66134 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

§ 1.6045–1(g)(1) of this chapter) to the

payor, but before the payor or broker

treats the number or required

certification as having been received

under § 31.3406(e)–1(b).

(2) Limitation. For purposes of

paragraph (a)(1) of this section, if a

payor or broker withholds because the

payor or broker has not received a

taxpayer identification number or

required certification and the payee

subsequently provides a taxpayer

identification number or a required

certification to the payor, the payor or

broker may not refund the amount to the

payee.

(b) Refunding amounts erroneously

withheld—(1) Time and manner. If a

payor or broker withholds under section

3406 from a payee in error (including

withholding more than the correct

amount, as described in paragraph (a) of

this section), the payor or broker may

refund the amount erroneously

withheld to the payee if the refund is

made prior to the end of the calendar

year and prior to the time the payor or

broker furnishes a Form 1099 to the

payee with respect to the payment for

which the erroneous withholding

occurred. If the amount of the erroneous

withholding is refunded to the payee,

the payor or broker must—

(i) Keep as part of its records a receipt

showing the date and amount of refund

and must provide a copy of the receipt

to the payee (a canceled check or an

entry in a statement is sufficient,

provided that the check or statement

contains a specific notation that it is a

refund of tax erroneously withheld);

(ii) Not report on a Form 1099 as tax

withheld any amount which the payor

or broker has refunded to a payee; and

(iii) Not deposit the amount

erroneously withheld if the payor or

broker has not deposited the amount of

the tax prior to the time that the refund

is made to the payee.

(2) Adjustment after the deposit of the

tax. For purposes of paragraph (b)(1) of

this section, if the amount erroneously

withheld has been deposited prior to the

time that the refund is made to the

payee, the payor or broker may adjust

any subsequent deposit of the tax

collected under chapter 24 of the

Internal Revenue Code that the payor or

broker is required to make in the

amount of the tax that has been

refunded to the payee.

PART 35a—TEMPORARY

EMPLOYMENT TAX REGULATIONS

UNDER THE INTEREST AND DIVIDEND

TAX COMPLIANCE ACT OF 1983

Par. 12. The authority citation for part

35a is amended by removing the entry

for 35a.3406–2 to read, in part, as

follows:

Authority: 26 U.S.C. 7805. * * *

§ 35a.3406–2 [Removed]

Par. 13. Section 35a.3406–2 is

removed.

Par. 14. Section 35a.9999–0T is added

to read as follows:

§ 35a.9999–0T Effective date (temporary).

In general, the provisions of

§§ 35a.9999–1, 35a.9999–2, 35a.9999–3,

35a.9999–3A, 35a.9999–4T, and

35a.9999–5 are effective before January

1, 1997. The provisions of those sections

remain effective after December 31,

1996, however, for purposes of

§ 301.6724–1(g) of this chapter, relating

to due diligence safe harbor, and for

international transactions, including

transactions involving a foreign payee, a

foreign payor, a foreign office of a U.S.

bank or broker, or a payment from

sources without the United States. See

§§ 31.3406–0 through 31.3406(i)–1 of

this chapter for rules that apply to other

transactions after December 31, 1996.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 15. The authority for part 301

continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 16. Section 301.6109–1 is

amended by:

1. Revising the third sentence in

paragraph (a)(1).

2. Revising the first sentence in

paragraph (h).

The revised sentences read as follows:

§ 301.6109–1 Identifying numbers.

(a) In general—(1) Social security

numbers and employer identification

numbers. * * * Social security numbers

identify individual persons, while

employer identification numbers

identify corporations, partnerships,

nonprofit associations, trusts, estates of

decedents, and similar nonindividual

persons. * * *

* * * * *

(h) Effective date. The provisions of

this section are effective for information

that must be furnished after April 15,

1974, except that the requirement that

an estate obtain an Employer

Identification Number applies on and

after January 1, 1984. * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par 17. The authority for part 602

continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 18. In § 602.101, paragraph (c) is

amended by adding an entry to the table

in numerical order to read as follows:

‘‘§ 31.3406(a)–1—§ 31.3406(i)–1...1545–

0112’’.

Dated: November 28, 1995.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Cynthia G. Beerbower,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 95–30733 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1 and 602

[TD 8643]

RIN 1545–AQ42

Distributions of Stock and Stock

Rights

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations amending regulations under

section 305(c) of the Internal Revenue

Code relating to constructive

distributions on preferred stock. The

final regulations concern the treatment

of stock redeemable at a premium by the

issuer. The regulations generally treat a

call premium as giving rise to a

constructive distribution only if

redemption pursuant to the call

provision is more likely than not to

occur. The final regulations also reflect

1990 amendments to section 305(c).

DATES: These regulations are effective

December 20, 1995.

For dates of applicability of these

regulations, see Effective dates under

SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT:

Kirsten L. Simpson, (202) 622–7790 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1438. Responses

to this collection of information are

required to comply with the consistency

requirements of the regulation.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number. The
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66135

estimated annual burden per respondent

varies from 5 minutes to 15 minutes,

depending on individual circumstances,

with an estimated average of 10

minutes.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On June 22, 1994, a notice of

proposed rulemaking (CO–8–91),

amending regulations under section

305(c) of the Internal Revenue Code

relating to constructive distributions on

preferred stock, was published in the

Federal Register (59 FR 32160). No

public hearing was requested and none

was held.

Written comments responding to the

notice were received. After

consideration of all the comments, the

regulations proposed by CO–8–91 are

adopted as revised by this Treasury

decision. The principal revisions are

discussed below.

Explanation of Provisions

The primary focus of the final

regulations is on preferred stock callable

at a premium at the option of the issuer.

The final regulations retain the

approach of the proposed regulations

and require constructive distribution

treatment with respect to an issuer call

only if, based on all of the facts and

circumstances as of the issue date,

redemption pursuant to the call right is

more likely than not to occur.

Safe harbor rule. The proposed

regulations provided a safe harbor,

under which constructive distribution

treatment does not result from an issuer

call if the issuer and holder are

unrelated, there are no arrangements

that effectively require the issuer to

redeem the stock, and exercise of the

option to redeem would not reduce the

yield of the stock. In response to

comments, the final regulations make

certain modifications to the safe harbor

to clarify its scope.

Commentators suggested that the

exclusion from the safe harbor where

there are ‘‘arrangements that effectively

require the issuer to redeem’’ is too

narrow and will permit taxpayers who

issue stock with ‘‘understandings’’

concerning redemption, whether or not

legally enforceable, to qualify for the

safe harbor. Commentators

recommended safeguarding against

abuse by changing the effectively

requires redemption test to one that

requires a lesser degree of probability.

The IRS and Treasury intend that the

safe harbor not be available where an

issuer and a holder have an underlying

understanding. Although the IRS and

Treasury believe that the word

‘‘arrangement’’ is broad enough to

include such understandings, in

response to these comments, this prong

of the safe harbor has been clarified.

To retain greater certainty for nonabusive transactions, however, the

effectively requires redemption test has

not been substantially modified.

Instead, the final regulations safeguard

against abuse by lowering the threshold

for determining whether an issuer and

a holder are related. The proposed

regulations adopted a 50-percent

threshold for determining whether an

issuer and a holder are related. The final

regulations lower this threshold to 20

percent. This threshold relates only to

eligibility for the safe harbor, and not to

the application of the general ‘‘more

likely than not’’ test. When a holder’s

ownership interest exceeds this

threshold, the IRS and Treasury believe

it is appropriate to determine whether

redemption is more likely than not to

occur based on all of the facts and

circumstances.

Commentators also suggested that the

IRS and Treasury except preferred stock

within the meaning of section 1504(a)(4)

in determining whether the issuer and

holder are related. The regulations do

not adopt this suggestion. As noted

above, the determination of whether the

issuer and holder are related only

governs eligibility for the safe harbor.

The IRS and Treasury believe that when

a holder’s ownership interest in an

issuer exceeds the threshold, even if all

that the holder owns is preferred stock

within the meaning of section

1504(a)(4), it is appropriate to determine

whether redemption is more likely than

not to occur based on all of the facts and

circumstances.

In response to comments, the final

regulations clarify that the

‘‘arrangements’’ that effectively require

or are intended to compel the issuer to

redeem the stock relate to the issuer call

right, and not to a later mandatory

redemption feature.

In testing whether a call right meets

the yield prong of the safe harbor, the

final regulations clarify that principles

similar to the principles of section

1272(a) and the original issue discount

regulations apply to determine whether

exercise of the right to redeem would

reduce the yield of the stock.

Miscellaneous. The final regulations

expand the definition of issuer in

certain circumstances. In particular, the

regulations provide that if preferred

stock may be acquired by a person other

than the issuer (a third person), the term

issuer includes such third person if the

regulations would apply to the stock if

the third person were the issuer, and

acquisition of the stock by the third

person would be treated as a

redemption for federal income tax

purposes (under section 304 or

otherwise). In addition, if the issuer and

the third person are members of the

same affiliated group, the term issuer

includes the third person if a principal

purpose of the arrangement is to avoid

the application of section 305 and the

final regulations. Furthermore, an

agreement or other arrangement for a

person other than the issuer of the stock

to acquire the stock may create a

conversion transaction within the

meaning of section 1258.

The final regulations provide rules for

the treatment of mandatory redemption

obligations and put options that are

subject to contingencies. Generally,

premiums on such stock are not subject

to constructive distribution treatment if

the contingency renders remote the

likelihood of redemption. For example,

where an issuer issues stock that is

mandatorily redeemable in the event of

an initial public offering, the regulations

require evaluation of the likelihood of

the occurrence of the initial public

offering. The regulations provide,

however, that a contingency does not

include the possibility of default,

insolvency, or similar circumstances, or

that a redemption may be precluded by

applicable law due to insufficient

capital.

The preamble to the proposed

regulations requested comments on the

appropriate treatment of unpaid

cumulative dividends. Because of the

complexity of this issue, the final

regulations do not provide rules for

those dividends. The IRS and Treasury

will continue to consider the issue, as

well as other issues involving the

implementation of the amendments to

section 305(c) made by the Revenue

Reconciliation Act of 1990. The IRS and

Treasury continue to invite public

comments on these issues.
66136 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

EFFECTIVE DATES. The regulations apply

to stock issued on or after December 20,

1995. Although the regulations do not

apply to stock issued before December

20, 1995, the rules of sections 305(c) (1),

(2), and (3) apply to stock described

therein issued on or after October 10,

1990, except as provided in section

11322(b)(2) of the Revenue

Reconciliation Act of 1990 (Pub. L. 101–

508 Stat.). Moreover, except as provided

in section 11322(b)(2) of the Revenue

Reconciliation Act of 1990 (Pub. L. 101–

508 Stat.), with respect to stock issued

on or after October 10, 1990, and issued

before December 20, 1995, the economic

accrual rule of section 305(c)(3) will

apply to the entire call premium on

stock that is not described in paragraph

(b)(2) of this section if the premium is

considered to be unreasonable under the

principles of § 1.305–5(b) (as contained

in the 26 CFR part 1 edition revised

April 1, 1995). A call premium

described in the preceding sentence will

be accrued over the period of time

during which the preferred stock cannot

be called for redemption.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal author of these

regulations is Kirsten L. Simpson of the

Office of Assistant Chief Counsel

(Corporate), IRS. However, other

personnel of the IRS and Treasury

Department participated in their

development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 1 and 602

are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding the

following entries in numerical order to

read as follows:

Authority: 26 U.S.C. 7805 * * * Section

1.305–3 also issued under 26 U.S.C. 305.

Section 1.305–5 also issued under 26 U.S.C.

305. Section 1.305–7 also issued under 26

U.S.C. 305. * * *

Par. 2. Section 1.305–3 is amended as

follows: 1. In paragraph (e), remove the

parentheses from the numbers in the

headings for Examples (1) through (15).

2. In paragraph (e), Example 15 is

revised to read as follows:

§ 1.305–3 Disproportionate distributions.

* * * * *

(e) * * *

Example 15. (i) Facts. Corporation V is

organized with two classes of stock, class A

common and class B convertible preferred.

The class B stock is issued for $100 per share

and is convertible at the holder’s option into

class A at a fixed ratio that is not subject to

full adjustment in the event stock dividends

or rights are distributed to the class A

shareholders. The class B stock pays no

dividends but it is mandatorily redeemable

in 10 years for $200. Under sections 305(c)

and 305(b)(4), the entire redemption

premium (i.e., the excess of the redemption

price over the issue price) is deemed to be

a distribution of preferred stock on preferred

stock which is taxable as a distribution of

property under section 301. This amount is

considered to be distributed over the 10-year

period under principles similar to the

principles of section 1272(a). During the year,

the corporation declares a dividend on the

class A stock payable in additional shares of

class A stock.

(ii) Analysis. The distribution on the class

A stock is a distribution to which sections

305(b)(2) and 301 apply since it increases the

proportionate interests of the class A

shareholders in the assets and earnings and

profits of the corporation and the class B

shareholders have received property (i.e., the

constructive distribution described above). If,

however, the conversion ratio of the class B

stock were subject to full adjustment to

reflect the distribution of stock to class A

shareholders, the distribution of stock

dividends on the class A stock would not

increase the proportionate interest of the

class A shareholders in the assets and

earnings and profits of the corporation and

such distribution would not be a distribution

to which section 301 applies.

(iii) Effective date. This Example 15

applies to stock issued on or after December

20, 1995. For previously issued stock, see

§ 1.305–3(e) Example (15) (as contained in

the 26 CFR part 1 edition revised April 1,

1995).

Par. 3. Section 1.305–5 is amended as

follows:

1. Paragraph (b) is revised.

2. In paragraph (d), remove the

parentheses from the numbers in the

headings for Examples (1) through (9),

redesignate Examples 8 and 9 as

Examples 9 and 10, respectively.

3. In paragraph (d), Examples 4, 5,

and 7 are revised, and Example 8 is

added.

4. Paragraph (e) is added.

The revisions read as follows:

§ 1.305–5 Distributions on preferred stock.

* * * * *

(b) Redemption premium—(1) In

general. If a corporation issues preferred

stock that may be redeemed under the

circumstances described in this

paragraph (b) at a price higher than the

issue price, the difference (the

redemption premium) is treated under

section 305(c) as a constructive

distribution (or series of constructive

distributions) of additional stock on

preferred stock that is taken into

account under principles similar to the

principles of section 1272(a). However,

constructive distribution treatment does

not result under this paragraph (b) if the

redemption premium does not exceed a

de minimis amount, as determined

under the principles of section

1273(a)(3). For purposes of this

paragraph (b), preferred stock that may

be acquired by a person other than the

issuer (the third person) is deemed to be

redeemable under the circumstances

described in this paragraph (b), and

references to the issuer include the third

person, if—

(i) This paragraph (b) would apply to

the stock if the third person were the

issuer; and

(ii) Either—

(A) The acquisition of the stock by the

third person would be treated as a

redemption for federal income tax

purposes (under section 304 or

otherwise); or

(B) The third person and the issuer

are members of the same affiliated group

(having the meaning for this purpose

given the term by section 1504(a),

except that section 1504(b) shall not

apply) and a principal purpose of the

arrangement for the third person to

acquire the stock is to avoid the

application of section 305 and

paragraph (b)(1) of this section.

(2) Mandatory redemption or holder

put. Paragraph (b)(1) of this section

applies to stock if the issuer is required

to redeem the stock at a specified time

or the holder has the option (whether or

not currently exercisable) to require the

issuer to redeem the stock. However,

paragraph (b)(1) of this section will not
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66137

apply if the issuer’s obligation to

redeem or the holder’s ability to require

the issuer to redeem is subject to a

contingency that is beyond the legal or

practical control of either the holder or

the holders as a group (or through a

related party within the meaning of

section 267(b) or 707(b)), and that, based

on all of the facts and circumstances as

of the issue date, renders remote the

likelihood of redemption. For purposes

of this paragraph, a contingency does

not include the possibility of default,

insolvency, or similar circumstances, or

that a redemption may be precluded by

applicable law which requires that the

issuer have a particular level of capital,

surplus, or similar items. A contingency

also does not include an issuer’s option

to require earlier redemption of the

stock. For rules applicable if stock may

be redeemed at more than one time, see

paragraph (b)(4) of this section.

(3) Issuer call—(i) In general.

Paragraph (b)(1) of this section applies

to stock by reason of the issuer’s right

to redeem the stock (even if the right is

immediately exercisable), but only if,

based on all of the facts and

circumstances as of the issue date,

redemption pursuant to that right is

more likely than not to occur. However,

even if redemption is more likely than

not to occur, paragraph (b)(1) of this

section does not apply if the redemption

premium is solely in the nature of a

penalty for premature redemption. A

redemption premium is not a penalty

for premature redemption unless it is a

premium paid as a result of changes in

economic or market conditions over

which neither the issuer nor the holder

has legal or practical control.

(ii) Safe harbor. For purposes of this

paragraph (b)(3), redemption pursuant

to an issuer’s right to redeem is not

treated as more likely than not to occur

if—

(A) The issuer and the holder are not

related within the meaning of section

267(b) or 707(b) (for purposes of

applying sections 267(b) and 707(b)

(including section 267(f)(1)), the phrase

‘‘20 percent’’ shall be substituted for the

phrase ‘‘50 percent’’);

(B) There are no plans, arrangements,

or agreements that effectively require or

are intended to compel the issuer to

redeem the stock (disregarding, for this

purpose, a separate mandatory

redemption obligation described in

paragraph (b)(2) of this section); and

(C) Exercise of the right to redeem

would not reduce the yield of the stock,

as determined under principles similar

to the principles of section 1272(a) and

the regulations under sections 1271

through 1275.

(iii) Effect of not satisfying safe

harbor. The fact that a redemption right

is not described in paragraph (b)(3)(ii) of

this section does not affect the

determination of whether a redemption

pursuant to the right to redeem is more

likely than not to occur.

(4) Coordination of multiple

redemption provisions. If stock may be

redeemed at more than one time, the

time and price at which redemption is

most likely to occur must be determined

based on all of the facts and

circumstances as of the issue date. Any

constructive distribution under

paragraph (b)(1) of this section will

result only with respect to the time and

price identified in the preceding

sentence. However, if redemption does

not occur at that identified time, the

amount of any additional premium

payable on any later redemption date, to

the extent not previously treated as

distributed, is treated as a constructive

distribution over the period from the

missed call or put date to that later date,

to the extent required under the

principles of this paragraph (b).

(5) Consistency. The issuer’s

determination as to whether there is a

constructive distribution under this

paragraph (b) is binding on all holders

of the stock, other than a holder that

explicitly discloses that its

determination as to whether there is a

constructive distribution under this

paragraph (b) differs from that of the

issuer. Unless otherwise prescribed by

the Commissioner, the disclosure must

be made on a statement attached to the

holder’s timely filed federal income tax

return for the taxable year that includes

the date the holder acquired the stock.

The issuer must provide the relevant

information to the holder in a

reasonable manner. For example, the

issuer may provide the name or title and

either the address or telephone number

of a representative of the issuer who

will make available to holders upon

request the information required for

holders to comply with this provision of

this paragraph (b).

* * * * *

(d) * * *

Example 4—(i) Facts. Corporation X is a

domestic corporation with only common

stock outstanding. In connection with its

acquisition of Corporation T, X issues 100

shares of its 4% preferred stock to the

shareholders of T, who are unrelated to X

both before and after the transaction. The

issue price of the preferred stock is $40 per

share. Each share of preferred stock is

convertible at the shareholder’s election into

three shares of X common stock. At the time

the preferred stock is issued, the X common

stock has a value of $10 per share. The

preferred stock does not provide for its

mandatory redemption or for redemption at

the option of the holder. It is callable at the

option of X at any time beginning three years

from the date of issuance for $100 per share.

There are no other plans, arrangements, or

agreements that effectively require or are

intended to compel X to redeem the stock.

(ii) Analysis. The preferred stock is

described in the safe harbor rule of paragraph

(b)(3)(ii) of this section because X and the

former shareholders of T are unrelated, there

are no plans, arrangements, or agreements

that effectively require or are intended to

compel X to redeem the stock, and calling the

stock for $100 per share would not reduce

the yield of the preferred stock. Therefore,

the $60 per share call premium is not treated

as a constructive distribution to the

shareholders of the preferred stock under

paragraph (b) of this section.

Example 5—(i) Facts—(A) Corporation Y is

a domestic corporation with only common

stock outstanding. On January 1, 1996, Y

issues 100 shares of its 10% preferred stock

to a holder. The holder is unrelated to Y both

before and after the stock issuance. The issue

price of the preferred stock is $100 per share.

The preferred stock is—

(1) Callable at the option of Y on or before

January 1, 2001, at a price of $105 per share

plus any accrued but unpaid dividends; and

(2) Mandatorily redeemable on January 1,

2006, at a price of $100 per share plus any

accrued but unpaid dividends.

(B) The preferred stock provides that if Y

fails to exercise its option to call the

preferred stock on or before January 1, 2001,

the holder will be entitled to appoint a

majority of Y’s directors. Based on all of the

facts and circumstances as of the issue date,

Y is likely to have the legal and financial

capacity to exercise its right to redeem. There

are no other facts and circumstances as of the

issue date that would affect whether Y will

call the preferred stock on or before January

1, 2001.

(ii) Analysis. Under paragraph (b)(3)(i) of

this section, paragraph (b)(1) of this section

applies because, by virtue of the change of

control provision and the absence of any

contrary facts, it is more likely than not that

Y will exercise its option to call the preferred

stock on or before January 1, 2001. The safe

harbor rule of paragraph (b)(3)(ii) of this

section does not apply because the provision

that failure to call will cause the holder to

gain control of the corporation is a plan,

arrangement, or agreement that effectively

requires or is intended to compel Y to

redeem the preferred stock. Under paragraph

(b)(4) of this section, the constructive

distribution occurs over the period ending on

January 1, 2001. Redemption is most likely

to occur on that date, because that is the date

on which the corporation minimizes the rate

of return to the holder while preventing the

holder from gaining control. The de minimis

exception of paragraph (b)(1) of this section

does not apply because the $5 per share

difference between the redemption price and

the issue price exceeds the amount

determined under the principles of section

1273(a)(3) (5×.0025×$105 = $1.31).

Accordingly, $5 per share, the difference

between the redemption price and the issue

price, is treated as a constructive distribution
66138 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

received by the holder on an economic

accrual basis over the five-year period ending

on January 1, 2001, under principles similar

to the principles of section 1272(a). * * *

Example 7—(i) Facts—(A) Corporation Z is

a domestic corporation with only common

stock outstanding. On January 1, 1996, Z

issues 100 shares of its 10% preferred stock

to C, an individual unrelated to Z both before

and after the stock issuance. The issue price

of the preferred stock is $100 per share. The

preferred stock is—

(1) Not callable for a period of 5 years from

the issue date;

(2) Callable at the option of Z on January

1, 2001, at a price of $110 per share plus any

accrued but unpaid dividends;

(3) Callable at the option of Z on July 1,

2002, at a price of $120 per share plus any

accrued but unpaid dividends; and

(4) Mandatorily redeemable on January 1,

2004, at a price of $150 per share plus any

accrued but unpaid dividends.

(B) There are no other plans, arrangements,

or agreements between Z and C concerning

redemption of the stock. Moreover, there are

no other facts and circumstances as of the

issue date that would affect whether Z will

call the preferred stock on either January 1,

2001, or July 1, 2002.

(ii) Analysis. This stock is described in

paragraph (b)(2) of this section because it is

mandatorily redeemable. It is also potentially

described in paragraph (b)(3)(i) of this section

because it is callable at the option of the

issuer. The safe harbor rule of paragraph

(b)(3)(ii) of this section does not apply to the

option to call on January 1, 2001, because the

call would reduce the yield of the stock when

compared to the yield produced by the

January 1, 2004, mandatory redemption

feature. Moreover, absent any other facts

indicating a contrary result, the fact that

redemption on January 1, 2001, would

produce the lowest yield indicates that

redemption is most likely to occur on that

date. Under paragraph (b)(4) of this section,

paragraph (b)(1) of this section applies with

respect to the issuer’s right to call on January

1, 2001, because redemption is most likely to

occur on January 1, 2001, for $110 per share.

The de minimis exception of paragraph (b)(1)

of this section does not apply because the

$10 per share difference between the

redemption price payable in 2001 and the

issue price exceeds the amount determined

under the principles of section 1273(a)(3)

(5×.0025×$110=$1.38). Accordingly, $10 per

share, the difference between the redemption

price and the issue price, is treated as a

constructive distribution received by the

holder on an economic accrual basis over the

five-year period ending January 1, 2001,

under principles similar to the principles of

section 1272(a).

(iii) Coordination rules—(A) If Z does not

exercise its option to call the preferred stock

on January 1, 2001, paragraph (b)(4) of this

section provides that the principles of

paragraph (b) of this section must be applied

to determine if any remaining constructive

distribution occurs. Under paragraphs

(b)(3)(i) and (b)(4) of this section, paragraph

(b)(1) of this section applies because, absent

any other facts indicating a contrary result,

the fact that redemption on July 1, 2002,

would produce a lower yield than the yield

produced by the mandatory redemption

feature indicates that redemption on that date

is most likely to occur. The safe harbor rule

of paragraph (b)(3)(ii) of this section does not

apply to the option to call on July 1, 2002,

because, as of January 1, 2001, a call by Z on

July 1, 2002, for $120 would reduce the yield

of the stock. The de minimis exception of

paragraph (b)(1) of this section does not

apply because the $10 per share difference

between the redemption price and the issue

price (revised as of the missed call date as

provided by paragraph (b)(4) of this section)

exceeds the amount determined under the

principles of section 1273(a)(3)

(1×.0025×$120=$.30). Accordingly, the $10

per share of additional redemption premium

that is payable on July 1, 2002, is treated as

a constructive distribution received by the

holder on an economic accrual basis over the

period between January 1, 2001, and July 1,

2002, under principles similar to the

principles of section 1272(a).

(B) If Z does not exercise its second option

to call the preferred stock on July 1, 2002,

then the $30 additional redemption premium

that is payable on January 1, 2004, is treated

as a constructive distribution under

paragraphs (b)(2) and (b)(1) of this section.

The de minimis exception of paragraph (b)(1)

of this section does not apply because the

$30 per share difference between the

redemption price and the issue price (revised

as of the second missed call date) exceeds the

amount determined under the principles of

section 1273(a)(3) (1×.0025×$150=$.38). The

holder is treated as receiving the constructive

distribution on an economic accrual basis

over the period between July 1, 2002, and

January 1, 2004, under principles similar to

the principles of section 1272(a).

Example 8—(i) Facts. The facts are the

same as in paragraph (i) of Example 7, except

that, based on all of the facts and

circumstances as of the issue date (including

an expected lack of funds on the part of Z),

it is unlikely that Z will exercise the right to

redeem on either January 1, 2001, or July 1,

2002.

(ii) Analysis. The safe harbor rule of

paragraph (b)(3)(ii) of this section does not

apply to the option to call on either January

1, 2001, or July 1, 2002, because each call

would reduce the yield of the stock. Under

paragraph (b)(3)(i) of this section, neither

option to call is more likely than not to

occur, because, based on all of the facts and

circumstances as of the issue date (including

an expected lack of funds on the part of Z),

it is not more likely than not that Z will

exercise either option. However, the $50 per

share redemption premium that is payable on

January 1, 2004, is treated as a constructive

distribution under paragraphs (b) (1) and (2)

of this section, regardless of whether Z is

anticipated to have sufficient funds to

redeem on that date, because Z is required to

redeem the stock on that date. The de

minimis exception of paragraph (b)(1) of this

section does not apply because the $50 per

share difference between the redemption

price and the issue price exceeds the amount

determined under the principles of section

1273(a)(3) (8×.0025×$150=$3).

* * * * *

(e) Effective date. The rules of

paragraph (b) of this section and

Examples 4, 5, 7, and 8 of paragraph (d)

of this section apply to stock issued on

or after December 20, 1995. For rules

applicable to previously issued stock,

see § 1.305–5 (b) and (d) Examples (4),

(5), and (7) (as contained in the 26 CFR

part 1 edition revised April 1, 1995).

Although the rules of paragraph (b) of

this section and the revised examples do

not apply to stock issued before

December 20, 1995, the rules of sections

305(c) (1), (2), and (3) apply to stock

described therein issued on or after

October 10, 1990, except as provided in

section 11322(b)(2) of the Revenue

Reconciliation Act of 1990 (Public Law

101–508 Stat.). Moreover, except as

provided in section 11322(b)(2) of the

Revenue Reconciliation Act of 1990

(Public Law 101–508 Stat.), with respect

to stock issued on or after October 10,

1990, and issued before December 20,

1995, the economic accrual rule of

section 305(c)(3) will apply to the entire

call premium on stock that is not

described in paragraph (b)(2) of this

section if the premium is considered to

be unreasonable under the principles of

§ 1.305–5(b) (as contained in the 26 CFR

part 1 edition revised April 1, 1995). A

call premium described in the preceding

sentence will be accrued over the period

of time during which the preferred stock

cannot be called for redemption.

Par. 4. Section 1.305–7 is amended by

revising the fourth sentence in the

concluding text of paragraph (a) to read

as follows:

§ 1.305–7 Certain transactions treated as

distributions.

(a) * * *

* * * For example, where a redemption

premium exists with respect to a class

of preferred stock under the

circumstances described in § 1.305–5(b)

and the other requirements of this

section are also met, the distribution

will be deemed made with respect to

such preferred stock, in stock of the

same class. * * *

* * * * *
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66139

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 5. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

§ 602.101 [Amended]

Par. 6. In § 602.101, paragraph (c) is

amended in the table by adding the

entry ‘‘1.305–5.........1545–1438’’ in

numerical order.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 11, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30831 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 31 and 301

[TD 8636]

RIN 1545–AN57

Time for Furnishing Wage Statements

on Termination of Employer’s

Operations

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations concerning the time for

furnishing wage statements to

employees and for filing wage

statements with the Social Security

Administration upon the termination of

an employer’s operations. These

regulations will affect employers and

their employees in the year the

employer ceases to pay wages. These

regulations are intended to improve the

wage reconciliation process between the

Social Security Administration and the

IRS.

EFFECTIVE DATE: These regulations are

effective January 1, 1997.

ADDRESSES: Send submissions to:

CC:DOM:CORP:T:R (EE–83–89), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:T:R (EE–83–89),

Courier’s Desk. Internal Revenue

Service, 1111 Constitution Avenue NW,

Washington, DC.

FOR FURTHER INFORMATION CONTACT: Jean

M. Casey, (202) 622–6040 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

On December 22, 1994, the Federal

Register (59 FR 65982) published a

notice of proposed rulemaking which

required an employer to furnish Forms

W–2 to employees and to file Forms W–

2 and W–3 with the Social Security

Administration (SSA) at the same time

that the employer is required to file the

final Form 941 with the IRS.

Written comments responding to the

notice of proposed rulemaking were

received. A public hearing was held on

May 8, 1995, pursuant to a notice

published in the Federal Register on

March 24, 1995 (60 FR 15526). After

consideration of the comments that

were received in response to the notice

of proposed rulemaking and at the

hearing, the IRS and Treasury adopt the

proposed regulations, as amended and

revised by this Treasury decision.

Explanation of Revisions and Summary

of Comments

Availability of Forms W–2

The regulations, as proposed, would

have required an employer who ceases

paying wages to furnish Form W–2 to

employees and file Forms W–2 and W–

3 with SSA on or before the date on

which the final Form 941 is required to

be filed with the IRS. Form 941 is

generally due quarterly, on or before the

last day of the first calendar month

following the period for which it is

made (i.e., April 30, July 31, October 31,

and January 31). Consequently, if an

employer ceased paying wages in the

first quarter of the calendar year, the

Forms 941, W–2 and W–3 would be due

by April 30. Some commentators

expressed concern that Forms W–2 and

W–3 are not available in the first quarter

of the calendar year. Commentators

questioned whether using prior year

Forms W–2 was an acceptable

alternative if current year forms were

unavailable.

Under the Internal Revenue Code and

the existing regulations, an employee

may request the Form W–2 at any time

during the year if the employee is

terminated and there is no reasonable

expectation on the part of the employer

or the employee of further employment

during the calendar year. Therefore,

Forms W–2 are available from the IRS,

either through the mail or at the district

offices, in January of each year.

Specifications for the private printing of

substitute Forms W–2, however, are not

always available during the first quarter

of the calendar year. Thus, during this

period, employers may be limited to

using the Forms W–2 printed by the

IRS. Neither prior year Forms W–2 nor

the prior year specifications for the

private printing of substitute Forms W–

2 should be used for filing Forms W–2

on an expedited basis for the current

year because such procedures could

result in significant processing errors.

Availability of Magnetic Media

Specifications

Commentators questioned whether

magnetic media specifications would be

available in the first quarter of the

calendar year for employers who are

required to file on an expedited basis

under the proposed regulations.

Regulation section 301.6011–2 and

Notice 90–15, 1990–1 C.B. 326,

generally require an employer to file

Forms W–2 with SSA on magnetic

media if the employer is required to file

250 or more Forms W–2 in a calendar

year. Employers who do not meet the

250 return threshold may also file their

Forms W–2 with SSA on magnetic

media.

It is not certain that magnetic media

specifications, which are issued by SSA,

will be available in the first quarter of

the calendar year for employers who are

required to file on an expedited basis.

The Commissioner has the authority to

provide for reasonable extensions of

time, upon written application, for an

employer to furnish Forms W–2 to

employees and file Forms W–2 and W–

3 with SSA. To assure that filers need

not shift from magnetic media to paper

filings in order to comply with the

expedited filing requirements, the final

regulations affirm that the

Commissioner may adopt automatic

extension procedures where

appropriate.

It is anticipated that the

Commissioner will establish automatic

extension procedures to the extent

necessary to permit employers that

terminate operations a reasonable

period of time, after the issuance of

specifications, to make their filings on

magnetic media.

It is further anticipated that these

procedures will include appropriate

automatic extensions of time to file