Part IV. Items — Internal Revenue Bulletin 1997-11

Notice of Proposed Rulemaking

Filing Requirements for Returns Claiming the Foreign Tax Credit

REG–208288–90

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains a proposed regulation relating to the substantiation requirements for taxpayers claiming foreign tax credits. The proposed regulation is necessary to provide guidance to U.S. taxpayers who claim foreign tax credits.

DATES: Written comments and requests for a public hearing must be received by April 14, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–208288–90), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–208288–90), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS internet site at HTTP://www.irs.ustreas.gov/prod/ tax_regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Joan Thomsen, (202) 622–3840 (not a tollfree call); concerning submissions, Evangelista Lee, (202) 622–7190 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

On June 3, 1988, the Internal Revenue Service issued a Notice (Notice 88–65, 1988–1 C.B. 552) which stated that regulations would be issued suspending portions of § 1.905–2 of the Treasury Regulations. Section 1.905–2 requires taxpayers who claim foreign tax credits to attach documents to their returns substantiating the credits. The Notice was issued in response to problems taxpayers were experiencing be

cause they could not timely obtain and prepare the necessary documentation in a form suitable for submission with their tax returns. The intent of the Notice was to advise taxpayers that Treasury and the IRS would issue a new regulation that would suspend, beginning on January 1, 1988, the existing regulation requiring the submission of this documentation with a tax return. This new regulation has not been issued. Instead of suspending the relevant portions of the existing regulation, Treasury and the IRS now have decided to permanently eliminate the requirement that documentation be submitted with the tax return, effective January 1, 1988.

Explanation of Provisions

§ 1.905–2(a)(1), 1.905–2(b)(1) and (2), and 1.905–2(c)

Sections 1.905–2(a)(1), 1.905–2(b)(1) and (2), and 1.905–2(c) are unchanged from the final regulations.

§ 1.905–2(a)(2)

Under § 1.905–2(a)(2), taxpayers generally are required to attach to their income tax returns either (1) the receipt for the foreign tax payment, or (2) a foreign tax return for accrued foreign taxes. Proposed § 1.905–2(a)(2) removes the requirement that the documentation must be attached to the income tax return. The proposed regulation now provides that such evidence of foreign taxes must be presented to the district director upon request.

§ 1.905–2(b)(3)

Section 1.905–2(b)(3) addresses issues for taxes withheld at the source. The section allows the district director to accept secondary evidence of such withholding. The proposed regulation clarifies that evidence of a tax withheld at the source and the amount withheld is only sufficient for an interim credit. Upon request of the district director, taxpayers must provide evidence, as provided in § 1.905–2(a)(2), that the tax withheld was actually paid to the foreign country. Although this regulation will be effective on the date that is 30 days after the date the final regulation is published in the Federal Register, it reflects an IRS requirement upheld as a reasonable interpretation of current law by the Tax Court and the Court of

Appeals for the Seventh Circuit in Con- tinental Illinois Corp. v. Commissioner, T.C. Memo. 1991–66, 61 T.C.M. (CCH) 1916, 1939–42 (1991), aff’d in part and rev’d in part, 998 F.2d 513, 516–17 (7th Cir. 1993).

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedures Act (5 U.S.C. chapter 5) does not apply to this regulation, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 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 Requests for a Public Hearing

Before this proposed regulation is adopted as a final regulation, consideration will be given to any comments that are submitted timely to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by any person that timely submits comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register .

Drafting Information

The principal author of this regulation is Joan Thomsen of the Office of the Associate Chief Counsel (International), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citation for 26 CFR part 1 continues to read in part as follows:

1997–11 I.R.B. 14

Authority: 26 U.S.C. 7805 - - Par 2. Section 1.905–2 is amended by:

Revising the second through fourth sentences in paragraph (a)(2).
Adding two sentences to the end of paragraph (b)(3).

The revision and addition read as follows:

§ 1.905–2 Conditions of allowance of credit.

(a) - - (2) - - - Except where it is established to the satisfaction of the district director that it is impossible for the taxpayer to furnish such evidence, the taxpayer must provide upon request the receipt for each such tax payment if credit is sought for taxes already paid or withheld, or the return on which each such accrued tax was based if credit is sought for taxes accrued. This receipt or return must be either the original, a duplicate original, or a duly certified or authenticated copy. The preceding two sentences are effective for returns whose original due date falls on or after January 1, 1988. - - (b) - - (3) - - - Any foreign tax credit claimed for taxes withheld at the source is an interim credit and the taxpayer must prove that any taxes withheld at the source were paid to the foreign country, as required in paragraph (a) of this section. The preceding sentence is effective the date that is 30 days after the date this regulation is published in the Federal Register as a final regulation, however, for periods prior to the date that is 30 days after the date this regulation is published in the Federal Register as a final regulation, see Conti- nental Illinois Corp. v. Commissioner, T.C. Memo. 1991–66, 61 T.C.M. (CCH) 1916, 1939–42 (1991), aff’d in part and rev’d in part, 998 F.2d 513, 516–17 (7th Cir. 1993), wherein the court upheld this rule as a reasonable interpretation of section 905(b) of the Internal Revenue Code.

- - - -

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1700)

Notice of Proposed Rulemaking and Notice of Public Hearing

Certain Asset Transfers to a Tax-Exempt Entity

REG–209121–89

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Notice of proposed rulemaking and notice of public hearing

SUMMARY: This document contains proposed regulations. The proposed regulations effectuate provisions of the Tax Reform Act of 1986 and the Technical and Miscellaneous Revenue Act of 1988. The proposed regulations generally affect a taxable corporation that transfers all or substantially all of its assets to a tax-exempt entity or converts from a taxable corporation to a taxexempt entity, and generally require the taxable corporation to recognize gain or loss in such a transaction.

DATES: Written comments must be received by April 15, 1997. Requests to speak (with outlines of oral comments to be discussed) at the public hearing scheduled for May 6, 1997, at 10 a.m. must be submitted by April 15, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–209121–89), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions also may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209121–89), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave. NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas. gov/prod/tax_regs/comments.html. The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Stephen R. Cleary (202) 622–7530; concerning submissions and the hearing, Evangelista Lee, (202) 622–7180, (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR Part 1) relating to the repeal of the General Utilities doctrine in the Tax Reform Act of 1986. Under the General Utilities doctrine, which took its name from General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935), corporations were not required to recognize gain or loss when they distributed appreciated or depreciated property to their shareholders. The General Utilities doctrine applied to distributions of property in complete liquidation, certain sales of property that were in connection with a complete liquidation, and nonliquidating distributions of property. It was codified in former sections 311, 336, and 337 of the Internal Revenue Code of 1954.

The General Utilities doctrine was an exception to the general rule that income earned by a corporation is taxed twice, once to the corporation when the income is earned and a second time to the corporation’s shareholders when the earnings are distributed. The General Utilities doctrine generally permitted the permanent elimination of corporate-level tax on the disposition of appreciated assets because the transferee received a fair market value basis in the assets and the corporation generally did not recognize any gain. Thus, the appreciated assets left corporate solution without any corporate-level tax having been paid.

Beginning in 1969, the scope of the General Utilities doctrine was restricted by a series of amendments (initially relating to nonliquidating distributions governed by section 311), until ultimately the General Utilities doctrine was repealed, with limited exceptions, in the Tax Reform Act of 1986. Sections 336 and 337 were amended to generally require corporations to recognize gain or loss when appreciated or depreciated property is distributed in complete liquidation or sold in connection with a complete liquidation.

Section 337(a) provides one of the limited exceptions from the repeal of the General Utilities doctrine by allowing a subsidiary to liquidate into its 80percent distributee (a corporation meeting the stock ownership requirements of section 332(b) in the liquidating corporation) without recognizing gain or loss.

15 1997–11 I.R.B.

The 80-percent distributee takes a carryover basis in the distributed property. However, under section 337(b)(2), this nonrecognition exception generally does not apply if the 80-percent distributee is a tax-exempt entity.

The Tax Reform Act of 1986 added section 337(d), directing the Secretary to prescribe regulations as may be necessary to carry out the purposes of the repeal of the General Utilities d octrine. The legislative history of the Tax Reform Act of 1986 indicates that the General Utilities doctrine was repealed because it tended to undermine the corporate income tax by allowing appreciated property to leave corporate solution without imposition of a corporate level tax. H.R. Rep. No. 99–426, 99th Cong., 1st Sess. 282 (1985). The Technical and Miscellaneous Revenue Act of 1988 amended section 337(d) to specify that the section authorizes regulations to ‘‘ensure that these purposes shall not be circumvented . . . through the use of a . . . tax-exempt entity.’’ The legislative history concerning the 1988 amendment to section 337(d) explains:

The bill also clarifies in connection with the built-in gain provisions of the Act that the Treasury Department shall prescribe such regulations as may be necessary or appropriate to carry out those provisions . . . . For example, this includes rules to require the recognition of gain if appreciated property of a C corporation is transferred to a . . . tax-exempt entity

[footnote 32] in a carryover basis transaction that would otherwise eliminate corporate level tax on the built-in appreciation.

[footnote 32] The Act generally requires recognition of gain if a C corporation transfers appreciated assets to a tax exempt entity in a section 332 liquidation. See Code section 337(b)(2). S. Rep. No. 145, 100th Cong., 2d Sess. 66 (1988).

Explanation of Provision

An acquisition by a tax-exempt entity of all or substantially all of the assets of a taxable corporation or a change in status of a taxable corporation to a tax-exempt entity, like a liquidation into an 80-percent tax-exempt distributee that is taxable under section 337(b)(2), could eliminate the corporate level tax on the appreciation in the taxable corporation’s assets. Accordingly, the proposed regulations apply rules similar to section

337(b)(2) to these transactions. The proposed regulations generally do not affect the tax treatment of the taxable corporation’s shareholders or the availability of any charitable contribution deduction.

The proposed regulations provide that a taxable corporation that transfers all or substantially all of its assets to one or more tax-exempt entities is required to recognize gain or loss as if the assets transferred were sold at their fair market values. Like section 337(b)(2), the proposed regulations provide that no gain or loss will be recognized on any of the assets transferred that are used by the tax-exempt entity in an activity the income from which is subject to the unrelated business tax under section 511(a). However, gain on such assets will later be recognized as unrelated business taxable income if the taxexempt entity disposes of the assets or ceases to use the assets in an unrelated trade or business activity.

The proposed regulations generally treat a taxable corporation that changes its status to a tax-exempt entity as having transferred all of its assets to a tax-exempt entity immediately before the change in status becomes effective, irrespective of whether an actual transfer of the assets has occurred. For this purpose, if a state, a political subdivision thereof, or an entity any portion of whose income is excluded from gross income under section 115, acquires the stock of a taxable corporation and thereafter any of the taxable corporation’s income is excluded from gross income under section 115, the taxable corporation will be treated as if it transferred all of its assets to a tax-exempt entity immediately before the stock acquisition.

Certain exceptions are provided to the change in status rule for organizations that are tax-exempt or are seeking taxexempt status under section 501(a). These exceptions provide relief for corporations needing a brief start-up period to establish their tax-exempt status and for those that temporarily lose their tax-exempt status. Under the proposed regulations, the change in status rule does not apply to a corporation that is tax-exempt within three taxable years of the taxable year of its formation, or to a corporation that regains its tax-exempt status within three years after either a final adverse adjudication on its taxexempt status or filing a tax return as a taxable corporation. The change in status rule also does not apply to an organization that before publication of

these proposed regulations was exempt or unsuccessfully applied for exemption, if the organization is tax-exempt within three years after the date of publication of final regulations. An organization that files for recognition of its exempt status during one of the three-year periods will be deemed to have or regain tax-exempt status if the application ultimately results in recognition as of a date during the three-year period. An anti-abuse rule makes all these exceptions unavailable to a taxable corporation that acquires all or substantially all of the assets of another taxable corporation and then changes its status with a principal purpose of avoiding the gain or loss recognition rule made applicable by these regulations.

The proposed regulations disallow the recognition of loss if assets are acquired by the taxable corporation in a section 351 transaction or a contribution to capital, or if assets are distributed by the taxable corporation to a shareholder, with a principal purpose to recognize loss by the taxable corporation on the transfer of its assets to a tax-exempt entity (loss limitation rule). For example, the loss limitation rule may apply if (a) a loss asset is contributed to a taxable corporation and then is transferred with substantially all of the taxable corporation’s assets to a tax-exempt entity; (b) loss assets not constituting substantially all of a taxable corporation’s assets are contributed to a new subsidiary and then the new subsidiary transfers the loss assets which are its only assets to a tax-exempt entity, or (c) assets are distributed by a taxable corporation to its parent and then the taxable corporation transfers loss assets now constituting substantially all of its assets to a tax-exempt entity. For purposes of the loss limitation rule, the principles of section 336(d)(2) apply.

Under the proposed regulations, a ‘‘taxable corporation’’ is any corporation that is not a tax-exempt entity as defined in the proposed regulations. Thus, taxable corporations include all S corporations whether or not subject to tax on built-in gain under section 1374. After the repeal of the General Utilities doctrine, an S corporation like a C corporation is required to recognize gain or loss when it liquidates. This gain or loss passes through to the S corporation’s shareholders under section 1366. The proposed regulations parallel this treatment.

Under the proposed regulations, a ‘‘tax-exempt entity’’ includes organiza tions exempt from tax under section 501, section 527, section 528, or section 529; Federal, state, and local governments; Indian tribal governments and federally chartered Indian tribal corporations; foreign governments and international organizations; and entities any portion of whose income is excluded from gross income under section 115. The term does not, however, include a cooperative described in section 521, paralleling the exception to section 337(b)(2). A transaction conveying all or substantially all of the assets of a taxable corporation to an Indian tribal government or a corporation organized under section 17 of the Indian Reorganization Act (IRA) or section 3 of the Oklahoma Welfare Act (OWA) will be covered by these regulations. Rev. Rul. 94–16, 1994–1 C.B. 19, held that an unincorporated Indian tribe or a corporation organized under section 17 of the IRA is not subject to federal income tax, but a corporation wholly owned by an Indian tribe and organized under state law is subject to federal income tax. Rev. Rul. 94–65, 1994–2 C.B. 14, held that a corporation organized under section 3 of the OWA also was not subject to federal income tax. In that ruling, the Service announced that an Indian tribe seeking to dissolve a corporation organized under state law and organize into a federally chartered corporation (corporation organized under either section 17 of the IRA or section 3 of the OWA) will be granted relief under section 7805(b) of the Code upon application for such relief provided it demonstrates to the Service that it has acted reasonably and in good faith to achieve the dissolution and organization. The relief described in that ruling applied to taxes on income earned after September 30, 1994, by a corporation organized by an Indian tribe under state law from income earned within the boundaries of the reservation (including gain or loss properly allocable to such activities from the sale or exchange of assets). The Service intends to provide similar relief from tax resulting from any gain or loss recognized under the rules provided in these regulations. The relief will be available to state law corporations wholly owned by Indian tribes that have acted reasonably and in good faith to dissolve and reorganize as federally chartered corporations.

Proposed Effective Date

These regulations are proposed to be applicable to transfers of assets as described in the regulations occurring after the date that is 30 days after publication in the Federal Register of these regulations as final regulations, unless the transfer is pursuant to a written agreement which is (subject to customary conditions) binding on or before the date that is 30 days after publication in the Federal Register of these regulations as final regulations.

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 has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. Chapter 6) does not apply. 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 written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. All comments will be available for public inspection and copying.

A public hearing has been scheduled for Tuesday, May 6, 1997, at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Service 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 comments by April 15, 1997, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 15, 1997.

PART I—INCOME TAXES

Paragraph 1. The authority citation for 26 CFR Part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 - - Section 1.337(d)–4 also issued under 26 U.S.C. 337. - - Par. 2. Section 1.337(d)–4 is added to read as follows:

§ 1.337(d)–4 Taxable to tax-exempt.

(a) Gain or loss recognition —(1) General rule. If a taxable corporation transfers all or substantially all of its assets to one or more tax-exempt entities, the taxable corporation must recognize gain or loss immediately before the transfer as if the assets transferred were sold at their fair market values. But see section 267 and paragraph (d) of this section concerning limitations on the recognition of loss.

(2) Change in corporation’s tax sta- tus treated as asset transfer. Except as provided in paragraph (a)(3) of this section, a taxable corporation’s change in status to a tax-exempt entity will be treated as if it transferred all of its assets to a tax-exempt entity immediately before the change in status becomes effective in a transaction to which paragraph (a)(1) of this section applies. For purposes of this paragraph (a), if a state, a political subdivision thereof, or an entity any portion of whose income is excluded from gross income under section 115, acquires the stock of a taxable corporation and thereafter any of the taxable corporation’s

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the 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 Stephen R. Cleary of the Office of Assistant Chief Counsel (Corporate), IRS. However, other personnel from the IRS and the Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

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

17 1997–11 I.R.B.

income is excluded from gross income under section 115, the taxable corporation will be treated as if it transferred all of its assets to a tax-exempt entity immediately before the stock acquisition.

(3) Exceptions for certain changes in status - (i) To whom available. Paragraph (a)(2) of this section does not apply to the following corporations—

(A) A corporation previously exempt under section 501(a) which regains its tax-exempt status under section 501(a) within three years from the later of a final adverse adjudication on the corporation’s tax exempt status, or the filing by the corporation, or by the Secretary or his delegate under section 6020(b), of a federal income tax return of the type filed by a taxable corporation;

(B) A newly-formed corporation that is tax-exempt under section 501(a) within three taxable years from the end of the taxable year in which it was formed;

(C) A corporation previously exempt under section 501(a) or that applied for but did not receive recognition of exemption under section 501(a), before January 15, 1997, if such corporation is tax-exempt under section 501(a) within three years from the date of publication of these regulations in the Federal Register as final regulations.

(ii) Application for recognition. An organization is deemed to have or regain tax-exempt status within one of the three-year periods described in paragraph (a)(3)(i) of this section if it files an application for recognition of exemption with the Commissioner within the three-year period and the application either results in a determination by the Commissioner or a final adjudication that the organization is tax-exempt under section 501(a) during any part of the three-year period. The preceding sentence does not require the filing of an application for recognition of exemption by any organization not otherwise required, such as by § 1.501(a)–1, § 1.505(c)–1T, and § 1.508–1(a), to apply for recognition of exemption.

(iii) Anti-abuse rule. This paragraph (a)(3) does not apply to a corporation that, with a principal purpose of avoiding the application of paragraphs (a)(1) and (a)(2) of this section, acquires all or substantially all of the assets of another taxable corporation and then changes its status to that of a tax-exempt entity.

(4) Related transactions. This section applies to any series of related transactions having an effect similar to any of the transactions to which this section applies.

(b) Exceptions. Paragraph (a) of this section does not apply to—

(1) Any assets transferred to a taxexempt entity if the assets are used in an activity the income from which is subject to tax under section 511(a). However, if assets on which no gain or loss was recognized by reason of the preceding sentence are disposed of by the tax-exempt entity, then, notwithstanding any other provision of law, any gain (not in excess of the amount not recognized by reason of the preceding sentence) shall be included in the taxexempt entity’s unrelated business taxable income. If the tax-exempt entity ceases to use the assets in an activity the income from which is subject to tax under section 511(a), the entity will be treated for purposes of this subparagraph as having disposed of the assets on the date of the cessation;

(2) Any transfer of assets to the extent gain or loss otherwise is recognized by the taxable corporation on the transfer. See, for example, sections 336, 337(b)(2), 367, and 1001; (3) Any forfeiture of a taxable corporation’s assets in a criminal or civil action to the United States, the government of a possession of the United States, a state, the District of Columbia, the government of a foreign country, or a political subdivision of any of the foregoing; or any expropriation of a taxable corporation’s assets by the government of a foreign country; and

(4) Any transfer of assets to a cooperative described in section 521.

(1) Taxable corporation. A taxable corporation is any corporation that is not a tax-exempt entity as defined in paragraph (c)(2) of this section.

(2) Tax-exempt entity. A tax-exempt entity is—

(i) Any entity that is exempt from tax under section 501(a), section 527, section 528, or section 529;

(ii) A charitable remainder annuity trust or charitable remainder unitrust as defined in section 664(d);

(iii) The United States, the government of a possession of the United States, a state, the District of Columbia, the government of a foreign country, or a political subdivision of any of the foregoing;

(iv) An Indian Tribal Government as defined in section 7701(a)(40), a subdivision of an Indian tribal government determined in accordance with section 7871(d), or an agency or instrumentality of an Indian tribal government or subdivision thereof;

(v) An Indian Tribal Corporation organized under section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 477, or section 3 of the Oklahoma Welfare Act, 25 U.S.C. 503;

(vi) An international organization as defined in section 7701(a)(18);

(vii) An entity any portion of whose income is excluded under section 115; or

(viii) An entity that would not be taxable under the Internal Revenue Code for reasons substantially similar to those applicable to any entity listed in this paragraph (c)(2) unless otherwise explicitly made exempt from the application of this section by statute or by action of the Commissioner.

(3) Substantially all. The term sub- stantially all has the same meaning as under section 368(a)(1)(C).

(d) Loss limitation rule. For purposes of determining the amount of loss recognized by a taxable corporation on the transfer of its assets to a tax-exempt entity under paragraph (a) of this section, if assets are acquired by the taxable corporation in a transaction to which section 351 applied or as a contribution to capital, or assets are distributed from the taxable corporation to a shareholder or another member of the taxable corporation’s affiliated group, and in either case as part of a plan a principal purpose of which is to recognize loss by the taxable corporation on the transfer of its assets to the tax-exempt entity, the losses recognized by the taxable corporation on the assets transferred to the tax-exempt entity will be disallowed. For purposes of the preceding sentence, the principles of section 336(d)(2) apply.

(e) Effective date. This section is applicable to transfers of assets as described in paragraph (a) of this section occurring after the date that is 30 days after publication in the Federal Register of these regulations as final regulations, unless the transfer is pursuant to a written agreement which is (subject to customary conditions) binding on or before the date that is 30 days after

1997–11 I.R.B. 18

FOR FURTHER INFORMATION CONTACT: Concerning the regulation, Robert Honigman, (202) 622–3050; concerning submissions and the hearing, Christina Vasquez, (202) 622–6808 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 1402 of the Internal Revenue Code and replaces the notice of proposed rulemaking published in the Federal Register on December 29, 1994, at 59 FR 67253 (EE–45–94, 1995–1 C.B. 853), that treated certain members of a limited liability company (LLC) as limited partners for self-employment tax purposes. Written comments responding to the proposed regulations were received, and a public hearing was held on June 23, 1995. Under the 1994 proposed regulations, an individual owning an interest in an LLC was treated as a limited partner if (1) the individual lacked the authority to make management decisions necessary to conduct the LLC’s business (the management test), and (2) the LLC could have been formed as a limited partnership rather than an LLC in the same jurisdiction, and the member could have qualified as a limited partner in the limited partnership under applicable law (the limited partner equivalence test). The intent of the 1994 proposed regulations was to treat owners of an LLC interest in the same manner as similarly situated partners in a state law partnership.

Public comments on the 1994 proposed regulations were mixed. While some commentators were pleased with the proposed regulations for attempting to conform the treatment of LLCs with state law partnerships, others criticized the 1994 proposed regulations based on a variety of arguments.

A number of commentators discussed administrative and compliance problems with the 1994 proposed regulations. For example, it was noted that both the management test and the limited partner equivalence test depend upon legal or factual determinations that may be difficult for taxpayers or the IRS to make with certainty.

Another commentator pointed out that basing the self-employment tax treatment of LLC members on state law

publication in the Federal Register of these regulations as final regulations.

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 15, 1997, 62 F.R. 2064)

Withdrawal of Notice of Proposed Rulemaking

Self-Employment Tax Treatment of Members of Certain Limited Liability Companies

REG–209729–94

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

SUMMARY: This document withdraws the notice of proposed rulemaking relating to the self-employment tax treatment of members of certain limited liability companies that was published in the Federal Register on Thursday, December 29, 1994. The proposed regulations sought to provide guidance concerning the applicability of certain selfemployment tax rules to certain members of limited liability companies. The IRS and Treasury have issued new proposed regulations that will provide guidance on this issue.

FOR FURTHER INFORMATION CONTACT: Robert Honigman, (202) 622– 3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On Thursday, December 29, 1994, the IRS issued proposed regulations (EE– 45–94 [1995–1 C.B. 853]) relating to the self-employment tax treatment of members of certain limited liability companies (59 FR 67253). Upon consideration of the written comments received and the oral comments made at the public hearing held on June 23, 1995, the IRS has decided to withdraw those proposed regulations.

- - - -

Withdrawal of Notice of Proposed Rulemaking

Accordingly, under the authority of 26 U.S.C. 7805, the notice of proposed rulemaking that was published in the

Federal Register on Thursday, December 29, 1994, at 59 FR 67253, is withdrawn.

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1701)

Notice of Proposed Rulemaking and Notice of Public Hearing

Definition of Limited Partner for Self-Employment Tax Purposes

REG–209824–96

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed amendments to the regulations relating to the self-employment income tax imposed under section 1402 of the Internal Revenue Code of 1986. These regulations permit individuals to determine whether they are limited partners for purposes of section 1402(a)(13), eliminating the uncertainty in calculating an individual’s net earnings from selfemployment under existing law. This document also contains a notice of public hearing on the proposed regulations.

DATES: Written comments must be received by April 14, 1997. Requests to speak and outlines of oral comments to be discussed at the public hearing scheduled for May 21, 1997, at 10 a.m. must be received by April 30, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–209824–96), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–209824–96), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the ‘‘Tax Regs’’ option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/prod/ tax_regs/comments.html. The public hearing will be held in the Auditorium, Internal Revenue Service building, 1111 Constitution Avenue, NW, Washington, DC.

19 1997–11 I.R.B.

limited partnership rules would lead to disparate treatment between members of different LLCs with identical rights based solely on differences in the limited partnership statutes of the states in which the members form their LLC. For example, State A’s limited partnership act may allow a limited partner to participate in a partnership’s business while State B’s limited partnership act may not. Thus, an LLC member, who is not a manager, that participates in the LLC’s business would be a limited partner under the proposed regulations if the LLC is formed in State A, but not if the LLC is formed in State B. Commentators asserted that this disparate treatment is inherently unfair for federal tax purposes.

Some commentators argued for a ‘‘material participation’’ test to determine whether an LLC member’s distributive share is included in the individual’s net earnings from selfemployment. The proposed regulations did not contain a participation test. Commentators advocating a participation test stressed that such a test would eliminate uncertainty concerning many LLC members’ limited partner status and would better implement the selfemployment tax goal of taxing compensation for services.

Other commentators argued for a more uniform approach, stating that a single test should govern all business entities (i.e., partnerships, LLCs, LLPs, sole proprietorships, et al.) whose members may be subject to self-employment tax. These commentators generally recognized, however, that a change in the treatment of a sole proprietorship or an entity that is not characterized as a partnership for federal tax purposes would be beyond the scope of regulations to be issued under section 1402(a)(13). Finally, some commentators focused on whether the Service would respect the ownership of more than one class of partnership interest for self-employment tax purposes (bifurcation of interests). The proposed regulations treated an LLC member as a limited partner with respect to his or her entire interest (if the member was not a manager and satisfied the limited partner equivalence test), or not at all (if either the management test or limited partner equivalence test was not satisfied). Commentators, however, pointed to the legislative history of section 1402(a)(13) to support their argument that Congress only intended to tax a partner’s distributive

share attributable to a general partner interest. Under this argument, a partner that holds both a general partner interest and a limited partner interest is only subject to self-employment tax on the distributive share attributable to the partner’s general partner interest. This intent also may be inferred from the statutory language of section 1402(a)(13) that the self-employment tax does not apply to ‘‘. . . the distributive share of any item of income or loss of a limited partner, as such . . ..’’ Based on this evidence, these commentators requested that the proposed regulations be revised to allow the bifurcation of interests for selfemployment tax purposes.

After considering the comments received, the IRS and Treasury have decided to withdraw the 1994 notice of proposed rulemaking and to re-propose amendments to the Income Tax Regulations (26 CFR part 1) under section 1402 of the Code. Explanation of Provisions

The proposed regulations contained in this document define which partners of a federal tax partnership are considered limited partners for section 1402(a)(13) purposes. These proposed regulations apply to all entities classified as a partnership for federal tax purposes, regardless of the state law characterization of the entity. Thus, the same standards apply when determining the status of an individual owning an interest in a state law limited partnership or the status of an individual owning an interest in an LLC. In order to achieve this conformity, the proposed regulations adopt an approach which depends on the relationship between the partner, the partnership, and the partnership’s business. State law characterizations of an individual as a ‘‘limited partner’’ or otherwise are not determinative.

Generally, an individual will be treated as a limited partner under the proposed regulations unless the individual (1) has personal liability (as defined in § 301.7701–3(b)(2)(ii) of the Procedure and Administration Regulations) for the debts of or claims against the partnership by reason of being a partner; (2) has authority to contract on behalf of the partnership under the statute or law pursuant to which the partnership is organized; or, (3) participates in the partnership’s trade or business for more than 500 hours during the taxable year. If, however, substantially all of the activities of a partnership involve the performance of services in the fields of health, law, engineering, architecture,

accounting, actuarial science, or consulting, any individual who provides services as part of that trade or business will not be considered a limited partner.

By adopting these functional tests, the proposed regulations ensure that similarly situated individuals owning interests in entities formed under different statutes or in different jurisdictions will be treated similarly. The need for a functional approach results not only from the proliferation of new business entities such as LLCs, but also from the evolution of state limited partnership statutes. When Congress enacted the limited partner exclusion found in section 1402(a)(13), state laws generally did not allow limited partners to participate in the partnership’s trade or business to the extent that state laws allow limited partners to participate today. Thus, even in the case of a state law limited partnership, a functional approach is necessary to ensure that the self-employment tax consequences to similarly situated taxpayers do not differ depending upon where the partnership organized.

The proposed regulations allow an individual who is not a limited partner for section 1402(a)(13) purposes to nonetheless exclude from net earnings from self-employment a portion of that individual’s distributive share if the individual holds more than one class of interest in the partnership. Similarly, the proposed regulations permit an individual that participates in the trade or business of the partnership to bifurcate his or her distributive share by disregarding guaranteed payments for services. In each case, however, such bifurcation of interests is permitted only to the extent the individual’s distributive share is identical to the distributive share of partners who qualify as limited partners under the proposed regulation (without regard to the bifurcation rules) and who own a substantial interest in the partnership. Together, these rules exclude from an individual’s net earnings from self-employment amounts that are demonstrably returns on capital invested in the partnership.

Proposed Effective Date

These regulations are proposed to be effective beginning with the individual’s first taxable year beginning on or after the date these regulations are published as final regulations in the Federal Reg- ister .

1997–11 I.R.B. 20

(h) Definition of limited partner —(1) In general. Solely for purposes of section 1402(a)(13) and paragraph (g) of this section, an individual is considered to be a limited partner to the extent provided in paragraphs (h)(2), (h)(3), (h)(4), and (h)(5) of this section.

(2) Limited partner. An individual is treated as a limited partner under this paragraph (h)(2) unless the individual—

(i) Has personal liability (as defined in § 301.7701–3(b)(2)(ii) of this chapter for the debts of or claims against the partnership by reason of being a partner;

(ii) Has authority (under the law of the jurisdiction in which the partnership is formed) to contract on behalf of the partnership; or

(iii) Participates in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year.

(3) Exception for holders of more than one class of interest. An individual holding more than one class of interest in the partnership who is not treated as a limited partner under paragraph (h)(2) of this section is treated as a limited partner under this paragraph (h)(3) with respect to a specific class of partnership interest held by such individual if, immediately after the individual acquires that class of interest—

(i) Limited partners within the meaning of paragraph (h)(2) of this section own a substantial, continuing interest in that specific class of partnership interest; and,

(ii) The individual’s rights and obligations with respect to that specific class of interest are identical to the rights and obligations of that specific class of partnership interest held by the limited partners described in paragraph (h)(3)(i) of this section.

(4) Exception for holders of only one class of interest. An individual who is not treated as a limited partner under paragraph (h)(2) of this section solely because that individual participates in the partnership’s trade or business for more than 500 hours during the partnership’s taxable year is treated as a limited partner under this paragraph (h)(4) with respect to the individual’s partnership interest if, immediately after the individual acquires that interest—

(i) Limited partners within the meaning of paragraph (h)(2) of this section own a substantial, continuing interest in that specific class of partnership interest; and

(ii) The individual’s rights and obligations with respect to the specific class

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) does not apply to these regulations, and, because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. 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

A public hearing has been scheduled for Wednesday, May 21, 1997, at 10 a.m. in the Auditorium, Internal Revenue Service building, 1111 Constitution Avenue, NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue Service 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 comments by April 14, 1997, and submit an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 30, 1997.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of the 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 Honigman of the Office of Assistant Chief Counsel (Passthroughs & Special Industries). How

ever, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

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

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 1.1402(a)–2 is amended by:

Revising the first sentence of paragraph (d).
Removing the reference ‘‘section 702(a)(9)’’ in the first sentence of paragraph (e) and adding ‘‘section 702(a)(8)’’ in its place.
Revising the last sentence of paragraph (f).
Revising paragraphs (g) and (h).
Adding new paragraphs (i) and (j). The revisions and additions read as follows:

§ 1.1402(a)–2 Computation of net earn- ings from self-employment.

- - - - (d) - - - Except as otherwise provided in section 1402(a) and paragraph

(g) of this section, an individual’s net earnings from self-employment include the individual’s distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by each partnership of which the individual is a partner. - - - - - - (f) - - - For rules governing the classification of an organization as a partnership or otherwise, see § § 301.7701–1, 301.7701–2, and 301.7701–3 of this chapter. (g) Distributive share of limited part- ner. An individual’s net earnings from self-employment do not include the individual’s distributive share of income or loss as a limited partner described in paragraph (h) of this section. However, guaranteed payments described in section 707(c) made to the individual for services actually rendered to or on behalf of the partnership engaged in a trade or business are included in the individual’s net earnings from selfemployment.

21 1997–11 I.R.B.

of interest are identical to the rights and obligations of the specific class of partnership interest held by the limited partners described in paragraph (h)(4)(i) of this section.

(5) Exception for service partners in service partnerships. An individual who is a service partner in a service partnership may not be a limited partner under paragraphs (h)(2), (h)(3), or (h)(4) of this section.

(6) Additional definitions. Solely for purposes of this paragraph (h)—

(i) A class of interest is an interest that grants the holder specific rights and obligations. If a holder’s rights and obligations from an interest are different from another holder’s rights and obligations, each holder’s interest belongs to a separate class of interest. An individual may hold more than one class of interest in the same partnership provided that each class grants the individual different rights or obligations. The existence of a guaranteed payment described in section 707(c) made to an individual for services rendered to or on behalf of a partnership, however, is not a factor in determining the rights and obligations of a class of interest.

(ii) A service partner is a partner who provides services to or on behalf of the service partnership’s trade or business. A partner is not considered to be a service partner if that partner only provides a de minimis amount of services to or on behalf of the partnership.

(iii) A service partnership is a partnership substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting.

(iv) A substantial interest in a class of interest is determined based on all of the relevant facts and circumstances. In all cases, however, ownership of 20 percent or more of a specific class of interest is considered substantial.

(i) Example. The following example illustrates the principles of paragraphs (g) and (h) of this section:

Example. (i) A, B, and C form LLC, a limited liability company, under the laws of State to engage in a business that is not a service partnership described in paragraph (h)(6)(iii) of this section. LLC, classified as a partnership for federal tax purposes, allocates all items of income, deduction, and credit of LLC to A, B, and C in proportion to their ownership of LLC. A and C each contribute $1x for one LLC unit. B contributes $2x for two LLC units. Each LLC unit entitles its holder to receive 25 percent of LLC’s tax items, including profits. A does not perform services for LLC; however, each year B receives a

guaranteed payment of $6x for 600 hours of services rendered to LLC and C receives a guaranteed payment of $10x for 1000 hours of services rendered to LLC. C also is elected LLC’s manager. Under State’s law, C has the authority to contract on behalf of LLC.

(ii) Application of general rule of paragraph (h)(2) of this section. A is treated as a limited partner in LLC under paragraph (h)(2) of this section because A is not liable personally for debts of or claims against LLC, A does not have authority to contract for LLC under State’s law, and A does not participate in LLC’s trade or business for more than 500 hours during the taxable year. Therefore, A’s distributive share attributable to A’s LLC unit is excluded from A’s net earnings from self-employment under section 1402(a)(13). (iii) Distributive share not included in net earn- ings from self-employment under paragraph (h)(4) of this section. B’s guaranteed payment of $6x is included in B’s net earnings from self-employment under section 1402(a)(13). B is not treated as a limited partner under paragraph (h)(2) of this section because, although B is not liable for debts of or claims against LLC and B does not have authority to contract for LLC under State’s law, B does participates in LLC’s trade or business for more than 500 hours during the taxable year. Further, B is not treated as a limited partner under paragraph (h)(3) of this section because B does not hold more than one class of interest in LLC. However, B is treated as a limited partner under paragraph (h)(4) of this section because B is not treated as a limited partner under paragraph (h)(2) of this section solely because B participated in LLC’s business for more than 500 hours and because A is a limited partner under paragraph (h)(2) of this section who owns a substantial interest with rights and obligations that are identical to B’s rights and obligations. In this example, B’s distributive share is deemed to be a return on B’s investment in LLC and not remuneration for B’s service to LLC. Thus, B’s distributive share attributable to B’s two LLC units is not net earnings from self-employment under section 1402(a)(13). (iv) Distributive share included in net earnings from self-employment. C’s guaranteed payment of $10x is included in C’s net earnings from selfemployment under section 1402(a). In addition, C’s distributive share attributable to C’s LLC unit also is net earnings from self-employment under section 1402(a) because C is not a limited partner under paragraphs (h)(2), (h)(3), or (h)(4) of this section. C is not treated as a limited partner under paragraph (h)(2) of this section because C has the authority under State’s law to enter into a binding contract on behalf of LLC and because C participates in LLC’s trade or business for more than 500 hours during the taxable year. Further, C is not treated as a limited partner under paragraph (h)(3) of this section because C does not hold more than one class of interest in LLC. Finally, C is not treated as a limited partner under paragraph (h)(4) of this section because C has the power to bind LLC. Thus, C’s guaranteed payment and distributive share both are included in C’s net earnings from self-employment under section 1402(a). (j) Effective date. Paragraphs (d), (e), (f), (g), (h), and (i) are applicable beginning with the individual’s first taxable year beginning on or after the date this

section is published as a final regulation in the Federal Register .

Margaret Milner Richardson, Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on January 10, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 13, 1997, 62 F.R. 1702)

Employee Plans and Exempt Organizations; Requests for Certain Determination Letters and Applications for Recognition of Exemption

Announcement 97–20

PURPOSE

This is to announce new ‘‘Where to File’’ instructions for applications for employee plan determination and other letters, as well as exempt organization applications for recognition of exemption from federal income tax, previously submitted to the Los Angeles Key District Office of Internal Revenue.

BACKGROUND

The Internal Revenue Service is in the process of centralizing the filing of requests for determination and other letters and applications for recognition of tax exemption. Announcement 95–51, published in Internal Revenue Bulletin 1995–25 at page 132, announced that centralization will be phased in by district. Announcement 96–92, published in Internal Revenue Bulletin 1996–38 at page 151, announced that beginning September 1, 1996, requests formerly sent to the key district offices in Atlanta, Georgia, and Baltimore, Maryland, should be sent to the Internal Revenue Service Center in Covington, Kentucky. Announcement 96–133, published in Internal Revenue Bulletin 1996–53 at page 60, announced that beginning January 1, 1997, requests formerly sent to the key district offices in Chicago, Illinois, and Dallas, Texas, should also be sent to the Covington address.

In addition, the Service is consolidating the employee plan volume submitter and regional prototype programs that are presently maintained by each individual key district office. Plans previously approved by a key district office, whose determination letter processing program is being transferred to Cincinnati, will be reviewed using the same criteria and procedures used by the original district office. New guidelines are being devel

1997–11 I.R.B. 22

CO Bob Rich Memorial Scholarship

oped that will combine the best features and procedures currently in use by the districts. Guidelines for the revised volume submitter and regional prototype programs will be explained in a future announcement.

INSTRUCTIONS

Beginning April 1, 1997, letter requests and applications previously submitted to the Key District Office in Los Angeles, California, should be sent to the Internal Revenue Service Center in Covington, Kentucky, at the address shown below. (For a period of time, requests and applications mistakenly sent to the Los Angeles Key District Office will be forwarded.) The new address applies to requests for determination letters, regional prototype notification letters and volume submitter advisory letters, on the qualified status of employee plans under sections 401, 403(a), and 409, and the exempt status of any related trust under section 501 of the Internal Revenue Code, applications for recognition of tax exemption on Form 1023, Form 1024, and Form 1028 and other applications for recognition of qualification or exemption. The affected plan sponsors and organizations are those whose principal office or place of business is located in Alaska, California, Hawaii, Idaho, Nevada, Oregon, and Washington. These requests and applications, as well as those formerly submitted to the Atlanta, Baltimore, Cincinnati, Chicago, and Dallas Key Districts, should be sent to:

Internal Revenue Service P.O. Box 192 Covington, KY 41012–0192 Until further notice, plans and organizations in all other locations, i.e., those located within the jurisdiction of the Brooklyn Key District Office, will continue to file their requests or applications in accordance with the applicable user fee instructions, currently in Section 7 of Revenue Procedure 97–8, published in Internal Revenue Bulletin 1997–1, at page 187, and the instructions for Form 8717, User Fee for Employee Plan Determination Letter Request, or Form 8718, User Fee for Exempt Organization Determination Letter Request.

Comments or concerns regarding the centralization of the determination process or applications submitted to the Covington address, may be directed to

the EP/EO Customer Service Unit in Cincinnati at (513) 684–3957 (not a toll-free number).

Deletions From Cumulative List of Organizations Contributions to Which Are Deductible Under Section 170 of the Code

Announcement 97–21

The name of an organization that no longer qualifies as an organization described in section 170(c)(2) of the Internal Revenue Code of 1986 is listed below.

Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on March 17, 1997, and would end on the date the court first determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual who was responsible, in whole or in part, for the acts or omissions of the organization that were the basis for revocation. Gilpin Grammar School

Sports Association, Bryan, TX

Foundations Status of Certain Organizations

Announcement 97–23

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: Abilene Cultural Foundation, Abilene,

TX Academy of Mount St. Scholastica

Endowment Association, Inc., Atchison, KS Accessible Parks Incorporated, Austin,

TX Acorn-Pacific Foundation, Port Collins,

CO Advocates for Incest Survival, Houston,

TX American Association for Advancement

Core Curriculum, Denver, CO American Awareness Institute, Inc.,

Kansas City, KS American Economic Defense

Foundation, Denver, CO American Indian Anti-Defamation

Council, Denver, CO American Indian Resource and

Education Coalition, San Antonio, TX American Pow-Mia Coalition, Shawnee

Mission, KS A. M. G. Foundation, Inc., Lewisville,

TX Andale Nogales Foundation, Nogales,

AZ Ardra Foundation, Lawrence, KS Arizona Childrens Heart Fund, Inc.,

Phoenix, AZ Blummer 100 KN Trail Run, Boulder,

Denver, CO The National Organization for the

Foundation Trust, Williamsburg, VA Boys and Girls Club of La Joya Texas,

Reform of Marijuana Laws Washington, DC

Inc., La Joya, TX Brazos Valley Christian Home School

23 1997–11 I.R.B.

Bread of Love Outreach Ministries of

Association, Tulsa, OK Unlimited Handi-Capable, Inc., Fowler,

Texas, Houston, TX Bright Hopes Foundation, Albuquerque,

He’s Not Heavy He’s My Brother, Inc.,

Roxbury, MA Home Base, Inc., Ipswich, MA Humanitarian Foundation for Nicaragua,

United Way of Choctaw County, Inc.,

Hugo, OK University of Tulsa Lettermens

NM Broken Bow Summer Baseball, Inc.,

CO Wadley Partners, Inc., Dallas, TX Walter Smith Ministry, Houston, TX Water and Sanitation Consultancy

Broken Bow, OK Businesswomen Unlimited, Inc., Olathe,

Incorporated, New York, NY Jacksonville College Foundation, Inc.,

Franklin, TX Westbury High School Area

KS Cerebral Palsy Foundation of Nassau,

Inc., Roosevelt, NY Charles Schwartz Foundation for Music,

Jacksonville, TX Jasper Fire Department, Jasper, TX Jefferson County Domestic Violence

Task Force, Inc., Valley Falls, KS Labette County Humane Society,

Parsons, KS LaDonia Foundation, Inc., LaDonia, TX Lake Powell Project, Page, AZ Lamda Phoenix Center, Inc., Phoenix,

Inc., New York, NY David Bowen Memorial Scholarship

Inc., Yokum, TX Decatur County Retirement Housing

AZ Lane Ranch Corporation, Cheyenne,

Group, Denver, CO Welch Evangelistic Association,

Inc., Oberlin, KS Denver Broncos Alumni Charities,

Englewood, CO East Texas Arboretum & Botanical

Society, Inc., Athens, TX East Texas Center for Independent

WY Laughter to Go, Inc., Shawnee Mission,

Improvement Corporation, Houston, TX West Roosevelt Community

Development Corporation, Phoenix, AZ Zinser Elementary Parent & Teacher

Organization, Grand Rapids, MI 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 classification of foundation status in the Internal Revenue Bulletin.

Living, Tyler, TX East Valley Pony Baseball, Sandy, UT Eberle Puppet Player, Dallas, TX Ellis County Sheriffs Posse Inc.,

KS Make a Kid Smile Inc., Houston, TX Marlin Volunteer Fire Department,

Marlin, TX Metro-Rail Inc., Boulder, CO Narciso Martinez Cultural Arts Center,

San Benito, TX Northeast Mens Center, Denver, CO North Texas Drug Awareness Library,

Ennis, TX Operation Exaltation, Inc., Cedar Hill,

Waxahachie, TX Employees Helping Employees Inc.,

Phoenix, AZ Environmental Literacy Project,

McAllen, TX Executive Womens Coalition for

Children, Phoenix, AZ Faith Victory Ministries Inc., Tulsa, OK Families of Murder Victims, Watauga,

TX Opportunity is Through Education,

Denver, CO Orthodox Community Services, Inc.,

Denver, CO Our Home, Inc., Tulsa, OK Paces Foundation Inc., Atlanta, GA Scottish Rite Charitable Trust Valley of

TX Family Service Network, Irving, TX Family Therapy Training Center of

Colorado, Denver, CO Family Watch Inc., Albuquerque, NM Fatima Foundation, Houston, TX First Colorado Regiment United States

Kansas City Orient Kansas, Kansas City, KS Seguin Tri-Party Club, Seguin, TX Seminole Youth Soccer Association,

Volunteers LTD, Englewood, CO First Step Shelter Inc., Pratt, KS Flying Start Foundation, Tucson, AZ Georgetown Little Dribblers, Inc.,

Seminole, TX Share Parents of Northern Utah, Ogden,

Georgetown, TX G H F Ministries Inc., Keene, TX Gloria Russell Childrens Ministry Inc.,

UT Sheridan County Soccer Association,

Sheridan, WY Sheridan Historical Society, Inc.,

Lufkin, TX Golden Earth Days, Golden, CO Grady County Child Welfare Services

Advisory Board, Inc., Chickasha, OK Greater New Bedford Aglas, Inc., New

Sheridan, CO Shoebox Ministry, Inc., Phoenix, AZ St. Augustine Technical Center

Foundation Inc., St. Augustine, FL 10-4 Ministries, Bellingham, MA Tamina Action Committee, Inc., Spring,

Timing of Certain Plan Amendments Relating to Section 401(a)(9)

Announcement 97–24

PURPOSE

This announcement provides that an employer is not precluded from offering, to employees (other than 5-percent owners) who attain age 70½ after 1995 and have not retired, an option to defer commencement of benefit distributions under a qualified plan merely because the plan has not yet been amended to provide for the option.

BACKGROUND

Section 1404(a) of the Small Business Job Protection Act of 1996 (SBJPA) amended section 401(a)(9) of the Internal Revenue Code to provide that, in the case of an employee who is not a 5-percent owner, the required beginning date for minimum distributions from a qualified plan is April 1 of the calendar year following the later of the calendar

Bedford, MA Great Western Trail—Wasatch Section,

Farmington, NM Gulf Coast Drum Corps Associates Inc.,

TX Tarrant County Opportunities

Industrialization Center, Inc., Fort Worth, TX Tecumseh Beautiful, Inc., Tecumseh,

Spring, TX Healthcare Solutions for America, Inc.,

Belmont, MA Henry Lukas Foundation, Inc., Blue

Point, NY Hercules Athletic Association, Inc., New

OK Telluride Youth Foundation, Telluride,

CO United States Helicopter Museum,

Tucson, AZ

York, NY year in which the employee attains age 70½ or the calendar year in which the employee retires. The amendment to section 401(a)(9) applies to years beginning after December 31, 1996.

Notice 96–67, 1996–53 I.R.B. 12, Q&A–2, provides that, under section 401(a)(9) as amended by the SBJPA, an employee (other than a 5-percent owner) who attained age 70½ in 1996, but who had not retired from employment with the employer maintaining the plan by the end of 1996, is not required to receive a minimum distribution by April 1, 1997. Many qualified plans continue to contain provisions (consistent with section 401(a)(9) prior to its amendment by the SBJPA) requiring an employee who attains age 70½ in a calendar year to begin receiving distributions by April 1 of the following calendar year. Some employers wish to give employees (other than 5-percent owners) who have not retired the option to defer commencement of distributions beyond April 1 following the calendar year the employees attain age 70½ and have requested guidance as to whether such an option may be offered before their plans are amended to provide for the option.

This announcement responds to these requests concerning the addition of an option to defer commencement of distributions before plan amendment. It does not address the elimination of the option to receive in-service distributions after age 70½.

As noted in Notice 96–67, an amendment that eliminates the right to receive a distribution prior to retirement after age 70½ is precluded by section 411(d)(6) if the amendment applies to benefits accrued as of the later of the adoption date or the effective date of the

amendment. In Notice 96–67, the Service and Treasury requested comments concerning the extent to which a relaxation of section 411(d)(6) protection is appropriate for amendments that eliminate in-service distributions after age 70½, and the Service and Treasury are currently considering the comments received.

TIMING OF PLAN AMENDMENTS

Under a qualified plan, an employer is permitted to offer an employee (other than a 5-percent owner) who attains age 70½ in a calendar year after 1995 and has not retired by the end of that calendar year the option to delay commencement of benefit distributions until no later than April 1 following the calendar year in which the employee retires from employment with the employer maintaining the plan. A plan that continues to contain provisions requiring an employee to begin receiving distributions by April 1 following the calendar year in which the employee attains age 70½ will not fail to satisfy section 401(a) merely because the employer offers the option described in the preceding sentence prior to amending the plan to include this option. Thus, if employees (other than 5-percent owners) who attained age 70½ in 1996 and did not retire from employment with the employer maintaining the plan by the end of 1996 are offered the opportunity to make an election to defer commencement of benefits rather than to begin receiving benefits from the plan by April 1, 1997, the plan will not fail to satisfy section 401(a) merely because the plan has not yet been amended to provide for this election.

Future guidance will provide that an employer that offers this option under a

plan must amend the plan retroactively, no later than the date specified in that guidance, to provide for the option. The retroactive plan amendment will have to conform the plan to its pre-amendment operation regarding the option to defer commencement of benefits. The date by which a plan providing for this option must be retroactively amended will not be earlier than 90 days after the future guidance is published and in no event will be earlier than January 1, 1998.

This announcement also applies to an employer that has adopted a master or prototype or a regional prototype plan. Such an employer should note that if a conforming amendment is not an available option under the sponsor’s prototype plan document, the required amendment may result in the loss of prototype status.

ELECTIONS TO STOP RECEIVING DISTRIBUTIONS

This announcement does not address the conditions under which employers may offer employees who have attained age 70½ and have begun to receive distributions under a plan an election to stop receiving distributions until a date no later than April 1 of the calendar year following retirement. Employers are cautioned that, under certain circumstances, an election to stop receiving distributions may violate the qualification requirements under section 401(a), such as sections 401(a)(11) and 417 (relating to participant and spousal consent, joint and survivor annuity requirements, and related matters). Future guidance will address the conditions under which these types of elections may be made and the permitted timing of related plan amendments.

25 1997–11 I.R.B.