Part IV. Items — Internal Revenue Bulletin 1996-49

required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely (in the manner described under the ADDRESSES caption) to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for February 25, 1997, at 10 a.m., in room 3313, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must submit written or electronically generated comments (in the manner described under the ADDRESSES caption) by February 10, 1997, and submit an outline of the topics to be discussed and the time devoted to each topic by February 4, 1997. A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Robert J. Fitzpatrick, formerly of the Office of the Assistant Chief Counsel (Income Tax & Accounting), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

Notice of Proposed Rulemaking and Notice of Public Hearing

Definition of Reasonable Basis

IA–42–95

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations relating to the accuracy-related penalty regulations under chapter 1 of the Internal Revenue Code. These amendments are necessary to define reasonable basis and provide corrections to final regulations relating to the accuracy-related penalty under chapter 1 of the Internal Revenue Code. The proposed regulations would affect all taxpayers who file tax returns. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronically generated comments must be received by February 10, 1997. Outlines of topics to be discussed at the public hearing scheduled for February 25, 1997, must be received by February 4, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (IA–42–95), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (IA–42–95), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC., or electronically, via the IRS Internet site at: http://www.irs. ustreas.gov/prod/tax_regs/comments. html. The public hearing will be held in room 3313, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Nancy Romano, 202–622–6232 (not a toll-free number). Concerning submissions and the public hearing, Michael L. Slaughter, 202–622–7190 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On September 1, 1995, the IRS issued Treasury Decision 8617 (60 FR 45663),

setting forth final regulations relating to the accuracy-related penalty under chapter 1 of the Internal Revenue Code. These regulations provided guidance concerning the reasonable basis standard for purposes of the negligence penalty (section 6662(b)(1)) and for purposes of the disclosure exception to the penalties for disregarding rules or regulations (section 6662(b)(1)) and substantial understatement of income tax (section 6662(b)(2)). In the preamble to the final regulations, Treasury requested comments and suggestions on providing further guidance on the reasonable basis standard. Treasury has not received any additional comment letters in response to this request for comments. Previous comments that were addressed in the preamble to the final regulations published on September 1, 1995 have been considered in drafting these proposed regulations.

Explanation of Provision

Under the final regulations currently in place, the reasonable basis standard is ‘‘significantly higher than the not frivolous standard applicable to preparers under 6694.’’ These proposed regulations provide that the reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. A return position will generally satisfy the reasonable basis standard if it is reasonably based on one or more of the authorities set forth in § 1.6662–4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments). Additionally, the proposed regulations clarify that if a return position does not satisfy the reasonable basis standard, the reasonable cause and good faith exception as set forth in § 1.6664–4 may still provide relief from the penalty.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not

21 1996–49 I.R.B.

(2) Advice defined.

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on November 8, 1996, 8:45 a.m., and published in the issue of the Federal Register for November 12, 1996, 61 F.R. 58020)

Section 482 — Allocations Between Related Parties

Announcement 96–124

In Announcement 95–49, 1995–24 I.R.B. 13, the Service provided, for public comment, a draft revision of Rev. Proc. 91–22, 1991–1 C.B. 526, which sets forth procedural rules for the Advance Pricing Agreement (‘‘APA’’) Program. The Service received several comments on Announcement 95–49 and is issuing revised procedural rules in Rev. Proc. 96–53 at page 9, this Bulletin.

The most significant changes to the draft revenue procedure in Announcement 95–49 are as follows (with section references to Rev. Proc. 96–53):

Sec. 3.06

Often, APA negotiations are used to find a basis for resolving transfer pricing issues in years prior to the initial year of the APA’s term (‘‘rollback’’ of the APA). In response to comments, the new revenue procedure indicates that the taxpayer has the option whether or not to request a rollback of the APA methodology. Taxpayers should, of course, recognize that, even absent formal negotiations for a rollback, the Service may determine under regularly applicable procedures that the methodology used to resolve an APA request also is appropriate for prior taxable years.

Sec. 3.07

In response to questions that sometimes arise in APA negotiations, section 3.07 clarifies that the initiation of an APA request does not put into abeyance pending examinations or other proceedings. Section 3.07 also instructs Service personnel, wherever feasible, to coordinate the consideration of APA requests with pending related proceedings, so as to enhance the efficiency of Service operations and reduce overall taxpayer compliance burdens.

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. Section 1.6662–0 is amended by:

Revising the entry for § 1.6662–2.
Removing the entries for §§ 1.6662–3(b)(3)(i) and (ii).
Revising the entry for § 1.6662– 7(d). 4 . Removing the entries for §§ 1.6662–7(d)(1) and (2).

The amendments and revisions read as follows:

§ 1.6662–0 Table of contents.

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§ 1.6662–2 Accuracy-related penalty.

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§ 1.6662–7 Omnibus Budget Reconcili- ation Act of 1993 changes to the accuracy-related penalty.

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(d) Reasonable basis.

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Par. 3. Section § 1.6662–3 is amended by:

Revising the third sentence in paragraph (b)(1) introductory text.
Revising paragraph (b)(3). The revisions read as follows:

§ 1.6662–3 Negligence or disregard of rules or regulations.

(b)* - *(1) - - - A return position that has a reasonable basis as defined in paragraph (b)(3) of this section is not attributable to negligence. - - - - - -
(3) Reasonable basis. Reasonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable or that is merely a colorable claim. If a return position is reasonably based on one or more of the authorities set forth in § 1.6662– 4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities, and subsequent developments), the return position will generally satisfy the reasonable basis standard even though it may not satisfy the substantial

authority standard as defined in § 1.6662–4(d)(2). In addition, the reasonable cause and good faith exception, as set forth in § 1.6664–4, may provide relief from the penalty, even if a return position does not satisfy the reasonable basis standard.

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Par. 4. In § 1.6662–4, the second sentence in paragraph (d)(2) is revised to read as follows:

§ 1.6662–4 Substantial understatement of income tax.

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(d) - - (2) - - - The substantial authority standard is less stringent than the more likely than not standard (the standard that is met when there is a greater than 50-percent likelihood of the position being upheld), but more stringent than the reasonable basis standard as defined in § 1.6662–3(b)(3). - -

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Par. 5. In 1.6662–7, paragraph (d) is revised to read as follows:

§ 1.6662–7 Omnibus Budget Reconcili- ation Act of 1993 changes to the accuracy-related penalty.

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(d) Reasonable basis. For purposes of §§ 1.6662–3(c) and 1.6662–4(e) and (f) (relating to methods of making adequate disclosure), the provisions of § 1.6662– 3(b)(3) apply in determining whether a return position has a reasonable basis.

Par. 6. Section 1.6664–0 is amended by:

Revising the entry for paragraph (c)(2) of § 1.6664–4.
Removing the entries for paragraphs (c)(1)(iii), (c)(2)(i), and (c)(2)(ii) of § 1.6664–4.

The revision reads as follows:

§ 1.6664–0 Table of contents.

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§ 1.6664–4 Reasonable cause and good faith exception to section 6662 penalties.

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1996–49 I.R.B. 22

Sec. 3.09

Section 3.09 emphasizes the Service’s willingness to adapt APA procedures to the needs of particular taxpayers and situations, and especially to the special needs of small business taxpayers.

Sec. 5.09

The draft revenue procedure in Announcement 95–49 provided that an APA request would be considered filed on the date the user fee was paid, provided that a substantially complete request is filed within 120 days thereafter. In response to comments, section 5.09 provides that the Service may extend the 120-day period based on a showing of substantial unforeseen circumstances.

Sec. 5.13

New mailing and delivery instructions are provided to reflect current addresses and Service procedures for handling user fees.

Sec. 5.14

Section 5.14 makes technical corrections to the user fee rules for APAs contained in Rev. Proc. 96–1, 1996–1 I.R.B. 8. In addition, section 5.14 provides guidelines for determining whether an APA submission consists of a single or multiple requests for purposes of the user fee rules. The revenue procedure also provides special lower fees for certain specified categories of requests, including certain smaller transactions, routine renewals where material facts and issues have not changed, and multilateral requests where the facts and issues are essentially similar with respect to each foreign jurisdiction. As a matter of clarification, the provision of the reduced fee for certain multilateral APA requests should not be read to imply that user fees are charged with respect to a taxpayer’s request for competent authority relief; rather, the fees are charged with respect to the Service’s analysis and consideration of the APA requests.

Sec. 6.04

In response to comments, section 6.04 provides that, wherever reasonably feasible, if a prefiling conference has been held with the taxpayer, the Service’s Team Leader for considering the request will be appointed from among the IRS representatives at the prefiling conference.

Sec. 6.05(4)

In response to comments, the revenue procedure modifies and clarifies procedures to be followed when the Service or taxpayer fail to conform to a Case Plan and Schedule.

Sec. 6.05(5)

In response to comments, section 6.05(5) enables the Service and taxpayer APA Teams to modify the Case Plan and Schedule by mutual agreement, without prior approval of the APA Director, provided that progress is maintained toward completion of the case as expeditiously as is feasible.

Sec. 6.05(6)

In response to comments, section 6.05(6) gives the Service and taxpayer APA Teams additional flexibility concerning how to document the progress of pending negotiations.

Secs. 6.06 & 6.07

These portions of the revenue procedure discuss the circumstances under which user fees will be returned if the taxpayer withdraws, or the Service rejects, an APA request. In general, user fees will not be returned if a request is withdrawn or rejected; however, the user fee may be returned in the case of a rejection if the Service determines return of the fee to be appropriate.

Sec. 7.01

Section 7.01 contains changes designed to reflect the increasing coordination between treaty partners in the evaluation of bilateral and multilateral APA requests, including consultation at the earliest stages of APA proceedings.

Sec. 7.08

Section 7.05 of Rev. Proc. 96–13, 1996–3 I.R.B. 31, provides in part that, if a taxpayer reaches a settlement on an issue with Counsel pursuant to a written agreement, the U.S. competent authority will endeavor only to obtain a correlative adjustment from a treaty country and will not undertake any actions that would otherwise change such agreements. This provision has caused taxpayers to ask whether the position of Rev. Proc. 91–22, to the effect that by obtaining a unilateral APA a taxpayer does not limit its access to treaty relief,

remains in effect. Section 7.08 of the new revenue procedure clarifies the interaction between a unilateral APA and the taxpayer’s attempts to obtain treaty relief through the competent authority process. In general, the U.S. competent authority will endeavor to reach agreement with a treaty partner to provide relief from double taxation. However, a unilateral APA may hinder the ability of the U.S. competent authority to reach a mutual agreement which will provide relief from double taxation, particularly when a contemporaneous bilateral or multilateral APA request would have been both effective and practical (within the meaning of § 1.901–2(e)(5)(i)) to obtain consistent treatment of the APA matters in a treaty country.

Sec. 8

Section 8 of Rev. Proc. 96–53 provides new rules clarifying the treatment of APA rollback requests, and coordinating APA rollback procedures with procedures for accelerated competent authority resolution and simultaneous Appeals and competent authority consideration. Such coordination would be necessary in the case of ‘‘gap years,’’ i.e., tax years for which returns have been filed that are not covered by the APA request but that are not yet under audit.

Sec. 11.02

Rev. Proc. 96–53, like Rev. Proc. 91–22, provides that in certain circumstances taxpayers may make compensating adjustments, after the end of a taxable year, in order to achieve compliance with an APA. In general, the obligation to make such compensating adjustments does not affect the taxpayer’s estimated tax liability, and does not result in other specified consequences, for the taxable year. Section 11.02 of the revenue procedure clarifies that this favorable treatment is available only when the taxpayer has made a good-faith effort to comply with the terms of the APA. In addition, the revenue procedure provides that the special treatment of compensating adjustments applies to compensating adjustments directly related to the taxpayer’s application of the TPM, but not to ‘‘subsequent compensating adjustments,’’ which are subject to normal procedures for assessment, collection and refund.

23 1996–49 I.R.B.

Sec. 11.08

Commentators have asked for clarification concerning the type of review the Service will apply to requests for renewal of APAs. In general, the Service will seek to minimize the amount of new information and analysis that taxpayers need to supply in connection

with renewal requests, and to the extent consistent with applicable law and policies, will seek to maintain continuity between original APAs and renewals.

The Service desires to receive comments at any time concerning how APA procedures might be revised in the future to enhance the value of the APA

Program to taxpayers and to the Service. Such comments should be sent to:

Advance Pricing Agreement Program Internal Revenue Service Attn: CC:INTL Room 3501, 1111 Constitution Ave.,

N.W. Washington, DC 20024

1996–49 I.R.B. 24