Part IV. Items — Internal Revenue Bulletin 1996-40

Request for Comments on the Effect Under Rev. Proc. 96–47 of a Waiver or Reimbursement of an Expense of a Regulated Investment Company.

Announcement 96–95

Rev. Proc. 96–47, 1996–39 I.R.B. 10, describes certain situations in which distributions made to shareholders of a regulated investment company (RIC) may vary and nevertheless be deductible as dividends under § 562 of the Internal Revenue Code. The Service understands that in some instances a person may waive or reimburse an expense of a RIC and the benefit of the waiver or reimbursement may be allocated to specific shares. In addition, various groups of shares may be allocated different investment advisory fees under a performance-based fee contract. This announcement solicits public comment on what effect, if any, these allocations should have under §§ 561 and 562.

BACKGROUND

Section 852(b)(2)(D) allows a RIC a deduction for dividends paid (as defined in § 561 with certain modifications). Section 561 defines the deduction for dividends paid and applies the rules of § 562 to determine which dividends are eligible for the deduction for dividends paid. Section 562(c) provides that the amount of any distribution is not considered a dividend for purposes of computing the dividends paid deduction under § 561 unless the distribution is pro rata, does not prefer any share of stock of a class over any other share of stock of that same class, and does not prefer one class of stock over another class except to the extent that one class is entitled (without reference to waivers of their rights by shareholders) to the preference. The legislative history to the 1986 amendment to section 562(c) explains that any difference in the investment advisory fee charged to shares of a RIC results in a preference. See 2 H.R. Conf. Rep. No. 841, 99th Cong., 2d Sess. II–246, reprinted at 1986–3 (Vol. 4) C.B. 246.

Many RICs have issued groups of shares that represent interests in the same portfolio of securities but have different arrangements for shareholder services or the distribution of shares or both (Qualified Groups). Because the fees for these arrangements and services

may vary, shareholders with equivalent investments in the same fund may receive different distributions. To permit open-end management investment companies to issue these groups of shares, the Securities and Exchange Commission has adopted Rule 18f–3, 17 C.F.R. 270.18f–3, under the Investment Company Act of 1940, 15 U.S.C. 80a–1 to –64.

Under Rev. Proc. 96–47, variations in distributions to shareholders of different Qualified Groups that exist solely as a result of the allocation of expenses in accordance with the revenue procedure do not prevent the distributions from being dividends under § 562. Occasionally, the person providing services to a RIC waives some or all of its fees for those services. In addition, occasionally a person other than the person providing particular services reimburses the RIC for some or all of the fees that the RIC incurred for those services. Rev. Proc. 96–47 is silent as to the treatment of distributions to shareholders that differ in part as a result of the allocation of the benefit of a waiver or reimbursement.

Rule 18f–3 also permits a group of shares to be allocated disproportionate advisory fees to the extent that any difference in amount allocated ‘‘is the result of the application of the same performance fee provisions in the advisory contract of the company to the different investment performance [net of other expenses]’’ of each group. Rev. Proc. 96–47 does not apply to variations in distributions that are due to performance-based advisory fees.

REQUEST FOR COMMENTS

Where there is an allocation of a waiver or reimbursement or of differing advisory fees under a performance-based contract, the Service requests comments on what effect, if any, the allocation should have under §§ 561 and 562. In addition to other matters that commentators are interested in addressing, comments on the following questions may be particularly helpful:

(1) What are the common situations in which expenses of a RIC are waived or reimbursed? In what situations, if any, is a waiver or reimbursement a legal necessity?

(2) What restrictions, if any, limit the ability of a person to waive or reimburse an expense of a RIC?

(3) What accounting methods are used to determine the proper allocation of a waiver or reimbursement?

(4) Should the benefit of a waiver or reimbursement of an expense be required to be allocated in a manner that does not differ from how the unwaived expense would have been allocated? (5) Does the answer to (4) above vary depending on whether a waiver or reimbursement is made by a person unrelated to the RIC’s investment advisor, by a person related to the RIC’s investment advisor, or by the RIC’s investment advisor itself?

(6) For purposes of §§ 561 and 562, what is the appropriate treatment of variations in distributions that arise as a result of allocation of the investment advisory fee under a contract that compensates the advisor on the basis of applying the same performance-fee provisions to different groups of shares?

METHOD OF MAKING COMMENTS

Comments should be submitted in writing on or before November 22, 1996 to: CC:DOM:CORP:R (Announcement 96–95), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, comments may be hand delivered to CC:DOM:CORP:R (Announcement 96–95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the IRS Internet site at http://www.irs.ustreas.gov/prod/ tax_regs/comments.html. All comments will be available for public inspection and copying.

DRAFTING INFORMATION

The principal author of this announcement is Arnold Golub of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this announcement, contact Mr. Golub at (202) 622–3950 (not a toll-free call).

Public Hearing on Consolidated Returns—Limitations on the Use of Certain Losses and Deductions; Correction

Announcement 96–100

AGENCY: Internal Revenue Service (IRS), Treasury.

1996–40 I.R.B. 10

Ft. Myers, FL Christian Action Services Association

Inc., Orange Park, FL Christian Fellowship Alive Ministries

ACTION: Correction to the notice of public hearing.

SUMMARY: This document contains a correction to the notice of public hearing (CO–24–96 [1996–30 I.R.B. 22]) which was published in the Federal Register on Thursday, June 27, 1996 (61 FR 33393). The notice of public hearing generally relates to the carryover and carryback of losses to consolidated and separate return years.

FOR FURTHER INFORMATION CONTACT: David Friedel (202) 622–7550 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of public hearing that is the subject of this correction is under section 1502 of the Internal Revenue Code.

Need for Correction

As published, the notice of public hearing (CO–24–96) contains an error which may prove to be misleading and is in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of public hearing (CO–24–96) which is the subject of FR Doc. 96– 15826 is corrected as follows: On page 33394, column 2, in the preamble, under the heading “Comments and Public Hearing”, in the second paragraph, line 2, the language ‘‘for Monday, September 16, 1996, at 10’’ is corrected to read “for Thursday, October 17, 1996, at 10”.

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed with the Office of the Federal Register on September 10, 1996, 8:45 a.m., and published in the issue of the Federal Register for September 11, 1996, 61 F.R. 47838)

Foundations Status of Certain Organizations

Announcement 96–101

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List

of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations: Alliance for Educational Enhancement,

Boca Raton, FL

Brevard Youth Soccer League Inc.,

Merritt Island, FL Cameron Cares Inc. Concerned Adults

Responding to the Extra Special, Cameron, LA Center for Cetacean Studies Inc.,

Madeira Beach, FL Charleston Leadership Foundation Inc.,

Charleston, SC Children of the King, Conway, SC Childrens Academy Daycare Center,

Jackson, MS Childrens Home Literacy Council Inc.,

Shreveport, LA Alternative Coping Resources Inc.,

Inc., Lakeland, FL Christian Golfers International Inc.,

Jacksonville, FL America Family Center Inc., Miami, FL American Institute for Medieval Studies

Largo, FL Christian Missionary Research &

Inc., Gainesville, FL American Legal Ethics Institute Inc.,

Charleston, SC American Medical Relief Association

Incorporated, Winter Haven, FL Americare Research Institute Inc.,

Advocacy Association Inc., Gainesville, FL Citizens for Water Inc., Deleon Springs,

Miami, FL Anchors Aweigh Club Inc., Key West,

FL College Assist Inc., West Palm Beach,

FL College Hill Homes Resident

Management Corp, Tampa, FL Columbia Classical Ballet Company,

FL Animal Aid for Vermilion Area Inc.,

Abbeville, LA Artist Foundation of Broward Inc.,

Hollywood, FL Arts Alliance Center Inc., Orange Park,

Columbia, SC Combat and Transport Aircraft Museum,

Broussard, LA Community and Friends Inc.,

Charleston, SC Company Inc. Westlake Powers

FL Arts Renaissance, Minneapolis, MN Asian American AIDS Foundation,

Chicago, IL Assistcare, Inc., West Palm Beach, FL Association of Workers To Acquire

Theatrical Productions, Ft. Myers, FL Connections for At-Risk Runaway and

Resources for Education, Port Royal, SC Astronomical Society of Bay County,

Homeless Youth, Columbia, SC Cooper City Civic Association Inc.,

Cooper City, FL Cornerstone Family Counseling Center

Inc., Shreveport, LA Covenant Life Family Ministries Inc.,

Panama City, FL Atlanta Center for Torah Inc., Ft.

Lauderdale, FL Awareness Information Discovery

Services Inc., Sunrise, FL Baby Love Pregnancy Crisis Center

Panama City, FL Crime Busters, New Orleans, LA Crown Foundation Inc., Gainesville, FL D’Iberville Babe Ruth League Inc.,

Inc., Spring Hill, FL Basinger Ministries Inc., Okeechobee,

D’Iberville, MS Day and Nite Lovin Care Center of

Laurel Inc., Laurel, MS Dayspring Maternity Home Inc.,

FL Baton Rouge National Senior Sports

Classic Inc., Baton Rouge, LA Bayou Council on Promoting Esteem

Melbourne, FL Dennis Ministries Inc., Ocala, FL Dispair to Victory Ministries, Baton

Inc., Thibodaux, LA Beaches Sea Turtle Patrol Inc.,

Jacksonville Beach, FL Beaufort Alliance for the Mentally Ill,

Rouge, LA Dominican Republic Educational

Port Royal, SC B. E. Enterprenue, Nashatah, WI Boca Raton Police Athletic League Inc.,

Foundation Inc., Port Charlotte, FL Drew Kids Inc., West Palm Beach, FL Drugs Off the Street, New Orleans, LA East Hillsborough Law Enforcement

Appreciation Association Inc., Plant City, FL

11 1996–40 I.R.B.

El-Shadi Literacy Center, Greenville,

MS Elijah House of Florida Inc., Sanibel,

Hope for the Deaf, Inc., Petal, MS Hospital Jesus is the Rock and

FL Faith in Children, Oceanside, CA Faith Refuge, Inc., Shreveport, LA Feed My Lambs Inc., Deland, FL Fibromyalgia Polymyalgia Outreach of

Polk County Inc., Lakeland, FL 1st New York Volunteer Engineer Regiment Association, Jacksonville, FL Florence Family Fling Inc., Florence,

Development Center Inc., Miami, FL Humane Society of Walton County

Rouge, LA Jehovah Shalom Personal Care Home

Florida Inc., Defuniak, FL Inter-Faith Mass Choir Incorporated,

Grenada, MS International Genetic Epidemiology

Society Inc., New Orleans, LA Irish Politicians Foundation Inc.,

Pensacola, FL Jazz Society of Baton Rouge, Baton

SC Florida Adoption & Childrens Center

Inc., Miami, FL Florida AIDS Foundation Inc., Miami,

FL Florida Association for the Gifted Inc.,

Inc., Jackson, MS Jennie Moore Relief Fund, Mt. Pleasant,

SC John Mark Ministries Inc., Fernandina

Fort Lauderdale, FL Florida Association of Suicidology Inc.,

Beach, FL Jordan Park Resident Management

Corporation, St. Petersburg, FL Lifeline Foundation Inc., Jersey City, NJ Life Through the Word Inc., Paterson,

Boca Raton, FL Florida District 10 Little League

Baseball Inc., Ft. Lauderdale, FL Florida Events for the Disadvantaged

Inc., Orlando, FL Florida Fellowship Inc., Tallahassee, FL Florida School of Addiction Studies

NJ Lindenwold Baseball Athletic

Association, Lindenwold, NJ Listening Ear Inc., Harrisonburg, VA Little Lambs Day Care Center Plus Inc.,

Weehawken, NJ Love All People Outreach Ministry

Alumni Association Inc., Titusville, FL Florida Womens Foundation Inc., San

Antonio, FL Floridawatch Institute Inc., Gainesville,

FL Foundation for Civic Development Inc.,

Incorporated, Edgewater, NJ Lucretia Mott Center Inc., Philadelphia,

Foundation Inc., Woodbury, NJ Mahima Inc., Lewisdale, MD Manassas Society for the Preservation of

PA Major Thomas B. McGuire Jr

Picayune, MS Free Enterprise Partnership of Florida

Inc., Jacksonville, FL Friends of the Cultural Center Inc.,

Institute Inc., Arlington, VA Mario B. Magno Scholarship Fund Inc.,

Chalmette, LA Gainesville Area Sports Support Inc.,

Gainesville, FL Gateway to Heaven Inc., Morton, MS Gibbs-Puckett Book Foundation

Black Heritage Inc., Manassas, VA Manufactured Housing Educational

MN Paraclete Ministries Inc., Eustis, FL Parent Connection of Tampa Bay Inc.,

Washington, DC Med Insight Incorporated, St. Cloud,

Incorporated, Winter Park, FL GMAA Grover Loening Scholarship

Fund Inc., Sunrise, FL Gods Community Out Reach Center

fication of foundation status in the Internal Revenue Bulletin.

Modifications of Debt Instruments; Correction

Announcement 96–102

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Correction to final regulations.

SUMMARY: This document contains a correction to final regulations (T.D. 8675 [1996–29 I.R.B. 5]) which were published in the Federal Register on Wednesday, June 26, 1996 (61 FR 32926). The final regulations relate to the modification of debt instruments.

EFFECTIVE DATE: September 24, 1996

FOR FURTHER INFORMATION CONTACT: Thomas J. Kelly, (202) 622– 3930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final regulations that are the subject of this correction are under section 1001 of the Internal Revenue Code.

Need for Correction

As published, the final regulations (T.D. 8675) contain an error which may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the final regulations (T.D. 8675) which are the subject of FR Doc. 96–15830 is corrected as follows:

§ 1.1001–3 [Corrected]

On page 32935, column 3, § 1.1001–3 (g), paragraph (iv) of Example 5., line 8, the language ‘‘(e)(4)(i)(E) of this section and is a significant’’ is corrected to read ‘‘(e)(4)(i)(C) of this section and is a significant’’.

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on September 10, 1996, 8:45 a.m., and published in the issue of the Federal Register for September 11, 1996, 61 F.R. 47822)

Inc., Miami, FL Gospel Truth Foundation Inc., Metairie,

LA Greater Homestead Florida City

Chamber of Commerce Charitable Trust Inc., Homestead, FL Greater Miami Haitian Federation Inc.,

Miami, FL Green Horizon Land Trust Incorporated,

Brandon, FL Park Way Housing Inc., Jacksonville, FL Zimbabwe Child Survival &

Development Foundation, Washington, DC If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)–7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classi

Lake Wales, FL Gretna Food Distribution Center Inc.,

Gretna, LA Heartbreaker Boxing of America Inc.,

Daytona Beach, FL Hollywood Performing Arts Inc.,

Hallandale, FL

1996–40 I.R.B. 12

Consolidated Returns—Limitations on the Use of Certain Losses and Deductions; Correction

Announcement 96–103

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to the final and temporary regulations.

SUMMARY: This document contains corrections to the final and temporary regulations (T.D. 8677 [1996–30 I.R.B. 7]) which were published in the Federal Register on Thursday, June 27, 1996 (61 FR 33321). The final and temporary regulations relate to the deductions and losses of members and also to the carryover and carryback of losses to consolidated and separate return years and to the built-in deduction rules.

EFFECTIVE DATE: June 27, 1996

FOR FURTHER INFORMATION CONTACT: David Friedel (202) 622–7550 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The final and temporary regulations that are the subject of these corrections are under section 1502 of the Internal Revenue Code.

Need for Correction

As published, the final and temporary regulations (T.D. 8677) contain errors which may prove to be misleading and are in need of clarification.

Correction of Publication

Accordingly, the publication of the final and temporary regulations (T.D.

which are the subject of FR Doc. 96–15823 is corrected as follows:

On page 33322, column 3, under the authority citation for Part 1, the entry ‘‘Section 1.1502–1T also issued under 26 U.S.C. 1502’’ is corrected to read ‘‘Section 1.1502–1 also issued under 26 U.S.C. 1502’’.
On page 33322, column 3, under the authority citation for Part 1, the entry ‘‘Section 1.1502–79T also issued under 26 U.S.C. 1502’’ is corrected to read ‘‘Section 1.1502–79 also issued under 26 U.S.C. 1502’’.

Cynthia E. Grigsby, Chief, Regulations Unit, Assistant Chief Counsel (Corporate).

(Filed by the Office of the Federal Register on September 10, 1996, 8:45 a.m., and published in the issue of the Federal Register for September 11, 1996, 61 F.R. 47821)

13 1996–40 I.R.B.