Final Regulations on C Corporation Transfers to RIC or REIT

By Mariana Moghadam

The IRS issued final regulations which provide guidance concerning certain transfers of property from a C corporation to a Regulated Investment Company (RIC) or a Real Estate Investment Trust (REIT).

Generally, under Reg. Sec. 1.337(d)-7, if property owned by a C corporation becomes the property of a RIC or REIT by the qualification of that C corporation as a RIC or REIT, or by the transfer of assets of that C corporation to a RIC or REIT, then the RIC or REIT is subject to tax on the net built-in gain in the converted property as if the RIC or REIT were an S corporation.  However, this general rule does not apply if the C corporation makes an election under Reg. Sec. 1.337(d)-7(c) to recognize gain or loss as if it sold the converted property (deemed sale) to an unrelated person at fair market value.

The final regulations (T.D. 9626) amend Reg. Sec. 1.337(d)-7 to add two more exceptions where the gain will not be recognized:

1. If the transfer of property qualifies as a like-kind exchange under IRC Sec. 1031 or an involuntary conversion under Sec. 1033
2.  If the C corporation that owned the converted property is a tax-exempt entity, but only to the extent that the gain would not be subject to tax under the Internal Revenue Code if the deemed sale election were made. 

The final regulations are effective for transactions on or after 8/12/13, but may be applied to transactions occurring before this date and on or after 1/2/02.