Part IV. Items — Internal Revenue Bulletin 1998-9

ance contracts that do not provide further consumer protections.

Section 7702B of the Code applies to contracts issued after December 31, 1996. Section 321(f)(2) of HIPAA treats a contract issued before January 1, 1997, as a qualified long-term care insurance contract under section 7702B(b) of the Code, and services provided or reimbursed under such a contract as qualified longterm care services under section 7702B(c) of the Code, provided the contract met the long-term care requirements of the State in which the contract was sitused at the time the contract was issued. Section 321(f)(2) of HIPAA also provides that in the case of an individual covered on December 31, 1996, by a State long-term care plan under section 7702B(f) of the Code, the terms of the plan on that date are treated as a contract meeting the longterm care insurance requirements of that State.

Section 321(f)(4) of HIPAA provides that for purposes of applying sections 101(f), 7702, and 7702A of the Code, neither the issuance of a rider that is treated as a qualified long-term care insurance contract nor the addition of any provision required to conform any other long-term care rider to the requirements applicable to a qualified long-term care insurance contract is treated as a modification or material change of the contract.

Explanation of Provisions

The proposed regulations provide guidance concerning

the consumer protection requirements that apply to qualified long-term care insurance contracts under sections 7702B(g), 7702B(b)(1)(F), and 4980C of the Code; and
the grandfather provisions of section 321(f)(2) of HIPAA under which pre1997 contracts are treated as qualified long-term care insurance contracts if certain conditions are met. The standards in the proposed regulations are based on safe harbors that were originally set forth in Notice 97–31. They reflect comments made by consumer representatives, issuers of long-term care insurance, independent sales agents, State regulators of long-term care insurance,

Notice of Proposed Rulemaking and Notice of Public Hearing

Qualified Long-Term Care Insurance Contracts

REG–109333–97

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations relating to consumer protection with respect to qualified longterm care insurance contracts and relating to events that will be considered material changes with respect to long-term care insurance contracts issued prior to January 1, 1997. Changes to the applicable law were made by the Health Insurance Portability and Accountability Act of 1996. The regulations affect issuers of longterm care insurance contracts and individuals entitled to receive payments under these contracts. The regulations are necessary to provide these taxpayers with guidance needed to comply with these changes.

DATES: Written comments must be received by April 2, 1998. Outlines of topics to be discussed at the public hearing scheduled for May 13, 1998, must be received by April 2, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–109333–97), 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–109333–97), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC. Alternatively, taxpayers may also 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 room 2615, Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Katherine A. Hossofsky, (202) 622-3477; concerning submissions and the hearing, LaNita VanDyke, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) to provide rules under section 7702B of the Internal Revenue Code of 1986 (the “Code”). Section 7702B was added by sections 321 and 325 of the Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104–191, 110 Stat. 1936, 2054 and 110 Stat. at 2063)(“HIPAA”). Notice 97–31, 1997–21 I.R.B. 5 (May 6, 1997), provides interim guidance on certain provisions of section 7702B and other provisions of the Code added or amended by HIPAA.

Explanation of Statutory Provisions

Section 7702B establishes the tax treatment for qualified long-term care insurance contracts. Sections 7702B(a)(1) and (3) provide that a qualified long-term care insurance contract is treated as an accident and health insurance contract and that any employer plan providing coverage under a qualified long-term care insurance contract is treated as an accident or health plan with respect to that coverage.

Section 7702B(a)(2) provides that amounts (other than policyholder dividends and premium dividends) received under a qualified long-term care insurance contract are generally excludable from gross income as amounts received for personal injuries and sickness.

Section 213(d)(1)(D) was amended by section 322 of HIPAA to provide that eligible long-term care premiums as defined in section 213(d)(10) are deductible medical expenses.

Under section 7702B(b)(1)(F), a qualified long-term care insurance contract must meet the consumer protection provisions of section 7702B(g). In addition, section 4980C imposes an excise tax on issuers of qualified long-term care insur

1998–9 I.R.B 9 March 2, 1998

icyholder under a qualified long-term care insurance contract as in effect on December 31, 1996, does not constitute a material change. ¹

After Notice 97–31 was issued, commentators recommended that certain common practices should not cause long-term care insurance contracts issued before January 1, 1997, to lose their grandfathered status. In response to these comments, the proposed regulations provide additional exceptions to the general rule that a material change in a long-term care insurance contract issued before January 1, 1997, will be considered the issuance of a new contract.

The proposed regulations provide that the exercise of any right provided to a policyholder ( i.e., a right that can be exercised without the issuer’s consent and without other conditions, such as underwriting) or the addition of any right that is required by State law to be provided to the policyholder will not be treated as a material change to a longterm care insurance contract.
In addition, the proposed regulations provide that the following practices will not be treated as material changes for purposes of section 7702B: (1) any change in the mode of premium payment, such as a change from paying premiums monthly to quarterly; (2) any classwide increase or decrease in premiums for contracts that have been issued on a guaranteed renewable basis; (3) a reduction in premiums due to the purchase of a long-term care insurance policy by a member of the policyholder’s family; (4) any reduction in coverage (with correspondingly lower premiums) made at the request of a policyholder; (5) the addition, without an increase in premiums, of alternative forms of benefits that may be selected by the policyholder; (6) the purchase of a rider to increase benefits under a pre1997 contract if the rider would constitute a qualified long-term care insurance contract if it were a separate

1The definition of material change in Notice 97– 31 is narrower than the definition of material change for purposes of other sections of the Code. For example, the exercise of an option in a life insurance contract results in the loss of grandfathering under section 7702 if the option only guarantees terms that are likely to be available when the option is exercised.

and others. The proposed regulations are intended to provide clear and workable rules to assist those who want to ensure that a contract issued before 1997 retains its status as a qualified long-term care insurance contract.

Notice 97–31

Notice 97–31 was issued to provide interim standards for taxpayers to use in interpreting the new long-term care provisions and to facilitate operation of the insurance market by avoiding the need to amend contracts. For example, Notice 97–31 includes interim guidance on the determination of whether an individual is a “chronically ill individual,” including safe harbor definitions of the terms “substantial assistance,” “hands-on assistance,” “standby assistance,” “severe cognitive impairment,” and “substantial supervision.” The standards contained in Notice 97–31 include interim guidance on both the consumer protection provisions and the scope of the statutory grandfather provisions that apply to long-term care insurance contracts issued before 1997.

Consumer Protection Requirements

Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, qualified long-term care insurance contracts and issuers of those contracts are required to satisfy certain provisions of the model act and model regulation promulgated by the National Association of Insurance Commissioners (NAIC) for long-term care insurance as of January 1993. The requirements relate to guaranteed renewability, unintentional lapse, disclosure, prohibitions against post-claims underwriting, inflation protection, and prohibitions against pre-existing conditions exclusions and probationary periods. Section 4980C imposes an excise tax on an issuer of a qualified long-term care insurance contract if, after 1996, the issuer fails to satisfy certain requirements, including requirements relating to application forms, reporting, marketing, appropriateness of recommended purchase, standard format outline of coverage, delivery of a shopper’s guide, right to return, outline of coverage, and incontestability. Most of these requirements are based on the NAIC model act and regulation.

The proposed regulations reflect the standards that were set forth in Notice 97–

For example, the consumer protection requirements will be considered satisfied if a contract complies with State law in a State that has adopted the related NAIC model or a more stringent version of the model.

Pre-1997 Long-Term Care Insurance Contracts

Section 321(f)(2) of HIPAA provides that a contract issued before January 1, 1997, is treated as a qualified long-term care insurance contract if the contract met the “long-term care insurance requirements of the State” in which the contract was sitused at the time it was issued. Under the proposed regulations, the date on which a long-term care insurance contract other than a group long-term care insurance contract is issued is generally the date assigned to the contract by the insurance company. In no event is the issue date earlier than the date on which the policyholder submitted a signed application for coverage to the insurance company. In addition, if the period between the date of application and the date on which the long-term care insurance contract actually becomes effective is substantially longer than under the insurance company’s usual business practice, then the issue date is the date the contract becomes effective. For purposes of applying the grandfather rule of section 321(f)(2) to a group long-term care insurance contract, the issue date of the contract is the date the group contract was issued. As a result, coverage for an individual who joins a grandfathered group long-term care insurance contract on or after January 1, 1997, is accorded the same treatment under section 321(f)(2) as is accorded coverage for those who joined the group before that date.

For purposes of applying section 321(f)(2) of HIPAA to long-term care insurance contracts issued before January 1, 1997, a material change in the contract generally is considered the issuance of a new contract. Notice 97–31 provides that a material change includes any change in the terms of the contract altering the amount or timing of any item payable by the policyholder (or certificate holder), the insured, or the insurance company. Notice 97–31 also provides that the exercise of an option or right granted to a pol

March 2, 1998 10 1998–9 I.R.B.

contract; ² (7) the deletion of a rider or provision of a contract (called an HHS rider) that prohibited coordination of benefits with Medicare; and (8) the effectuation of a continuation or conversion of coverage right under a group contract following an individual’s ineligibility for continued coverage under the group contract. The proposed regulations include examples illustrating certain of these standards. The exceptions to the general rule that a material change results in the issuance of a new contract apply solely for purposes of determining whether a pre-1997 insurance contract is treated as a qualified long-term care insurance contract under section 7702B. ³

Comments are requested on these standards, including (1) whether the material change rules in the proposed regulations should be limited to pre-1997 longterm care insurance contracts that cannot have cash surrender value; (2) whether there are any conditions under which the expansion of coverage under a group long-term care insurance contract in connection with a corporate merger, acquisition or similar transaction should not constitute a material change; and (3) whether the extension of a group long-term care contract to a collective bargaining unit is a material change in all cases. For example, should the extension of a group longterm care contract to a bargaining unit after 1997 be treated as a material change

2Thus, for example, the only coverage provided under the rider must be coverage for qualified longterm care services and the purchase must satisfy the consumer protection requirements of section 7702B(g) of the Code. (This would not include protections that apply only the first time a contract is purchased, i.e., subsections (g)(2)(A)(i)(III), (V),(VII)(other than section 6B of the NAIC model regulation), and (X),(g)(3), and (g)(4) of section 7702B. Similarly, subsections (c)(1)(A)(i) and (c)(2) of section 4980C would apply only the first time a contract is purchased.)

3The exceptions depart from the definition of material change that would apply for purposes of other sections of the Code, including sections 7702, 7702A, 101(f), and 264. These exceptions are consistent with the purpose of section 7702B, which has the effect of expanding the tax benefits for certain long-term care insurance contracts. By contrast, sections 7702, 7702A, 101(f), and 264, for example, limit the tax benefits associated with certain insurance products and, unlike pre-1997 long-term care insurance contracts, apply to contracts with a substantial investment orientation.

if the bargaining agreement for the unit has not been renewed since before the group contract was first adopted?

Comments also are requested on what the effective date of the final regulations should be. It is intended that the regulations will not be effective until after the end of a specified period following adoption of the final regulations. Taxpayers may rely on these proposed regulations for guidance pending the issuance of final regulations. If, and to the extent, future guidance is more restrictive than the guidance in these proposed regulations, the future guidance will be applied without retroactive effect. In addition, until further notice, taxpayers may continue to rely on Notice 97–31.

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 comments that are submitted timely to the IRS (a signed original and eight (8) copies). All comments will be available for public inspection and copying.

A public hearing has been scheduled for May 13, 1998, 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 written comments by April 2, 1998 and submit an outline of the topics to be discussed and the time to be devoted to each topic by April 2, 1998.

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 Katherine A. Hossofsky, Office of Assistant Chief Counsel (Financial Institutions & Products). 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. Sections 1.7702B–1 through 1.7702B–2 are added to read as follows:

§ 1.7702B–1 Consumer protection provisions.

(a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, qualified long-term care insurance contracts and issuers of those contracts are required to satisfy certain provisions of the Long-Term Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model Regulation (Model Regulation) promulgated by the National Association of Insurance Commissioners (NAIC), as adopted as of January 1993. The requirements for qualified long-term care insurance contracts under sections 7702B(b)(1)(F) and 7702B(g) relate to guaranteed renewal or noncancellability, prohibitions on limitations and exclusions, extension of benefits, continuation or conversion of coverage, discontinuance and replacement of policies, unintentional lapse, disclosure, prohibitions

1998–9 I.R.B 11 March 2, 1998

against post-claims underwriting, minimum standards, inflation protection, prohibitions against pre-existing conditions exclusions and probationary periods, and prior hospitalization. The requirements for qualified long-term care insurance contracts under section 4980C relate to application forms and replacement coverage, reporting requirements, filing requirements for marketing, standards for marketing, appropriateness of recommended purchase, standard format outline of coverage, delivery of a shopper’s guide, right to return, outline of coverage, certificates under group plans, policy summary, monthly reports on accelerated death benefits, and incontestability period.

(b) Coordination with State require- ments —(1) Contracts issued in a State that imposes more stringent requirements. If a State imposes a requirement that is more stringent than the analogous requirement imposed by section 7702B(g) or 4980C, then, under section 4980C(f), compliance with the more stringent requirement of State law is considered compliance with the parallel requirement of section 7702B(g) or 4980C. The principles of paragraph (b)(3) of this section apply to any case in which a State imposes a requirement that is more stringent than the analogous requirement imposed by section 7702B(g) or 4980C (as described in this paragraph (b)(1)), but in which there has been a failure to comply with that State requirement.

(2) Contracts issued in a State that has adopted the model provisions. If a State imposes a requirement that is the same as the parallel requirement imposed by section 7702B(g) or 4980C, compliance with that requirement of State law is considered compliance with the parallel requirement of section 7702B(g) or 4980C, and failure to comply with that requirement of State law is considered failure to comply with the parallel requirement of section 7702B(g) or 4980C. (3) Contracts issued in a State that has not adopted the model provisions or more stringent requirements. If a State has not adopted the Model Act, the Model Regulation, or a requirement that is the same as or more stringent than the analogous requirement imposed by section 7702B(g) or 4980C, then the language, caption, format, and content requirements imposed by sections 7702B(g) and 4980C with re

spect to contracts, applications, outlines of coverage, policy summaries, and notices will be considered satisfied for a contract subject to the law of that State if the language, caption, format, and content are substantially similar to those required under the parallel provision of the Model Act or Model Regulation. Only nonsubstantive deviations are permitted in order for language, caption, format, and content to be considered substantially similar to the requirements of the Model Act or Model Regulation.

§1.7702B–2 Special rules for pre-1997 long-term care insurance contracts.

(a) Scope. The definitions and special provisions of this section apply solely for purposes of determining whether an insurance contract (other than a qualified long-term care insurance contract described in section 7702B(b) and any regulations issued thereunder) is treated as a qualified long-term care insurance contract for purposes of the Internal Revenue Code.

(b) Pre-1997 long-term care insurance contracts. —(1) In general. A pre-1997 long-term care insurance contract is treated as a qualified long-term care insurance contract, regardless of whether the contract satisfies section 7702B(b) and any regulations issued thereunder.

(2) Pre-1997 long-term care insurance contract defined. A pre-1997 long-term care insurance contract is any insurance contract with an issue date before January 1, 1997, that met the long-term care insurance requirements of the State in which the contract was sitused on the issue date. For this purpose, the long-term care insurance requirements of the State are the State laws (including statutory and administrative law) that are intended to regulate insurance coverage that constitutes “long-term care insurance” (as defined in section 4 of the National Association of Insurance Commissioners (NAIC) LongTerm Care Insurance Model Act, as in effect on August 21, 1996), regardless of the terminology used by the State in describing the insurance coverage.

(3) Issue date of a contract. (i) In gen- eral. The issue date of a contract is the issue date assigned to the contract by the insurance company, but in no event is the issue date earlier than the date the policy

holder submitted a signed application for coverage to the insurance company. However, if the period between the date the signed application is submitted to the insurance company and the date coverage under the contract actually becomes effective is substantially longer than under the insurance company’s usual business practice, then the issue date is the date coverage under the contract becomes effective (if this is later than the issue date assigned to the contract by the insurance company). A policyholder’s right to return a contract within a “free-look” period following delivery for a full refund of any premiums paid is not taken into account in determining the contract’s issue date.

(ii) Special rule for group contracts. The issue date of a group contract (including any certificate issued thereunder) is the date on which coverage under the group contract becomes effective.

(iii) Exchange of contract or material change in a contract treated as a new is- suance. For purposes of this paragraph (b)(3)—

(A) A contract issued in exchange for an existing contract after December 31, 1996, is considered a contract issued after that date;

(B) Any material change (as defined in paragraph (b)(4) of this section) in a contract is treated as the issuance of a new contract with an issue date no earlier than the date the material change goes into effect; and

(C) If a material change occurs with regard to one or more, but fewer than all, of the certificates evidencing coverage under a group contract, then the insurance coverage under the changed certificates is treated as coverage under a newly issued group contract (and the insurance coverage provided by any unchanged certificate continues to be treated as coverage under the original group contract).

(4) Material change. (i) In general. For purposes of paragraph (b)(3) of this section, except as provided in paragraph (b)(4)(ii) of this section, a material change means—

(A) A change in the terms of a contract that alters the amount or timing of an item payable by the policyholder (or certificate holder), the insured, or the insurance company;

(B) A substitution of the insured under an individual contract; or

March 2, 1998 12 1998–9 I.R.B.

(C) A change (other than an immaterial change) in the eligibility for membership in the group covered under a group contract.

(ii) Exceptions. For purposes of this paragraph (b)(4), the following changes are not treated as a material change:

(A) A policyholder’s exercise of any right provided under the terms of the contract as in effect on December 31, 1996, or a right required by applicable State law to be provided to the policyholder;

(B) A change in the mode of premium payment (for example, a change from monthly to quarterly premiums);

(C) In the case of a policy that is guaranteed renewable or noncancellable, a classwide increase or decrease in premiums;

will issue the contract, and assigns December 20, 1996, as the issue date for the contract. Under the terms of the contract, A’s insurance coverage becomes effective on January 1, 1997. The company delivers the contract to A on January 3, 1997. A has the right to return the contract within 15 days following delivery for a refund of all premiums paid.

(ii) Under paragraph (b)(3)(i) of this section, the issue date of the contract is December 20, 1996. Thus, the contract is a pre-1997 long-term care insurance contract that is treated as a qualified longterm care insurance contract.

Example 2. (i) The facts are the same as in Ex- ample 1, except that the insurance coverage under the contract does not become effective until March 1, 1997. Under the insurance company’s usual business practice, the period between the date of the application and the date the contract becomes effective is 30 days or less.

(ii) Under paragraph (b)(3)(i) of this section, the issue date of the contract is March 1, 1997. Thus, the contract is not a pre-1997 long-term care insurance contract, and, accordingly, the contract must meet the requirements of section 7702B(b) and any regulations issued thereunder to be a qualified longterm care insurance contract.

Example 3. (i) B, an individual, is the policyholder under a long-term care insurance contract purchased in 1995. On June 15, 2000, the insurance coverage and premiums under the contract are increased by agreement between B and the insurance company.

(ii) Under paragraph (b)(4)(i)(A) of this section, a change in the terms of a contract that alters the amount or timing of an item payable by the policyholder or the insurance company is a material change in the contract. Thus, B’s coverage is treated as coverage under a contract issued on June 15, 2000, and, accordingly, the contract must meet the requirements of section 7702B(b) and any regulations issued thereunder in order to be a qualified long-term care insurance contract.

Example 4. (i) C, an individual, is the policyholder under a long-term care insurance contract purchased in 1994. At that time and through December 31, 1996, the contract met the long-term care insurance requirements of the State in which the contract was sitused. In 1996, the policy was amended to add a provision requiring the policyholder to be offered the right to increase dollar limits for inflation every three years (without the policyholder being required to pass a physical or satisfy any other underwriting requirements). During 2002, C elects to increase the amount of insurance coverage (with a resulting premium increase) pursuant to the inflation protection provision.

(ii) Under paragraph (b)(4)(ii)(A) of this section, an increase in the amount of insurance coverage at the election of the policyholder (without the insurance company’s consent and without underwriting or other limitations on the policyholder’s rights) pursuant to a pre-1997 inflation protection provision does not constitute a material change in the contract. Thus, C’s contract continues to be a pre-1997 longterm care insurance contract that is treated as a qualified long-term care insurance contract.

(D) A reduction in premiums due to the purchase of a long-term care insurance contract by a family member of the policyholder;

(E) A reduction in coverage (with a corresponding reduction in premiums) made at the request of a policyholder;

(F) The addition, without an increase in premiums, of alternative forms of benefits that may be selected by the policyholder;

(G) The addition of a rider (including any similarly identifiable amendment) to a pre-1997 long-term care insurance contract in any case in which the rider, if issued as a separate contract of insurance, would itself be a qualified long-term care insurance contract under section 7702B and any regulations issued thereunder (including the consumer protection provisions in section 7702B(g) to the extent applicable to the addition of a rider);

(H) The deletion of a rider or provision of a contract (often referred to as an HHS rider) that prohibited coordination of benefits with Medicare; and

(I) The effectuation of a continuation or conversion of coverage right provided under a group contract following an individual’s ineligibility for continued coverage under the group contract.

(5) Examples. The following examples illustrate the principles of this paragraph (b):

Example 1. (i) On December 3, 1996, A, an individual, submits a signed application to an insurance company to purchase a nursing home contract that meets the long-term care insurance requirements of the State in which the contract is sitused. The insurance company decides on December 20, 1996, that it

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on December 31, 1997, 8:45 a.m., and published in the issue of the Federal Register for January 2, 1998, 63 F.R. 35)

Notice of Proposed Rulemaking and Notice of Public Hearing

Reorganizations; Nonqualified Preferred Stock

REG–121755–97

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In T.D. 8753, page 6 of this Bulletin, the IRS and Treasury Department are issuing a temporary regulation under section 356(e) of the Internal Revenue Code (Code) relating to the receipt of nonqualified preferred stock in certain exchanges. The temporary regulation provides guidance on when nonqualified preferred stock (as defined in section 351(g)(2)) will not be treated as stock or securities for purposes of sections 354, 355, and 356. The guidance also addresses the treatment of the receipt of a right to acquire nonqualified preferred stock. The temporary regulation provides that in certain circumstances the terms stock and securities will not include nonqualified preferred stock, or a right to acquire such stock, when received in exchange for stock or rights to acquire stock. The text of the temporary regulation also serves as the text of this proposed regulation. This document also provides notice of a public hearing on this proposed regulation.

DATES: Written comments must be received by April 6, 1998. Requests to appear and outlines of topics to be discussed at the public hearing scheduled for May 5, 1998, at 10 a.m. must be received by April 14, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R [REG–121755–97], 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

1998–9 I.R.B 13 March 2, 1998

[REG–121755–97], 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 . The public hearing will be held in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation, Michael J. Danbury, (202) 622-7750; concerning submissions and the public hearing, LaNita Van Dyke, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

A temporary regulation in T.D. 8753 amends the Income Tax Regulations (26 CFR part 1) relating to section 356 by adding §1.356–6T. The text of that temporary regulation also serves as the text of this proposed regulation. The preamble to the temporary regulation explains the reason for the addition.

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 this regulation. 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 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 this proposed regulation is adopted as a final regulation, 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 May 5, 1998, at 10 a.m. in room 2615, Internal Revenue Building, 1111 Constitution Ave., NW, Washington, DC. Because of access restrictions, visitors will not be admitted beyond the building lobby more than 15 minutes before the hearing starts.

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

Persons who wish to present oral comments at the hearing must submit written comments by April 6, 1998, 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 14, 1998.

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 this regulation is Michael J. Danbury of the Office of Assistant Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in its 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 1.356–6 is added to read as follows:

§1.356–6 Rules for treatment of nonqualified preferred stock as “other property.”

[The text of this proposed section is the same as the text of §1.356–6T published in T.D. 8753.]

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on January 5, 1998, 8:45 a.m., and published in the issue of the Federal Register for January 6, 1998, 63 F.R. 453)

Notice of Proposed Rulemaking

Civil Cause of Action for Certain Unauthorized Collection Actions

REG–251502–96

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations relating to civil causes of action for damages caused by unlawful collection actions of officers and employees of the Internal Revenue Service (IRS). The proposed regulations reflect amendments made by the Taxpayer Bill of Rights 2. The proposed regulations affect all taxpayers who file civil actions for damages caused by unlawful collection actions of officers or employees of the IRS.

DATES: Written comments and requests for a public hearing must be received by March 31, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–251502–96), 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–251502–96), 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.

FOR FURTHER INFORMATION CONTACT: Kevin B. Connelly, (202) 6223640 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Procedure and Admin

March 2, 1998 14 1998–9 I.R.B.

grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service); (3) a description of the injuries incurred by the taxpayer filing the claim (include copies of any available substantiating documentation or evidence); (4) the dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and (5) the signature of the taxpayer or duly authorized representative.

The notice of proposed rulemaking does not have a new effective date paragraph because amended paragraphs (a), (d), and (e) set forth the effective dates of the new statutory provisions as well as the statutory provisions they are replacing.

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 that are submitted timely (a signed original and eight (8) copies) to the IRS. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested in writing by a 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.

istration Regulations (26 CFR part 301) relating to civil actions for damages caused by unlawful collection actions of officers or employees of the IRS. The Taxpayer Bill of Rights 2 (TBOR2), Public Law 104–168, 110 Stat. 1465 (1996), amended section 7433 of the Internal Revenue Code of 1986 (Code) by raising the cap on the amount a taxpayer may be awarded for damages caused by unlawful collection actions from $100,000 to $1,000,000. Under prior law, a suit for damages could not be brought unless the taxpayer first exhausted administrative remedies available within the IRS. TBOR2 eliminated this jurisdictional prerequisite but authorized federal district courts to reduce damage awards if the taxpayer fails to exhaust administrative remedies. The proposed regulations reflect these changes.

Explanation of Provision

Section 801 of TBOR2 amended section 7433(a) of the Code by increasing from $100,000 to $1,000,000 the cap on the amount of damages that a taxpayer may recover in Federal district court from the United States for damages caused by any unauthorized collection actions of an officer or employee of the IRS occurring after July 30, 1996. Section 802 of TBOR2 amended section 7433(d)(1) of the Code by providing that a taxpayer’s failure to exhaust administrative remedies available within the IRS shall only be a factor that the court may consider in determining whether to reduce the amount of an award. In actions filed prior to the enactment of TBOR2, the failure to exhaust administrative remedies was a jurisdictional bar to an action. The proposed regulations reflect the changes made by TBOR2.

The regulations that are being amended by these proposed regulations currently provide that administrative remedies shall be considered exhausted on the earlier of: (1) the date the decision is rendered by the IRS on an administrative claim for damages filed in accordance with the manner and form set forth in the regulations; or (2) the date six months after the date an administrative claim is filed in accordance with the manner and form set forth in the regulations. 26 CFR §301.7433– l(d). An exception to this rule is provided with respect to civil actions filed in fed

eral district court prior to July 31, 1996. Under this exception, if an administrative claim is filed during the last six months of the period of limitations for filing a civil action for damages under section 7433 of the Code, administrative remedies shall be considered exhausted on the date the administrative claim is filed. The exception was included in the current regulations because, prior to the enactment of TBOR2, the failure to exhaust administrative remedies was a jurisdictional bar to an action. Without the exception, if a taxpayer filed an administrative claim during the last six months of the period of limitations and the IRS did not consider the claim before the limitations period expired, the taxpayer automatically would have been barred from filing suit. These provisions still apply to actions that were filed on or before July 30, 1996, the enactment date of TBOR2.

With respect to actions filed after July 30, 1996, the proposed regulations do not contain the exception for administrative claims filed during the last six months of the period of limitation because the failure to exhaust administrative remedies is no longer a bar to an action. Since the enactment of TBOR2, the failure to exhaust administrative remedies is just one factor the court may consider in determining whether to reduce an award of damages. Pursuant to the notice of proposed rulemaking, if a taxpayer waits until the last six months of the period of limitations to file an administrative claim, the IRS does not reach a determination before the limitations period expires, and the taxpayer files a timely action under section 7433, the court may consider the facts and circumstances of the case and decide what effect the late filing of the claim should have on the amount of damages awarded.

The proposed manner and form for filing an administrative claim for damages remain the same as those set forth in the current regulations at 26 CFR 301.7433– l(e)(1) and (2). The claim must be sent in writing to the district director (marked for the attention of the Chief, Special Procedures Function) of the district in which the taxpayer resides. The claim must include: (1) the name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim; (2) the

1998–9 I.R.B 15 March 2, 1998

(i) The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;

(ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service);

(iii) A description of the injuries incurred by the taxpayer filing the claim (include copies of any available substantiating documentation or evidence);

(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and

(v) The signature of the taxpayer or the taxpayer’s duly authorized representative as defined in paragraph (f)(3) of this section.

(3) Duly authorized representative. For purposes of paragraph (f)(2)(v) of this section, a duly authorized representative is any attorney, certified public accountant, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service who is not disbarred or suspended from practice before the Internal Revenue Service and who has a written power of attorney executed by the taxpayer.

Michael P. Dolan, Deputy Commissioner of

Internal Revenue.

(Fi1ed by the Office of the Federal Register on December 30, 1997, 8:45 a.m., and published in the issue of the Federal Register for December 31, 1997, 62 F.R. 68242)

Change to Part B, Section 8 of Rev. Proc. 97–34; Correction

Announcement 98–17

This announcement supersedes Announcement 98–6, 1998–5 I.R.B. 25, dated February 2, 1998.

The purpose of this announcement is to clarify information in Part B, Section 8 of Rev. Proc. 97–34, 1997–30 I.R.B. 14, dated July 28, 1997, reprinted as Pub.

Drafting Information

The principal author of these regulations is Kevin B. Connelly, Office of Assistant Chief Counsel (General Litigation) CC:EL:GL, IRS. However, other personnel from the IRS and Treasury Department participated in their development.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. In §301.7433–1, paragraphs (a), (d), (e), and (f) are revised to read as follows:

§301.7433 Civil cause of action for certain unauthorized collection actions.

(a) In general. If, in connection with the collection of a federal tax with respect to a taxpayer, an officer or an employee of the Internal Revenue Service recklessly or intentionally disregards any provision of the Internal Revenue Code or any regulation promulgated under the Internal Revedue Code, such taxpayer may bring a civil action for damages against the United States in federal district court. The taxpayer has a duty to mitigate damages. The total amount of damages recoverable is the lesser of $1,000,000 ($100,000 if the act giving rise to damages occurred before July 31, 1996) or the sum of—

(1) The actual, direct economic damages sustained as a proximate result of the reckless or intentional actions of the officer or employee; and

(2) Costs of the action.

(d) Exhaustion of administrative reme- dies in suits brought prior to July 31, 1996 —(1) General. With respect to civil actions filed in federal district court prior to July 31, 1996, no action may be maintained before the exhaustion of administrative remedies. Administrative remedies are exhausted on the earlier of the following dates—

(i) The date the decision is rendered on an administrative claim filed in accordance with paragraph (f) of this section; or

(ii) The date six months after the date an administrative claim is filed in accordance with paragraph (f) of this section.

(2) Exception. If an administrative claim is filed in accordance with paragraph (f) of this section during the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may file an action in federal district court any time after the administrative claim is filed and before the expiration of the period of limitations.

(3) No action in federal district court for any sum in excess of the dollar amount sought in the administrative claim. With respect to civil actions filed in federal district court prior to July 31, 1996, no action may be instituted for any sum in excess of the amount (already incurred and estimated) of the administrative claim filed under paragraph (f) of this section, except where the increased amount is based upon newly discovered evidence not reasonably discoverable at the time the administrative claim was filed, or upon allegation and proof of intervening facts relating to the amount of the claim.

(e) Exhaustion of administrative reme- dies in suits brought after July 30, 1996 (1) General. With respect to civil actions filed in federal district court after July 30, 1996, the amount of damages awarded under paragraph (a) of this section may be reduced if the court determines that the taxpayer has not exhausted the administrative remedies available within the Internal Revenue Service.

(2) Administrative remedies exhausted. Administrative remedies shall be considered exhausted on the earlier of—

(i) The date the decision is rendered on a claim filed in accordance with paragraph (f) of this section; or

(ii) The date six months after the date an administrative claim is filed in accordance with paragraph (f) of this section.

(f) Procedures for an administrative claim —(l) Manner. An administrative claim for damages shall be sent in writing to the district director (marked for the attention of the Chief, Special Procedures Function) of the district in which the taxpayer resides.

(2) Form. The administrative claim shall include—

March 2, 1998 16 1998–9 I.R.B.

tronically, an IRA, SEP, or SIMPLE Indicator must always be used in conjunction with Payment Amount Field 2 (Rollover) or Payment Amount Field 4 (Fair Market Value).

1220, Specifications for Filing Forms 1098, 1099 series, 5498, 5498-MSA and W-2G Magnetically or Electronically.

In the Payee “B” Record, the field descriptions for the Form 5498 IRA, SEP,

and SIMPLE Indicators have been revised. The statement, “and not reporting contributions in Amount Codes 1, 6 or 7” has been removed. For Form 5498 information returns filed magnetically or elec

Field Field Position Title Length Description and Remarks

141 Form 5498 1 Required. Form 5498 only. Enter ‘ 1 ’ if reporting a rollover (Amount Code IRA 2) or Fair Market Value (Amount Code 4) for an IRA. Otherwise, Indicator enter a blank. ( I ndividual R etirement A rrangement)

142 Form 5498 1 Required. Form 5498 only. Enter ‘ 1 ’ if reporting a rollover (Amount Code SEP 2) or Fair Market Value (Amount Code 4) for a SEP. Otherwise Indicator enter a blank. ( S implified E mployee P ension)

143 Form 5498 1 Required. Form 5498 only. Enter ‘ 1 ’ if reporting a rollover (Amount Code SIMPLE 2) or Fair Market Value (Amount Code 4) for a SIMPLE. Otherwise, Indicator enter a blank. ( S avings I ncentive M atch Pl an for E mployees of Small Employers)

Consortium for Educational Process and

Technology Incorporated, Princeton, NJ Constitution Football League, Lexington,

KY Consultation and Counseling Services,

Foundations Status of Certain Organizations

Announcement 98–16

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:

Cephas Ministry, Inc., Zephyehills, FL Childrens Development Services Inc.,

Leonia, NJ Childrens Heritage Montessori School,

Inc., Fort Smith, AR

Cheyenne, WY Childrens Literature Assembly of the

National Council of Teachers of English, Dekalb, IL Childrens Museum of Arkansas Inc.,

Inc., Philadelphia, PA Consumer Credit Counseling of Northern

Little Rock, AR Chisam Memorial Trust, Vienna, VA Christian Basketball Associates Inc., San

Indiana, Inc., Mishawaka, IN Downstate Afro-American Hall of Fame

Antonio, TX Christian Fellowship of San Antonio

Firefighters, San Antonio, TX Christmas in April Greater Gateway, Inc.,

Inc., Peoria, IL Downtown Crossville Inc., Crossville,

TN Dr. John Gorrie Science Foundation of

Franklin County Inc., Apalachicola, FL Eleusis Theater, Mobile, AL Elijah Thurston Organization for Training

Edwardsville, IL Christmas in April Joplin, Inc., Joplin,

MO Chrysalis Inc., New Orleans, LA The Competitive America Foundation,

Bethesda, MD Consolidated Community Development

and Community Development, Homewood, IL Elim Retreat Center Inc., Chicago, IL Elite Ladies Association Inc., Miami, FL Elkhart County Safe Kids Coalition Inc.,

Elkhart, IN

1998–9 I.R.B 17 March 2, 1998

Elkhorn Day Care Center Inc., Elkhorn,

Henry County Family Housing Project

Mayfield Country Club Scholarship

Foundation, South Euclid, OH Meals on Wheels of Jefferson County

WI. Ellis County Child Protective Services

Board, Waxahachie, TX Fido Inc., Oklahoma City, OK Final Net Inc., Memphis, TX Fishermens Wharf Inc., Wheaton, IL Five Leaf Clover Society Inc., Florence,

Incorporated, Mt. Pleasant, IA Henry County Step Ahead Council

Incorporated, New Castle, IN Henry Gonzales Nursing Education

Lafayette, IN Heritage Rails to Trails Coalition, Amlin,

Inc., Meriden, KS Mecklenburg Child Daycare Inc., Chase

Foundation, Chicago, IL Heritage Design Consortium Inc.,

City, VA Mediation Center of Kentucky Inc.,

Lexington, KY Medical Awareness Association Inc.,

Annapolis, MD Medical International Resource

KY Flight for Life Incorporated, Gahanna,

OH Jersey City Center for the Performing

OH Flint and Vicinity Action Community

Economic Development Corporation, Flint, MI French Quarter North and South Inc.,

Arts Inc., Jersey City, NJ Jesus Christ Hope Center Inc., Carmel,

IN Jobworks, Inc., St. Petersburg, FL Keepers of Young Disadvantaged

New Orleans, LA Fresh Beginnings Incorporated,

Reclamation Organization, Denver, CO Medical Research Junior Board

Foundation, Chicago, IL Medici Foundation, Omaha, NE Medina Community Playground, Medina,

Arlington, VA Friend of Hospice Inc., Henderson, NC Friends and Neighbors of the Greater

Students Inc., Toledo, OH Kemetic Education for Young Scholars,

OH Mediplex Hospice Foundation, Abilene,

TX Memphis City Relief Inc., Memphis, TN Mending the Broken Hoop Inc., Phoenix,

AZ Meridian Hills Arts Foundation Inc.,

Washington Area Inc., Washington, DC Friends of Braddock Maryland Chapter,

Raleigh, NC Kids Voting Georgia Inc., Macon, GA Kidtech Inc., Austin, TX Kimberly Bergalis Memorial Committee

Inc., Ft. Pierce, FL Kinderfest Inc., Kinder, LA King Youth Soccer League, King, NC Lamplight Communications Inc.,

Bradenton, FL Lancaster Area Interfaith Coalition for

Silver Spring, MD Friends of Challenger Inc., Akron, OH Friends of Egypt Inc., McLean, VA Friends of Geosphere Inc., Alpharetta,

Indianapolis, IN M O Educators Inc., Hollywood, FL Network Community Services, Livonia,

GA Friends of Galena the Park Branch

Library, Galena Park, TX Friends of Gresham Inc., Chicago, IL Frontline Productions Inc., Tulsa, OK Fort Wayne Indiana Seminoles Baseball

Caring, Lancaster, PA Lancaster Swim Team Booster Club Inc.,

Lancaster, OH Lancelot H Owens Scholarship

MI New Directions, Inc., Lexington, KY San Antonio Urban Network, San

Antonio, TX Texas Neurosciences Foundation, San

Club Inc., Fort Wayne, IN Full Gospel Christian Center Inc.,

Antonio, TX Wilson Group, Inc., Princeton, NJ The Word’s Out, Chantilly, VA

Taylorsville, KY Fuller-Hunt Foundation Inc., Columbus,

Foundation Inc., Jersey City, NJ Lewis County Childrens Fund,

Hohenwald, TN Limestone Creek Community

Development Corporation, Jupiter, FL Limon Train Ride & Heritage Society,

OH Fund for Tenant Ownership Inc.,

Washington, DC Handi-Capable in the Media, Inc.,

Atlanta, GA Helping Gods Children Food Pantry,

Lima, OH Hemingford Community Care Center

Limon, CO Lincoln Arts & Humanities Foundation,

Lincoln, KS Max Samples Evangelistic Association,

Inc., W. Frankfort, IL Maximum Life Community Development

Corporation, Baltimore, MD Maxine Guy Wildlife Rehabilitation

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.

Foundation Inc., Alliance, NE Henderson Catholic Education

Endowment Inc., Henderson, KY Henderson County Fire Chiefs

Center, Inc., Amado, AZ Maya American Community Council

Inc., Homestead, FL

Association Inc., Athens, TX

March 2, 1998 18 1998–9 I.R.B.