The final regulations T.D. 9626 [PDF 85 KB] adopt regulations that were proposed in April 2012, with some clarifications added.
Reg. section 1.337(d)-7 (issued in 2003) provides generally that if property of a C corporation (the C corporation transferor) becomes the property of a RIC or REIT because the C corporation becomes a qualified RIC or REIT or by the transfer of assets of the C corporation to a RIC or REIT (a conversion transaction), then the RIC or REIT will be subject to tax on the net built-in gain in the converted property under the rules of section 1374 and the underlying regulations. This is referred to as the “general rule.”
The general rule, however, does not apply if the C corporation transferor elects to recognize gain and loss as if it sold the converted property to an unrelated party at fair market value (deemed sale treatment).
In April 2012, proposed regulations described:
- Measures relating to net built-in gain property acquired by a RIC or REIT either in a like-kind exchange (when the C corporation transferor’s gain is not recognized by reason of section 1031) or in an involuntary conversion (when such gain is not recognized by reason of section 1033)
- A proposed revision to the definition of a C corporation so that a transfer of property by a tax-exempt entity to a RIC or REIT is not treated as a conversion transaction unless the tax-exempt entity would have been subject to tax if a deemed sale election had been made
- New definitions for the terms RIC, REIT, and S corporation
Read a preliminary discussion of the proposed regulation: TaxNewsFlash-United States [PDF 43 KB]
Today’s final regulations adopt the rules that were proposed in 2012, but with changes made in response to a written comment.
With respect to a request for clarification concerning one of two exceptions from the general rule—i.e., the tax-exempt exception—the final regulations clarify that the general rule does not apply to a conversion transaction in which the C corporation that owned the converted property is a tax-exempt entity to the extent that gain would not be subject to tax if a deemed sale election were made.
Thus, for example, the tax-exempt exception applies to the extent the deemed sale gain with respect to the converted property would be exempt from tax under section 501(a) because that portion of the gain would not be subject to tax under any Code provision had a deemed sale election been made—even if the tax-exempt exception does not apply to the extent the deemed sale gain with respect to the converted property would be subject to tax under section 511.
The final regulations are effective on August 2, 2013—the date when they will be published in the Federal Register.