Part I. Rulings — Internal Revenue Bulletin 1999-47

Treasury Inflation-Indexed Securities is a qualified reopening for purposes of §1.1275–2(d) even though the reopening is not intended to alleviate an acute, protracted shortage of the original Treasury securities.

For debt management and liquidity concerns, the Treasury Department has decided that it needs the ability to reopen an issue of Treasury securities within one year. Therefore, the temporary regulations in this document (§1.1275–2T) revise the rules for when a reopening is a qualified reopening by eliminating the acute, protracted shortage requirement. As a result, the Treasury Department can reopen an issue of outstanding Treasury securities at any time within 12 months after the issue date of the securities for any reason and the securities will be fungible for Federal income tax purposes.

The temporary regulations also revise the rules to determine the issue price and issue date of an issue of Treasury securities auctioned on or after November 2, 1998, to reflect changes in how Treasury securities are sold. On November 2, 1998, the Treasury Department switched from an average price auction to a single price auction for selling Treasury securities.

In response to comments, the IRS is proposing rules for reopenings of debt instruments other than Treasury securities. See the proposed rules in REG– 115932–99 on page 583.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 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) does not apply to these regulations and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Section 1275.—Other Definitions and Special Rules

26 CFR 1.1275–2T: Special rules relating to debt instruments (temporary).

T.D. 8840

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reopenings of Treasury Securities; Original Issue Discount

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to the Federal income tax treatment of reopenings of Treasury securities. The temporary regulations change the definition of a qualified reopening. The text of the temporary regulations also serves as the text of the proposed regulations set forth in REG–115932–99 on page 583 of this Bulletin. The regulations in this document provide needed guidance to holders of reopened Treasury securities.

DATES: The regulations are effective November 5, 1999.

FOR FURTHER INFORMATION CONTACT: William E. Blanchard, (202) 6223950 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Sections 163(e) and 1271 through 1275 of the Internal Revenue Code (Code) provide rules for the Federal income tax treatment of interest and original issue discount (OID). On February 2, 1994, final regulations relating to these sections of the Code (T.D. 8517, 1994–1 C.B. 38) were published in the Federal Register (59 F.R. 4799). Section 1.1275–2(d)(2) of the regulations provides rules for the treatment of certain reopenings of Treasury securities.

On January 6, 1997, temporary regulations relating to the Federal income tax treatment of inflation-indexed debt instruments (T.D. 8709, 1997–1 C.B. 167) were published in the Federal Register (62 F.R. 615). Section 1.1275–7T(g) of those temporary regulations provided rules for the treatment of certain reopenings of Treasury Inflation-Indexed Securities. On September 7, 1999, §1.1275–7T was redesignated as §1.1275–7 (T.D. 8838, 1999–38 I.R.B. 424 [64 F.R. 48545]).

Explanation of Provisions

The Secretary of the Treasury is authorized to issue Treasury securities, including Treasury Inflation-Indexed Securities, and to prescribe terms and conditions for their issuance and sale. The Treasury Department sells securities throughout the year.

In January 1992, the Treasury Department determined that it will be prepared to provide additional quantities of a security to the public when an acute, protracted shortage develops. These reopenings are necessary to preserve the integrity and efficient functioning of the market in Treasury securities. See Department of the Treasury, Securities and Exchange Commission, and Board of Governors of the Federal Reserve System, Joint Report on the Government Se- curities Market (January 1992).

In order to ensure that the original and additional Treasury securities are fungible, §1.1275–2(d) provides that the additional Treasury securities issued in a reopening are part of the same issue as the original Treasury securities if (1) the additional Treasury securities have the same terms as the original Treasury securities, (2) the additional Treasury securities are issued not more than 12 months after the original Treasury securities were first issued to the public, and (3) the additional Treasury securities are issued in a reopening intended to alleviate an acute, protracted shortage of the original Treasury securities (a qualified reopening). As a result, any discount generated upon the issuance of the additional Treasury securities in the reopening is market discount rather than OID.

Under §1.1275–7(g), a reopening of

1999–47 I.R.B. 575 November 22, 1999

Drafting Information

The principal author of the regulations is William E. Blanchard, Office of Assistant Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and Treasury Department participated in their development.

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Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.1275–2T also issued under 26 U.S.C. 1275(d). * * *

Par. 2. Section 1.1271–0 is amended by:

Revising the entry for §1.1275–2(d) in paragraph (b).
Adding an entry for §1.1275–2T in numerical order in paragraph (b).
Revising the entry for §1.1275–7(g) in paragraph (b).

The revisions and additions read as follows:

§1.1271–0 Original issue discount; effective date; table of contents.

(b) * * *

§1.1275–2 Special rules relating to debt instruments.

(d) [Reserved]

§1.1275–2T Special rules relating to debt instruments (temporary).

(a) through (c) [Reserved] (d) Special rules for Treasury securities. (1) Issue price and issue date. (2) Reopenings of Treasury securities.

§1.1275–7 Inflation-indexed debt instruments.

(g) [Reserved]

Par. 3. Section 1.1275–2 is amended by revising paragraph (d) to read as follows:

§1.1275–2 Special rules relating to debt instruments.

(d) [Reserved] For further guidance, see §1.1275–2T(d).

Par. 4. Section 1.1275–2T is added to read as follows:

§1.1275–2T Special rules relating to debt instruments (temporary).

(a) through (c) [Reserved] For further guidance, see §1.1275–2(a) through (c).

(d) Special rules for Treasury securi- ties —(1) Issue price and issue date —(i) In general. The issue price of an issue of Treasury securities is the price of the securities sold at auction. In addition, the issue date of the issue is the first settlement date of a substantial amount of the securities.

(ii) Treasury securities auctioned be- fore November 2, 1998. For an issue of Treasury securities auctioned before November 2, 1998, the issue price of the issue is the average price of the securities sold. In addition, the issue date of the issue is the first settlement date on which a substantial amount of the securities in the issue is sold.

(2) Reopenings of Treasury secu- rities —(i) Treatment of additional Trea- sury securities. Additional Treasury securities issued in a qualified reopening are part of the same issue as the original Treasury securities and have the same issue price and issue date as the original Treasury securities. This paragraph (d)(2) applies to qualified reopenings that occur on or after March 25, 1992.

(ii) Definitions —(A) Additional Trea- sury securities. Additional Treasury securities are Treasury securities with terms that are in all respects identical to the terms of the original Treasury securities.

(B) Original Treasury securities. Original Treasury securities are securities comprising any issue of outstanding Treasury securities.

(C) Qualified reopening. A qualified reopening is a reopening that occurs not more than one year after the original Treasury securities were first issued to the public. For reopenings of Treasury securities (other than Treasury Inflation-Indexed Securities) that occur prior to November 5, 1999, a qualified reopening is a reopening of Treasury securities that satisfies the preceding sentence and that was intended to alleviate an acute, protracted shortage of the original Treasury securities.

§1.1275–7 [Amended]

Par. 5. Section 1.1275–7 is amended by removing and reserving paragraph (g).

David A. Mader, Acting Deputy Commissioner

of Internal Revenue.

Approved October 29, 1999.

Jonathan Talisman, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on November 3, 1999, 8:45 a.m., and published in the issue of the Federal Register for November 5, 1999, 64 F.R. 60342)

Section 1502.—Regulations

26 CFR 1.1502–76: Taxable year of members of group.

T.D. 8842

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Acquisition of an S Corporation by a Member of a Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section 1502 of the Internal Revenue Code. These final regu

November 22, 1999 576 1999–47 I.R.B.

lations provide specific rules that apply to the acquisition of the stock of an S corporation by a member of a consolidated group. These rules eliminate the compliance burdens associated with filing a separate return for the day that an S corporation is acquired by a consolidated group. Additionally, the regulations clarify the rules for the filing of the separate return for a corporation’s items for the period not included in the consolidated return.

DATES: Effective Date: These regulations are effective November 10, 1999.

Applicability Date: For dates of applicability, see §1.1502–76(b)(6)(i).

FOR FURTHER INFORMATION CONTACT: Vincent Daly, (202) 622-7770 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

On December 17, 1998, the IRS published in the Federal Register a notice of proposed rulemaking (REG–106219–98, 1999–9 I.R.B. 51 [63 F.R. 69581]), concerning acquisitions by a consolidated group of at least eighty percent of the stock of an S corporation. Although a comment was received questioning the advisability of a special rule for the acquisition of an S corporation, the IRS and Treasury have determined the rules are necessary to eliminate the administrative burden of filing a separate tax return for the day the S corporation is acquired. The proposed regulations are adopted by this Treasury decision.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the regulations will provide administrative relief to small entities by removing the administrative burden of filing a separate one-day return currently required for certain acquisitions. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flex

ibility Act (5 U.S.C. chapter 6) 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 Jeffrey L. Vogel of the Office of the Assistant Chief Counsel (Corporate), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

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Adoption of Amendments 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 in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.1362–3 is amended by adding a sentence to the end of paragraph (a) to read as follows:

§1.1362–3 Treatment of S termination year.

(a) In general. - * * See, however, §1.1502–76(b)(1)(ii)(A)( 2 ) for special rules for an S election that terminates under section 1362(d) immediately before the S corporation becomes a member of a consolidated group (within the meaning of §1.1502–1(h)).

Par. 3. Section 1.1502–76 is amended as follows:

The text of paragraph (b)(1)(ii)(A) following the paragraph heading is redesignated as paragraph (b)(1)(ii)(A)( 1 ).
A paragraph heading for newly designated paragraph (b)(1)(ii)(A)( 1 ) is added.
The first sentence of newly designated paragraph (b)(1)(ii)(A)( 1 ) is revised.
Paragraph (b)(1)(ii)(A)( 2 ) is added.
Paragraph (b)(2)(v) is redesignated as paragraph (b)(2)(vi).
New paragraph (b)(2)(v) is added.
Paragraphs (b)(4) and (b)(5) are redesignated as paragraphs (b)(5) and (b)(6), respectively.
New paragraph (b)(4) is added.
Newly designated paragraph (b)(5) is amended as follows:

a. Example 6 (b), first sentence is revised.

b. Example 6 (c), second sentence is revised.

c. Example 7 is added. 10. Newly designated paragraph (b)(6)(i) is revised.

The revisions and additions read as follows:

§1.1502–76 Taxable year of members of group.

(b) * * * (1) * * * (ii) * * *(A) End of the day rule. ( 1 ) In general. If a corporation (S), other than one described in paragraph (b)(1)(ii)(A)( 2 ) of this section, becomes or ceases to be a member during a consolidated return year, it becomes or ceases to be a member at the end of the day on which its status as a member changes, and its tax year ends for all Federal income tax purposes at the end of that day. * * *

( 2 ) Special rule for former S corpora- tions. If S becomes a member in a transaction other than in a qualified stock purchase for which an election under section 338(g) is made, and immediately before becoming a member an election under section 1362(a) was in effect, then S will become a member at the beginning of the day the termination of its S corporation election is effective. S’s tax year ends for all Federal income tax purposes at the end of the preceding day. This paragraph (b)(1)(ii)(A)( 2 ) applies to transactions occurring after November 10, 1999.

(2) * * * (v) Acquisition of S corporation. If a corporation is acquired in a transaction to which paragraph (b)(1)(ii)(A)( 2 ) of this section applies, then paragraphs (b)(2)(ii) and (iii) of this section do not apply and items of income, gain, loss, deduction, and credit are assigned to each short taxable year on the basis of the corporation’s normal method of accounting as deter

1999–47 I.R.B. 577 November 22, 1999

mined under section 446. This paragraph (b)(2)(v) applies to transactions occurring after November 10, 1999.

(4) Determination of due date for sepa- rate return. Paragraph (c) of this section contains rules for the filing of the separate return referred to in this paragraph (b). In applying paragraph (c) of this section, the due date for the filing of S’s separate return shall also be determined without regard to the ending of the tax year under paragraph (b)(1)(ii) of this section or the deemed cessation of its existence under paragraph (b)(2)(i) of this section.

(5) * * *

Example 6. Allocation of partnership items. - * * (b) Analysis. Under paragraph (b)(2)(vi)(A) of this section, T is treated, solely for purposes of determining T’s tax year in which the partnership’s items are included, as selling or exchanging its entire interest in the partnership as of P’s sale of T’s stock. * * *

(c) Controlled partnership. - * * Under paragraph (b)(2)(vi)(B) of this section, T’s distributive share of the partnership items is treated as T’s items for purposes of paragraph (b)(2) of this section. * * *

Example 7. Acquisition of S corporation. (a) Facts. Z is a small business corporation for which an election under section 1362(a) was in effect at all times since Year 1. At all times, Z had only 100 shares of stock outstanding, all of which were owned by individual A. On July 1 of Year 3, P acquired all of the Z stock. P does not make an election under section 338(g) with respect to its purchase of the Z stock.

(b) Analysis. As a result of P’s acquisition of the Z stock, Z’s election under section 1362(a) terminates. See sections 1361(b)(1)(B) and 1362(d)(2). Z is required to join in the filing of the P consolidated return. See §1.1502–75. Z’s tax year ends for all Federal income tax purposes on June 30 of Year 3. If no extension of time is sought, Z must file a separate return for the period from January 1 through June 30 of Year 3 on or before March 15 of Year 4. See paragraph (b)(4) of this section. Z will become a member of the P consolidated group as of July 1 of Year 3. See paragraph (b)(1)(ii)(A)( 2 ) of this section. P group’s Year 3 consolidated return will include Z’s items from July 1 to December 31 of Year 3.

(6) Effective date —(i) General rule. Except as provided in paragraphs (b)(1)(ii)(A)( 2 ) and (b)(2)(v) of this section, this paragraph (b) applies to corporations becoming or ceasing to be members of consolidated groups on or after January 1, 1995.

Bob Wenzel, Deputy Commissioner of

Internal Revenue.

Approved October 29, 1999.

Jonathan Talisman, Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on November 9, 1999, 8:45 a.m., and published in the issue of the Federal Register for November 10, 1999, 64 F.R. 61205)

Section 6601.—Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax

26 CFR 301.6601–1: Interest on underpayments.

How is the net interest rate of zero in section 6621(d) of the Code applied to interest accruing before October 1, 1998, with respect to overlapping tax underpayments and tax overpayments. See Rev. Proc. 99–43, page 579.

Section 6611.—Interest on Overpayments

26 CFR 301.6611–1: Interest on overpayments.

Section 6621.—Determination of Rate of Interest

26 CFR 301.6621–1: Interest rate.

November 22, 1999 578 1999–47 I.R.B.