[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Rules and Regulations]
[Pages 19544-19546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10394]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8663]
RIN 1545-AT43


Transfers to Investment Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations amending regulations 
under section 351(e) of the Internal Revenue Code relating to transfers 
to investment companies. The final regulations concern the treatment of 
certain transfers to a controlled corporation. Generally, the final 
regulations amend the regulations to provide when certain transfers 
will not cause a diversification of the transferors' interests.

EFFEFCITVE DATE: These regulations are effective May 2, 1996.

FOR FURTHER INFORMATION CONTACT: Andrew M. Eisenberg, (202) 622-7790 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

1. Background

    This document contains final regulations under section 351. The 
final regulations provide for the treatment of

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certain transfers to a controlled corporation. Section 351(a) provides 
that no gain or loss will be recognized if one or more persons transfer 
property to a corporation solely in exchange for stock in the 
corporation and immediately after the exchange such person or persons 
are in control of the corporation. Section 351(e)(1) provides that 
section 351(a) will not apply to a transfer of property to an 
investment company.
    On August 10, 1995, the Federal Register published a notice of 
proposed rulemaking (CO-19-95), amending regulations under section 351 
of the Internal Revenue Code relating to transfers of property to an 
investment company (60 FR 40794). The proposed rules were based on the 
conclusion that transfers of diversified portfolios are not 
inconsistent with the Congressional purpose of section 351(e)(1).

2. Public Comments and the Final Regulations

    The IRS received comments from the public on the proposed 
regulations. No public hearing was requested and none was held. The 
comments received were generally supportive of the proposed 
regulations. After consideration of all the comments, the regulations 
proposed by CO-19-95 are adopted as revised by this Treasury decision. 
The principal comments on the proposed regulations are discussed below.
    Government securities are not treated as securities of an issuer 
for purposes of the 25 and 50-percent tests. Several commentators 
suggested that the final regulations include specific assurance that 
Government securities are not treated as securities of an issuer in 
applying the 25 and 50-percent tests contained in section 
368(a)(2)(F)(ii). The proposed regulations generally adopt the section 
368(a)(2)(F)(ii) tests for purposes of determining whether a portfolio 
of stocks and securities is diversified. However, the proposed 
regulations modify the 25 and 50-percent tests of section 
368(a)(2)(F)(ii) by including Government securities in total assets 
(clause (iv) of section 368(a)(2)(F) excludes Government securities 
from total assets for purposes of the 25 and 50-percent tests in clause 
(ii) of section 368(a)(2)(F)). The final regulations clarify that 
Government securities, while included in total assets, are not treated 
as securities of an issuer for purposes of the numerator of the 25 and 
50-percent tests of section 368(a)(2)(F)(ii).
    The transfer of a diversified portfolio of stocks and securities by 
any transferor satisfies the modified diversification test. One 
commentator suggested that the final regulations should clarify that 
any person, rather than corporate transferors only, may satisfy the 
modified diversification test. The commentator is concerned that the 
use of the section 368(a)(2)(F)(ii) tests, which are adopted from a 
provision that applies only to transfers by corporations, may imply 
that the tests as applied in section 351 are limited to corporate 
transferors.
    The Treasury and IRS do not intend to limit application of the 
final regulations solely to corporate transferors. The final 
regulations provide that a portfolio will be diversified if it 
satisfies the 25 and 50-percent tests of section 368(a)(2)(F)(ii) (as 
modified), rather than section 368(a)(2)(F)(ii), generally.
    Transfers of interests in real property to an investment company. 
One commentator suggested that the final regulations adopt a rule 
whereby transfers of real property would not result in the 
diversification of the transferors' interests if each transferor 
transfers a diversified portfolio of real property to a Real Estate 
Investment Trust. The subject of real property transfers is beyond the 
scope of these final regulations.
    Retroactive effect of the final regulations. Several commentators 
suggested that the final regulations include a retroactive effective 
date. The final regulations allow taxpayers who transfer diversified, 
but nonidentical, portfolios of stocks and securities before May 2, 
1996, to choose to treat the transfers consistent with the final 
regulations or as transfers resulting in diversification. However, 
transfers completed on or after May 2, 1996, are subject to the final 
regulations.
    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 Chief Counsel for Advocacy of 
the Small Business Administration for comment on its impact on small 
business.
    Drafting Information. The principal author of these regulations is 
Andrew M. Eisenberg, Office of Assistant Chief Counsel (Corporate), 
IRS. However, 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 Amendment to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read as 
follows:

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

    Section 1.351-1 also issued under 26 U.S.C. 351. * * * .
    Par. 2. Section 1.351-1 is amended by:
    1. Redesignating paragraph (c)(6) as paragraph (c)(7).
    2. Adding new paragraph (c)(6) to read as follows:


Sec. 1.351-1 Transfer to corporation controlled by transferor.

* * * * *
    (c) * * *
    (6)(i) For purposes of paragraph (c)(5) of this section, a transfer 
of stocks and securities will not be treated as resulting in a 
diversification of the transferors' interests if each transferor 
transfers a diversified portfolio of stocks and securities. For 
purposes of this paragraph(c)(6), a portfolio of stocks and securities 
is diversified if it satisfies the 25 and 50-percent tests of section 
368(a)(2)(F)(ii), applying the relevant provisions of section 
368(a)(2)(F). However, Government securities are included in total 
assets for purposes of the denominator of the 25 and 50-percent tests 
(unless the Government securities are acquired to meet the 25 and 50-
percent tests), but are not treated as securities of an issuer for 
purposes of the numerator of the 25 and 50-percent tests.
    (ii) Paragraph (c)(6)(i) of this section is effective for transfers 
completed on or after May 2, 1996. Transfers of diversified (within the 
meaning of paragraph (c)(6)(i) of this section), but nonidentical, 
portfolios of stocks and securities completed before May 2, 1996, may 
be treated either--
    (A) Consistent with paragraph (c)(6)(i) of this section; or

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    (B) As resulting in diversification of the transferors' interests.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: March 6, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-10394 Filed 5-1-96; 8:45 am]
BILLING CODE 4830-01-U