Part IV. Items of General Interest

426, 99th Cong., 1st Sess. 293 (1985), 1986–3 (Vol. 2) C.B. 293; S. Rep. No. 313, 99th Cong., 2d Sess. 748 (1986), 1986–3 (Vol. 3) C.B. 748. Section 465(b)(6)(E), however, provides that the activity of holding real property includes the holding of personal property that is incidental to making real property available as living accommodations. Section 465(b)(6) does not specifically provide that such incidental property may be used to secure qualified nonrecourse financing. The proposed regulations provide that financing can qualify as qualified nonrecourse financing if, in addition to the real property used in the activity of holding real property, the financing is secured by both real property and other property that is incidental to the activity of holding real property.

II. Personal Liability

Section 465(b)(6)(B)(iii) provides that, except to the extent provided in regulations, no person may be personally liable for repayment of qualified nonrecourse financing. The legislative history of section 465 states that regulations may provide rules under which the guaranty, indemnity, or personal liability of a person other than the taxpayer does not cause the financing to be treated as other than qualified nonrecourse financing. H.R. Rep. No. 426, 99th Cong., 1st Sess. 294 (1985), 1986–3 (Vol. 2) C.B. 294; S. Rep. No. 313, 99th Cong., 2d Sess. 749 (1986), 1986–3 (Vol. 3) C.B. 749. A partnership is treated as a person under the Code. Thus, any financing for which a partnership is personally liable is not qualified nonrecourse financing under section 465(b)(6)(B)(iii), even if no partner is personally liable for the financing. This result is inappropriate if the only activity of the partnership is the real property activity; the personal liability of the partnership in that situation is not meaningful and the financing is the equivalent of nonrecourse financing. Situations in which a partnership is liable for repayment, but no partner is personally liable, may be unusual for general and limited partnerships; however, such situations may become increasingly common with the use of limited liability companies (LLCs) in which the LLC is personally liable for its debts and the members of the

Notice of Proposed Rulemaking and Notice of Public Hearing

Qualified Nonrecourse Financing Under Section 465(b)(6)

REG–105160–97

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations under section 465(b)(6) regarding qualified nonrecourse financing. The proposed regulations address whether the personal liability of an entity prevents financing from being treated as qualified nonrecourse financing and whether qualified nonrecourse financing may be secured by property that is incidental to the activity of holding real property. The proposed regulations would affect partnerships and their partners. This document also gives notice of a public hearing scheduled for December 10, 1997.

DATES: Written comments and requests to speak (with outlines of oral comments) at the public hearing scheduled for December 10, 1997, must be received by November 19, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–105160–97), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–105160–97), 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 of 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 room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jeffrey A. Erickson, (202) 622-3070; concerning submissions and the hearing, Michael Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document contains proposed regulations under section 465(b)(6) of the Internal Revenue Code (Code). Section 465, which applies to individuals and certain corporations, limits a taxpayer’s loss deduction for an activity to the amount of the taxpayer’s amount at risk in the activity at the close of the taxable year. A taxpayer’s amount at risk generally includes the amount of any cash and the adjusted tax basis of any property contributed by the taxpayer to the activity plus any amounts borrowed for use in the activity to the extent the taxpayer is personally liable for repayment.

For the activity of holding real property, a taxpayer may also include as an amount at risk the taxpayer’s share of any “qualified nonrecourse financing” that is secured by real property used in the activity of holding real property, even though the taxpayer is not personally liable for repayment of the financing. Section 465(b)(6) defines qualified nonrecourse financing as any financing that (i) is borrowed by the taxpayer for the activity of holding real property; (ii) is borrowed by the taxpayer from a qualified person or represents a loan from any federal, state, or local government or instrumentality thereof, or is guaranteed by any federal, state, or local government; (iii) except to the extent provided in regulations, no person is personally liable for repayment; and (iv) is not convertible debt.

Explanation of Provisions

I. Secured by Real Property

Section 465(b)(6)(A) provides that qualified nonrecourse financing must be secured by real property used in the activity of holding real property. The legislative history of section 465(b)(6) suggests that qualified nonrecourse financing can be secured only by real property. H.R. Rep. No.

September 15, 1997 22 1997–37 I.R.B.

LLC are not liable. In response, the proposed regulations provide that the personal liability of a partnership (including an LLC that is treated as a partnership) is disregarded in determining whether a financing is qualified nonrecourse financing if the entity’s only assets are real property used in the activity of holding real property or both real property and other property that is incidental to the activity of holding real property, and no other person is liable for the financing.

In addition, section 465(b)(6) does not specifically provide that financing may qualify as qualified nonrecourse financing if a person is personally liable for a portion of the financing. Treating the portion of the financing for which no person is personally liable as qualified nonrecourse financing would not be inconsistent with the underlying policy of section 465. Therefore, the proposed regulations provide that the portion for which no person is personally liable can qualify as qualified nonrecourse financing.

Proposed Effective Date

These regulations are proposed to be effective for financing incurred on or after the date final regulations are published in the Federal Register.

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 these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written com

ments (preferably 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 December 10, 1997, at 10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC. Because of access restrictions, visitors will not be admitted beyond the Internal Revenue 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 timely written comments (preferably a signed original and eight (8) copies) and an outline of the topics to be discussed and the time to be devoted to each topic by November 19, 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 Jeffrey A. Erickson, Office of Chief Counsel (Passthroughs and Special Industries). 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 part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * * §1.465–27(b)(3) also issued under 26 U.S.C. 465(b)(6)(B)(iii). * * *

Par. 2. Section 1.465–27 is added to read as follows:

§1.465–27 Qualified nonrecourse financing

(a) In general. Notwithstanding any provision of section 465(b) or the regulations under section 465, in the case of an

activity of holding real property, a taxpayer is considered at risk with respect to the taxpayer’s share of any qualified nonrecourse financing that is secured by real property used in such activity.

(b) Qualified nonrecourse financing (1) In general. For section 465(b)(6) and this section, the term qualified nonrecourse financing means any financing—

(i) Which is borrowed by the taxpayer with respect to the activity of holding real property;

(ii) Which is borrowed by the taxpayer from a qualified person or represents a loan from any federal, state, or local government or instrumentality thereof, or is guaranteed by any federal, state, or local government;

(iii) Except as otherwise provided in paragraph (b)(3)(ii) of this section, for which no person is personally liable for repayment; and

(iv) Which is not convertible debt. (2) Secured by incidental property. A taxpayer will be considered at risk with respect to the taxpayer’s share of any qualified nonrecourse financing secured by real property used in the activity of holding real property, where such financing is also secured by property that is incidental to the activity of holding such real property.

(3) Personal liability —(i) Partial lia- bility. If a person is personally liable for repayment of a portion of a financing, the portion of the financing for which no person is personally liable can qualify as qualified nonrecourse financing.

(ii) Partnership liability. The personal liability of an entity classified as a partnership for repayment of a financing shall be disregarded in determining whether the financing is qualified nonrecourse financing, if the only assets of the partnership are either real property used in the activity of holding real property or both such real property and other property that is incidental to the activity of holding such real property, and no other person is liable for repayment of the financing.

(4) Examples. The following examples illustrate the rules of paragraph (b) of this section:

Example 1. Personal liability of partnership; In- cidental property. X is a limited liability company that is classified as a partnership for federal tax purposes. X is engaged only in the activity of holding real property. In addition to real property used in the activity of holding real property, X owns office equipment, a truck, and maintenance equipment that it uses to support the activity of holding real prop

1997–37 I.R.B. 23 September 15, 1997

erty. X borrows $500 to use in the activity. X is personally liable on the financing, but no member of X and no other person is liable for repayment of the financing. Under paragraph (b)(3)(ii) of this section, the personal liability of X for repayment of the financing is disregarded when determining whether the financing is qualified nonrecourse financing. Under paragraph (b)(2) of this section, the personal property is treated as incidental personal property used in the activity of holding real property. Therefore, assuming the financing satisfies the other requirements for qualified nonrecourse financing, the financing will be treated as qualified nonrecourse financing.

Example 2. Bifurcation of financing. The facts are the same as in Example 1, except that A, a member of X, is personally liable for repayment of $100 of the financing. Under paragraph (b)(3)(i) of this section, the portion of the financing for which A is not personally liable for repayment ($400) can qualify as qualified nonrecourse financing.

(c) Effective date. This section is effective for financing incurred on or after the date the final regulations are published in the Federal Register.

Michael P. Dolan, Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on August 12, 1997, 8:45 a.m., and published in the issue of the Federal Register for August 13, 1997, 62 F.R. 43295)

Notice of Proposed Rulemaking

Remedial Amendment Period

REG–106043–97

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: T.D. 8727, 1997–34 I.R.B. 5, the IRS is issuing temporary regulations relating to the remedial amendment period during which a sponsor of a qualified retirement plan or an employer that maintains a qualified retirement plan can make retroactive amendments to the plan to eliminate certain qualification defects for the entire period. The text of those temporary regulations also serves as the text of these proposed regulations. These proposed regulations will affect sponsors of qualified retirement plans, and employers that maintain qualified retirement plans.

DATES: Written comments and requests for a public hearing must be received by

October 30, 1997. ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-106043-97), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–106043–97), 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 proposed regulations, Linda S. F. Marshall, (202) 6226030; concerning submissions, Evangelista Lee, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Final and temporary regulations in T.D. 8727 amend the Income Tax Regulations (26 CFR part 1) relating to section 401(b). The regulations provide guidance to clarify the scope of the Commissioner’s authority to provide relief from plan disqualification under section 401(b) and the regulations.

The text of T.D. 8727 the temporary regulations also serves as the text of these proposed regulations. The preamble to the final and temporary regulations explains the temporary 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 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 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 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 may be scheduled if requested in writing by any person that timely submits written 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 these regulations is Linda S. F. Marshall, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). 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 part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.401(b)-1 is amended by:

1. Revising paragraphs (b)(3), (c) and (d)(1)(iv).

2. Adding paragraph (d)(1)(v). The addition and revisions read as follows:

§1.401(b)-1 Certain retroactive changes in plan.

[The text of proposed paragraphs (b)(3), (c), (d)(1)(iv) and (v) is the same as the text of §1.401(b)–1T(b)(3), (c), (d)(1)(iv) and (v) published in T.D. 8727.]

Michael P. Dolan, Acting Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on July 31, 1997, 8:45 a.m., and published in the issue of the Federal Register for August 1, 1997, 62 F.R. 41322)

September 15, 1997 24 1997–37 I.R.B.

Changes to Excise Taxes

Announcement 97–91

Purpose To announce additional excise tax changes made by the Taxpayer Relief Act of 1997 (P.L. 105–34). These changes affect taxes on:

• Fuels

• Communications

  • Air transportation

• Heavy highway vehicles

• Luxury automobiles

• Arrow components

Note: Announcement 97–78, 1997–34 I.R.B. 11, released on August 14, 1997, covered certain changes made by the Act that took effect during August of 1997. Those changes affect the tax on the use of inter- national air travel facilities, the date for deposits of air transportation taxes, and the tax on vaccines.

Fuel tax rates The changes listed below apply after September 30, 1997.

• The table below shows the new rates for fuels (other than those included under IRS No. 79) due to the

reinstatement of the Leaking Underground Storage Tank Trust Fund tax (generally $.001 per gallon).

• The rate on liquefied petroleum gas has decreased; this fuel will be identified separately as IRS No.

Communications tax In the case of communications services acquired by means of a prepaid telephone card, the 3% excise tax is imposed on the face amount of the card when the card is transferred by a telecommunications carrier to any person who is not a carrier. The provision will be effective after October 31, 1997.

Transportation of For amounts paid after September 30, 1997, for transportation beginning after September 30, 1997, the persons by air following changes apply:

• The tax is 9% (7.5% for segments to or from rural airports), plus $1.00 for each domestic segment (excluding segments to or from rural airports).

• Amounts paid to an air carrier for the right to provide mileage awards or other reductions in the cost of

any transportation of persons are treated as amounts paid for taxable transportation.

Retail tax on heavy The following changes apply after December 31, 1997, except as noted: highway vehicles - The repair or modification of a vehicle will not be treated as manufacture for excise tax purposes unless

1997–37 I.R.B. 25 September 15, 1997

the repair or modification costs exceed 75% of the retail price of a comparable new vehicle. This rule does not apply if the vehicle as repaired or modified would, if new, be taxable, and the vehicle when new was not taxable.

• The registration requirement applicable to certain sales of trucks, tractors, and trailers will be replaced

with a certification requirement.

• Parts or accessories added to a heavy truck within six months of the initial purchase will be taxable

only if the aggregate price of the additions is more than $1,000. (This change is effective for vehicles sold after August 5, 1997.)

• A credit against the retail tax on heavy highway vehicles will be allowed for excise tax imposed on

tires sold on or in connection with the vehicle. This replaces the exclusion from the amount subject to the heavy vehicle tax allowed for tire value.

Luxury tax Effective after August 5, 1997, the luxury tax threshold is raised for electric and clean-fuel motor vehicles.

• The electric vehicle threshold is 150 percent of the luxury tax threshold.

• The clean-fuel motor vehicle threshold is the luxury tax threshold plus an amount equal to the increase

in the price of the vehicle attributable to the retrofit parts and components installed that permit the vehicle to be clean burning.

Also effective for vehicles sold after August 5, 1997, parts or accessories added to a luxury automobile within six months of the initial purchase are only taxable if the aggregate price of the additions is more than $1,000.

Arrow components Effective after September 30, 1997, a 12.4% tax will be imposed on the price for which the manufacturer sells any point, nock, vane, or shaft of the type used in the manufacture of any arrow. This replaces the tax on arrows. The tax will be reported under new IRS No. 102.

Cleveland, Willoughby Hills, OH Japanese-American International Art

Foundations Status of Certain Organizations

Announcement 97–92

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:

Celestial Flight Nonprofit Housing

Boston, MA Illinois Town Hall Meetings, Rolling

Meadows, IL Imperial Valley Affordable Housing,

Brawley, CA Interculture, Inc., New York, NY International Friends of Migdal Ohr

Corporation, Detroit, MI Cerebral Palsy SOS, Inc., New York, NY Challenges, Inc., Atlanta, GA Chippechaug Christian Camp Inc.,

James Phillip Family Foundation of

Corporation, New York, NY Japanese Community Association, Inc.,

Scarsdale, NY Jeff’s Companion Animal Shelter, Inc.,

Meriden, CT Church of Gospel Ministry, Lenoxdale,

MA Classic Foundation, Inc., Fitchburg, MA Families A La Carte, Vallejo, CA The Family School, Bronx, NY Florida Home Incorporated, Richmond,

Westport, MA La Casa Housing Corporation, Inc.,

Waterbury, CT Learning Ladder Day Care, Inc.,

CA Foundation for Genetics Research,

Houston, TX The Foundation for Living, Tacoma, WA Foundation for the Special Commission

Cortland, NY Lincoln and Friends, Fairfax, CA Maryland Volunteer Water Quality

Monitoring Association Inc., Crofton, MD Maxie Wright’s Boys Center, San

on the Administration of Justice in Illinois, Chicago, IL Friends of Evergreen, Portland, ME Haverhill Junior Football League,

Bernardino, CA MGS Charity, Inc., Huntington, NY The Nashville Foundation for Women

Haverhill, MA Home Care for Christian Scientists, Inc.,

Business Owners Inc., Nashville, TN National Association of Minorities in

Cable Foundation, Cerritos, CA National Council for the Handicapped,

Inc., Brooklyn, NY The National Museum of Artificial Limb

Across the Bridge Eastside Children’s

Technology, San Francisco, CA Nevada Historical Automobile Society

Museum, Bellevue, WA African Christian Fellowship of

California Inc., Fullerton, CA Ark Ministries, Inc., Lewisville, TX Burlington-Edison School District

Institutions, New York, NY In the Best Interests of the Children, Inc.,

Boston, MA

Inc., Elcajon, CA New Beginnings Outreach Ministries,

Inc., Bronx, NY New Hampshire Association for the

Foundation, Burlington, WA

September 15, 1997 26 1997–37 I.R.B.

Education of Young Children, Weare, NH New Hampshire Soccer Association,

Point O Woods Historical Society,

Summit, NJ Preserve Earths Threatened Ecosystems

Foundation, Berkeley, CA PTA New York State Congress, Inc.,

Traumatic Brain Injury Resource

Network, Inc., Framingham, MA Trenton Education Dance Institute, Inc.,

W. Trenton, NJ Trillium Performing Arts Center, Inc.,

Nashua, NH New Village Productions, Inc., New

York, NY New World Dancers and Singers, Inc.,

Watertown, NY Tzu Charn Foundation, Sunnyvale, CA Walden-Bell Foundation, Portland, OR Waterville Performing Arts Centre, Inc.,

Company, West Greenwich, RI Wilson County Education Foundation,

Inc., Floresville, TX Worcester Institute for Students of

New York, NY New York City Society for Parenteral and

Brentwood, NY Public Productions, Inc., Waltham, MA Rainforest Rescue, Inc., West Action,

MA Rakka Thamm Theater Company, Inc.,

New York, NY RCLC Foundation, Inc., Riverside, CT Reach Out Ethiopia, Inc., Cambridge,

Waterville, ME West Greenwich Community Rescue

Enteral Nutrition, Riverdale, NY North Okaloosa Arc Inc., Crestview, FL Onake II, Rooseveltown, NY Out of the Blue Theater Company,

MA Renaissance Intl, Inc., New York, NY Rochester Charity Partners, Inc.,

Somerville, MA Pacific Basin Research Institute,

Rockville, MD Paradise Pet Shelter, Inc., Millis, MA Patricia Marschner Memorial for the

Europe, Worcester, MA You Make Our Future, Inc., Danbury, CT

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.

Children of Londonderry, Londonderry, NH Peaceful Settlements Foundation, Boise,

Rochester, NY San Diego Museum of Modern Sculpture,

ID Peninsula Sexual Minority Youth League,

San Diego, CA Senior Citizen Association of Taiwanese

Christians of Greater New York, Inc., Flushing, NY Shelter Homeless America, Inc.,

Lawrence, MA Sluggers Forever Inc., New Ulm, MN Southeast Texas Legal Clinic, Houston,

TX St. Boniface Development Corporation,

Newport News, VA Picnic-in-the-Park, Incorporated,

Concord, MA Pima Optimum Learning Center,

Scottsdale, AZ Pipco Corporation, Rochester, NY Pittsburgh Allergy Society, Latrobe, PA Plainfield First Response, Plainfield, VT Playground in the Park, Inc., Cheshire,

Bridgehampton, NY Transglobal Communications

Foundation, New York, NY

Brooklyn, NY Survivors United Network, Inc.,

CT

1997–37 I.R.B. 27 September 15, 1997