[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.503(e)-1]

[Page 55-56]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.503(e)-1  Special rules.

    (a) In general. (1) Section 503(e) provides that for purposes of 
section 503(b)(1) (relating to loans made without the receipt of 
adequate security and a reasonable rate of interest) the acquisition of 
a bond, debenture, note, or certificate or other evidence of 
indebtedness shall not be treated as a loan made without the receipt of 
adequate security if certain requirements are met. Those requirements 
are described in Sec. 1.503(e)-2.
    (2) Section 503(e) does not affect the requirement in section 
503(b)(1) of a reasonable rate of interest. Thus, although the 
acquistion of a certificate of indebtedness which meets all of the 
requirements of section 503(e) and of Sec. 1.503(e)-2 will not be 
considered as a loan made without the receipt of adequate security, the 
acquisition of such an indebtedness does consitute a prohibited 
transaction if the indebtedness does not bear a reasonable rate of 
interest.
    (3) The provisions of section 503(e) do not limit the effect of 
section 401(a) and Sec. 1.401-2, section 501(c)(17)(A)(i), or section 
501(c)(18)(A), all relating to the use of diversion of corpus or incopme 
of the respective employee trusts. Furthermore, the provisions of 
section 503(e) do not limit the effect of any of the provisions of 
section 503 other than section 503(b)(1). Thus, for example, although a 
loan made by employees' trust described in section 503(a)(1)(B) meets 
all the requirements of section 503(e) and therefore is not treated as a 
loan made without the receipt of adequate security, such an employees' 
trust making such a loan will lose its exempt status if the loan is not 
considered as made for the exclusive benefit of the employees or their 
beneficiaries. Similarly, a loan which meets the requirements of section 
503(e) will constitute a prohibited transaction within the meaning of 
section 503(b)(6) if it results in a substantial diversion of the 
trust's income or corpus to a person described in section 503(b).
    (b) Definitions. For purposes of section 503(e):

[[Page 56]]

    (1) The term obligation means bond, debenture, note, or certificate 
or other evidence of indebtedness.
    (2) The term issuer includes any person described in section 503(b) 
who issues an obligation.
    (3)(i) The term person independent of the issuer means a person who 
is not related to the issuer by blood, by marriage, or by reason of any 
substantial business interests. Persons who will be considered not to be 
independent of the issuer include but are not limited to:
    (a) The spouse, ancestor, lineal descendant, or brother or sister 
(whether by whole or half blood) of an individual who is the issuer of 
an obligation;
    (b) A corporation controlled directly or indirectly by an individual 
who is the issuer, or directly or indirectly by the spouse, ancestor, 
lineal descendant, or brother or sister (whether by whole or half blood) 
of an individual who is the issuer;
    (c) A corporation which directly or indirectly controls, or is 
controlled by, a corporate issuer;
    (d) A controlling shareholder of a corporation which is the issuer, 
or which controls the issuer;
    (e) An officer, director, or other employee of the issuer, of a 
corporation controlled by the issuer, or of a corporation which controls 
the issuer;
    (f) A fiduciary of any trust created by the issuer, by a corporation 
which controls the issuer, or by a corporation which is controlled by 
the issuer; or
    (g) A corporation controlled by a person who controls a corporate 
issuer.
    (ii) For purposes of paragraph (b)(3)(i) of this section, the term 
control means, with respect to a corporation, direct or indirect 
ownership of 50 percent or more of the total combined voting power of 
all voting stock or 50 percent or more of the total value of shares of 
all classes of stock. If the aggregate amount of stock in a corporation 
owned by an individual and by the spouse, ancestors, lineal descendants, 
brothers and sisters (whether by whole of half blood) of the individual 
is 50 percent or more of the total combined voting power of all voting 
stock or is 50 percent or more of the total value of all classes of 
stock, then each of these persons shall be considered as the controlling 
shareholder of the corporation.
    (iii) In determining family relationships for purposes of paragraph 
(b)(3)(i) of this section, a legally adopted child of an individual 
shall be treated as a child of such individual by blood.
    (4) The term issue means all the obligations of a issuer which are 
offered for sale on substantially the same terms. Obligations shall be 
considered offered for sale on substantially the same terms if such 
obligation would, at the same time and under the same circumstances, be 
traded on the market at the same price. On the other hand, if the terms 
on which obligations are offered for sale differ in such manner as would 
cause such obligations to be traded on the market at different prices, 
then such obligations are not part of the same issue. The following are 
examples of terms which, if different, would cause obligations to be 
traded on the market at different prices: (i) Interest rate; (ii) 
Maturity date; (iii) Collateral; and (iv) Conversion provisions.

The fact that obligations are offered for sale on different dates will 
not preclude such obligations from being part of the same issue if they 
all mature on the same date and if the terms on which they are offered 
for sale are otherwise the same, since such obligations would, at the 
same time and under the same conditions, be traded on the market at the 
same price. Obligations shall not be considered part of the same issue 
merely because they are part of the same authorization or because they 
are registered as part of the same issue with the Securities and 
Exchange Commission.

[T.D. 7428, 41 FR 34623, Aug. 16, 1976]