Part IV. Items — Internal Revenue Bulletin 1999-49

Second, under section 1433(b)(2)(B) of the TRA, as amended by the Technical and Miscellaneous Revenue Act of 1988, the GST tax does not apply to any generationskipping transfer under a will or revocable trust executed before October 22, 1986, if the decedent died before January 1, 1987.

Third, under section 1433(b)(2)(C) of the TRA, the GST tax does not apply to any generation-skipping transfer under a trust to the extent such trust consists of property included in the gross estate of a decedent or reinvestments thereof, but only if the decedent was, on October 22, 1986, under a mental disability to change the disposition of the decedent’s property and did not regain competence to dispose of the property before death.

Numerous taxpayers have requested private letter rulings regarding the effect that a proposed modification or construction will have on an exempt trust for GST tax purposes. In rulings in this area, the IRS has held that a modification will not cause the trust to lose its exempt status if the modification does not result in any change in the quality, value, or timing of any beneficial interest under the trust. Although the statute does not specifically address modifications to trusts that are exempt under section 1433(b)(2) of the TRA, Treasury and the IRS believe that a trust that is modified such that none of the beneficial interests change can be viewed as the same trust that was in existence on September 25, 1985.

The majority of the ruling requests received by the Service concern proposed modifications intended to enable the trust to adapt to changed circumstances or to enable the trustee to administer the trust properly. These proposed modifications often are not inconsistent with the purpose of the TRA effective date provisions. Accordingly, as discussed below, these proposed regulations adopt a more liberal standard with respect to changes that may be made to the trust without the loss of exempt status. Treasury and the IRS intend that the regulations, when finalized, provide sufficient guidance concerning modifications that the need for private letter rulings will be greatly diminished. Comments are requested regarding whether the proposed regulations will achieve this result.

Notice of Proposed Rulemaking and Notice of Public Hearing

Generation-Skipping Transfer Issues

REG–103841–99

AGENCY: Internal Revenue Service (IRS), Treasury.

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

SUMMARY: This document contains proposed regulations relating to the application of the effective date rules of the generation-skipping transfer (GST) tax imposed under chapter 13 of the Internal Revenue Code. The proposed regulations provide guidance with respect to the type of trust modifications that will not affect the exempt status of a trust. In addition, the proposed regulations clarify the application of the effective date rules in the case of property transferred pursuant to the exercise of a general power of appointment. The proposed regulations are necessary to provide guidance to taxpayers so that they may properly determine if chapter 13 of the Code is applicable to a particular trust.

DATES: Written and electronic comments must be received by February 16, 2000. Outlines of topics to be discussed at the public hearing scheduled for March 15, 2000 at 10:00, must be received by February 23, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–103841–99), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may also be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–103841–99), 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.gov/tax regs/ reglist.html. The public hearing will be

held in room 2615, Internal Revenue Service Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, James F. Hogan, (202) 622-3090; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Michael L. Slaughter, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The GST tax provisions were enacted as part of the Tax Reform Act of 1986 (TRA), Pub. L. 99–514, 1986–3 (Vol. 1) C.B. 1, 634. Under section 1433(a) of the TRA, the GST tax generally applies to all generation-skipping transfers made after October 22, 1986, the date the TRA was enacted.

Section 1433(b)(2) of the TRA exempts transfers from certain trusts from the GST tax. Hereinafter, a trust that is exempt under section 1433(b)(2) is referred to as an “exempt trust.”

First, under section 1433(b)(2)(A) of the TRA, the GST tax does not apply to any transfer from a trust that was irrevocable on September 25, 1985, to the extent the transfer is not made out of additions to the trust after September 25, 1985 (the day before the House Ways and Means Committee began considering the bill containing the GST provisions). Under §26.2601–1(b)(1)(ii) of the Generation-skipping Transfer Tax Regulations, a trust created on or before September 25, 1985, is considered irrevocable on that date unless: (1) the settlor retained a power that would cause the trust to be included in the settlor’s gross estate for federal estate tax purposes by reason of section 2038 of the Code, if the settlor had died on September 25, 1985; or (2) the property held in the trust is a life insurance policy transferred by the insured and the insured possessed, on September 25, 1985, any incident of ownership that would have caused the value of the trust to be included in the insured’s gross estate under section 2042 of the Code if the insured had died on September 25, 1985.

1999–49 I.R.B. 639 December 6, 1999

In addition, the proposed regulations clarify the application of the effective date provisions when the exercise or lapse of a general power of appointment over an otherwise grandfathered trust results in property passing to a skip person.

Explanation of Provisions

Modifications to Trusts

The proposed regulations provide guidance regarding the types of modifications, constructions, and settlements of controversies that will not cause a trust to lose its exempt status. However, the rules contained in these proposed regulations apply only for GST tax purposes. Thus, the rules do not apply in determining, for example, whether a modification will result in a gift for gift tax purposes, or may cause inclusion of the trust assets in the gross estate, or may result in the realization of gain for purposes of section 1001 of the Code.

Under the proposed regulations, a court order in a construction proceeding that resolves an ambiguity in the terms of a trust instrument will not cause the trust to lose its exempt status. The judicial action, however, must involve a bona fide issue and the court’s decision must be consistent with applicable state law that would be applied by the highest court of the state. Commissioner v. Estate of Bosch, 387 U.S. 456 (1967). Construction proceedings determine a settlor’s intent as of the date the instrument became effective, and thus, a court order construing an instrument that satisfies these requirements does not alter or modify the terms of the instrument.

Similarly, under the proposed regulations, a court-approved settlement of a bona fide controversy relating to the administration of a trust or the construction of terms of the governing instrument of a trust will not cause a trust to lose its exempt status. This will be the case, however, only if the settlement is the product of arm’s length negotiations, and the settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement. See Ahmanson Foundation v. United States, 674 F.2d 761 (9th Cir. 1981); Estate of Suzuki v. Commissioner, T.C. Memo. 1991–624. For example, A and B are the

sole remainder beneficiaries of a trust established by their parent. They disagree as to the portion of the remainder each is entitled to under the terms of the trust when the trust terminates. A settlement dividing the corpus equally among A, B, and C, B ’s child and the grandchild of the parent who established the trust, would not be considered within the range of reasonable outcomes because C is not a potential remainderman under any construction of the trust agreement.

The proposed regulations also address the situation in which a trustee distributes trust principal to a new trust for the benefit of succeeding generations. In some cases, the governing instrument grants the trustee broad discretionary powers to distribute principal to or for the benefit of the trust beneficiaries, outright or in trust. Under these circumstances, distributions by the trustee to trusts for the benefit of trust beneficiaries will not cause the original trust or the new trusts to lose exempt status provided the vesting of trust principal is not postponed beyond the perpetuities period applicable to the original trust.

Finally, under the proposed regulations, a trust may be modified and remain exempt for GST purposes. The modification, however, must not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in section 2651) than the person or persons who held the beneficial interest prior to the modification and must not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

Exercise of a General Power of Appointment after September 25, 1985.

In Simpson v. United States, 183 F.3d 812 (8th Cir. 1999), the decedent exercised a testamentary general power of appointment granted under a marital trust that was created in 1966. Pursuant to the decedent’s exercise of the general power of appointment, the property passed to her grandchildren who were skip persons under section 2612. The court concluded that the transfer to the grandchildren was exempt from the GST tax under section 1433(b)(2)(A) of the TRA, because the transfer was “under a trust” that was irrevocable on September 25, 1985.

The facts in Simpson are similar to those presented in Peterson Marital Trust v. Commissioner, 78 F.3d 795 (2nd Cir. 1996). In Peterson, the decedent had a testamentary general power to appoint property in a pre-September 25, 1985 marital trust created under her husband’s will. Rather than appointing the property outright, the taxpayer allowed the power to lapse and the property passed to her husband’s grandchildren, who were skip persons under section 2612. The court concluded that the transfer was subject to the GST tax. The court noted that the effective date provisions in section 1433(b)(2) of the TRA were “designed . . . to protect those taxpayers who, on the basis of pre-existing rules, made arrangements from which they could not reasonably escape and which, in retrospect, had become singularly undesirable.” Peter- son Marital Trust, at 801 (footnote omitted). The court concluded that there was no basis to apply the protection provided in section 1433(b)(2) to the marital trust because the arrangement could have been changed to avoid the GST tax through the exercise of the decedent’s general power of appointment.

Treasury and the IRS believe that there is no substantive difference between the situation in Simpson where property passed pursuant to the exercise of a general power of appointment and the situation in Peterson Marital Trust where property passed pursuant to a lapse of a general power of appointment. An individual who has a general power of appointment has the equivalent of outright ownership in the property. Estate of Kruz v. Commissioner, 101 T.C. 44, 50-51, 5960 (1993). The value of the property subject to the general power is includible in the powerholder’s gross estate at death under section 2041(a). In either case, the powerholder can avoid the consequences of the GST tax by appointing the property to nonskip persons. Therefore, as the court noted in Peterson Marital Trust, there is no basis for exempting such dispositions from the GST tax under the TRA effective date provisions.

Accordingly, the proposed regulations clarify that the transfer of property pursuant to the exercise, release, or lapse of a general power of appointment created in a pre-September 25, 1985 trust is not a transfer under the trust, but rather is a

December 6, 1999 640 1999–49 I.R.B.

transfer by the powerholder occurring when the exercise, release, or lapse of the power becomes effective, for purposes of section 1433(b)(2)(A) of the TRA.

Special Analysis

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 a collection of information on small entities, 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, the regulations will be submitted to the Small Business Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely (in the manner described in ADDRESSES) to the IRS. Treasury and the IRS specifically request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for March 15, 2000 at 10:00 a.m. in room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the 10th Street entrance, located between Constitution and Pennsylvania Avenues, NW. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

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 comments by February 16, 2000, 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 February 23, 2000. 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 proposed regulations is James F. Hogan, Office of the Chief Counsel, IRS. Other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

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

PART 26— GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1986

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

Authority: 26 U.S.C. 7805 * * * Par. 2. In §26.2600–1 the Table is amended under §26.2601 by revising the entry for paragraphs (b) and (b)(4) and adding an entry for paragraph (b)(5) to read as follows:

§26.2600–1. Table of contents. §26.2601–1. Effective dates.

(b) Exceptions

(4) Retention of trust’s exempt status in the case of modifications, etc.

(5) Exceptions to additions rule.

Par. 3. Section 26.2601–1 is amended as follows:

Adding four sentences to the end of paragraph (b)(1)(i).
Redesignating paragraph (b)(4) as paragraph (b)(5).
Adding a new paragraph (b)(4).
Paragraph (c) is amended by adding a new sentence to the end of the paragraph.

The additions read as follows:

§26.2601–1 Effective Dates.

(b) * * * (1) * * * (i) * * * Further, the rule in the first sentence of this paragraph (b)(1)(i) does not apply to a transfer of property pursuant to the exercise, release, or lapse of a general power of appointment that is treated as a taxable transfer under chapter 11 or chapter 12. The transfer is made by the person holding the power at the time the exercise, release, or lapse of the power becomes effective, and is not considered a transfer under a trust that was irrevocable on September 25, 1985. See §26.26011(b)(1)(v)(B) regarding the treatment of the release, exercise, or lapse of a power of appointment that will result in a constructive addition to a trust. See §26.2652–1(a) for the definition of a transferor.

(4) Retention of trust’s exempt status in the case of modifications, etc. (i) In gen- eral. This paragraph provides rules for determining when a modification, judicial construction, settlement agreement, or trustee action with respect to a trust that is exempt from the generation-skipping transfer tax under paragraphs (b)(1), (b)(2), or (b)(3) of this section (hereinafter referred to as an exempt trust) will not cause the trust to lose its exempt status. The rules contained in this paragraph (b)(4) are applicable only for purposes of determining whether an exempt trust retains its exempt status for generation-skipping transfer tax purposes. The rules do not apply in determining, for example, whether the transaction results in a gift subject to gift tax, or may cause the trust to be included in the gross estate of a beneficiary, or may result in the realization of capital gain for purposes of section 1001 of the Code.

(A) Trustee’s discretionary powers. The distribution of trust principal from an

1999–49 I.R.B. 641 December 6, 1999

exempt trust to a new trust will not cause the new trust to be subject to the provisions of chapter 13, if—

( 1 ) The terms of the governing instrument of the exempt trust authorize the trustee to make distributions to the new trust without the consent or approval of any beneficiary or court, and

( 2 ) The terms of the governing instrument of the new trust do not extend the time for vesting of any beneficial interest in the trust in a manner that may postpone or suspend the vesting, absolute ownership, or power of alienation of an interest in property for a period, measured from the date of creation of the original trust, extending beyond any life in being at the date of creation of the original trust plus a period of 21 years, plus if necessary, a reasonable period of gestation. For purposes of this paragraph (b)(4)(i)(A), the exercise of a trustee’s distributive power that validly postpones or suspends the vesting, absolute ownership, or power of alienation of an interest in property for a term of years that will not exceed 90 years (measured from the date of creation of the original trust) will not be considered an exercise that postpones or suspends vesting, absolute ownership, or the power of alienation beyond the perpetuities period. If a trustee’s distributive power is exercised by creating another power, it is deemed to be exercised to whatever extent the second power may be exercised.

(B) Settlement. A court-approved settlement of a bona fide controversy regarding the administration of the trust or the construction of terms of the governing instrument will not cause an exempt trust to be subject to the provisions of chapter 13, if—

( 1 ) The settlement is the product of arm’s length negotiations, and

( 2 ) The settlement is within the range of reasonable outcomes under the governing instrument and applicable state law addressing the issues resolved by the settlement.

(C) Judicial construction. A judicial construction of a governing instrument to resolve an ambiguity in the terms of the instrument or to correct a scrivener’s error will not cause an exempt trust to be subject to the provisions of chapter 13, if—

( 1 ) The judicial action involves a bona fide issue, and

( 2 ) The construction is consistent with applicable state law that would be applied by the highest court of the state.

(D) Other changes. A modification of the governing instrument of an exempt trust (including a trustee distribution, settlement, or construction that does not satisfy paragraphs (b)(4)(i)(A), (B), or (C) of this subsection) by judicial reformation, or nonjudicial reformation that is valid under applicable state law, will not cause an exempt trust to be subject to the provisions of chapter 13, but only if—

( 1 ) The modification does not shift a beneficial interest in the trust to any beneficiary who occupies a lower generation (as defined in section 2651) than the person or persons who held the beneficial interest prior to the modification, and

( 2 ) The modification does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust.

(E) Examples. The following examples illustrate the application of this paragraph (b)(4). In each example, assume that the trust established in 1980 was irrevocable for purposes of §26.2601–1(b)(1)(ii) and that there have been no additions to any trust after September 25, 1985.

Example 1. Trustee’s power to distribute princi- pal authorized under trust instrument. In 1980, Grantor established an irrevocable trust (Trust) for the benefit of Grantor’s child, A, A ’s spouse, and A ’s issue. At the time Trust was established, A had two children, B and C . A corporate fiduciary was designated as trustee. Under the terms of Trust, the trustee has the discretion to distribute all or part of the trust income to one or more of the group consisting of A, A ’s spouse or A ’s issue. The trustee is also authorized to distribute all or part of the trust principal to one or more trusts for the benefit of A, A ’s spouse, or A ’s issue under terms specified by the trustee in the trustee’s discretion. Any trust established under Trust, however, must terminate 21 years after the death of the last child of A to die who was alive at the time Trust was executed. Trust will terminate on the death of A, at which time the remaining principal will be distributed to A ’s issue, per stirpes. In 2000, the trustee distributed part of Trust’s principal to a new trust for the benefit of B and C and their issue. The new trust will terminate 21 years after the death of the survivor of B and C, at which time the trust principal will be distributed to the issue of B and C, per stirpes. The terms of the governing instrument of Trust authorize the trustee to make the distribution to a new trust without the consent or approval of any beneficiary or court. In addition, the terms of the governing instrument of the new trust do not extend the time for vesting of any beneficial interest in a manner that may post

pone or suspend the vesting, absolute ownership or power of alienation of an interest in property for a period, measured from the date of creation of Trust, extending beyond any life in being at the date of creation of Trust plus a period of 21 years, plus if necessary, a reasonable period of gestation. Accordingly, neither Trust nor the new trust will be subject to the provisions of chapter 13 of the Code.

Example 2. Trustee’s power to distribute princi- pal pursuant to state statute. In 1980, Grantor established an irrevocable trust (Trust) for the benefit of Grantor’s child, A, A ’s spouse, and A ’s issue. At the time Trust was established, A had two children, B and C . A corporate fiduciary was designated as trustee. Under the terms of Trust, the trustee has the discretion to distribute all or part of the trust income or principal to one or more of the group consisting of A, A ’s spouse or A ’s issue. Trust will terminate on the death of A, at which time the trust principal will be distributed to A ’s issue, per stirpes. Under a state statute applicable to Trust, a trustee who has the absolute discretion under the terms of a testamentary instrument or irrevocable inter vivos trust agreement to invade the principal of a trust for the benefit of the income beneficiaries of the trust, may exercise the discretion by appointing so much or all of the principal of the trust in favor of a trustee of a trust under an instrument other than that under which the power to invade is created, or under the same instrument. The trustee may take the action either with consent of all the persons interested in the trust but without prior court approval, or with court approval, upon notice to all of the parties. The exercise of the discretion, however, must not reduce any fixed income interest of any income beneficiary of the trust and must be in favor of the beneficiaries of the trust. In 2000, the trustee distributes one-half of Trust’s principal to a new trust that provides for the payment of trust income to A for life and further provides that, at A ’s death, one-half of the trust remainder will pass to B or B ’s issue and one-half of the trust will pass to C or C ’s issue. Because the state statue requires the consent of all of the parties, the transaction constitutes a modification of Trust. However, because the modification does not shift any beneficial interest in Trust to a beneficiary or beneficiaries who occupy a lower generation than the person or persons who held the beneficial interest prior to the modification, neither Trust nor the new trust will be subject to the provisions of chapter 13 of the Code.

Example 3. Construction of an ambiguous term in the instrument. In 1980, Grantor established an irrevocable trust for the benefit of Grantor’s children, A and B, and their issue. The trust is to terminate on the death of the last to die of A and B, at which time the principal is to be distributed to their issue. However, the provision governing the termination of the trust is ambiguous regarding whether the trust principal is to be distributed per stirpes, only to the children of A and B, or per capita among the children, grandchildren, and more remote issue of A and B . The trustee files a construction suit with the appropriate local court to resolve the ambiguity. The court issues an order construing the instrument to provide for per capita distributions to the children, grandchildren, and more remote issue of A and B living at the time the trust terminates. The court’s construction is consistent with applicable state law as it

December 6, 1999 642 1999–49 I.R.B.

would be interpreted by the highest court of the state and resolves a bona fide controversy regarding the proper interpretation of the instrument. Therefore, the trust will not be subject to the provisions of chapter 13 of the Code.

Example 4. Change in trust situs. In 1980, Grantor, who was domiciled in State X, executed an irrevocable trust for the benefit of Grantor’s issue, naming a State X bank as trustee. Under the terms of the trust, the trust is to terminate, in all events, no later than 21 years after the death of the last to die of certain designated individuals living at the time the trust was executed. The provisions of the trust do not specify that any particular state law is to govern the administration and construction of the trust. In State X, the common law rule against perpetuities applies to trusts. In 2000, a State Y bank is named as sole trustee. The effect of changing trustees is that the situs of the trust changes to State Y, and the laws of State Y govern the administration and construction of the trust. State Y law contains no rule against perpetuities. In this case, however, in view of the terms of the trust, the trust will terminate at the same time before and after the change in situs. Accordingly, the change in situs does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in section 2651) than the person or persons who held the beneficial interest prior to the transfer. Furthermore, the change in situs does not extend the time for vesting of any beneficial interest in the trust beyond that provided for in the original trust. Therefore, the trust will not be subject to the provisions of chapter 13 of the Code. If, in this example, as a result of the change in situs, State Y law governed such that the time for vesting was extended beyond the period prescribed under the terms of the original trust instrument, the trust would not retain exempt status.

Example 5. Division of a trust. In 1980, Grantor established an irrevocable trust for the benefit of his two children, A and B, and their issue. Under the terms of the trust, the trustee has the discretion to distribute income and principal to A, B, and their issue in such amounts as the trustee deems appropriate. On the death of the last to die of A and B, the trust principal is to be distributed to the living issue of A and B, per stirpes. In 2000, the appropriate local court approved the division of the trust into two equal trusts, one for the benefit of A and A ’s issue and one for the benefit of B and B ’s issue. The trust for A and A ’s issue provides that the trustee has the discretion to distribute trust income and principal to A and A ’s issue in such amounts as the trustee deems appropriate. On A ’s death, the trust principal is to be distributed equally to A ’s issue, per stirpes. The trust for B and B ’s issue is identical (except for the beneficiaries), and terminates at B ’s death at which time the trust principal is to be distributed equally to B ’s issue, per stirpes. The division of the trust into two trusts does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in section 2651) than the person or persons who held the beneficial interest prior to the division. In addition, the division does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the two partitioned trusts resulting from the division will not be

subject to the provisions of chapter 13 of the Code.

Example 6. Merger of two trusts. In 1980, Grantor established an irrevocable trust for Grantor’s child and the child’s issue. In 1983, Grantor’s spouse also established a separate irrevocable trust for the benefit of the same child and issue. The terms of the spouse’s trust and Grantor’s trust are identical. In 2000, the appropriate local court approved the merger of the two trusts into one trust to save administrative costs and enhance the management of the investments. The merger of the two trusts does not shift any beneficial interest in the trust to a beneficiary who occupies a lower generation (as defined in section 2651) than the person or persons who held the beneficial interest prior to the merger. In addition, the merger does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Therefore, the trust that resulted from the merger will not be subject to the provisions of chapter 13 of the Code.

Example 7. Modification that does not shift an interest to a lower generation. In 1980, Grantor established an irrevocable trust for the benefit of Grantor’s grandchildren, A, B, and C . The trust provides that income is to be paid to A, B, and C, in equal shares for life. The trust further provides that, upon the death of the first grandchild to die, onethird of the principal is to be distributed to that grandchild’s issue, per stirpes. Upon the death of the second grandchild to die, one-half of the remaining trust principal is to be distributed to that grandchild’s issue, per stirpes, and upon the death of the last grandchild to die, the remaining principal is to be distributed to that grandchild’s issue, per stirpes. In 2000, A became disabled. Subsequently, the trustee, with the consent of B and C, petitioned the appropriate local court and the court approved a modification of the trust that increased A ’s share of trust income. The modification does not shift a portion of the income interest to a beneficiary who occupies a generation lower than the generation occupied by A, B and C, and does not extend the time for vesting of any beneficial interest in the trust beyond the period provided for in the original trust. Accordingly, the trust as modified will not be subject to the provisions of chapter 13 of the Code. However, the modification increasing A ’s share of trust income is a transfer by B and C to A for federal gift tax purposes.

(ii) Effective date. The rules in this paragraph (b)(4) are effective as of [THE DATE OF PUBLICATION IN THE FEDERAL REGISTER AS A FINAL REGULATION].

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on November 17, 1999, 8:45 a.m., and published in the issue of the Federal Register for November 18, 1999, 64 F.R. 62997)

Notice of Proposed Rulemaking

Definition of Last Known Address

REG–104939–99

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations defining “last known address” in relation to the mailing of notices of deficiency and other notices, statements, and documents sent to a taxpayer’s last known address. The proposed regulations affect taxpayers who receive notices of deficiency and other notices, statements, and documents sent to taxpayers’ last known addresses.

DATES: Written or electronic comments and requests for a public hearing must be received by February 22, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG–104939–99), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG–104939–99), 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 http://www. irs.gov/tax_regs/regslist.html (the IRS Internet site).

FOR FURTHER INFORMATION CONTACT: Concerning submissions, Michael Slaughter, (202) 622-7180; concerning the regulations, Charles A. Hall, (202) 622-4940 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

1999–49 I.R.B. 643 December 6, 1999

Background

In General

This document contains proposed amendments to the Regulations on Procedure and Administration (26 CFR part 301) under section 6212(b) relating to the sufficiency of a notice of deficiency if it is mailed to the last known address of a taxpayer. This document also contains proposed amendments to the Income Tax Regulations (26 CFR part 1) and the Regulations on Procedure and Administration (26 CFR part 301) to provide cross-references to the proposed last known address rules under section 6212(b) in order to apply those rules to other notices, statements, and documents required to be sent to the last known address of a taxpayer.

Last Known Address

Many statutory and regulatory provisions refer to the last known address of a taxpayer. However, current law with respect to the last known address of a taxpayer has developed under section 6212(b), relating to the address for mailing a notice of deficiency. Generally, under section 6501, the IRS has three years from the date a Federal tax return is filed, or the due date for the return if the return is filed early, to assess a deficiency. Under section 6213, the IRS may not assess or collect a deficiency until after the notice of deficiency has been mailed to the taxpayer giving the taxpayer an opportunity to petition the United States Tax Court. Under section 6212(b), an otherwise valid notice of deficiency is sufficient if it is mailed to the taxpayer’s last known address, even if it is not received by the taxpayer.

The term last known address is not defined by statute or current regulations. However, case law defines last known ad- dress as the “address which appears on the taxpayer’s most recently filed return, unless [the IRS] has been given clear and concise notification of a different address.” Abeles v. Commissioner, 91 T.C. 1019, 1035 (1988), acq. 1989–2 C.B. 1. The taxpayer’s most recently filed return for this purpose is the last return filed by the taxpayer from which, if the return was properly processed, the address on the return was available to the IRS agent mailing a notice of deficiency. Id. at 1035.

The taxpayer provides the IRS with clear and concise notification of a change of address by affirmatively informing the IRS that the former address is not to be used. See King v. Commissioner, 857 F.2d 676, 681 (9th Cir. 1988); Monge v. Commissioner, 93 T.C. 22, 32 (1989). Although the IRS must exercise due diligence in ascertaining the last known address and in mailing the notice of deficiency to the correct address after having become aware of a taxpayer’s change of address, that duty does not require the IRS to change the taxpayer’s last known address based on information from third party sources. See Grencewicz v. Com- missioner, 60 T.C.M. (CCH) 1300, 1302 (1990). Accordingly, under current law, clear and concise notification does not include taxpayer notification to third parties, such as payors or the United States Postal Service (USPS). See Adams v. Commis- sioner, 68 T.C.M. (CCH) 291, 294 (1994), aff’d sub nom., Miller v. Commissioner, 76 A.F.T.R.2d (RIA) 95-5903 (10th Cir. 1995) (forwarding order filed with USPS not clear and concise notice to IRS); Sel- man v. Commissioner, 61 T.C.M. (CCH) 2184, 2186 (1991) (USPS change of address form not notice to IRS because no evidence IRS received form); Martin v. Commissioner, 64 T.C.M. (CCH) 1529, 1531 (1992) (citing Selman ); Grencewicz v. Commissioner, 60 T.C.M. (CCH) 1300, 1302 (1990) (IRS not required to review Forms 1099 and Schedule K-1); Green- stein v. Commissioner, 60 T.C.M. (CCH) 379, 382 (1990) (Forms W-2G and Form 1099-DIV not sufficient notice).

Current IRS Procedures for Changing Last Known Address

The IRS has prescribed rules for providing clear and concise notification of a different address in Rev. Proc. 90–18 (1990–1 C.B. 491). Under Rev. Proc. 90– 18, a taxpayer must give clear and concise written notification of a change of address to the Internal Revenue Service Center that serves the taxpayer’s old address or to the Chief, Taxpayer Service Division, in the local district office. The revenue procedure applies to notices required to be sent to a taxpayer’s last known address under sections 982(c)(1), 6110(f)(3)(B), 6212(b), 6303(a), 6325(f)(2)(A), 6331(d)(2)(C), 6332(b)(1), 6335(a) and (b),

6901(g), and 7609(a)(2). Rev. Proc. 90– 18, section 2.01. Although not included in Rev. Proc. 90–18, section 6110(f)(4)(B) also requires a notice to be sent to a taxpayer’s last known address. Since publication of Rev. Proc. 90–18, four new sections have been added to the Code that reference last known address. See sections 6245(b)(1), 6320(a)(2)(C), 6330(a)(2)(C), and 7603(b)(1). Future updates of Rev. Proc. 90–18 will incorporate these new sections, as well as section 6110(f)(4)(B).

Under section 5.04 of Rev. Proc. 90–18, taxpayers may provide the IRS with clear and concise notification of a different address in one of three ways. First, a taxpayer may send the IRS a signed statement informing the IRS that the taxpayer wants the address of record changed to a new address. In addition to the new address, this notification must contain the taxpayer’s full name, signature, old address, and social security number and/or employer identification number. Filers of a joint return should provide both names, social security numbers, and signatures. Individuals who have changed last names, for instance, due to marriage, should provide the last name shown on the most recently filed return and the new last name. In all cases, clear and concise written notification must be specific as to a change of address. Thus, a new address reflected in the letterhead of taxpayer correspondence will not by itself change a taxpayer’s address of record.

Second, if the IRS sends correspondence to the taxpayer that solicits or requires a response by the taxpayer and the taxpayer returns the correspondence to the IRS with corrections marked on the taxpayer’s address information, the return of the correspondence will constitute clear and concise written notification of a change of address. The taxpayer’s signature on the correspondence is not required.

Third, the taxpayer may file a Form 8822, “Change of Address,” with the IRS. In addition to the rules prescribed in Rev. Proc. 90–18, the IRS currently accepts oral notification of a different address, provided the request is made in the context of an inquiry about the taxpayer’s account. Courts have acknowledged the validity of oral notification of a change of

December 6, 1999 644 1999–49 I.R.B.

address for purposes of last known address under section 6212(b), provided the notification is sufficiently clear, is given to a proper representative of the IRS, and is established by competent proof. See Mollet v. Commissioner, 82 T.C. 618, 625–26 (1984). Future updates of Rev. Proc. 90–18 will permit the oral notification of a change of address.

Explanation of Provisions

The proposed regulations define last known address consistent with the definition set forth in Abeles. Accordingly, the proposed regulations provide that the taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the IRS is given clear and concise notification of a different address.

The proposed regulations also provide that the IRS will use an address obtained from the United States Postal Service (USPS) as a taxpayer’s last known address in the absence of a more recent address. Although current law does not require the IRS to treat a taxpayer’s notification to a third party, such as a payor or the USPS, as clear and concise notification of a different address for purposes of determining a last known address, the IRS and the Treasury Department are not prohibited from prescribing a rule that would allow the IRS to consult a third party source for the taxpayer’s most current address.

Thus, the proposed regulations provide that beginning in May 2000, the IRS will refer to the USPS’s National Change of Address (NCOA) database to obtain a taxpayer’s address for purposes of determining the taxpayer’s last known address. The proposed regulations also provide that the rules for last known address under §301.6212–2 apply for purposes of other notices, statements, and documents mailed by the IRS to a taxpayer’s last known address pursuant to the Internal Revenue Code or regulations. In addition, the regulations propose to amend existing regulations that use the term “last known address” to cross reference the regulations to §301.6212–2.

NCOA Database

The NCOA database is a computerized record of changes of address maintained

by the USPS. This database retains address changes for a thirty-six month period. USPS obtains the change of address information from a properly submitted USPS Form 3575, “Official Mail Forwarding Change of Address Form.” Both businesses and individuals use the Form 3575. Individuals may indicate whether the change of address applies to the individual or, if applicable, the individual’s entire family.

Updating Master File

In May 2000, and again in November 2000, and annually thereafter in each November, the Martinsburg Computing Center (MCC) in Martinsburg, West Virginia, will access the NCOA database to update all taxpayer address records maintained in the IRS’s automated master file for purposes of updating the IRS’s mailing list. Generally, if the taxpayer’s name and the last known address maintained in the automated master file match the taxpayer’s name and old mailing address contained in the NCOA database, within certain tolerances, the IRS will use the new address obtained from the NCOA database to update the automated master file. The updated address will be the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address. However, due to IRS system limitations, if taxpayers file jointly, but the NCOA database contains change of address information for only one spouse, the earliest this rule will apply is January 2001. The IRS will publish further guidance as to when this rule will apply to these joint filers.

In addition, beginning in May 2000, prior to mailing correspondence to any particular taxpayer from an IRS Service Center, the IRS will access the NCOA database to determine if the taxpayer submitted a Form 3575 to the USPS with a more recent address. If so, the following will occur: (1) the correspondence will be mailed to the address obtained from the NCOA database, and (2) the IRS will use the new address from the NCOA database to update the automated master file. This updated address will be the taxpayer’s last known address. Similar to the exception relating to the annual update, however, this rule will not be effective any earlier than January 2001 if taxpayers file jointly, but the NCOA database contains change

of address information for only one spouse.

If the taxpayer subsequently files a return with an address other than the address on the Form 3575, the taxpayer’s last known address will be the address on the subsequently filed and properly processed return. Similarly, if the taxpayer submits a Form 8822, “Change of Address,” (or other clear and concise notification of a change of address) to the IRS after the taxpayer submits a Form 3575 to the USPS, the taxpayer’s last known address will be the address on the Form 8822 (or on the clear and concise notification). In each instance, the IRS’s master file will be updated to reflect the taxpayer’s new last known address.

The IRS will not access the NCOA database prior to mailing correspondence from district offices and posts of duty. Unlike Service Centers, these locations do not have the systems capability to check the NCOA database for individual mailings at this time. Instead, the IRS will use the address stored in the automated master file. For purposes of correspondence mailed from district offices and posts of duty, the address on the IRS automated master file, as updated through the use of the NCOA database, will be the taxpayer’s last known address.

Using the NCOA database will increase customer service by allowing faster delivery of IRS correspondence to a taxpayer. Rather than mailing correspondence to an address which is no longer a taxpayer’s address and relying on the USPS to forward mail to the taxpayer’s most recent address, the IRS will mail the correspondence directly to the taxpayer’s most recent address. In addition, by updating the automated master file with the most recent address, future IRS correspondence will be mailed to the taxpayer’s most recent address.

Although use of the NCOA database will result in improved delivery in most cases, such use does not completely eliminate the taxpayer’s need to provide the IRS with clear and concise notification of a different address. For instance, if the taxpayer changes the address of a residence or business and submits a Form 3575 with the USPS, but does not wish to change the taxpayer’s address for purposes of IRS correspondence, then the taxpayer must notify the IRS as provided

1999–49 I.R.B. 645 December 6, 1999

in Rev. Proc. 90–18. It should be noted, however, that even if the taxpayer notifies the IRS to continue using the old address for IRS correspondence, the USPS may forward the correspondence to the address on the USPS Form 3575.

Licensing Agreement with USPS

To gain access to the NCOA database, the IRS has applied to the USPS to become a limited licensee of the NCOA database. As a limited licensee, the IRS will receive from the USPS a copy of the entire thirty-six month NCOA database and periodic updates thereto in electronic format. The USPS will not have access to confidential return information as a result of this process. Moreover, unlike organizations that have entered into general licensing agreements with the USPS for use of the NCOA database, the IRS will not provide name and address matching services to commercial customers. Rather, the IRS will only use the NCOA database to update taxpayers’ addresses maintained in the automated master file in the manner prescribed by these regulations. The IRS and the Treasury Department invite comments regarding whether the IRS should become a licensee for the limited purpose of updating its automated master file.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 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 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, considera

tion will be given to any electronic or written comments (a signed original and eight (8) copies) that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. A public hearing may be scheduled if requested 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 these regulations is Charles A. Hall, Office of Assistant Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 301 are 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. In §1.468A–5, paragraph (c)(1)(ii) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.468A–5 Nuclear decommissioning fund qualification requirements; prohibitions against self-dealing; disqualification of nuclear decommissioning fund; termination of fund upon substantial completion of decommissioning.

(c) * * * (1) * * * (ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 3. In §1.503(a)–1 is amended by adding a sentence at the end of the concluding text of paragraph (c) to read as follows:

§1.503(a)–1 Denial of exemption to certain organizations engaged in prohibited transactions.

- - For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 4. In §1.547–2, paragraph (b)(1)(v) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§1.547–2 Requirements for deficiency dividends.

(b) * * * (1) * * * (v) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 5. In §1.856-6, paragraph (g)(5) is amended by adding a sentence after the first sentence of the paragraph to read as follows:

§1.856–6 Foreclosure property.

(g) * * * (5) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 6. In §1.860–2, paragraph (b)(1)(ii) is amended by adding a sentence after the fourth sentence of the paragraph to read as follows:

§1.860–2 Requirements for deficiency dividends.

(b) * * * (1) * * * (ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

December 6, 1999 646 1999–49 I.R.B.

Par. 7. In §1.963–6, paragraph (c)(5) is amended by adding a sentence after the second sentence of the paragraph to read as follows:

§1.963–6 Deficiency distribution.

(c) * * * (5) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 8. In §1.992–3, paragraph (c)(3)(iv) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§1.992–3 Deficiency distributions to meet qualification requirements.

(c) * * * (3) * * * (iv) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter. * * *

Par. 9. In §1.6081–2, paragraph (f) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–2 Automatic extension of time to file partnership return of income.

(f) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 10. In §1.6081–3, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–3 Automatic extension of time for filing corporation income tax returns.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 11. In §1.6081–4, paragraph (c) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081-4 Automatic extension of time for filing individual income tax returns.

Par. 12. In §1.6081-6, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–6 Automatic extension of time to file trust income tax return.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212–2 of this chapter.

Par. 13. In §1.6081–7, paragraph (d) is amended by adding a sentence at the end of the paragraph to read as follows:

§1.6081–7 Automatic extension of time to file Real Estate Mortgage Investment Conduit (REMIC) income tax return.

(d) * * * For further guidance regarding the definition of last known address, see §301.6212-2 of this chapter.

PART 301—PROCEDURE AND ADMINISTRATION

Par. 14. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 15. In §301.6110–4, paragraph (c)(3) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6110-4 Communications from third parties.

Par. 16. In §301.6110–5, paragraph (b)(4) is amended by adding a sentence at

the end of the paragraph to read as follows:

§301.6110–5 Notice and time requirements; actions to restrain disclosure; actions to obtain additional disclosure.

(b) * * * (4) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 17. In §301.6110–6, paragraph (b)(2)(v) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6110–6 Written determinations issued in response to requests submitted before November 1, 1976.

(b) * * * (2) * * * (v) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 18. Section 301.6212–2 is added to read as follows:

§301.6212–2 Definition of last known address.

(a) General rule. Except as provided in paragraph (b)(2) of this section, a taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the Internal Revenue Service (IRS) is given clear and concise notification of a different address.

(b) Address obtained from third party (1) In general. Except as provided in paragraph (b)(2) of this section, change of address information that a taxpayer provides to a third party, such as a payor or another government agency, is not clear and concise notification of a different address for purposes of determining a last known address under this section.

(2) Exception for address obtained from the United States Postal Service —(i) Annual update. Annually, the IRS will

1999–49 I.R.B. 647 December 6, 1999

update taxpayer addresses maintained in IRS records by referring to data accumulated and maintained in the United States Postal Service (USPS) National Change of Address database that retains change of address information for thirty-six months (NCOA database). Except as provided in paragraph (b)(2)(ii) of this section, if the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database, within certain tolerances, the new address in the NCOA database is the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address.

(ii) Update prior to mailing any notice, statement or document from an IRS Ser- vice Center. Prior to mailing any notice, statement, or other document, including a notice of deficiency, to the taxpayer from an IRS Service Center, the IRS will update the taxpayer’s last known address by referring to the NCOA database. If the taxpayer’s name and last known address in IRS records match the taxpayer’s name and old mailing address contained in the NCOA database, within certain tolerances, the new address in the NCOA database is the taxpayer’s last known address, unless the IRS is given clear and concise notification of a different address.

(iii) Duration of address obtained from NCOA database. The address obtained from the NCOA database under paragraph (b)(2)(i) or (ii) of this section is the taxpayer’s last known address until one of the following events occurs—

(A) The taxpayer files and the IRS properly processes a Federal tax return with an address different from the address obtained from the NCOA database; or

(B) The taxpayer provides the IRS with clear and concise notification of a change of address, as defined in procedures prescribed by the Commissioner, that is different from the address obtained from the NCOA database.

(3) Examples. The following examples illustrate the rules of paragraph (b)(2) of this section:

Example 1. (i) A is an unmarried taxpayer. The address on A’s 1999 Form 1040, U.S. Individual Income Tax Return, filed on April 14, 2000, and 2000 Form 1040 filed on April 13, 2001, is 1234 Anyplace Street, Anytown, USA 43210. On May 15, 2001, A informs the USPS of a new permanent address (9876 Newplace Street, Newtown, USA 12345) using the USPS Form 3575, “Official Mail

Forwarding Change of Address Form.” The change of address is included in the USPS NCOA database.

(ii) In June 2001 the IRS determines a deficiency for A’s 1999 tax year and prepares to issue the notice of deficiency. When the IRS mails the notice of deficiency from the Service Center, the IRS refers to the NCOA database and updates the taxpayer’s last known address to 9876 Newplace Street, Newtown, USA 12345. On June 15, 2001, the IRS mails a notice of deficiency to A at 9876 Newplace Street, Newtown, USA 12345. For purposes of section 6212(b), the notice of deficiency mailed on June 15, 2001, is mailed to A’s last known address. Example 2. (i) The facts are the same as in Ex- ample 1, except that instead of determining a deficiency for A’s 1999 tax year in June 2001, the IRS determines a deficiency for A’s 1999 tax year in December 2001. The IRS performs its annual update of addresses in November 2001. At this time the taxpayer’s address maintained in IRS records was changed to 9876 Newplace Street, Newtown, USA 12345. (ii) On December 14, 2001, the IRS mails a notice of deficiency to A at 9876 Newplace Street, Newtown, USA 12345. For purposes of section 6212(b), the notice of deficiency mailed on December 14, 2001, is mailed to A’s last known address.

Example 3. (i) B is an unmarried taxpayer. The address on B’s 1999 Form 1040, U.S. Individual Income Tax Return, filed on April 14, 2000, is 1234 Main Street, Mytown, USA 56789. In September 2000, B informs the USPS of a new permanent address (4321 Maple Street, Ourtown, USA 54321) using the USPS Form 3575, “Official Mail Forwarding Change of Address Form.”

(ii) In September 2000, the IRS determines a deficiency for B’s 1998 tax year and prepares to issue the notice of deficiency in the Service Center. On September 15, 2000, the IRS refers to the NCOA database to update the taxpayer’s last known address. Because B did not inform the USPS of a change of address in sufficient time to be included in the NCOA database on September 15, 2000, the NCOA database does not yet contain any address information for B. On September 15, 2000, the IRS mails a notice of deficiency to B at 1234 Main Street, Mytown, USA 56789. For purposes of section 6212(b), the notice of deficiency mailed on September 15, 2000, is mailed to B’s last known address. Example 4. (i) C is an unmarried taxpayer. The address on C’s 1998 Form 1040, U.S. Individual Income Tax Return, filed on April 15, 1999, and 1999 Form 1040 filed on April 14, 2000, is 2468 Spring Street, Little City, USA 97531. On August 15, 2001, C informs the USPS of a new permanent address (8642 Peachtree Street, Big City, USA 13579) using the USPS Form 3575, “Official Mail Forwarding Change of Address Form.” The IRS performs its annual update of addresses in November 2001.

(ii) In September 2001 the IRS district office for Little City, USA determines a deficiency for C’s 1998 tax year and prepares to issue the notice. When the IRS mails the notice of deficiency from the district office, the IRS does not refer to the NCOA database because IRS systems are not capable of checking the NCOA database for individual mailings other than for Service Center correspondence. On September 17, 2001, the IRS mails a notice of deficiency for tax year 1998 to C at 2468 Spring Street, Little City, USA 97531. For purposes of section 6212(b), the

notice of deficiency mailed on September 17, 2001, is mailed to C’s last known address.

(iii) Also in September 2001, the IRS determines a deficiency for C’s 1999 tax year. When the IRS mails this notice of deficiency from the IRS Service Center, the IRS refers to the NCOA database and updates the taxpayer’s last known address to 8642 Peachtree Street, Big City, USA 13579. On September 18, 2001, the IRS mails a notice of deficiency for tax year 1999 to C at 8642 Peachtree Street, Big City, USA 13579. For purposes of section 6212(b), the notice of deficiency mailed on September 18, 2001, is mailed to C’s last known address. Example 5. The facts are the same as in Example 4, except that the IRS Service Center mails the notice of deficiency for C’s 1999 tax year on September 10, 2001, after updating the taxpayer’s last known address by referring to the NCOA database. On September 17, 2001, when the district office prepares to mail the notice of deficiency for C’s 1998 tax year by referring to the IRS’s automated master file, the taxpayer’s address will appear as 8642 Peachtree Street, Big City, USA 13579. Thus, in both cases, for purposes of section 6212(b), the taxpayer’s last known address is 8642 Peachtree Street, Big City, U.S.A. 13579.

(c) Last known address for all notices, statements, and documents. The rules in paragraphs (a) and (b) of this section apply for purposes of determining whether all notices, statements, or other documents are mailed to a taxpayer’s last known address whenever the term last known address is used in the Internal Revenue Code or the regulations thereunder.

(d) Effective Date —(1) In general. Except as provided in paragraph (d)(2) of this section, the rules prescribed by this section apply to all notices, statements, and other documents mailed on or after May 1, 2000.

(2) Individual moves in the case of joint filers. In the case of taxpayers who file joint returns under section 6013, if the NCOA database contains change of address information for only one spouse, paragraphs (b)(2) and (3) of this section will not apply to notices, statements, and other documents mailed before January 1, 2001. Par. 19. In §301.6303–1, paragraph (a) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6303–1 Notice and demand for tax.

(a) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

December 6, 1999 648 1999–49 I.R.B.

Par. 20. In §301.6305–1, paragraph (b)(2)(ii) is revised to read as follows:

§301.6305–1 Assessment and collection of certain liability.

(b) * * * (2) * * * (ii) The name, social security number, and last known address of the individual owing the assessed amount. For further guidance regarding the definition of last known address, see §301.6212–2;

Par. 21. In §301.6320–1T, paragraph (a)(1) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6320–1T Notice and opportunity for hearing upon filing of notice of Federal tax lien (temporary).

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 22. In §301.6325–1, paragraph (f)(2)(ii)(a) is revised to read as follows:

§301.6325–1 Release of lien or discharge of property.

(f) * * * (2) * * * (ii) * * * ( a ) Mailing notice of the revocation to the taxpayer at his last known address (see §301.6212–2 for further guidance regarding the definition of last known address); and

Par. 23. In §301.6330–1T, paragraph (a)(1) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6330–1T Notice and opportunity for hearing prior to levy (temporary).

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 24. In §301.6331–2, paragraph (a)(1) is amended by adding a sentence after the second sentence of the paragraph to read as follows:

§301.6331–2 Procedures and restrictions on levies.

(a) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2. * * *

Par. 25. Section 301.6332–2 is amended as follows:

Paragraphs (b)(1) introductory text, (b)(1)(i), and (b)(1)(ii) are redesignated as paragraphs (b)(1)(i) introductory text, (b)(1)(i)(A), and (b)(1)(i)(B), respectively.
In newly designated paragraph (b)(1)(i)(B), the text beginning with the second sentence is redesignated as paragraph (b)(1)(ii).
Newly designated paragraph (b)(1)(ii) is amended by adding a sentence after the second sentence of the paragraph.

The addition reads as follows:

§301.6332–2 Surrender of property subject to levy in the case of life insurance and endowment contracts.

(b) * * * (1) In general. (i) * * * (ii) * * * For further guidance regarding the definition of last known address, see §301.6212–2. * * *

Par. 26. In §301.6335–1, paragraph (b)(1) is amended by adding a sentence after the third sentence of the paragraph to read as follows:

§301.6335–1 Sale of seized property.

(b) * * * (1) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 27. In §301.6503(c)–1, paragraph (a) is amended by adding a sentence at the end of the paragraph to read as follows:

§301.6503(c)–1 Suspension of running of period of limitation; location of property outside the United States or removal of property from the United States; taxpayer outside of United States.

(a) * * * For further guidance regarding the definition of last known address, see §301.6212–2.

Par. 28. In §301.6903–1, paragraph (c) is amended by adding a sentence after the first sentence of the paragraph to read as follows:

§301.6903–1 Notice of fiduciary relationship.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on November 19, 1999, 8:45 a.m., and published in the issue of the Federal Register for November 22, 1999, 64 F.R. 63768)

Announcement 99–112

This announcement corrects certain errors which appear in Rev. Proc. 99–29, 1999–31, I.R.B. 138, which provides specifications for filing Forms 1098, 1099, 5498, and W-2G, magnetically or electronically. Revenue Procedure 99–29 is reprinted as Publication 1220, Specifications for Filing Forms 1098, 1099, 5498, and W-2G Magnetically or Electronically. Corrections to forms are also included in this announcement.

Changes are listed by part, section and form number. The actual wording changes are highlighted using italics and bold print.

1999–49 I.R.B. 649 December 6, 1999

Part A. General

Sec. 9. Filing of Information Returns Magnetically/Electronically and Retention Requirements

.02 IRS/MCC allows for the use of computer-generated substitutes for Form 4804/4802. The substitutes must contain all information requested on the original forms including the affidavit and signature line. Photocopies are acceptable but an original signature is required . . .

Sec. 19. Major Problems Encountered

The Payment Amount Fields in the “B” Record Do Not Correspond to the Amount Codes in the “A” Record

If codes 2, 4, and 7 appear in the Amount Codes Field of the “A” Record, then the “B” Record must show payment amounts in only Payment Amount Fields 2, 4, and 7, right-justified and unused positions must be zero (0) filled. EXAMPLE: “A” RECORD 247 b/b/b/b/b/b/b/b/b/ (‘b/’ denotes a blank) (Pos. 28-39)

Part B. Magnetic Media Specifications

Sec. 3. Tape Cartridge Specifications

0.2 The tape cartridge records defined in this revenue procedure may be blocked subject to the following: (c) All records, except the header and trailer labels, may be blocked or unblocked. A record may not contain any control fields or block descripter fields, which describe the length of the block or the logical records within the block. The number of logical records within a block (the blocking factor) must be constant in every block with the exception of the last block which may be shorter [see item (b) above]. The block length must be evenly divisible by 750.

Sec. 4. 8mm, 4mm, and Quarter Inch Cartridge Specifications

.01 In most instances, IRS/MCC can process 8mm tape cartridges that meet the following specifications:

(3) The 8mm tape cartridge must meet the following specifications:

TRACKS DENSITY CAPACITY

1 20 (43245 BPI 2.3 Gb (10Gb) 1 21 (45434 BPI) 5 Gb (20Gb)

Sec. 10. Payee “B” Record – General Field Description and Record Layouts

(14) Payee “B” Record Layout Positions 544–750 for Form 1099-R

Field Position Field Title Length Description and Remarks

545–546 Distribution Code 2 Required. Enter at least one distribution code from the (For a detailed table below. More than one code may apply. If only one explanation of the code is required, it must be entered in position 545 and posidistribution codes tion 546 must be blank. A blank in position 545 is not see the “1999 acceptable. Position 545 must contain a numeric code in all Instructions for cases except when using Code D, E, F, G, H, J, L, M, P, R, Forms 1099, 1098 or S... 5498, and W-2G.”)

Part C. Electronic Filing Specifications

Sec. 6. Electronic Submissions

.05 If a file was submitted timely and is bad, the filer will have up to 60 days from the day the file was transmitted or 4 replace- ment attempts within that 60 days period, whichever comes first, to transmit an acceptable file. If an acceptable file is not re- ceived within 60 days or within 4 replacement attempts, within that 60 day period, then the payer could be subject to late filing pe- nalities. This only applies to files originally sent electronically.

December 6, 1999 650 1999–49 I.R.B.

Corrections to Form 4419 and Form 8508

The following forms, for the filer’s use, were printed incorrectly in the back of the Publication 1220. The correct wording below is highlighted using italics and bold print. These forms may be photocopied.

Form 4419: Application for Filing Information Returns Magnetically/Electronically

Type of Return To Be Reported

(Check appropriate box(s))

Important: Form W-2 information is sent to the Social Security Administration only. Do not use Form 4419 to request authorization to file information magnetically. Contact SSA to request the appropriate application.

Forms 1098, 1099-series, 5498, 5498-MSA, and W-2G - 1042-S, (Tape, Tape Cartridges, 3- ¹ ⁄2 - Diskette or Electronic) (Tape, Tape Cartridges, 3- ¹ ⁄2 - Diskette or Electronic) - 8027 (Tape, Tape Cartridges, 3- ¹ ⁄2 - Diskette or Electronic)

- 8596 (Tape, Tape Cartridges, 3- ¹ ⁄2 - Diskette or Electronic)

- W-4 (Tape, Tape Cartridges, 3- ¹ ⁄2 - Diskette or Electronic)

Form 8508: Request for Waiver From Filing Information Returns on Magnetic Media

Box 3. Payer name and complete address (A separate 8508 form must be filed for each payer requesting a waiver.)

Box 7. � W-2VI

1999–49 I.R.B. 651 December 6, 1999