Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66083

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the

subject of this correction are under

section 411 of the Internal Revenue

Code.

Need for Correction

As published, TD 8631 contains an

error which is in need of correction.

Correction of Publication

Accordingly, the publication to the

final regulations which is the subject of

FR Doc. 95–30416, is corrected as

follows:

On page 64321, column 3, in the

preamble, following the paragraph

heading Effective Dates, line 5, the

language ‘‘or after January 2, 1996.’’ is

corrected to read ‘‘or after December 30,

1995.’’.

Michael Slaughter,

Acting Chief, Regulations Unit, Assistant

Chief Counsel (Corporate).

[FR Doc. 95–30977 Filed 12–15–95; 3:31 pm]

BILLING CODE 4830–01–U

26 CFR Parts 1 and 602

[TD 8649]

RIN 1545–AS87

Regulations Under Section 1258 of the

Internal Revenue Code of 1986; Netting

Rule for Certain Conversion

Transactions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to conversion

transactions. These regulations provide

that certain gains and losses from

positions of the same conversion

transaction may be netted for purposes

of determining the amount of gain that

is recharacterized as ordinary income.

These regulations reflect changes to the

law made by the Revenue

Reconciliation Act of 1993 and affect

persons who enter into conversion

transactions.

DATES: These regulations are effective

December 21, 1995.

For applicability of these regulations,

see EFFECTIVE DATES under the

SUPPLEMENTARY INFORMATION part of the

preamble.

FOR FURTHER INFORMATION CONTACT:

Alan B. Munro, (202) 622–3950 (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 1545–1452. Responses

to this collection of information are

required to obtain netting relief for

conversion transactions.

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 estimated annual burden per

recordkeeper varies from .05 to 10

hours, depending on individual

circumstances, with an estimated

average of .10 hour.

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 December 27, 1994, the IRS

published in the Federal Register a

notice of proposed rulemaking and

notice of public hearing at 59 FR 66498

(FI–43–94) under section 1258 of the

Internal Revenue Code of 1986.

The IRS received a number of written

comments on the proposed regulations.

No requests to speak at the public

hearing were received, however, and

consequently the hearing was cancelled.

Explanation of Provisions

A. General

The proposed regulations allow

taxpayers to net gains and losses on the

positions of certain conversion

transactions for purposes of section

1258(a). For a taxpayer to be eligible, the

proposed regulations require the

taxpayer to identify, before the close of

the day on which the positions become

part of the conversion transaction, all

the positions that are part of the

conversion transaction. In addition, the

taxpayer has to dispose of all the

positions within a 14-day period that is

within a single taxable year. The

proposed regulations also define builtin loss and prohibit the netting of builtin loss against gain.

The commenters uniformly supported

the netting relief provided by the

proposed regulations. Accordingly, the

final regulations are substantially

unchanged from the proposed

regulations.

The proposed regulations provide that

the regulations will be effective for

conversion transactions entered into on

or after the date of filing of final

regulations with the Federal Register.

Several commenters requested that the

regulations also apply to conversion

transactions entered into prior to the

filing date. In response to these

comments, the final regulations provide

for application of the regulations to any

conversion transaction that is

outstanding on December 21, 1995,

provided that all the positions which

are part of the conversion transaction

are identified under § 1.1258–1(b)(2)

before the close of business on February

20, 1996. The final regulations also

provide a transition rule for the sameday identification requirement that

allows taxpayers to identify conversion

transactions entered into prior to

February 20, 1996, at any time on or

before February 20, 1996.

Several commenters criticized the

examples for failing to adjust the

applicable imputed income amount

(AIIA) under section 1258(b) for interest

and dividends received. The scope of

these regulations, however, is limited to

netting relief. The IRS is still studying

various situations to determine the

extent to which it is appropriate to

reduce the AIIA by reason of amounts

capitalized under section 263(g),

ordinary income received, or otherwise.

Accordingly, Example 3 has been

deleted and Examples 1 and 2 have been

clarified to eliminate any implication on

this issue.

One commenter requested that the

identification requirement be eliminated

as impractical, unnecessary, and a trap

for the unwary. This same-day

identification requirement is similar to

identification requirements under

sections 475 and 1221. Identification of

all the positions of a conversion

transaction will aid examiners

attempting to determine whether

conversion transactions are present and

will prevent mismatching of those

positions by both taxpayers and agents.

The final regulations retain the sameday identification requirement but

provide a transition rule.
66084 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

Some commenters asked that netting

relief be expanded to cover unrealized

losses in retained positions by allowing

loss positions to be marked to market

when a gain position is disposed of or

terminated. Allowing retained positions

to be marked to market raises valuation

and other potentially complex issues.

For example, many of the issues

addressed by the regulations under

section 475 would have to be addressed

here. The complexity of these issues

outweighs the potential benefit of

allowing retained positions to be

marked to market. Thus, the final

regulations do not include a mark-tomarket provision.

To preserve the character of gain that

arose before a position became part of a

conversion transaction, one commenter

requested built-in gain rules similar to

the built-in loss rules in the proposed

regulations. The appropriateness of a

built-in gain rule under section 1258 is

beyond the scope of these regulations.

Therefore, the final regulations do not

address this issue.

The IRS is aware that section 1258

presents a number of issues not

addressed by these final regulations.

The IRS continues to study the scope of

section 1258, the types of transactions

that should be included under the

regulatory authority of section

1258(c)(2)(D), and what reductions, if

any, in the AIIA are appropriate under

section 1258(b). The IRS welcomes

comments on these and other issues

under section 1258.

B. Effective Dates

The regulations are effective for

conversion transactions that are

outstanding on or after December 21,

1995. In the case of a conversion

transaction entered into before February

20, 1996, the same-day identification

requirement is treated as satisfied if the

identification is made on or before

February 20, 1996.

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 also has

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 Alan B. Munro, Office

of Assistant Chief Counsel (Financial

Institutions and Products). However, other

personnel from 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 continues to read in part as

follows:

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

Par. 2. Section 1.1258–1 is added to

read as follows:

§ 1.1258–1 Netting rule for certain

conversion transactions.

(a) Purpose. The purpose of this

section is to provide taxpayers with a

method to net certain gains and losses

from positions of the same conversion

transaction before determining the

amount of gain treated as ordinary

income under section 1258(a).

(b) Netting of gain and loss for

identified transactions—(1) In general. If

a taxpayer disposes of or terminates all

the positions of an identified netting

transaction (as defined in paragraph

(b)(2) of this section) within a 14-day

period in a single taxable year, all gains

and losses on those positions taken into

account for federal tax purposes within

that period (other than built-in losses as

defined in paragraph (c) of this section)

are netted solely for purposes of

determining the amount of gain treated

as ordinary income under section

1258(a). For purposes of the preceding

sentence, a taxpayer is treated as

disposing of any position that is treated

as sold under any provision of the Code

or regulations thereunder (for example,

under section 1256(a)(1)).

(2) Identified netting transaction. For

purposes of this section, an identified

netting transaction is a conversion

transaction (as defined in section

1258(c)) that the taxpayer identifies as

an identified netting transaction on its

books and records. Identification of each

position of the conversion transaction

must be made before the close of the day

on which the position becomes part of

the conversion transaction. No

particular form of identification is

necessary, but all the positions of a

single conversion transaction must be

identified as part of the same

transaction and must be distinguished

from all other positions.

(c) Definition of built-in loss. For

purposes of this section, built-in loss

means—

(1) Built-in loss as defined in section

1258(d)(3)(B); and

(2) If a taxpayer realizes gain or loss

on any one position of a conversion

transaction (for example, under section

1256), as of the date that gain or loss is

realized, any unrecognized loss in any

other position of the conversion

transaction that is not disposed of,

terminated, or treated as sold under any

provision of the Code or regulations

thereunder within 14 days of and within

the same taxable year as the realization

event.

(d) Examples. These examples

illustrate this section:

Example 1. Identified netting transaction

with simultaneous actual dispositions. (i) On

December 1, 1995, A purchases 1,000 shares

of XYZ stock for $100,000 and enters into a

forward contract to sell 1,000 shares of XYZ

stock on November 30, 1997, for $110,000.

The XYZ stock is actively traded as defined

in § 1.1092(d)-1(a) and is a capital asset in A’s

hands. A maintains books and records on

which, on December 1, 1995, it identifies the

two positions as all the positions of a single

conversion transaction. A owns no other XYZ

stock. On December 1, 1996, when the

applicable imputed income amount for the

transaction is $7,000, A sells the 1,000 shares

of XYZ stock for $95,000. On the same day,

A terminates its forward contract with its

counterparty, receiving $10,200. No

dividends were received on the stock during

the time it was part of the conversion

transaction.

(ii) The XYZ stock and forward contract are

positions of a conversion transaction. Under

section 1258(c)(1), substantially all of A’s

expected return from the overall transaction

is attributable to the time value of the net

investment in the transaction. Under section

1258(c)(2)(B), the transaction is an applicable

straddle as defined in section 1258(d)(1).

(iii) A disposed of or terminated all the

positions of the conversion transaction

within 14 days and within the same taxable

year as required by paragraph (b)(1) of this

section. The transaction is an identified

netting transaction because it meets the

identification requirement of paragraph (b)(2)

of this section. Solely for purposes of section

1258(a), the $5,000 loss realized ($100,000

basis less $95,000 amount realized) on the

disposition of the XYZ stock is netted against

the $10,200 gain recognized on the

disposition of the forward contract. Thus, the

net gain from the conversion transaction for

purposes of section 1258(a) is $5,200
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66085

($10,200 gain less $5,000 loss). Only the

$5,200 net gain is recharacterized as ordinary

income under section 1258(a) even though

the applicable imputed income amount is

$7,000. For federal tax purposes other than

section 1258(a), A has recognized a $10,200

gain on the disposition of the forward

contract ($5,200 of which is treated as

ordinary income) and realized a separate

$5,000 loss on the sale of the XYZ stock.

Example 2. Identified netting transaction

with built-in loss. (i) The facts are the same

as in Example 1, except that A had purchased

the XYZ stock for $104,000 on May 15, 1995.

The XYZ stock had a fair market value of

$100,000 on December 1, 1995, the date it

became part of a conversion transaction.

(ii) The results are the same as in Example

1, except that A has built-in loss (in addition

to the $5,000 loss that arose economically

during the period of the conversion

transaction), as defined in section

1258(d)(3)(B), of $4,000 on the XYZ stock.

That $4,000 built-in loss is not netted against

the $10,200 gain on the forward contract for

purposes of section 1258(a). Thus, the net

gain from the conversion transaction for

purposes of section 1258(a) is $5,200, the

same as in Example 1. The $4,000 built-in

loss is recognized and has a character

determined without regard to section 1258.

(e) Effective date and transition rule—

(1) In general. These regulations are

effective for conversion transactions that

are outstanding on or after December 21,

1995.

(2) Transition rule for identification

requirements. In the case of a

conversion transaction entered into

before February 20, 1996, paragraph

(b)(2) of this section is treated as

satisfied if the identification is made

before the close of business on February

20, 1996.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 3. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

§ 602.101 [Amended]

Par. 4. In § 602.101, paragraph (c) is

amended by adding the entry ‘‘1.1258–

1 * * * .1545–1452’’ in numerical order

to the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: November 28, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95–30900 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1, 25, 301, and 602

[TD 8633]

RIN 1545–AS37

Grantor Trust Reporting Requirements

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the method of

reporting for trusts that are treated as

owned by grantors or other persons

under the provisions of subpart E

(section 671 and following), part I,

subchapter J, chapter 1 of the Internal

Revenue Code. These regulations are

intended to reduce the current filing

burden on trustees, to provide necessary

information to grantors or other persons

treated as the owners of trusts, to reduce

any cases of duplicate filing, and to

provide more meaningful information to

the IRS. These regulations affect

grantors and trustees of trusts that are

treated as owned by grantors or other

persons, as well as persons who are

required to file information returns with

respect to payments to these trusts.

DATES: These regulations are effective

January 1, 1996. For dates of

applicability of these regulations, see

§ 1.671–4(h).

FOR FURTHER INFORMATION CONTACT:

Steven Schneider, (202) 622–3060 (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 1545–1442. This

information is required by the IRS to

insure the proper reporting of income

and proceeds paid to a trust any portion

of which is treated as owned by the

grantor or another person.

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 estimated annual burden per

respondent is 30 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 July 22, 1994, the IRS published

in the Federal Register a notice of

proposed rulemaking and notice of

public hearing (59 FR 37450) proposing

amendments to the Income Tax

Regulations (26 CFR part 1) under

section 671 of the Internal Revenue

Code (Code) and to the Procedure and

Administration Regulations (26 CFR

part 301) under sections 6012 and 6109

of the Code.

Written comments responding to the

notice were received. A public hearing

was held on September 21, 1994,

pursuant to the notice published in the

Federal Register on July 22, 1994. After

consideration of all written and oral

comments regarding the proposed

amendments, those amendments are

adopted as revised by this Treasury

decision.

Explanation of Provisions and

Significant Changes in the Final

Regulations

Subject to certain new limitations

under § 1.671–4(b)(6) and (7), discussed

below, § 1.671–4(b) of the final

regulations retains the optional

alternative methods of reporting

contained in the proposed regulations

published on July 22, 1994.

Several comments were submitted

requesting confirmation that the

alternative methods of reporting

described in the proposed regulations

are optional and not mandatory. Section

1.671–4(b) of the final regulations

clarifies that the trustee of a trust all of

which is treated as owned by one or

more grantors or other persons may, but

is not required to, report pursuant to

one of the alternative methods.

Certain commentators were unsure of

which persons are considered payors for

purposes of the alternative filing

methods. The final regulations define

the term payor as including any person

who is required by any provision of the

Code and the regulations thereunder to

make any type of information return

with respect to the trust for the taxable

year.

With respect to the alternative

methods of reporting, several

commentators were unsure of the items