Treasury Regulations · 26 CFR
§ 1.503(e)-2. Requirements.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 503(e)
Cite as 26 CFR § 1.503(e)-2
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- August 16, 1976 by T.D. 7428
- Issued under
- 26 U.S.C. § 503(e)
- Length
- 2,366 words · about 10 min to read
- Defines
- 1 term
- Cross-references
- cites 3 Code sections and 0 regulations; cited by 2
(b) For purposes of section 503(e), the price of the obligation prevailing at the time of the purchase means the price which accurately reflects the market value of the obligation. In the case of an obligation purchased through a national securities exchange which is registered with the Securities and Exchange Commission, the price paid for the obligation will be considered the prevailing price of the obligation. In the case of an obligation purchased in an over-the-counter transaction, the prevailing price may be the price at which the last sale of the obligation was affected on such national securities exchange immediately before the employee trust's purchase of such obligation on the same day or may be the mean between the highest and lowest prices at which sales were effected on such exchange on the same day or on the immediately preceding day or on the last day during which there were sales of such obligation or may be a price determined by any other method which accurately reflects the market value of the obligation.
(b) For purposes of section 503(e) the offering price for the obligation at the time of the purchase means the price which accurately reflects the market value of the obligation. The offering price may be the price at which the last sale of the obligation to a person independent of the issuer was effected immediately before the employee trust's purchase of such obligation on the same day or may be the mean between the highest and lowest prices at which sales to persons independent of the issuer were effected on the same day or on the last day during which they were sales of such obligation or may be a price determinated by any other method which accurately reflects the market value of the obligation. The offering price for an obligation must be a valid price for the amount of the obligations which the trust is purchasing. For example, if an employees' trust described in section 503(a)(1)(B) purchases 1,000 bonds of the employer corporation at the offering price established by current prices for a lot of 10 such bonds, such offering price may not be a valid price for 1,000 bonds and the purchase may therefore not meet the requirements of this subdivision. For a purchase of an obligation to qualify under this subdivision, there must be sufficient current prices quoted by persons independent of the issuer to establish accurately the current value of the obligation. Thus, if there are no current prices quoted by persons independent of the issuer, an over-the-counter transaction will not qualify under this subparagraph even though the obligation was purchased in an arms's length transaction from a person independent of the issuer.
whichever is the lesser price. For purposes of this subparagraph, a portion of the issue will be considered substantial if the purchasers of such portion by persons independent of the issuer are sufficient to establish that fair market value of the obligations included in such issue. In determining whether the purchases are sufficient to establish the fair market value, all the surrounding facts and circumstances will be considered, including the number of independent purchasers, the aggregate amount purchased by each such independent purchaser, and the number of transactions. In the case of a large issue, purchases of a small percentage of the outstanding obligations may be considered purchases of a substantial portion of the issue; whereas, in the case of a small issue, purchases of a larger percentage of the outstanding obligations will ordinarily be required. The requirement in paragraph (b)(3)(ii) of this section contemplates purchase of the obligations by persons independent of the issuer contemporaneously with the purchase by the employee trust. If a substantial portion has been purchased at different prices, the price of the portion may be based on the average of such prices, and if several substantial portions have been sold to persons independent of the issuer, the price of any of the substantial portions may be used for pusposes of this subparagraph.
(a) Those obligations included in the acquisition in respect of which the percentage test in the first sentence of this subdivision is being applied shall be valued at their adjusted basis, as provided in section 1011, relating to adjusted basis for determining gain or loss; and
(b) All other obligations of persons described in section 503(b) which were part of the trust's assets immediately before the acquisition of the obligations described in (d)(1)(i)(a) of this section shall be valued at their fair market value on the day that the obligations described in (d)(1)(i)(a) of this section were acquired. For purposes of determining the total amount of the assets of the trust (including obligations of persons described in section 503(b)), there shall be used the fair market value of those assets on the day the obligation is acquired.
On February 1, 1960, an exempt employees' trust described in section 401(a) purchases unsecured debentures issued by the employer corporation for $1,000. At the time of this purchase, such debentures have a fair market value of $1,200. Immediately after the purchase of such unsecured debentures, the assets of the trust consist of the following:
| Cost | Fair market value on Feb. 1, 1960 | |
|---|---|---|
| (a) Assets other than obligations of persons described in sec. 503(b) | $5,000 | $7,800 |
| (b) Obligations of persons described in sec. 503(b) acquired before Feb. 1, 1960 | 500 | 1,000 |
| (c) Unsecured debentures of employer purchased on Feb. 1, 1960 | 1,000 | 1,200 |
Immediately following acquisition of the unsecured debentures by the trust, the percent of the assets of the trust that are invested in all obligations of all persons described in section 503(b) is computed as follows:
| (1) Obligations of persons described in section 503(b) acquired before Feb. 1, 1960 (valued at fair market value) | $1,000 |
| (2) Unsecured debentures of employer purchased on Feb. 1, 1960 (valued at cost) | 1,000 |
| (3) Total amount of trust's assets invested in obligations of persons described in section 503(b) ((1) plus (2)) | 2,000 |
| (4) Assets of the trust other than obligations of persons described in section 503(b) (valued at fair market value on Feb. 1, 1960) | 7,800 |
| (5) Obligations of persons described in section 503(b) acquired before Feb. 1, 1960 (valued at fair market value on Feb. 1, 1960) | 1,000 |
| (6) Unsecured debentures of employer purchased on Feb. 1, 1960 (valued at fair market value on Feb. 1, 1960) | $1,200 |
| (7) Total assets of the trust valued at fair market value on Feb. 1, 1960 (sum of (4), (5), and (6)) | 10,000 |
| (8) Percent of assets of the trust invested in all obligations of all persons described in section 503(b) immediately following purchase of unsecured debentures on Feb. 1, 1960 ((3) ÷ (7), that is, $2,000 ÷ $10,000) | 20% |
[T.D. 7428, 41 FR 34624, Aug. 16, 1976]
Terms defined here
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Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 503 Requirements for exemption
- § 1011 Adjusted basis for determining gain or loss
- § 401 Qualified pension, profit-sharing, and stock bonus plans
Cited by 2 other regulations
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Issued by T.D. 7428 (41 FR 34624)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Exempt Organizations
Nearby sections
- § 1.503(b)-1 Prohibited transactions.
- § 1.503(c)-1 Future status of organizations denied exemption.
- § 1.503(d)-1 Cross references.
- § 1.503(e)-1 Special rules.
- § 1.503(e)-2 Requirements.
- § 1.503(e)-3 Effective dates.
- § 1.503(f)-1 Loans by employers who are prohibited from pledging assets.
- § 1.504-1 Attempts to influence legislation; certain organizations formerly described in section 501(c)(3) denied exemption.
- § 1.504-2 Certain transfers made to avoid section 504(a).