[Code of Federal Regulations]
[Title 26, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.50A-4]

[Page 404-408]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.50A-4  Exceptions to the application of Sec. 1.50A-3.

    (a) In general. Notwithstanding the provisions of paragraph (a) of 
Sec. 1.50A-3, a termination of employment shall not be deemed to occur 
if paragraph (b) (relating to voluntary termination of employment), 
paragraph (c) (relating to termination of employment due to disability), 
paragraph (d) (relating to termination of employment due to misconduct), 
paragraph (f) (relating to transactions to which section 381(a) 
applies), or paragraph (g) (relating to mere change in form of 
conducting a trade or business) applies.
    (b) Voluntary termination of employment. A termination of employment 
shall not be deemed to occur for purposes of paragraph (a) of 
Sec. 1.50A-3 if the employee voluntarily leaves the employment of the 
taxpayer. If the taxpayer makes the working conditions of the employee 
so untenable that the employee is, in effect, compelled by the taxpayer 
to quit, or if the employee is coerced into quitting, the employee will 
not be deemed to have voluntarily left the employment of the taxpayer. 
For purposes of the preceding sentence, a substantial reduction in the 
benefits of employment of an employee (such as

[[Page 405]]

a substantial decrease in the hours of the employee's working week) 
shall constitute untenable working conditions. An employee has 
voluntarily left the employment of the taxpayer if he leaves for any 
reason external to his employment, such as sickness or death in the 
employee's family which the employee feels necessitates his quitting 
work with the taxpayer to remain at home. Any employee who participates 
in an authorized strike (as finally determined by a court, labor 
relations administrative body, or arbiter) will not be deemed to have 
voluntarily left the employment of the taxpayer.
    (c) Termination of employment due to death or disability. A 
termination of employment shall not be deemed to occur for purposes of 
paragraph (a) of Sec. 1.50A-3 if, after the initial date of employment 
(as defined in paragraph (c)(1) of Sec. 1.50A-3) and before the close of 
the period referred to in paragraph (a)(1) of Sec. 1.50A-3, the employee 
becomes disabled, by reason of illness or injury (including a disability 
relating to the employment), to perform the services required by such 
employment, unless, before the close of such period:
    (1) Such disability is removed,
    (2) The employer knows of the removal of the disability, and
    (3) The employer fails to offer reemployment to such employee.

The death of an employee shall not be deemed a termination of employment 
for purposes of paragraph (a) of Sec. 1.50A-3.
    (d) Termination of employment due to misconduct. A termination of 
employment shall not be deemed to occur for purposes of paragraph (a) of 
Sec. 1.50A-3 if it is determined by the appropriate State administrative 
agency or State court that under the applicable State unemployment 
compensation law such termination was due to the misconduct of the WIN 
employee. If the WIN employee is not covered by the applicable State 
unemployment compensation law (or if the employee did not work for the 
minimum period required to qualify for unemployment compensation or if 
the employee did not apply for unemployment compensation), a termination 
of employment shall not be deemed to occur for purposes of paragraph (a) 
of Sec. 1.50A-3 if the taxpayer demonstrates by convincing evidence 
that, were such employee covered by the applicable State unemployment 
compensation law (or if the employee had worked for such minimum period 
or if the employee had applied for unemployment compensation), he could 
reasonably have been found by such administrative agency or court to 
have been terminated for misconduct.
    (e) Recordkeeping requirement. A taxpayer who is claiming that a 
termination of employment falls within the provisions of paragraph (b), 
(c), or (d) of this section shall maintain sufficient records to support 
his claim until the expiration of the pertinent period of limitations.
    (f) Transactions to which section 381(a) applies--(1) General rule. 
The employment relationship between the taxpayer and a WIN employee (as 
defined in paragraph (h) of Sec. 1.50B-1) shall not be deemed terminated 
for purposes of paragraph (a) of Sec. 1.50A-3 in the case of a 
transaction to which section 381(a) (relating to carryovers in certain 
corporate acquisitions) applies. If there is a termination of employment 
(within the meaning of paragraph (a) of Sec. 1.50A-3 and this section) 
by the acquiring corporation with respect to the WIN employee described 
in the preceding sentence, or if the acquiring corporation fails to pay 
comparable wages to such employee (within the meaning of paragraph 
(a)(2) of Sec. 1.50A-3), then paragraph (a)(3) of Sec. 1.50A-3 shall 
apply to the acquiring corporation with respect to the credit allowed 
the acquired corporation as well as the credit allowed the acquiring 
corporation with respect to such employee. For purposes of the preceding 
sentence, the initial date of employment (as defined in paragraph (c)(1) 
of Sec. 1.50A-3) of such employee with respect to the acquired 
corporation shall be deemed to be the initial date of employment of such 
employee with respect to the acquiring corporation and employment by the 
acquired corporation shall be deemed employment by the acquiring 
corporation.
    (2) Examples. This paragraph may be illustrated by the following 
examples:

    Example 1. (i) X Corporation, a wholly owned subsidiary of Y 
Corporation, incurred WIN expenses of $12,000 for its taxable year 
ending December 31, 1972, with respect to

[[Page 406]]

WIN employees hired on March 1, 1972. Both X and Y made their returns on 
the basis of a calendar year. For the taxable year 1972 X Corporation's 
credit earned of $2,400 (20 percent of $12,000) was allowed under 
section 40 as a credit against its liability for tax. On December 15, 
1973, X Corporation is liquidated under section 332 and all of its 
assets and liabilities are transferred to Y Corporation in a transaction 
to which section 334(b)(2) is not applicable. In addition, Y Corporation 
continues the employment of the WIN employees which were employed by X 
Corporation and with respect to which X Corporation was allowed the 
credit for its taxable year 1972.
    (ii) Under subparagraph (1) of this paragraph, a termination of 
employment of the WIN employees shall not be deemed to occur for 
purposes of paragraph (a)(1) of Sec. 1.50A-3 due to the liquidation of X 
Corporation on December 15, 1973. Thus, no recapture determination under 
paragraph (a)(3) of Sec. 1.50A-3 shall be made with respect to X 
Corporation.
    Example 2. (i) The facts are the same as in Example 1 and, in 
addition, on February 2, 1974, Y Corporation terminates the employment 
of the employees with respect to whom X Corporation had incurred WIN 
expenses. The termination is a termination for purposes of paragraph 
(a)(1) of Sec. 1.50A-3. For purposes of applying the period described in 
paragraph (a)(1) of Sec. 1.50A-3, the date the employees reported for 
work at X Corporation is deemed to be the initial date of employment of 
the employees with respect to Y Corporation.
    (ii) Under subparagraph (1) of this paragraph, a termination of 
employment of the WIN employees shall not be deemed to occur for 
purposes of paragraph (a)(1) of Sec. 1.50A-3 due to the liquidation of X 
Corporation on December 15, 1973. However, a termination of employment 
of the WIN employees is deemed to occur for purposes of paragraph (a)(1) 
of Sec. 1.50A-3 on February 2, 1974. Thus, Y Corporation shall make a 
recapture determination under paragraph (a) of Sec. 1.50A-3 with respect 
to the credit allowed X Corporation with respect to the WIN employees.

    (g) Mere change in form of conducting a trade or business--(1) 
General rule. (i) The employment relationship between the taxpayer and a 
WIN employee (as defined in paragraph (h) of Sec. 1.50B-1) shall not be 
deemed terminated for purposes of paragraph (a) of Sec. 1.50A-3 in the 
case of a mere change in the form of conducting the trade or business in 
which such employment occurs, provided that the conditions set forth in 
subdivision (ii) of this subparagraph are satisfied.
    (ii) The conditions referred to in subdivision (i) of this 
subparagraph are as follows:
    (a) The WIN employee described in subdivision (i) of this 
subparagraph is retained in the same trade or business,
    (b) The taxpayer retains a substantial ownership interest in such 
trade or business,
    (c) Substantially all the assets necessary to operate such trade or 
business are transferred to the transferee who continues the employment 
of the WIN employee described in subdivision (i) of this subparagraph, 
and
    (d) The basis of the assets described in (c) of this subdivision in 
the hands of the transferee is determined in whole or in part by 
reference to the basis of such assets in the hands of the transferor.

This subparagraph shall not apply if paragraph (e) of this section 
(relating to transactions to which section 381(a) applies) is applicable 
with respect to such transfer.
    (2) Substantial interest. For purposes of this paragraph, the 
taxpayer shall be considered as having retained a substantial ownership 
interest in the trade or business only if, after the change in form, the 
ownership interest in such trade or business by such taxpayer--
    (i) Is substantial in relation to the total ownership interests of 
all persons, or
    (ii) Is equal to or greater than the ownership interest prior to the 
change in form.

Thus, where a taxpayer owns a 5-percent interest in a partnership, and, 
after the incorporation of that partnership, the taxpayer retains at 
least a 5-percent interest in the corporation, the taxpayer will be 
considered as having retained a substantial interest in the trade or 
business as of the date of the change in form because of the application 
of the rule contained in subdivision (ii) of this subparagraph.
    (3) Termination of employment. (i) If employment of a WIN employee 
described in subparagraph (1)(i) of this paragraph is terminated by the 
transferee, the employment of such employee shall be deemed terminated 
by the taxpayer for purposes of paragraph

[[Page 407]]

(a) of Sec. 1.50A-3. For purposes of determining the period described in 
paragraph (a)(1) of Sec. 1.50A-3 with respect to such taxpayer 
employment by the transferee shall be deemed employment by the 
transferor.
    (ii) If in any taxable year the taxpayer does not retain a 
substantial ownership interest in the trade or business directly or 
indirectly (through ownership in other entities provided that such other 
entities' bases in such interest are determined in whole or in part by 
reference to the basis of such interest in the hands of the taxpayer) 
then, for purposes of paragraph (a)(1) of Sec. 1.50A-3, there shall be 
deemed to be a termination of employment of the WIN employees described 
in subparagraph (1)(i) of this paragraph on the first date on which such 
taxpayer does not retain a substantial interest in the trade or 
business. For purposes of determining the period described in paragraph 
(a)(1) of Sec. 1.50A-3, employment by the transferee shall be deemed 
employment by the transferor. Any taxpayer who seeks to establish his 
interest in a trade or business under the rule of this subdivision shall 
maintain adequate records to demonstrate his indirect interest in such 
trade or business after any such transfer or transfers.
    (iii) Notwithstanding subparagraph (1) of this paragraph and 
subdivision (ii) of this subparagraph in the case of a mere change in 
the form of a trade or business, if the interest of a taxpayer in the 
trade or business is reduced but such taxpayer has retained a 
substantial interest in such trade or business, paragraph (a)(2) of 
Sec. 1.50A-5 (relating to electing small business corporations), 
paragraph (a)(2) of Sec. 1.50A-6 (relating to estates or trusts), or 
paragraph (a)(2)(ii) of Sec. 1.50A-7 (relating to partnerships) shall 
apply, as the case may be.
    (4) Failure to pay comparable wages. If the transferee fails to pay 
comparable wages (within the meaning of paragraph (a)(2) of Sec. 1.50A-
3) to the WIN employee within the period described in paragraph (a)(1) 
of Sec. 1.50A-3, then such failure shall be deemed to be a failure of 
the transferor (or in a case where the transferor is a partnership, 
estate, trust, or electing small business corporation, the partners, 
beneficiaries, or shareholders), and a recapture determination shall be 
made with respect to such WIN employee as provided in Sec. 1.50A-3. For 
purposes of determining the period described in paragraph (a)(1) of 
Sec. 1.50A-3 with respect to such transferor (or such partners, 
beneficiaries, or shareholders), employment by the transferee shall be 
deemed employment by such transferor. For special rules in the case of 
an electing small business corporation (as defined in section 1371(b)), 
an estate or trust, or a partnership, see respectively, Sec. 1.50A-5, 
Sec. 1.50A-6, or Sec. 1.50A-7.
    (5) Examples. This paragraph may be illustrated by the following 
examples in each of which it is assumed that the transfer satisfies the 
conditions of subparagraphs (1)(ii) (a), (c) and (d) of this paragraph.

    Example 1. (i) On January 1, 1972, A, an individual, employed WIN 
employees in his sole proprietorship. A incurred WIN expenses with 
respect to these employees of $12,000 for the taxable year ending 
December 31, 1972. For the taxable year 1972 A's credit earned of $2,400 
(20 percent of $12,000) was allowed under section 40 as a credit against 
his liability for tax. On March 15, 1973, A transferred all of the 
assets used in his sole proprietorship to X Corporation, a newly formed 
corporation, in exchange for 45 percent of the stock of X Corporation.
    (i) Under subparagraph (1)(i) of this paragraph, paragraph (a) of 
Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X 
Corporation.
    Example 2. (i) The facts are the same as in Example 1 and in 
addition on June 1, 1973, X Corporation terminates the employment of WIN 
employees with respect to whom 50 percent of the WIN expenses were 
incurred during A's 1972 taxable year.
    (ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of 
Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X 
Corporation. However, under subparagraph (3)(i) of this paragraph, 
paragraph (a) of Sec. 1.50A-3 applies to the June 1, 1973, termination 
of WIN employees by X Corporation. The actual period of employment of 
such WIN employees is 1 year and 5 months (that is, the period beginning 
on January 1, 1972, and ending on June 1, 1973). For taxable year 1972, 
A's recomputed credit earned is $1,200 (20 percent of $6,000). The 
income tax imposed by chapter 1 of the Code on A for the taxable year 
1973 is increased by the $1,200 decrease in his credit earned for the 
taxable year 1972 (that is, $2,400 original credit earned minus $1,200 
recomputed credit earned).

[[Page 408]]

    Example 3. (i) The facts are the same as in Example 1 and in 
addition on April 1, 1973, X Corporation begins paying wages to the 
employees referred to in Example 1 which are less than the wages paid to 
its other employees who perform comparable services.
    (ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) 
of Sec. 1.50A-3 does not apply to the March 15, 1973, transfer to X 
Corporation. However, under subparagraph (4) of this paragraph, 
paragraph (a) of Sec. 1.50A-3 applies to the failure of X Corporation to 
pay wages to the WIN employees which are equal to the wages paid to its 
other employees who perform comparable services. For taxable year 1972, 
A's recomputed credit earned is zero. The income tax imposed by chapter 
1 of the Code on A for the taxable year 1973 is increased by the $2,400 
decrease in his credit earned for the taxable year 1972.
    Example 4. (i) On January 1, 1972, partnership ABC, which makes its 
returns on the basis of a calendar year, employed WIN employees. 
Partnership ABC incurred WIN expenses with respect to these employees of 
$20,000 for the taxable year. Partnership ABC has 10 partners who make 
their returns on the basis of a calendar year and share partnership 
profits equally. Each partner's share of the WIN expenses is 10 percent, 
that is, $2,000. On March 15, 1973, partnership ABC transfers all of the 
assets used in its trade or business to the X Corporation, a newly 
formed corporation, in exchange for its stock and immediately thereafter 
transfers 10 percent of the stock to each of the 10 partners.

    (ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) 
of Sec. 1.50A-1 does not apply to the March 15, 1973, transfer by the 
ABC Partnership to X Corporation.
    Example 5. (i) The facts are the same as in Example 4 except that 
partnership ABC transfers 10 percent of the stock in X Corporation to 
each of eight partners, 20 percent to partner A, and cash to partner B.
    (ii) Under subparagraph (1)(i) of this paragraph, with respect to 
all of the partners (including partner A) except partner B, paragraph 
(a)(1) of Sec. 1.50A-3 does not apply to the March 15, 1973, transfer by 
the ABC Partnership. Paragraph (a)(1) of Sec. 1.50A-3 applies with 
respect to partner B's $2,000 share of the WIN expenses. See paragraph 
(a)(2) of Sec. 1.50A-7.
    Example 6. (i) X Corporation operates a manufacturing business and a 
separate retail sales business. During the month of January 1972, X 
incurred WIN expenses in its manufacturing business. On February 10, 
1973, X transfers all the assets used in its manufacturing business to 
Partnership XY in exchange for a 50 percent interest in such 
partnership.
    (ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) 
of Sec. 1.50A-3 does not apply to the February 10, 1973, transfer to 
Partnership XY.

[T.D. 7263, 38 FR 6156, Mar. 7, 1973; 38 FR 8656, Apr. 5, 1973]