Part I. Rulings — Internal Revenue Bulletin 1996-53

Section 1.—Tax Imposed

26 CFR 1.1–1: Income tax on individuals.

The Service is providing adjusted tax tables for individuals and trusts and estates for taxable years beginning in 1997 to reflect changes in the cost of living. Also provided are certain reductions allowed against the unearned income of minor children in computing the ‘‘kiddie tax.’’ The amounts used to determine whether a parent may elect to report the ‘‘kiddie tax’’ on the parent’s return are also adjusted. The adjustments concerning the election to report the ‘‘kiddie tax’’ on the parent’s return are for taxable years beginning in 1996 and 1997. See Rev. Proc. 96–59, page 17.

Section 32.—Earned Income

26 CFR 1.32–2: Earned income credit for taxable years beginning after December 31, 1978.

The Service is providing inflation adjustments for taxable years beginning in 1997 to the limitations on the earned income tax credit. See Rev. Proc. 96–59, page 17.

Section 59.—Other Definitions and Special Rules

The Service is providing an inflation adjustment for taxable years beginning in 1996 and 1997 to the exemption amount use in computing the alternative minimum tax for a minor child subject to the ‘‘kiddie tax.’’ See Rev. Proc. 96–59, page 17.

Section 61.—Gross Income Defined

26 CFR 1.61–1: Gross income.

Section 62.—Adjusted Gross Income Defined

26 CFR 1.62–2: Reimbursements and other ex- pense allowance arrangements.

Rules are set forth under which a reimbursement or other expense allowance arrangement for the cost of lodging, meal, and incidental expenses or meal and incidental expenses incurred by an employee while traveling away from home will satisfy the requirements of § 62(c) of the Code as to substantiation of the amount of expenses. See Rev. Proc. 96–64, page 52.

Rules under which a reimbursement or other expense allowance arrangement for the cost of operating an automobile for business purposes will satisfy the requirements of section 62(c) of the Code as to business connection, substantiation, and returning amounts in excess of expenses. See Rev. Proc. 96–63, page 46.

Section 63.—Taxable Income Defined

26 CFR 1.63–1: Change of treatment with respect to the zero bracket amount and itemized deduc- tions.

The Service is providing inflation adjustments for taxable years beginning in 1997 to the standard deduction amounts (including the limitation in the case of certain dependents, and the additional standard deduction for the aged or blind). See Rev. Proc. 96–59, page 17.

Section 68.—Overall Limitation on Itemized Deductions

The Service is providing inflation adjustments for taxable years beginning in 1997 to the overall limitation on itemized deductions. See Rev. Proc. 96–59, page 17.

Section 104.—Compensation for Injuries or Sickness

26 CFR 1.104–1(c): Damages received on account of personal injuries or sickness. (Also §§ 61, 3121, 3231, 3306, 3401, 7805; 1.61–1; 31–3121(a)–1; 31.3231(e)–1; 31.3306(b)– 1; 31.3401(a)–1; 301.7805–1.)

Damages received on account of personal injuries or sickness. Under current § 104(a)(2), back pay and damages for emotional distress received to satisfy a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII of the 1964 Civil Rights Act are not excludable from gross income. Under former § 104(a)(2), as in effect before August 21, 1996, back pay received to satisfy such a claim is not excludable from gross income. However, damages received for emotional distress under that statute are excludable. Rev. Rul. 93–88 obsoleted. Notice 95–45 superseded. Rev. Rul. 72–341 and 84–92 obsoleted. Rev. Proc. 96–3 modified.

Rev. Rul. 96–65

ISSUE

LAW AND ANALYSIS

In general, § 61(a) provides that, except as otherwise provided by law, gross income includes all income from whatever source derived.

Section 104(a)(2), as amended by § 1605 of the Small Business Job Protection Act of 1996 (the 1996 Act) 110 Stat. 1755, 1838, provides generally that gross income does not include the amount of any damages received (whether by suit or agreement) on account of personal physical injuries or physical sickness. Section 104(a) further provides that, for purposes of paragraph (2), emotional distress is not treated as a physical injury or physical sickness except to the extent of damages paid for medical care (described in § 213(d)(1)(A) or (B)) attributable to emotional distress. The 1996 Act amendments to § 104(a) apply to amounts received after August 20, 1996, but not to amounts received under a written binding agreement, court decree, or mediation award in effect on (or issued on or before) September 13, 1995.

Before its amendment by the 1996 Act, former § 104(a)(2) provided generally that gross income does not include the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness.

Section 1.104–1(c) of the Income Tax Regulations provides that the term ‘‘damages received (whether by suit or agreement)’’ means an amount received (other than workmen’s compensation) through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.

In United States v. Burke, 504 U.S. 229 (1992), the Supreme Court held that back pay received for disparate impact gender discrimination under Title VII was not excludable from gross income as damages received on account of personal injuries under former § 104(a)(2) because that part of Title VII did not compensate for a broad range of traditional tort harms.

In light of Burke, the Service issued Rev. Rul. 93–88, 1993–2 C.B. 61, which holds that compensatory damages and back pay are excludable from gross income as damages for personal injury under former § 104(a)(2) when received for: (1) disparate treatment gender discrimination under Title VII, as amended in 1991; (2) racial discrimination under § 16 of the Civil Rights Act of 1870, 42 U.S.C. § 1981 and Title VII; and (3) disparate treatment discrimination under the Americans With Disabilities Act, 42

U.S.C. §§ 12101–12213, as amended in 1991. All three of these statutes provide a broad range of compensatory damages of the type the Supreme Court focused upon in Burke.

In Commissioner v. Schleier, 515 U.S., 115 S. Ct. 2159 (1995), the Supreme Court held that back pay and liquidated damages received to settle a claim under the Age Discrimination in Employment Act of 1967, 29 U.S.C. §§ 621–634 (ADEA), are not excludable from gross income under former § 104(a)(2). The Court concluded that former § 104(a)(2) and its regulations set forth two requirements for a recovery to be excludable from gross income: (1) it must be based on tort or tort type rights, and (2) it must be received ‘‘on account of personal injuries or sickness.’’ The Court held that back pay and liquidated damages received under the ADEA meet neither requirement because (1) the ADEA does not compensate for any of the other traditional tort harms associated with personal injury, (2) the back pay is completely independent of the existence or extent of any personal injury, and (3) the ADEA liquidated damages are punitive in nature.

Based on Schleier, Notice 95–45, 1995–2 C.B. 330, suspended Rev. Rul. 93–88, and added section 5.05 to Rev. Proc. 95–3, 1995–1 C.B. 385, to provide that pending issuance of published guidance, the Service will not issue rulings or determination letters on whether amounts received are excludable from gross income under § 104(a)(2) in situations affected by Schleier.

In light of Schleier, and the amendment of § 104(a)(2) by the 1996 Act, the Internal Revenue Service has reconsidered Rev. Rul. 93–88.

HOLDINGS

(1) Current § 104(a)(2). Back pay received in satisfaction of a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII is not excludable from gross income under § 104(a)(2) because it is completely independent of, and thus is not damages received on account of, personal physical injuries or physical sickness under that section. Similarly, amounts received for emotional distress in satisfaction of such a claim are not excludable from gross income under § 104(a)(2), except to the extent they are damages paid for medical care (as described in § 213(d)(1)(A) or (B)) attributable to emotional distress.

(2) Former § 104(a)(2). Back pay received in satisfaction of a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII is not excludable from gross income under former § 104(a)(2) because it is completely independent of, and thus is not damages received on account of, personal injuries or sickness under that section. However, damages received for emotional distress in satisfaction of such a claim are excludable from gross income under former § 104(a)(2) because they are received ‘‘on account of personal injuries or sickness.’’

(3) Wages and compensation. Back pay includible in gross income under Holding (1) or (2) is ‘‘wages’’ for purposes of § 3121 (Federal Insurance Contributions Act (FICA)), § 3306 (Federal Unemployment Tax Act (FUTA)), and § 3401 (federal income tax withholding), and is ‘‘compensation’’ for purposes of § 3231 (Railroad Retirement Tax Act (RRTA)).

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 93–88 is obsoleted. Notice 95–45 is superseded. Rev. Rul. 72–341, 1972–2 C.B. 32, and Rev. Rul. 84–92, 1984–1 C.B. 204, which hold that amounts received to settle a claim under pre-1991 Title VII are (1) includible in gross income as compensation, (2) ‘‘wages’’ for FICA, FUTA, and federal income tax withholding purposes, and (3) ‘‘compensation’’ for RRTA purposes, are obsoleted. Rev. Proc. 96–3, 1996–1 I.R.B. 82, is modified to delete section 5.05.

PROSPECTIVE APPLICATION

Pursuant to the authority contained in § 7805(b), this revenue ruling will not apply adversely to damages received under any provision of law providing tort or tort type remedies for employment discrimination for race, color, religion, gender, national origin, or other similar classifications, if the damages are received (1) on or before June 14, 1995, the date that Schleier was decided by the Supreme Court, or (2) pursuant to a written binding agreement, court decree, or mediation award in effect on (or issued on or before) June 14, 1995.

DRAFTING INFORMATION

The principal author of this revenue ruling is Sheldon A. Iskow of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information

regarding this revenue ruling, contact Mr. Iskow on (202) 622–4920 (not a toll-free call).

Section 132.—Certain Fringe Benefits

The Service is providing inflation adjustments for taxable years beginning in 1997 to the limitation on the exclusion of a qualified transportation fringe. See Rev. Proc. 96–59, page 17.

Section 135.—Income From United States Savings Bonds Used To Pay Higher Education Tuition and Fees

The Service is providing inflation adjustments for taxable years beginning in 1993 through 1997 to the limitation on the exclusion of income from United States savings bonds for taxpayers who pay qualified higher education expenses for taxable years. See Rev. Proc. 96–59, page 17.

Section 151.—Allowance of Deductions for Personal Exemptions

26 CFR 1.151–4: Amount of deduction for each exemption under section 151.

The Service is providing inflation adjustments for taxable years beginning in 1997 to the personal exemption and to the threshold amounts of adjusted gross income above which the exemption amount phases out. See Rev. Proc. 96–59, page 17.

Section 162.—Trade or Business Expenses

26 CFR 1.162–1: Business expenses. (Also section 263; 1.263(a)–1.)

Training costs; business expenses. The Supreme Court’s decision in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), does not affect the treatment of training costs as business expenses which are generally deductible under section 162 of the Code.

Rev. Rul. 96–62

ISSUE

Does the Supreme Court’s decision in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), affect the treatment of training costs as business expenses, which are generally deductible under § 162 of the Internal Revenue Code?

LAW AND ANALYSIS

Section 162 and § 1.162–1(a) of the Income Tax Regulations allow a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 263(a) and § 1.263(a)–1(a) provide that no deduction is allowed for any amount paid out for permanent improvements or betterments made to increase the value of any property.

Through provisions such as §§ 162(a), 263(a), and related sections, the Internal Revenue Code generally endeavors to match expenses with the revenues of the taxable period to which the expenses are properly attributable, thereby resulting in a more accurate calculation of net income for tax purposes. See INDOPCO, Inc. v. Commis- sioner, 503 U.S. 79, 84 (1992); Com- missioner v. Idaho Power Co., 418 U.S. 1, 16 (1974). In INDOPCO, the Supreme Court concluded that certain legal and professional fees incurred by a target corporation to facilitate a friendly merger created significant long-term benefits for the taxpayer and, therefore, were capital expenditures. In reaching this decision, the Court specifically rejected the argument that its decision in Commissioner v. Lincoln Savings and Loan Associa- tion, 403 U.S. 345 (1971), should be read as holding ‘‘that only expenditures that create or enhance separate and distinct assets are to be capitalized under § 263.’’ INDOPCO at 86–87 (emphasis in original).

The INDOPCO decision clarifies that the creation or enhancement of a separate and distinct asset is not a prerequisite to capitalization. That clarification does not, however, change the fundamental legal principles for determining whether a particular expenditure can be deducted or must be capitalized. As the Supreme Court has specifically recognized, the ‘‘decisive distinctions [between capital and ordinary expenditures] are those of degree and not of kind. . . .’’ Welch v. Helvering, 290 U.S. 111, 114 (1933); Deputy v. du Pont, 308 U.S. 488, 496 (1940). Therefore, with respect to expenditures that produce benefits both in the current year and in future years, the determination of whether such expenditures must be capitalized or may be deducted requires a careful examination of all the facts. Although the mere presence of some future benefit may not warrant capitalization, a taxpayer’s realization of future benefits is undeniably important in determining whether an expenditure is immediately deductible or must be capitalized. See INDOPCO at 87–88. The INDOPCO decision does not affect the treatment of training costs under

§ 162. Amounts paid or incurred for training, including the costs of trainers and routine updates of training materials, are generally deductible as business expenses under that section even though they may have some future benefit. INDOPCO at 87. See, e.g., Cleveland Electric Illuminating Co. v. United States, 7 Cl. Ct. 220 (1985) (deduction for costs of training employees to operate new equipment in an existing business); Rev. Rul. 58–238, 1958–1 C.B. 90, 91 (deduction for costs of training employees that relate to the regular conduct of the employer’s business); see also Ithaca Industries, Inc. v. Commis- sioner, 97 T.C. 253, 271 (1991) (deduction for costs of training new employees to keep the assembled workforce unchanged), aff’d, 17 F.3d 684 (4th Cir.), cert. denied, 115 S. Ct. 83 (1994). Training costs must be capitalized only in the unusual circumstance where the training is intended primarily to obtain future benefits significantly beyond those traditionally associated with training provided in the ordinary course of a taxpayer’s trade or business. See, e.g., Cleveland Electric, 7 Cl. Ct. at 227–29 (capitalization of costs for training employees of an electric utility to operate a new nuclear power plant, which were akin to start-up costs of a new business).

HOLDING

The INDOPCO decision does not affect the treatment of training costs as business expenses, which are generally deductible under § 162.

DRAFTING INFORMATION

The principal author of this revenue ruling is Barry M. Freiman of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Freiman on (202) 622–4950 (not a toll-free call).

26 CFR 1.162–17: Reporting and substantiation of certain business expenses of employees.

The rules for substantiating the amount of a deduction or expense for business use of an automobile that most nearly represents current costs are set forth. See Rev. Proc. 96–63, page 46.

The rules for substantiating the amount of a deduction or expense for lodging, meal, and incidental expenses or meal and incidental expenses incurred while traveling away from home that most nearly represents current costs are set forth. See Rev. Proc. 96–64, page 52.

Section 170.—Charitable, Etc., Contributions and Gifts

26 CFR 1.170–1: Charitable, etc., contributions and gifts; allowance of deductions.

The Service is providing inflation adjustments for calendar year 1997 to the ‘‘insubstantial benefit’’ guidelines. Under the guidelines, a charitable contribution is fully deductible even though the contributor receives ‘‘insubstantial benefits’’ from the charity. See Rev. Proc. 96–59, page 17.

Section 263.—Capital Expenditures

26 CFR 1.263(a)–1: Capital expenditures; in gen- eral.

Does the Supreme Court’s decision in INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992), affect the treatment of training costs as business expenses which are generally deductible under § 162 of the Code? See Rev. Rul. 96–62, page 38.

Section 267.—Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers

26 CFR 1.267(a)–1: Deductions disallowed.

When a payor provides a per diem allowance to an employee who is a related party, the rules set forth for the deemed substantiation to the payor of the amount of the employee’s ordinary and necessary business expenses for lodging, meal, and/or incidental expenses incurred while traveling away from home do not apply. See Rev. Proc. 96–64, page 52.

Section 274.—Disallowance of Certain Entertainment, Etc., Expenses

26 CFR 1.274(d)–1: Substantiation requirements

Simplified optional method for substantiating the amount of a deduction or expense for business use of an automobile. See Rev. Proc. 96–63, page 46.

26 CFR 1.274(d)–1(a): Substantiation require- ments.

26 CFR 1.274–5T: Substantiation requirements (temporary).

Simplified optional method for substantiating the amount of a deduction or expense for business use of an automobile. See Rev. Proc. 96–63, page 46.

Rules are set forth for substantiating the amount of ordinary and necessary business expense of an employee for lodging, meal, and incidental expenses or meal and incidental expenses incurred while traveling away from home when a payor provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for such expenses. Rules are also set forth for an optional method for employees and selfemployed individuals to use in computing the deductible costs of business meal and incidental expenses paid or incurred while traveling away from home. See Rev. Proc. 96–64, page 52.

Section 483.—Interest on Certain Deferred Payments

26 CFR 1.483–1: Computation of interest on certain deferred payments.

As defined by section 1274A, the definitions for both ‘‘qualified debt instruments’’ and ‘‘cash method debt instruments’’ have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 1997 calendar year. See Rev. Rul. 96–63, page 46.

Section 512.—Unrelated Business Taxable Income

The Service is providing inflation adjustments for taxable years beginning in 1996 and 1997 to the maximum amount of annual dues that can be paid to certain agricultural or horticultural organizations without any portion being treated as unrelated trade or business income by reason of any benefits or privileges available to members. See Rev. Proc. 96–59, page 17.

Section 513.—Unrelated Trade or Business

The Service is providing inflation adjustments for taxable years beginning in 1997 to the maximum amount of a ‘‘low cost article.’’ Funds raised through a charity’s distribution of ‘‘low cost articles’’ will not be treated as unrelated business income to the charity. See Rev. Proc. 96–59, page 17.

Section 877.—Expatriation To Avoid Tax

The Service is providing inflation adjustments for calendar year 1997 to amounts used to determine whether a principal purpose of expatriation is to avoid tax. See Rev. Proc. 96–59, page 17.

Section 1016.—Adjustments to Basis

26 CFR 1.1016–3: Exhaustion, wear and tear, obsolescence, amortization, and depletion for peri- ods since February 28, 1913.

Reduction of basis for business use of an automobile under either the optional standard mileage rate method or a mileage allowance under a reimbursement or other expense allowance arrangement. See Rev. Proc. 96–63, page 46.

Section 1274.—Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

26 CFR 1.1274A–1: Special rules for certain transactions where stated principal amount does not exceed $2,800,000.

Section 1274A.—Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000.

(Also §§ 1274, 483; 1.1274A–1.)

Section 1274A inflation-adjusted numbers for 1997. This ruling provides the dollar amounts, increased by the 1997 inflation-adjustment, for section 1274A of the Code. Rev. Rul. 96–4 supplemented and superseded.

Rev. Rul. 96–63

This revenue ruling provides the dollar amounts, increased by the 1997 inflation adjustment, for § 1274A of the Internal Revenue Code.

BACKGROUND

In general, §§ 483 and 1274 of the Code determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments.

In the case of a ‘‘qualified debt instrument,’’ the discount rate used for purposes of §§ 483 and 1274 of the Code may not exceed 9 percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of

sales or exchanges before January 1, 1990, this amount is $2,800,000. In the case of a ‘‘cash method debt instrument,’’ as defined in § 1274A(c) of the Code, the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash method of accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount does not exceed $2,000,000, (B) The lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged, (C) Section 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) An election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and lender. Section 1.1274A–1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

Section 1274A(d)(2) of the Code provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

INFLATION-ADJUSTED AMOUNTS

For debt instruments arising out of sales or exchanges after December 31, 1989, the inflation-adjusted amounts under § 1274A are shown in Table 1.

Rev. Rul. 96–63 Table 1 Inflation-Adjusted Amounts Under § 1274A

1274A(b) Amount 1274A(c)(2)(A) Amount

of Sale or Exchange (qualified debt instrument) (cash method debt instrument)

1990 $2,933,200 $2,095,100 1991 $3,079,600 $2,199,700 1992 $3,234,900 $2,310,600 1993 $3,332,400 $2,380,300 1994 $3,433,500 $2,452,500 1995 $3,523,600 $2,516,900 1996 $3,622,500 $2,587,500 1997 $3,723,800 $2,659,900

Calendar Year of Sale or Exchange

1274A(b) Amount (qualified debt instrument)

Note : These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982–1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 96–4, 1996–3 I.R.B. 16, is supplemented and superseded.

DRAFTING INFORMATION

The principal author of this revenue ruling is David B. Silber of the Office of the Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Silber on (202) 622– 3930 (not a toll-free call).

Section 3121.—Definitions

26 CFR 31.3121(a)–1: Wages.

Is back pay that is received in satisfaction of a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII of the Civil Rights Act of 1964, as amended in 1991, treated as ‘‘wages’’ for purposes of § 3121 (FICA)? See Rev. Rul. 96–65, page 5.

Section 3221.—Rate of Tax

Determination of Quarterly Rate of Excise Tax for Railroad Retirement Supplemental Annuity Program

In accordance with directions in Section 3221(c) of the Railroad Retirement Tax Act (26 U.S.C., Section 3221(c)), the Railroad Retirement Board has determined that the excise tax imposed by such Section 3221(c) on every employer, with respect to having individuals in his employ, for each work-hour for which compensation is paid by such employer for services rendered to him during the quarter beginning October 1, 1996, shall be at the rate of 34 cents. In accordance with directions in Section 15(a) of the Railroad Retirement Act of 1974, the Railroad Retirement Board has determined that for the quarter beginning October 1, 1996, 33.8

percent of the taxes collected under Sections 3211(b) and 3221(c) of the Railroad Retirement Tax Act shall be credited to the Railroad Retirement Account and 66.2 percent of the taxes collected under such Sections 3211(b) and 3221(c) plus 100 percent of the taxes collected under Section 3221(d) of the Railroad Retirement Tax Act shall be credited to the Railroad Retirement Supplemental Account.

Dated: August 27, 1996.

Beatrice Ezerski, Secretary to the Board

(Filed by the Office of the Federal Register on September 4, 1996, 8:45 a.m., and published in the issue of the Federal Register for September 5, 1996, 61 F.R. 46871)

In accordance with directions in Section 3221(c) of the Railroad Retirement Tax Act (26 U.S.C. 3221(c)), the Railroad Retirement Board has determined that the excise tax imposed by such Section 3221(c) on every employer, with respect to having individuals in his employ, for each work-hour for which compensation is paid by such employer for services rendered to him during the quarter beginning January 1, 1997, shall be at the rate of 35 cents.

In accordance with directions in Section 15(a) of the Railroad Retirement Act of 1974, the Railroad Retirement Board has determined that for the quarter beginning January 1, 1997, 33.4 percent of the taxes collected under Sections 3211(b) and 3221(c) of the Railroad Retirement Tax Act shall be credited to the Railroad Retirement Account and 66.6 percent of the taxes collected under such Sections 3211(b) and 3221(c) plus 100 percent of the taxes collected under Section 3221(d) of the Railroad Retirement Tax Act shall be

credited to the Railroad Retirement Supplemental Account.

Dated: December 4, 1996.

Beatrice Ezerski, Secretary to the Board

(Filed by the Office of the Federal Register on December 11, 1996, 8:45 a.m., and published in the issue of the Federal Register for December 12, 1996, 61 F.R. 65422)

Section 3231.—Definitions

26 CFR 31.3231(e)–1: Compensation

Is back pay that is received in satisfaction of a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII of the Civil Rights Act of 1964, as amended in 1991, treated as ‘‘compensation’’ for purposes of § 3231 (RRTA)? See Rev. Rul. 96–65, page 5.

Section 3306.—Definitions

26 CFR 31.3306(b)–1: Wages.

Section 3401.—Definitions

26 CFR 31.3401(a)–1: Wages.

Section 4001.—Passenger Vehicles

The Service is providing inflation adjustments to the price above which a passenger vehicle becomes subject to an excise tax for transactions occurring in calendar year 1997. See Rev. Proc. 96–59, page 17.

Section 4003.—Special Rules

The Service is providing inflation adjustments to the price above which a passenger vehicle becomes subject to an excise tax for transactions occurring in calendar year 1997. (Price includes the price of installation of parts or accessories on a passenger vehicle within six months of the date after the vehicle was first placed in service.) See Rev. Proc. 96–59, page 17.

Section 6011.—General Requirement of Return, Statement, or List.

26 CFR 31.6011(a)–4: Returns of income tax withheld.

Standard and alternate procedures to be used in preparing employment tax forms where a predecessor-successor employer relationship exists. Rev. Proc. 84–77 modified and superseded. See Rev. Proc. 96–60, page 24.

26 CFR 301.6011–2T: Required use of magnetic media (Temporary).

Automatic extensions of time to furnish Forms W–2 to employees and file Forms W–2 with the Social Security Administration are provided for ‘‘Qualified Employers.’’ See Rev. Proc. 96–57, page 14.

Section 6012.—Persons Required to Make Returns of Income

26 CFR 1.6012–1: Individuals required to make returns of income.

The Service is providing adjusted tax tables for individuals and trusts and estates for taxable years beginning in 1997 to reflect changes in the cost of living. See Rev. Proc. 96–59, page 17.

26 CFR 1.6012–5: Composite return in lieu of specified form.

What are the requirements for participation in the 1997 Electronic Filing Program for the Form 1040 series? See Rev. Proc. 96–61, page 27.

What are the requirements for participation in the 1997 On-Line Filing Program for the Form 1040 series? See Rev. Proc. 96–62, page 38.

Section 6013.—Joint Returns of Income Tax by Husband and Wife

26 CFR 1.6013–1: Joint returns.

The Service is providing adjusted tax tables for individuals for taxable years beginning in 1997 to reflect changes in the cost of living. See Rev. Proc. 96–59, page 17.

Section 6033.—Returns by Exempt Organizations

The Service is providing inflation adjustments for taxable years beginning in 1997 to the amount of dues certain exempt organizations can charge and still be excepted from the reporting requirements for exempt organizations with nondeductible

lobbying expenditures. See Rev. Proc. 96–59, page 17.

Section 6039F.—Notice of Large Gifts Received From Foreign Persons

The Service is providing an inflation adjustment for taxable years beginning in 1997 to the amount of gifts in a taxable year from foreign person(s) that triggers a reporting requirement for a United States person. See Rev. Proc. 96–59, page 17.

Section 6051.—Receipts for Employees

26 CFR 31.6051–1: Statements for employees.

Section 6061.—Signing of Returns and Other Documents

26 CFR 1.6061–1: Signing of returns and other documents by individuals.

What are the requirements for participation in the 1997 Electronic Filing Program for the Form 1040 series? See Rev. Proc. 96–61, page 27.

Section 6071.—Time for Filing Returns and Other Documents

26 CFR 31.6071(a)–1: Time for filing returns and other documents.

Section 6081.—Extension of Time for Filing Returns.

26 CFR 31.6081(a)–1: Extensions of time for filing returns and other documents.

Section 6601.—Interest on Underpayment, Nonpayment or Extensions of Time for Payment of Tax

26 CFR 301.6601–1: Interest on underpayments.

Uniform tables for computing interest using the daily compounding rules. See Rev. Proc. 95–17, 1995–1, C.B. 556.

Section 6611.—Interest on Overpayments

26 CFR 301.6611–1: Interest on overpayments.

Uniform tables for computing interest using the daily compounding rules. See Rev. Proc. 95–17, 1995–1, C.B. 556.

Section 6621.—Determination of Rate of Interest

26 CFR 301.6621–1: Interest rate.

Uniform tables for computing interest using the daily compounding rules. See Rev. Proc. 95–17, 1995–1, C.B. 556.

Section 6622.—Interest Compounded Daily

26 CFR 301.6622–1: Interest compounded daily.

Uniform tables for computing interest using the daily compounding rules. See Rev. Proc. 95–17, 1995–1, C.B. 556.

Section 7430.—Awarding of Costs and Certain Fees

The Service is providing an inflation adjustment for calendar year 1997 to the hourly limit on attorney fees that may be awarded in a judgment or settlement of an administrative or judicial proceeding concerning the determination, collection, or refund of tax, interest, or penalty. See Rev. Proc. 96–59, page 17.

Section 7805.—Rules and Regulations

26 CFR 301.7805–1: Rules and regulations.

Are amounts received in satisfaction of a claim for denial of a promotion due to disparate treatment employment discrimination under Title VII of the Civil Rights Act of 1964, as amended in 1991, excludable from gross income under § 104(a)(2)? The holding will not apply adversely to damages received under any provision of law providing tort or tort type remedies for employment discrimination on the basis of race, color, religion, gender, national origin, or other similar classifications, if the damages are received (1) on or before June 14, 1995, the date that Schleier was decided by the Supreme Court, or (2) pursuant to a written binding agreement, court decree, or mediation award in effect on (or issued on or before) June 14, 1995. See Rev. Rul. 96–65, page 5.

Section 7872.—Treatment of Loans With Below-Market Interest Rates

CPI adjustment for below-market loans for 1997. The amount that section 7872(g) of the Code permits a taxpayer to lend to a qualified continuing care facility without incurring imputed interest is published and adjusted for inflation for years 1987–1997. Rev. Rul. 96–5 supplemented and superseded.

Rev. Rul. 96–64

This revenue ruling publishes the amount that § 7872(g) of the Internal Revenue Code permits a taxpayer to lend to a qualifying continuing care facility without incurring imputed interest. The amount is adjusted for inflation for the years after 1986.

Section 7872 of the Code generally treats loans bearing a below-market interest rate as if they bore interest at the market rate.

Section 7872(g)(1) of the Code provides that, in general, § 7872 does not apply for any calendar year to any below-market loan made by a lender to a qualified continuing care facility pursuant to a continuing care contract if the lender (or the lender’s spouse) attains age 65 before the close of the year.

Section 7872(g)(2) of the Code provides that, in the case of loans made after October 11, 1985, and before 1987, § 7872(g)(1) applies only to the extent

that the aggregate outstanding amount of any loan to which § 7872(g) applies (determined without regard to § 7872(g)(2)), when added to the aggregate outstanding amount of all other previous loans between the lender (or the lender’s spouse) and any qualified continuing care facility to which § 7872(g)(1) applies, does not exceed $90,000.

Section 7872(g)(5) of the Code provides that, for loans made during any calendar year after 1986 to which § 7872(g)(1) applies, the $90,000 limit specified in § 7872(g)(2) is increased by an inflation adjustment. The inflation adjustment for any calendar year is the percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for calendar year 1985. Section 7872(g)(5) states that the CPI for any calendar year is the average of the CPI as of the close of the 12-month period ending on September 30 of that calendar year.

Rev. Rul. 96–5, 1996–3 I.R.B. 29, publishes the amount specified in § 7872(g)(2) of the Code, increased by the inflation adjustment, for the years 1987–96. Table 1 sets forth the amount specified in § 7872(g)(2) of the Code. The amount is increased by the inflation adjustment for the years 1987–97.

REV. RUL. 96–64 TABLE 1 Limit under 7872(g)(2)

Year Amount

Before 1987 $ 90,000 1987 $ 92,200 1988 $ 94,800 1989 $ 98,800 1990 $103,500 1991 $108,600 1992 $114,100 1993 $117,500 1994 $121,100 1995 $124,300 1996 $127,800 1997 $131,300

Note : These inflation adjustments were computed using the All-Urban, Consumer Price Index 1982–1984 base, published by the Bureau of Labor Statistics.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 96–5, 1996–3 I.R.B. 29, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is David B. Silber of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Silber on (202) 622–3930 (not a toll-free call).