain. Paragraph (a)(1) of this section does not apply to the 
transaction to the

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extent of the $8 gain recognized by Y by reason of paragraph (d)(1) 
of this section, or to the extent of the $22 gain realized but not 
recognized by Y by reason of paragraph (d)(3)(i) of this section.
    Example 4. Section 1033(a) involuntary conversion of property 
held by a C corporation transferor. (i) Facts. Y owned uninsured, 
improved property (Property 1) that was involuntarily converted 
(within the meaning of section 1033(a)) in a fire. Y sold Property 1 
for $100 to X, which owned an adjacent property and wanted Property 
1 for use as a parking lot. Y had a $70 basis in Property 1 
immediately before the sale. Y elected to defer gain recognition 
under section 1033(a)(2), and purchased qualifying replacement 
property (Property 2) for $100 from an unrelated party prior to the 
expiration of the period described in section 1033(a)(2)(B).
    (ii) Analysis. The transfer of Property 1 by Y to X is a 
conversion transaction within the meaning of paragraph (a)(2)(ii) of 
this section. The conversion transaction (combined with Y's purchase 
of Property 2) is a nonrecognition transaction under section 1033(a) 
as to Y; thus, Y does not recognize any of its $30 gain. Therefore, 
the conversion transaction is not subject to paragraph (a)(1) of 
this section by reason of paragraph (d)(3)(i) of this section.
    Example 5. Section 1033(a) involuntary conversion of property 
held by a REIT. (i) Facts. X owned property (Property 1). On January 
1, Year 2, Property 1 had a fair market value of $100 and a basis of 
$70, and X was not subject to section 1374 treatment with respect to 
Property 1. On that date, when Property 1 was under a threat of 
condemnation, X sold Property 1 to an unrelated party for $100 
(First Transaction). X elected to defer gain recognition under 
section 1033(a)(2), and purchased qualifying replacement property 
(Property 2) for $100 from Y (Second Transaction) prior to the 
expiration of the period described in section 1033(a)(2)(B).
    (ii) Analysis. The transfer of Property 2 by Y to X in the 
Second Transaction is a conversion transaction within the meaning of 
paragraph (a)(2)(ii) of this section. The Second Transaction 
(combined with the First Transaction) is a nonrecognition 
transaction under section 1033(a) as to X, but not as to Y. Assume 
no nonrecognition provision applied to Y; thus, Y recognized gain or 
loss on its sale of Property 2 in the Second Transaction, and the 
Second Transaction is not subject to paragraph (a)(1) of this 
section by reason of paragraph (d)(1) of this section.

    (4) Special rule if C corporation is a tax-exempt entity. Paragraph 
(a)(1) of this section does not apply to a conversion transaction in 
which the C corporation that owned the converted property is a tax-
exempt entity described in Sec.  1.337(d)-4(c)(2) to the extent that 
gain (if any) would not be subject to tax under Title 26 of the United 
States Code if a deemed sale election under paragraph (c)(5) of this 
section were made.
    (e) Special rule for partnerships--(1) In general. The principles 
of this section apply to property transferred by a partnership to a RIC 
or REIT to the extent of any gain or loss in the converted property 
that would be allocated directly or indirectly, through one or more 
partnerships, to a C corporation if the partnership 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). If the 
partnership were to elect deemed sale treatment under paragraph (c) of 
this section in lieu of section 1374 treatment under paragraph (b) of 
this section with respect to such transfer, then any net gain 
recognized by the partnership on the deemed sale must be allocated to 
the C corporation partner, but does not increase the capital account of 
any partner. Any adjustment to the partnership's basis in the RIC or 
REIT stock as a result of deemed sale treatment under paragraph (c) of 
this section shall constitute an adjustment to the basis of that stock 
with respect to the C corporation partner only. The principles of 
section 743 apply to such basis adjustment.

    (2) Example; Transfer by partnership of property to REIT. (i) 
Facts. PRS, a partnership for Federal income tax purposes, has three 
partners: TE, a C corporation (within the meaning of paragraph 
(a)(2)(i) of this section) that is also a tax-exempt entity (within 
the meaning of Sec.  1.337(d)-4(c)(2)), owns 50 percent of the 
capital and profits of PRS; A, an individual, owns 30 percent of the 
capital and profits of PRS; and Y, a C corporation (within the 
meaning of paragraph (a)(2)(i) of this section), owns the remaining 
20 percent. PRS owns a building that it leases for commercial use 
(Property 1). On January 1, Year 2, when PRS has an adjusted basis 
in Property 1 of $100 and Property 1 has a fair market value of 
$500, PRS transfers Property 1 to X, a REIT, in exchange for stock 
of X in an exchange described in section 351. PRS does not elect 
deemed sale treatment under paragraph (c) of this section. TE would 
not be subject to tax with respect to any gain that would be 
allocated to it if PRS had sold Property 1 to an unrelated party at 
fair market value.
    (ii) Analysis. The transfer of Property 1 by PRS to X is a 
conversion transaction within the meaning of paragraph (a)(2)(ii) of 
this section to the extent of any gain or loss that would be 
allocated to any C corporation partner if PRS sold Property 1 at 
fair market value to an unrelated party on the deemed sale date. TE 
and Y are C corporations, but A is not a C corporation within the 
meaning of paragraph (a)(2)(i) of this section. Therefore, the 
transfer of Property 1 by PRS to X is a conversion transaction 
within the meaning of paragraph (a)(2)(ii) of this section to the 
extent of the gain in Property 1 that would be allocated to TE and 
Y. Pursuant to paragraph (d)(4) of this section, paragraph (a)(1) of 
this section does not apply to the extent of the gain that would be 
allocated to TE if PRS had sold Property 1 to an unrelated party at 
fair market value on the deemed sale date. If PRS were to sell 
Property 1 to an unrelated party at fair market value on the deemed 
sale date, PRS would allocate $80 of built-in gain to Y. Thus, X is 
subject to section 1374 treatment on Property 1 with respect to $80 
of built-in gain.

    (f) Effective/Applicability date--(1) In general. Except as 
provided in paragraph (f)(2) of this section, this section applies to 
conversion transactions that occur on or after January 2, 2002. For 
conversion transactions that occurred on or after June 10, 1987, and 
before January 2, 2002, see Sec. Sec.  1.337(d)-5 and 1.337(d)-6.
    (2) Special rule. Paragraphs (a)(2), (d)(1), (d)(3), (d)(4), and 
(e) of this section apply to conversion transactions that occur on or 
after August 2, 2013. However, taxpayers may apply paragraphs (a)(2), 
(d)(1), (d)(3), (d)(4), and (e) of this section to conversion 
transactions that occurred before August 2, 2013. For conversion 
transactions that occurred on or after January 2, 2002 and before 
August 2, 2013, see Sec.  1.337(d)-7 as contained in 26 CFR part 1 in 
effect on April 1, 2013.

Beth Tucker,
Deputy Commissioner for Services and Enforcement.
    Approved: June 25, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-18695 Filed 8-1-13; 8:45 am]
BILLING CODE 4830-01-P