Treatment of Distributions of Property From a Corporation to a Shareholder
| Citation | 86 FR 52612 |
| Record Number | 2021-19980 |
| Published date | 22 September 2021 |
| Section | Rules and Regulations |
| Court | Internal Revenue Service |
Federal Register, Volume 86 Issue 181 (Wednesday, September 22, 2021)
[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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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
