The IRS released temporary and proposed regulations on the treatment of net built-in gain of C corporation assets that become assets of a RIC or REIT either by the qualification of a C corporation as a RIC or REIT, or by the transfer of assets to a RIC or REIT. The text of the temporary regulations serves as the text of the proposed regulations. PwC Observes: Sam Starr, partner in PwC's Washington National Tax Services, comments, "After a newly twelve-year wait for these regulations, frankly, they are not much of a surprise. They tell us to follow the existing S corporation built-in gain tax regulations. The most important thing is to make the elction to be under the regulations with the first return filed after February 7, 2000." Effective Date
The temporary regulations are effective on the date of filing with the Federal Register, February 4, 2000. However, for carryover of basis transactions involving the transfer of property of a C Corporation to a RIC or REIT, the regulations apply to transactions occurring on or after June 10, 1987. For C corporations that qualify to be taxed as a RIC or REIT, the regulations apply to qualifications that are effective for tax years beginning on or after June 10, 1987. Notice 88-19 had indicated that the regulations would be applicable retroactively to this date. Provisions of the Regulations
The temporary regulations amend the regulations under Section 337(d). They provide that if a C corporations qualifies to be taxed as a RIC or REIT or transfers assets to a RIC or REIT in a carryover basis transaction, then the C corporation is treated as if it sold all of its assets at their respective FMV and immediately liquidated, unless the RIC or REIT elects to be subject to tax under Section 1374. Any resulting net built-in gain is recognized by the C corporation and the bases of the assets in the hands of the RIC or REIT are generally adjusted to their FMV to reflect the recognized net built-in gain. A C corporation may not recognize a net built-in loss so the carryover bases of the asset in the hands of the RIC or REIT are preserved. If treatment under Section 1374 is elected by the RIC or REIT, both its built-in gain and the corporate-level tax imposed on that gain is subject to rules similar to those for foreclosure property of REITs, under Section 857. Election
If the first tax year in which the assets of the C corporation become assets of the RIC or REIT ends after June 10, 1987 but before the date which is 30 days after the publication of these regulations in the Federal Register, the Section 1374 election may be filed with the first tax return filed by the RIC or REIT after the date which is 30 days after the publication in the Federal Register. The regulations are anticipated to be published in the Federal Register on February 7, 2000. #### For additional information, please call PwC's Sam Starr at (202) 414-4423 or Jeffrey Rosenberg at (202) 414-1765.
(Source : PwC Tax News Network)
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