Td 9035

ing for federal tax purposes, and Z ceases its separate
legal existence for all purposes. Paragraph (b)(1)(iii)
of this section does not apply to prevent the transaction from qualifying as a statutory merger or consolidation for purposes of section 368(a)(1)(A) because
each of Z, Y, and X is a domestic entity. Moreover,
the deemed transfer of the assets of U in exchange for
U stock does not cause the transaction to fail to qualify
as a statutory merger or consolidation. See
§368(a)(2)(C). Accordingly, the transaction qualifies as a statutory merger or consolidation for purposes of section 368(a)(1)(A).
Example 4. Triangular merger of a target corporation into a disregarded entity. (i) The facts are the
same as in Example 2, except that V owns 100 percent of the outstanding stock of Y and, in the merger
of Z into X, the Z shareholders exchange their stock
of Z for stock of V. In the transaction, Z transfers substantially all of its properties to X.
(ii) The transaction is not prevented from qualifying as a statutory merger or consolidation under section 368(a)(1)(A), provided the requirements of section
368(a)(2)(D) are satisfied. Because the assets of X are
treated for federal tax purposes as the assets of Y, Y
will be treated as acquiring substantially all of the properties of Z in the merger for purposes of determining whether the merger satisfies the requirements of
section 368(a)(2)(D). As a result, the Z shareholders
that receive stock of V will be treated as receiving
stock of a corporation that is in control of Y, the combining entity of the transferee unit that is the acquiring corporation for purposes of section 368(a)(2)(D).
Accordingly, the merger will satisfy the requirements of section 368(a)(2)(D).
Example 5. Merger of a target corporation into a
disregarded entity owned by a partnership. (i) The facts
are the same as in Example 2, except that Y is organized as a partnership under the laws of State W and
is classified as a partnership for federal tax purposes.
(ii) The transaction does not satisfy the requirements of paragraph (b)(1)(ii)(A) of this section. All
of the assets and liabilities of Z, the combining entity and sole member of the transferor unit, do not become the assets and liabilities of one or more members
of a transferee unit because neither X nor Y qualifies as a combining entity. Accordingly, the transaction cannot qualify as a statutory merger or
consolidation for purposes of section 368(a)(1)(A).
Example 6. Merger of a disregarded entity into a
corporation. (i) Under State W law, X merges into Z.
Pursuant to such law, the following events occur simultaneously at the effective time of the transaction:
all of the assets and liabilities of X (but not the assets and liabilities of Y other than those of X) become the assets and liabilities of Z and X’s separate
legal existence ceases for all purposes.
(ii) The transaction does not satisfy the requirements of paragraph (b)(1)(ii)(A) of this section because all of the assets and liabilities of a transferor
unit do not become the assets and liabilities of one
or more members of the transferee unit. The transaction also does not satisfy the requirements of paragraph (b)(1)(ii)(B) of this section because X does not
qualify as a combining entity. Accordingly, the transaction cannot qualify as a statutory merger or consolidation for purposes of section 368(a)(1)(A).
Example 7. Merger of a corporation into a disregarded entity in exchange for interests in the disregarded entity. (i) Under State W law, Z merges into

2003–9 I.R.B.

X. Pursuant to such law, the following events occur
simultaneously at the effective time of the transaction:
all of the assets and liabilities of Z become the assets and liabilities of X and Z’s separate legal existence ceases for all purposes. In the merger of Z into
X, the Z shareholders exchange their stock of Z for
interests in X so that, immediately after the merger,
X is not disregarded as an entity separate from Y for
federal tax purposes. Following the merger, pursuant to §301.7701–3(b)(1)(i) of this chapter, X is classified as a partnership for federal tax purposes.
(ii) The transaction does not satisfy the requirements of paragraph (b)(1)(ii)(A) of this section because immediately after the merger X is not
disregarded as an entity separate from Y and, consequently, all of the assets and liabilities of Z, the combining entity of the transferor unit, do not become the
assets and liabilities of one or more members of a
transferee unit. Accordingly, the transaction cannot
qualify as a statutory merger or consolidation for purposes of section 368(a)(1)(A).
Example 8. Merger transaction preceded by distribution. (i) Z operates two unrelated businesses, Business P and Business Q, each of which represents 50
percent of the value of the assets of Z. Y desires to
acquire and continue operating Business P, but does
not want to acquire Business Q. Pursuant to a single
plan, Z sells Business Q for cash to parties unrelated to Z and Y in a taxable transaction, and then distributes the proceeds of the sale pro rata to its
shareholders. Then, pursuant to State W law, Z merges
into Y. Pursuant to such law, the following events occur simultaneously at the effective time of the
transaction: all of the assets and liabilities of Z related to Business P become the assets and liabilities
of Y and Z’s separate legal existence ceases for all purposes. In the merger, the Z shareholders exchange their
Z stock for Y stock. Prior to the transaction, Z is not
treated as owning any assets of an entity that is disregarded as an entity separate from its owner for federal tax purposes.
(ii) The transaction satisfies the requirements of paragraph (b)(1)(ii) of this section because the transaction is effected pursuant to State W law and the
following events occur simultaneously at the effective time of the transaction: all of the assets and liabilities of Z, the combining entity and sole member
of the transferor unit, become the assets and liabilities of Y, the combining entity and sole member of
the transferee unit, and Z ceases its separate legal existence for all purposes. Paragraph (b)(1)(iii) of this
section does not apply to prevent the transaction from
qualifying as a statutory merger or consolidation for
purposes of section 368(a)(1)(A) because each of Z
and Y is a domestic entity. Accordingly, the transaction qualifies as a statutory merger or consolidation
for purposes of section 368(a)(1)(A).

acquiring S corporation), the target corporation (and the shareholders of the target
corporation whose tax treatment of the
transaction reflects the tax treatment by the
target corporation) also applies these regulations in whole, but not in part, to the
transaction, and if the taxpayer is the target corporation (or a shareholder of the target corporation whose tax treatment of the
transaction reflects the tax treatment by the
target corporation), the acquiring corporation (and the shareholders of the acquiring corporation whose tax treatment of the
transaction reflects the tax treatment by the
acquiring corporation) also applies these
regulations in whole, but not in part, to the
transaction. For all other transactions, see
§1.368–2(b)(1) as in effect before January 24, 2003 (See 26 CFR part 1, revised
April 1, 2002).
(b)(2) through (k) [Reserved]. For further guidance, see §1.368–2(b)(2) through
(k).
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved January 17, 2003.
Pamela F. Olson,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on January 23,
2003, 8:45 a.m., and published in the issue of the Federal Register for January 24, 2003, 68 F.R. 3384)

Section 1041.—Transfers of
Property Between Spouses or
Incident to Divorce
26 CFR 1.1041–1T: Treatment of transfers of
property between spouses or incident to divorce
(temporary).

T.D. 9035

DEPARTMENT OF THE
(v) Effective dates. This paragraph (b)(1) TREASURY
applies to transactions occurring on or af- Internal Revenue Service
ter January 24, 2003. Taxpayers, however, 26 CFR Parts 1 and 602
may apply these regulations in whole, but
not in part, to transactions occurring before January 24, 2003, provided that, if the
taxpayer is the acquiring corporation (or a
shareholder of the acquiring corporation
whose tax treatment of the transaction reflects the tax treatment by the acquiring corporation, such as a shareholder of an

528

Constructive Transfers and
Transfers of Property to a
Third Party on Behalf of a
Spouse
AGENCY: Internal Revenue Service (IRS),
Treasury.

March 3, 2003

ACTION: Final and temporary regulations.
SUMMARY: This document contains final and temporary regulations relating to the
tax treatment of redemptions, during marriage or incident to divorce, of stock in a
corporation owned by a spouse or former
spouse.
DATE: Effective Date: These regulations are
effective January 13, 2003.
Applicability Date: These regulations are
applicable to redemptions of stock on or after January 13, 2003, that are pursuant to
instruments in effect after January 13, 2003.
These regulations are also applicable to redemptions before January 13, 2003, or that
are pursuant to instruments in effect before January 13, 2003, if the spouses or
former spouses execute a written agreement on or after August 3, 2001, that satisfies the requirements of §1.1041–2(c)(1)
or (2).
FOR FURTHER INFORMATION CONTACT: Edward C. Schwartz at (202) 622–
4960 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been reviewed
and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3507)
under control number 1545–1751. Responses to this collection of information are
required for certain taxpayers to redeem
stock in a corporation and utilize the special rule in §1.1041–2(c) of these regulations.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless
the collection of information displays a valid
control number assigned by the Office of
Management and Budget.
The estimated annual burden per
respondent/recordkeeper varies from 20
minutes to one hour, depending on individual circumstances, with an estimated average of 30 minutes.
Comments concerning the accuracy of
this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Of-

March 3, 2003

ficer for the Department of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this collection of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
On August 3, 2001, the IRS and Treasury Department published in the Federal Register a notice of proposed
rulemaking under section 1041 relating to
certain redemptions, during marriage or incident to divorce, of stock in a corporation owned by a spouse or former spouse
(REG–107151–00, 2001–2 C.B. 370 [66 FR
40659]). Written and electronic comments
were solicited, and a public hearing was
scheduled for December 14, 2001. Several comments were received and are discussed below. Because no requests to speak
were timely received, the public hearing was
cancelled. After consideration of all comments received, the proposed regulations under section 1041 are adopted as revised by
this Treasury decision.
Explanation and Summary of
Comments
1. Special Rules in Cases of Written
Agreements Between the Spouses
The proposed regulations provided generally that if a corporation redeemed stock
owned by a transferor spouse and the redemption resulted in a constructive distribution to the nontransferor spouse under
applicable tax law, then the redemption
would be taxable to the nontransferor
spouse as if the nontransferor spouse had
actually received the redemption proceeds.
The proposed regulations contained a special rule in §1.1041–2(c) allowing the
spouses the option of treating the redemption as resulting in a constructive distribution to the nontransferor spouse, and
therefore taxable to the nontransferor
spouse, even if the redemption would not
result in a constructive distribution to the
nontransferor spouse under applicable tax
law. The proposed regulations provided that
the spouses could elect the special rule by
providing in the divorce or separation instrument, or other written agreement, that

529

the spouses must file their federal income
tax returns in a manner that reflects that the
transferor spouse transferred the redeemed
stock to the nontransferor spouse in exchange for the redemption proceeds and the
corporation redeemed the stock from the
nontransferor spouse in exchange for the redemption proceeds. The proposed regulations also provided that the special rule
would be effective for written agreements
executed on or after August 3, 2001, that
met these requirements.
Commentators expressed concern that the
proposed regulations contained no provision addressing the situation where the
redemption results in a constructive distribution to the nontransferor spouse under applicable tax law, but the spouses nevertheless would like to agree that the
redemption will be treated as a redemption distribution to the transferor spouse.
They suggested that the final regulations expand the special rule in §1.1041–2(c) to allow the spouses to agree in the divorce or
separation instrument, or other valid written agreement, that the redemption will be
taxable to the transferor spouse notwithstanding that the redemption might otherwise result in a constructive distribution to
the nontransferor spouse under applicable
tax law.
The IRS and Treasury Department believe that this suggestion is consistent with
the policy of section 1041 and its legislative history, which is to provide flexibility to spouses and former spouses
concerning the structuring of their property transfers during marriage and incident to divorce. Accordingly, this suggestion
has been adopted in §1.1041–2(c) of the final regulations. New Example 2 in §1.1041–
2(d) illustrates the application of this new
special rule.
The manner of electing the special rule
also has been modified somewhat in the final regulations. Under the final regulations, the spouses can elect the special rule
by expressly providing, in a divorce or separation instrument or other valid written
agreement, that expressly supersedes any
other instrument or agreement concerning the purchase, sale, redemption, or other
disposition of the stock that is the subject
of the redemption, their mutual intent concerning whether the redemption should be
treated as a redemption distribution to the
transferor spouse or to the nontransferor
spouse. The IRS and Treasury Department

2003–9 I.R.B.

will treat a divorce or separation instrument or other valid written agreement executed on or after August 3, 2001, and
before May 13, 2003, that meets the requirements of the special rule of the proposed regulations as also meeting the
requirements of the special rule in paragraph (c)(2) of the final regulations.
2. Constructive Distribution Standard
Some commentators also expressed concern that taxpayers and divorce practitioners may not be aware of the situations in
which a redemption of stock owned by the
transferor spouse could result in a constructive distribution to the nontransferor
spouse under applicable tax law. They therefore suggested that the final regulations either provide that the redemption will be
treated as a redemption distribution to the
transferor spouse regardless of applicable
tax law, unless the spouses provide otherwise in a written agreement and file their
federal income tax returns accordingly, or
provide specific definitions and examples
of situations in which a redemption would
result in a constructive distribution to the
nontransferor spouse under applicable tax
law.
The IRS and Treasury Department continue to believe that the approach in the proposed regulations is appropriate. Under
existing tax law, a redemption of stock
owned by one shareholder may result in a
constructive distribution to another shareholder if such nonredeeming shareholder has
a primary and unconditional obligation to
purchase the redeeming shareholder’s stock.
See Rev. Rul. 69–608, 1969–2 C.B. 42,
Wall v. United States, 164 F.2d 462 (4th Cir.
1947), and Sullivan v. United States, 363
F.2d 724 (8th Cir. 1966). This “primary and
unconditional obligation” standard applies
to all redemptions, including those involving stock of closely held corporations by
spouses or former spouses. A rule that provides that a redemption of stock owned by
the transferor spouse will always be treated
as a redemption distribution to the transferor spouse would be inconsistent with this
established law. Furthermore, if taxpayers
and divorce practitioners are uncertain about
the application of the “primary and unconditional obligation” standard, they may take
advantage of the special rules of §1.1041–
2(c), which permit spouses to avoid any
question of whether a redemption results in
a constructive distribution to the nontrans-

2003–9 I.R.B.

feror spouse under applicable tax law relating to the primary and unconditional
obligation standard by providing in a written agreement which spouse will bear the
tax consequences of the redemption.

continue to believe that the final regulations should be limited to stock redemptions and that Q&A–9 should not be
withdrawn.

3. Withdrawal of §1.1041–1T(c), Q&A–9

One commentator proposed that the final regulations include a requirement that
the spouses or former spouses attach a form
to their federal income tax returns showing which spouse or former spouse has the
tax consequences of the redemption. After careful consideration, the IRS and Treasury Department have concluded that
requiring spouses, and particularly spouses
who have divorced or are divorcing, to
complete and file an additional form in order to obtain the result of the special rules
would unnecessarily increase the administrative burden on taxpayers and on the IRS.
The divorce or separation instrument, or
other valid written agreement of the
spouses, provides adequate evidence of the
spouses’ intent regarding which spouse has
the tax consequences of the redemption.

Section 1.1041–1T(c), Q&A–9, of the
temporary Income Tax Regulations provides that there are three situations in which
a transfer of property to a third party on behalf of a spouse or former spouse will
qualify under section 1041 (provided all
other requirements of that section are met):
(1) if such transfer is required by the divorce or separation instrument; (2) if the
transfer is pursuant to a written request of
the other spouse; and (3) where the transferor spouse receives a written consent or
ratification from the nontransferor spouse.
Under Q&A–9, a transfer of property made
to a third party on behalf of a spouse is
treated first as a deemed transfer of the
property made directly to the nontransferor spouse in a transfer to which section 1041 applies, and then as a deemed
transfer of the property from the nontransferor spouse to the third party in a transaction to which section 1041 does not apply.
Two commentators recommended that
Q&A–9 be withdrawn. They suggested that
retaining that provision would lead to confusion since it would apply to all transfers of property other than stock
redemptions while this final regulation
would apply only to stock redemptions. Another commentator advocated replacing existing Q&A–9 with a single standard
applicable to all transfers of property to third
parties under which the tax consequences
of the transfer would follow the transfer’s form unless the spouses agreed in writing otherwise.
The “on behalf of” standard has not led
to the same confusion and litigation outside the area of stock redemptions because,
in such cases, it does not conflict with any
other standard of tax law. See, e.g.,
Ingham v. United States, 167 F.3d 1240 (9th
Cir. 1999). In addition, as discussed above,
a single standard applicable to all transfers of property to third parties under which
the tax consequences of the transfer would
follow the transfer’s form would be inconsistent with the primary and unconditional
obligation standard applicable to stock redemptions under existing tax law. Consequently, the IRS and Treasury Department

530

4. Use of IRS Form to Designate Intent

5. Legal Guardians and/or Executors of
Estates of Spouses
One commentator suggested that the final regulations provide specific authority for
a legal guardian of a spouse or former
spouse or the executor of a spouse’s or
former spouse’s estate to elect the application of one of the special rules of
§1.1041–2(c). However, a legal guardian,
custodian, or executor of an estate that has
the general authority to act on behalf of a
spouse or former spouse (or his or her estate) for federal income tax purposes needs
no additional or special authority to elect
one of the special rules under §1.1041–
2(c). Accordingly, this suggestion has not
been adopted.
6. Other Changes
In an effort to improve the clarity of the
final regulations, the order of the two paragraphs in §1.1041–2(a) has been reversed
and conforming changes have been made
in the remainder of the final regulations.
Also, the final regulations remove the provision of the proposed regulations that
would have limited their application to
transactions in which both spouses or
former spouses own stock immediately before or after the redemption. On further reflection, the IRS and Treasury Department
believe it is appropriate to apply the regu-

March 3, 2003

lations to all stock redemptions, regardless of whether both spouses own stock of
the corporation before or after the redemption.
7. Effective Date
One comment was received suggesting that the effective date provision of the
final regulations be changed to include all
stock redemptions that were pending on the
day the proposed regulations were issued
(August 2, 2001) and to include all cases
involving stock redemptions at issue on that
date at any level of audit, review, appeal,
or collection by the IRS or before the Tax
Court or any other federal court. It was argued that this proposal would be consistent with the current state of the law and
would resolve numerous cases involving
taxpayers and the IRS. Adopting this suggestion would have the effect of making the
application of the final regulations retroactive. Apart from the special rules of
§1.1041–2(c), which are based upon the
stated intent of the spouses, the IRS and
Treasury do not believe it is appropriate to
apply the final regulations retroactively.
Therefore, the final regulations do not adopt
this suggestion.
Special Analysis
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, a Regulatory Flexibility Analysis under the Regulatory Flexibility 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 Edward C. Schwartz of the Office of the Associate Chief Counsel (Income
Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

March 3, 2003

*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602 are
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. In §1.1041–1T, paragraph (c) is
amended by adding a sentence at the end
of A–9 to read as follows:
§1.1041–1T Treatment of transfers of
property between spouses or incident to
divorce (temporary).
*****
(c) * * *
A–9: * * * This A–9 shall not apply to
transfers to which §1.1041–2 applies.
*****
Par. 3. Section 1.1041–2 is added to read
as follows:
§1.1041–2 Redemptions of stock.
(a) In general—(1) Redemptions of stock
not resulting in constructive distributions.
Notwithstanding Q&A–9 of §1.1041–1T(c),
if a corporation redeems stock owned by
a spouse or former spouse (transferor
spouse), and the transferor spouse’s receipt of property in respect of such redeemed stock is not treated, under
applicable tax law, as resulting in a constructive distribution to the other spouse or
former spouse (nontransferor spouse), then
the form of the stock redemption shall be
respected for federal income tax purposes.
Therefore, the transferor spouse will be
treated as having received a distribution
from the corporation in redemption of stock.
(2) Redemptions of stock resulting in
constructive distributions. Notwithstanding Q&A–9 of §1.1041–1T(c), if a corporation redeems stock owned by a transferor
spouse, and the transferor spouse’s receipt of property in respect of such redeemed stock is treated, under applicable
tax law, as resulting in a constructive distribution to the nontransferor spouse, then
the redeemed stock shall be deemed first
to be transferred by the transferor spouse
to the nontransferor spouse and then to be
transferred by the nontransferor spouse to

531

the redeeming corporation. Any property actually received by the transferor spouse from
the redeeming corporation in respect of the
redeemed stock shall be deemed first to be
transferred by the corporation to the nontransferor spouse in redemption of such
spouse’s stock and then to be transferred
by the nontransferor spouse to the transferor spouse.
(b) Tax consequences—(1) Transfers described in paragraph (a)(1) of this section. Section 1041 will not apply to any of
the transfers described in paragraph (a)(1)
of this section. See section 302 for rules relating to the tax consequences of certain redemptions; redemptions characterized as
distributions under section 302(d) will be
subject to section 301 if received from a
Subchapter C corporation or section 1368
if received from a Subchapter S corporation.
(2) Transfers described in paragraph
(a)(2) of this section. The tax consequences
of each deemed transfer described in paragraph (a)(2) of this section are determined
under applicable provisions of the Internal Revenue Code as if the spouses had actually made such transfers. Accordingly,
section 1041 applies to any deemed transfer of the stock and redemption proceeds
between the transferor spouse and the nontransferor spouse, provided the requirements of section 1041 are otherwise
satisfied with respect to such deemed transfer. Section 1041, however, will not apply to any deemed transfer of stock by the
nontransferor spouse to the redeeming corporation in exchange for the redemption
proceeds. See section 302 for rules relating to the tax consequences of certain redemptions; redemptions characterized as
distributions under section 302(d) will be
subject to section 301 if received from a
Subchapter C corporation or section 1368
if received from a Subchapter S corporation.
(c) Special rules in case of agreements
between spouses or former spouses— (1)
Transferor spouse taxable. Notwithstanding applicable tax law, a transferor spouse’s
receipt of property in respect of the redeemed stock shall be treated as a distribution to the transferor spouse in
redemption of such stock for purposes of
paragraph (a)(1) of this section, and shall
not be treated as resulting in a constructive distribution to the nontransferor spouse
for purposes of paragraph (a)(2) of this section, if a divorce or separation instrument,

2003–9 I.R.B.

or a valid written agreement between the
transferor spouse and the nontransferor
spouse, expressly provides that—
(i) Both spouses or former spouses intend for the redemption to be treated, for
federal income tax purposes, as a redemption distribution to the transferor spouse; and
(ii) Such instrument or agreement supersedes any other instrument or agreement concerning the purchase, sale,
redemption, or other disposition of the stock
that is the subject of the redemption.
(2) Nontransferor spouse taxable. Notwithstanding applicable tax law, a transferor spouse’s receipt of property in respect of the redeemed stock shall be treated
as resulting in a constructive distribution to
the nontransferor spouse for purposes of
paragraph (a)(2) of this section, and shall
not be treated as a distribution to the transferor spouse in redemption of such stock
for purposes of paragraph (a)(1) of this section, if a divorce or separation instrument,
or a valid written agreement between the
transferor spouse and the nontransferor
spouse, expressly provides that—
(i) Both spouses or former spouses intend for the redemption to be treated, for
federal income tax purposes, as resulting in
a constructive distribution to the nontransferor spouse; and
(ii) Such instrument or agreement supersedes any other instrument or agreement concerning the purchase, sale,
redemption, or other disposition of the stock
that is the subject of the redemption.
(3) Execution of agreements. For purposes of this paragraph (c), a divorce or
separation instrument must be effective, or
a valid written agreement must be executed
by both spouses or former spouses, prior to
the date on which the transferor spouse (in
the case of paragraph (c)(1) of this section) or the nontransferor spouse (in the case
of paragraph (c)(2) of this section) files such
spouse’s first timely filed federal income
tax return for the year that includes the date
of the stock redemption, but no later than
the date such return is due (including extensions).
(d) Examples. The provisions of this section may be illustrated by the following
examples:

2003–9 I.R.B.

Example 1. Corporation X has 100 shares outstanding. A and B each own 50 shares. A and B divorce.
The divorce instrument requires B to purchase A’s
shares, and A to sell A’s shares to B, in exchange for
$100x. Corporation X redeems A’s shares for $100x.
Assume that, under applicable tax law, B has a primary and unconditional obligation to purchase A’s
stock, and therefore the stock redemption results in
a constructive distribution to B. Also assume that the
special rule of paragraph (c)(1) of this section does
not apply. Accordingly, under paragraphs (a)(2) and
(b)(2) of this section, A shall be treated as transferring A’s stock of Corporation X to B in a transfer to
which section 1041 applies (assuming the requirements of section 1041 are otherwise satisfied), B shall
be treated as transferring the Corporation X stock B
is deemed to have received from A to Corporation X
in exchange for $100x in an exchange to which section 1041 does not apply and sections 302(d) and 301
apply, and B shall be treated as transferring the $100x
to A in a transfer to which section 1041 applies.
Example 2. Assume the same facts as Example 1,
except that the divorce instrument provides as follows:
“A and B agree that the redemption will be treated for
federal income tax purposes as a redemption distribution to A.” The divorce instrument further provides that it “supersedes all other instruments or
agreements concerning the purchase, sale, redemption, or other disposition of the stock that is the subject of the redemption.” By virtue of the special rule
of paragraph (c)(1) of this section and under paragraphs (a)(1) and (b)(1) of this section, the tax consequences of the redemption shall be determined in
accordance with its form as a redemption of A’s shares
by Corporation X and shall not be treated as resulting in a constructive distribution to B. See section 302.
Example 3. Assume the same facts as Example 1,
except that the divorce instrument requires A to sell
A’s shares to Corporation X in exchange for a note.
B guarantees Corporation X’s payment of the note.
Assume that, under applicable tax law, B does not have
a primary and unconditional obligation to purchase A’s
stock, and therefore the stock redemption does not result in a constructive distribution to B. Also assume
that the special rule of paragraph (c)(2) of this section does not apply. Accordingly, under paragraphs
(a)(1) and (b)(1) of this section, the tax consequences
of the redemption shall be determined in accordance
with its form as a redemption of A’s shares by Corporation X. See section 302.
Example 4. Assume the same facts as Example 3,
except that the divorce instrument provides as follows:
“A and B agree the redemption shall be treated, for
federal income tax purposes, as resulting in a constructive distribution to B.” The divorce instrument further provides that it “supersedes any other instrument
or agreement concerning the purchase, sale, redemption, or other disposition of the stock that is the subject of the redemption.” By virtue of the special rule
of paragraph (c)(2) of this section, the redemption is
treated as resulting in a constructive distribution to B
for purposes of paragraph (a)(2) of this section. Accordingly, under paragraphs (a)(2) and (b)(2) of this

532

section, A shall be treated as transferring A’s stock of
Corporation X to B in a transfer to which section 1041
applies (assuming the requirements of section 1041
are otherwise satisfied), B shall be treated as transferring the Corporation X stock B is deemed to have
received from A to Corporation X in exchange for a
note in an exchange to which section 1041 does not
apply and sections 302(d) and 301 apply, and B shall
be treated as transferring the note to A in a transfer
to which section 1041 applies.

(e) Effective date. Except as otherwise
provided in this paragraph, this section is
applicable to redemptions of stock on or after January 13, 2003, except for redemptions of stock that are pursuant to
instruments in effect before January 13,
2003. For redemptions of stock before January 13, 2003, and redemptions of stock that
are pursuant to instruments in effect before January 13, 2003, see §1.1041–1T(c),
A–9. However, these regulations will be applicable to redemptions described in the preceding sentence of this paragraph (e) if the
spouses or former spouses execute a written agreement on or after August 3, 2001,
that satisfies the requirements of one of the
special rules in paragraph (c) of this section with respect to such redemption. A divorce or separation instrument or valid
written agreement executed on or after August 3, 2001, and before May 13, 2003, that
meets the requirements of the special rule
in Regulations Project REG–107151–00
published in 2001–2 C.B. 370 (see
§601.601(d)(2) of this chapter) will be
treated as also meeting the requirements of
the special rule in paragraph (c)(2) of this
section.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 4. The authority citation for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *

March 3, 2003

CFR part or section where
identified and described

Current OMB
control No.

*****
1.1041–2 ......................................................................................................................................................... 1545–1751
*****
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved December 30, 2002.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on January 10,
2003, 8:45 a.m., and published in the issue of the Federal Register for January 13, 2003, 68 F.R. 1534)

tions, and for the same purposes, as if the
recipient had received the information from
the IRS directly.
DATES: This regulation is effective January 21, 2003.
FOR FURTHER INFORMATION CONTACT: Julie C. Schwartz, 202–622–4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act

Section 6103.—Confidentiality and Disclosure of
Returns and Return
Information
26 CFR 301.6103(p)(2)(B)–1: Disclosure of returns
and return information by other agencies.

T.D. 9036
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 301 and 602
Disclosure of Returns and
Return Information by Other
Agencies
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains a final regulation relating to the disclosure of
returns and return information by federal,
state, and local agencies other than the IRS.
The final regulation permits the IRS to authorize agencies with access to returns and
return information under section 6103 of the
Internal Revenue Code (Code) to redisclose returns and return information, with
the approval of the Commissioner of Internal Revenue (Commissioner), to any authorized recipient set forth in section 6103,
subject to the same conditions and restric-

March 3, 2003

The collection of information contained
in this final regulation has been reviewed
and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
4507(d)) under control number 1545–1757.
The collection of information in this regulation is in §301.6103(p)(2)(B)–1. This information is required for the Commissioner
to authorize the disclosure of returns and
return information from agencies with access to returns and return information under section 6103 to other authorized
recipients of returns and return information in accordance with section 6103.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless
the collection of information displays a valid
OMB control number.
The estimated annual burden per respondent varies from one half-hour to two
hours, depending on individual circumstances, with an estimated average of one
hour.
Comments concerning the accuracy of
this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a collection of information must be retained as long

533

as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and return information are confidential, as required by
26 U.S.C. 6103.
Background
This document contains amendments to
26 CFR parts 301 and 602. On December
13, 2001, a notice of proposed rulemaking (REG–105344–01, 2002–2 I.R.B. 302
[66 FR 64386]) was published in the Federal Register. No comments were received
from the public in response to the notice of
proposed rulemaking. No public hearing
was requested or held. The proposed regulations are adopted by this Treasury decision.
Explanation of Provisions
The final regulation expands the number of agencies that may redisclose returns and return information if authorized
by the Commissioner to any federal, state,
or local agency that receives such information under section 6103. Similarly, it expands the universe of authorized recipients
of returns and return information pursuant to this redisclosure authority to any recipient authorized to receive returns and
return information in accordance with section 6103. All redisclosures by agencies pursuant to this regulation will be made subject
to the same conditions, restrictions, safeguards, recordkeeping requirements, and
civil and criminal penalties that would apply if the disclosure were made by the IRS.
Federal, state and local agencies making disclosures of return information under the final regulation will continue to provide to
the IRS certain information regarding disclosures made pursuant to this authority, in
order for the IRS to fulfill its reporting requirements under section 6103(p).
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

2003–9 I.R.B.